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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES AND EXCHANGE ACT OF 1934.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 for the fiscal year ended May 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to
Commission File Number:
GENESIS MICROCHIP INC.
(exact name of Registrant as specified in its charter)
Ontario, Canada
(Jurisdiction of incorporation or organization)
200 Town Centre Boulevard
Suite 400
Markham, Ontario
Canada L3R 8G5
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Title of each class: Name of each exchange on which registered:
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COMMON SHARES NASDAQ NATIONAL MARKET
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
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The number of outstanding shares of the issuer's common stock as of May 31, 1998
was 13,808,132 Shares.
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 nor required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant
has elected to follow.
[ ] ITEM 17 [X] ITEM 18
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Unless the context otherwise requires, references herein to "the
Company" or to "Genesis" are to Genesis Microchip Inc. and its consolidated
subsidiaries.
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The Company's name together with its logo is registered as a trademark
in the United States and a number of other countries. This Annual Report on Form
20-F may also contain tradenames or trademarks of companies other than Genesis.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
<S> <C> <C>
1. Description of Business...................................................................... 1
2. Description of Property...................................................................... 14
3. Legal Proceedings............................................................................ 14
4. Control of Registrant........................................................................ 14
5. Nature of Trading Market..................................................................... 15
6. Exchange Controls and Other Limitations Affecting Security Holders........................... 15
7. Taxation..................................................................................... 16
8. Selected Financial Data...................................................................... 18
9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 20
10. Directors and Officers of Registrant......................................................... 35
11. Compensation of Directors and Officers....................................................... 37
12. Options to Purchase Securities from Registrant or Subsidiaries............................... 38
13. Interest of Management in Certain Transactions............................................... 38
PART II
14. Description of Securities to be Registered................................................... 40
PART III
15. Defaults Upon Senior Securities.............................................................. 40
16. Changes in Securities and Changes in Security for Registered Securities...................... 40
PART IV
17. Financial Statements......................................................................... 40
18. Financial Statements......................................................................... 40
19. Financial Statements and Exhibits............................................................ 40
</TABLE>
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FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act, as amended.
The forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. Genesis undertakes no obligation to
publicly revise these forward-looking statements, which reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including reports on form 6-K
filed by the Company in 1998.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Genesis Microchip Inc. ("Genesis" or the "Company") designs, develops and
markets sophisticated, real-time, cost-effective, high-quality digital image
manipulation integrated circuit ("IC") solutions. The Company's IC solutions
translate diverse video, graphics and image sources for viewing on various
display systems while maintaining the integrity of images and improving
perceived image quality. The Company has created a substantial intellectual
property portfolio and has developed strong technical expertise in the areas of
algorithms, IC architecture, IC design and systems design.
The Company initially developed its IC solutions for specialized high-end,
digital video processing markets and applications such as medical imaging,
aerospace, video editing and television broadcasting. The Company has
established itself as a principal supplier to leaders in the digital projection
systems market. More recently, the Company has begun to target the liquid
crystal display ("LCD") monitor market, which it believes is a potential mass
market. The Company intends to target other potential mass markets as they
develop, including home theater, digital video disk ("DVD"), plasma display
panel television ("PDP/TV"), PC theater, digital television ("DTV") and high
definition television ("HDTV").
Video, graphics and image sources are viewed on a variety of electronic
displays. Dedicated display systems come in many different forms, such as
television sets, computer monitors and projection display systems, each
supporting different standards. Historically, all image sources were only
capable of being displayed on display systems with standards that conformed to
those of the image source. Today, however, in order for different image sources
to be displayed on different display systems, the source image may have to be
manipulated from its original standard to conform to the standards of the target
display system. Furthermore, the convergence of television and computer
applications has resulted in an increasing requirement to view video and
graphics on a variety of display systems. Due to the complexity of the
calculations involved, high-quality image manipulation often requires a large
amount of circuitry resulting in IC solutions that are not cost-effective.
Although more silicon-efficient and less expensive technologies are available,
they fail to maintain image integrity and result in low-quality images. The
Company's patented technology enables it to provide high-quality image
manipulation in highly cost-effective IC solutions.
The convergence of television and computer applications together with the
demand for higher image quality are accelerating the introduction of newer, more
sophisticated digital display systems. Although analog cathode ray tubes
("CRTs") are currently the most common display system, they have a number of
limitations. These include their relatively large size, high power consumption,
heat generation and lack of portability. Digital displays were developed to
address these limitations. Advances in digital display system technologies are
improving image quality and reducing costs. As a result, the use of digital
displays is expanding from existing markets such as medical imaging and notebook
computers, to newer markets, including digital projection systems and potential
mass markets such as LCD monitors and home theater. Digital display systems
coupled with an increasing need for sophisticated standards translation require
high-quality, real-time image manipulation.
The Company's goal is to be the leading developer and provider of
high-quality, cost-effective video, graphics and image manipulation IC solutions
that address evolving standards of digital display systems as new markets
emerge. The Company's relationships with industry leaders enable the Company to
anticipate the demands of its customers, understand market trends and to develop
products more quickly. The Company also provides manufacture-ready reference
designs that allow its customers to quickly ramp into production while reducing
their development costs. The Company sells its products through authorized
distributors and with the support of outside regional sales representatives.
BACKGROUND
The electronic display of information has become pervasive and is critical
to our daily lives. Electronic displays are currently used in a variety of
settings, including entertainment, work and group presentations, and a myriad of
applications, such as computer-based training, stock trading, video game
systems, automated teller machines and interactive kiosks. Dedicated display
systems come in many different forms such as television sets, computer monitors
and projection displays and are available in a variety of shapes, sizes, types
and prices. The continued reduction in the prices of electronics and displays
and the availability of
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information from a variety of new sources, such as direct broadcast satellite
and DVD, have significantly increased the utilization of displays and resulted
in many new applications. New display applications include viewing news on a
personal computer, "surfing" the Internet on a television browser, playing 3D
games on a dedicated system, giving interactive computer-based presentations and
self-service airline ticketing. Today, advanced display systems improve
productivity by permitting users to view more information at the same time or
several pieces of information simultaneously in different windows or on
different areas of a display. The proliferation of display systems and
applications has driven users to demand more versatility and higher image
quality from such systems.
Historically, all image sources were only capable of being displayed on
display systems with standards that conformed to those of the image source. For
example, television images could only be displayed on television sets and
computer images could only be displayed on computer monitors. The convergence of
television and computer applications has resulted in an increasing requirement
to view video, graphics and image sources or text on a variety of display
systems. For example, digital projection systems are able to display images from
a variety of sources including VCRs and PCs, among others. To enable the display
of different image sources on different display systems, the source image must
be manipulated from its original standard to conform to the standards of the
target display system. The problems inherent in image manipulation are
compounded by the frequent introduction of new display standards to address user
demand for improved image quality. Image quality is a function of three
principal parameters specific to the display system: (i) resolution (the number
of lines or pixels that are contained in the display), (ii) format (the order in
which the lines or pixels are displayed) and (iii) frame refresh rate (the
number of times per second that an image is displayed on the screen). Computer
standards are evolving from lower resolutions and frame refresh rates such as
VGA (e.g., 640 x 480 pixels, 60 frames per second) to higher resolutions and
frame refresh rates such as XGA (e.g., 1,024 x 768 pixels, 85 frames per
second). Television is also evolving from existing standards such as NTSC (the
current standard in North America) to new digital standards such as HDTV.
The convergence of television and computer applications and the demand for
higher image quality have driven the demand for more sophisticated display
systems. Based on older vacuum tube technology, CRTs are currently the most
common display device. CRTs are analog in nature and provide viewers with a high
level of brightness, long lifetimes, wide viewing angles and low cost. However,
CRTs have a number of limitations including their relatively large size, high
power consumption, heat generation and lack of portability. Digital displays,
such as flat panel monitors and projection systems, were developed to address
these limitations. Initially, due to their relatively high cost, digital display
systems were adopted in applications where CRTs were unsuitable, such as in
weight or space-constrained applications or in display systems with large
viewing areas. However, advances in digital display device technologies are
resulting in improved quality and reduced cost. The use of digital displays is
expanding from existing markets such as medical imaging and notebook computers
to newer markets including digital projection systems and potential mass markets
such as desktop LCD monitors for PCs, PDP/TV, PC theater and home theater.
With the transition from analog to digital displays, both existing and
emerging display markets will have a fundamental need for sophisticated
high-quality digital image manipulation. Image manipulation technologies enable
the images from a range of analog and digital sources, such as PCs, television
broadcast signals, DVDs and satellite transmissions, to be displayed on various
analog and digital display systems such as television sets, LCD monitors and
digital projection systems. The sources and displays of video, graphics and
images are supplied by numerous vendors, are available in numerous resolutions,
formats and frame refresh rates, can be analog or digital and operate according
to many different standards, including the numerous domestic and international
standards for both television broadcast signals and computer graphics.
High-quality image manipulation is a complex process involving sophisticated
computational techniques, and must provide the real-time capability to extract
and manipulate the source pixel map of an image to create a pixel map formatted
to the target display while maintaining optimum image quality. For example,
image manipulation technologies enable the transfer of an image from a PC to a
television set, or vice versa, whether the source or display is in analog or
digital format. While low-quality image manipulation is performed using
unsophisticated techniques such as line and pixel dropping or replication, these
methods are subject to limitations and produce low quality images with
undesirable visual artifacts. As a result, use of these traditional technologies
in IC products to perform high-quality image manipulation is not satisfactory
for commercial applications in emerging digital display markets. While high-end
systems are capable of performing high-quality image manipulation, they are not
cost-effective for larger markets. The demands of the emerging digital display
markets to perform sophisticated, real-time image manipulation require
cost-effective ICs that incorporate advanced algorithms and execute billions of
operations per second.
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SOLUTION
Genesis designs, develops and markets sophisticated, real-time,
cost-effective image manipulation IC solutions. The Company's IC solutions
translate diverse video, graphics and image sources for viewing on various
display systems while maintaining the integrity of images by minimizing visual
artifacts and improving perceived image quality. The Company's IC solutions are
capable of executing billions of operations per second to perform high-quality
resolution, format and frame refresh rate conversion and allow for the
synchronization of various signals involved in these complex processes. The
Company's IC solutions solve resolution, format and frame refresh rate
conversion problems by utilizing patented algorithms and IC architectures as
well as advanced IC design and system design expertise. The Company's
technologies include shrink (reducing the number of pixels), zoom (increasing
the number of pixels), de-interlace (converting the display format), synchronize
(coordinating different pixel rates or image frame refresh rates) and warp
(creating image special effects).
The Company initially developed its IC solutions for specialized high-end
digital video processing markets and applications such as medical imaging,
aerospace, video editing and television broadcasting. Currently, the Company's
IC solutions are focused on addressing the demands of existing and emerging
digital video, graphics and image display markets where high-quality digital
image manipulation is a fundamental requirement. These markets include markets
such as digital projection systems and potential mass markets such as desktop
LCD monitors, home theater, DVD, PDP/TV, PC theater, digital television and
HDTV. The Company commenced commercial shipments of its IC products to LCD
monitor OEMs in the first quarter of calendar 1998. With nine years of
experience in the development of image manipulation technologies, the Company
has developed a substantial intellectual property portfolio and strong technical
expertise in the areas of algorithms, IC architecture, IC design and system
design. The Company has become a leading innovator in the development of
sophisticated, high image quality manipulation technologies and a leading
supplier of integrated image manipulation IC solutions and related
production-ready reference designs.
STRATEGY
The Company's goal is to be the leading developer and provider of
high-quality video, graphics and image manipulation IC solutions. The Company's
strategy consists of the following key elements:
Expand Technology Leadership in Image Manipulation. The Company intends to
leverage its image manipulation expertise in algorithms, IC architecture, IC
design and system design to continue to develop a full range of real-time,
cost-effective image manipulation IC solutions that meet the requirements of its
customers. The Company has created a substantial intellectual property portfolio
of key image manipulation technologies including shrinking, zooming,
de-interlacing, synchronizing and warping. The Company intends to continue to
make significant investments in research and development in order to maintain
and expand its leadership position in image manipulation technologies.
Leverage Relationships with Industry Leaders. The Company develops and
maintains close relationships with leading companies in the digital display
industry. These collaborative design relationships enable the Company to
anticipate the demands of its customers, understand market trends and accelerate
product development to address the requirements of these customers. The Company
has collaborated with companies such as Apple Computer, Inc. ("Apple Computer"),
Samsung and In Focus Systems in defining image manipulation requirements that
led to the development of IC products incorporating a number of image
manipulation technologies on single ICs ("system-on-a-chip").
Provide Manufacture-Ready Designs. The Company's in-house system design
team delivers manufacture-ready reference designs, including embedded software
and board design, that incorporate the Company's IC products. These designs
enable OEM customers to begin production quickly while incurring lower
development costs and provide the Company with the systems expertise needed to
create more highly-integrated next generation ICs.
Focus on Potential Mass Market Opportunities. The Company intends to
provide image manipulation solutions for mass markets as they develop. The
Company is a leading developer of image manipulation ICs for the digital
projection system market and is expanding into the emerging market for PC
desktop LCD monitors. The Company has achieved design wins with LCD monitor OEMs
and has been delivering commercial shipments of its IC products into this market
since the first quarter of calendar 1998. The Company believes its technologies
can be adapted to a wide range of applications in potential mass markets such as
home theater, DVD, PDP/TV, PC theater, DTV and HDTV.
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License Technologies for Additional Markets. To capitalize on its
intellectual property, the Company may license its technology to IC suppliers
outside of its target markets, although the appropriate opportunities for doing
so have not yet materialized. Licensing its proprietary technology allows the
Company to focus on its target markets while establishing a broader market
presence.
MARKETS, APPLICATIONS AND CUSTOMERS
The Company's IC solutions address the demands of existing and potential
digital video, graphics and image display markets in which high-quality image
manipulation is necessary. The Company's target markets include the following:
Digital Projection Systems. The increased use of high-quality multimedia
presentations and notebook computers has led to growing demand for digital
projection systems. The Company's image manipulation technologies give digital
projection systems the flexibility to display a variety of images from PC and
video sources while maintaining high image quality. The Company has established
itself as a principal supplier to leaders in this market. Digital projection
system OEMs using the Company's ICs include, among others, In Focus Systems,
Inc., Sharp, 3M, Hitachi, Mitsubishi, Fujitsu, Texas Instruments and CTX Opto
Electronics.
LCD Monitors. The Company believes that LCD monitors will garner an
increasing share of the market for computer monitors, which is currently
dominated by CRT monitors. The Company's image manipulation technologies give
LCD monitors the flexibility to display a variety of images from PC and video
sources while maintaining high image quality. The Company supplies its IC
products to LCD monitor OEMs including, among others, Apple Computer, Inc., LG
Electronics, Sony, Fujitsu, Samsung, Tatung and Acer. Many of these LCD monitor
OEMs in turn supply branded LCD monitors to major resellers. See "Risk
Factors--Dependence on Growth of LCD Monitor and Other Potential Markets" and
"--Market Acceptance of Company's Products for the LCD Monitor Market."
Advanced Image Processing. The Company developed its initial image
manipulation technologies by focusing on certain specialized, high-end imaging
markets that require a high level of performance and image quality and are not
necessarily cost sensitive. The Company continues to develop image manipulation
IC solutions for these markets, which include aerospace, broadcasting, document
management, medical imaging, post production, scan converters, surveillance,
video compression, video conferencing, video editing, video walls and
workstations. Some of the Company's customers in these markets include Silicon
Graphics, Inc., Sonic Solutions, Allied Signal and Scitex Corporation.
Potential Mass Markets. The Company intends to leverage its image
manipulation technologies and system design expertise to create IC solutions for
mass markets as they develop. The Company believes the demand for higher image
quality and the need to display a variety of image sources on a variety of
display systems will create new potential mass markets for the Company's
products. These potential markets include home theater, DVD, PDP/TV, PC theater,
DTV and HDTV. These ICs enable the conversion of interlaced television sources
into images that can be displayed on high-quality, progressively scanned
displays.
PRODUCTS
The Company's IC products are based on advanced algorithms, IC
architectures, IC designs and system designs that provide sophisticated,
real-time, cost-effective, high quality digital image manipulation IC solutions.
The Company began volume production of its first proprietary IC product in 1995.
The Company currently provides several series of IC solutions and related
reference designs to address the requirements of digital video, graphics and
image display markets and to offer its customers a comprehensive line of
products that satisfy their image manipulation requirements. The Company has
obtained numerous design wins and in the past year has shipped its IC products
to over 150 customers. There can be no assurance that such design wins will
translate into future orders for the Company's image manipulation ICs.
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The following table lists the Company's IC products that are currently
being marketed by the Company, including the calendar quarter in which each
product was related to production:
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PRODUCT PRODUCTION
APPLICATIONS PRODUCT FEATURES MARKETS RELEASE*
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GENSCALE SERIES
Digital Image (Still gm865x1 High-quality (65 taps), Aerospace, broadcast, Q4 1995
Video & Computer single-channel (8 bit), document management,
Graphics) Manipulation real-time digital image medical imaging
shrink and zoom
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Digital Image (Still & gm833x2 High-quality (33 taps), Surveillance, digital Q4 1995
Video) Manipulation two-channel (8 bit), projection systems,
real-time digital image video editing, video walls,
shrink and zoom workstations
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Digital Image (Still & gm833x3 High-quality (33 taps), PDP TVs, scan converters, Q4 1995
Computer Graphics) three-channel (8 bit), workstations, digital pro-
Manipulation real-time digital image jection systems, acro-
shrink and zoom space, medical imaging
gm833x3F High speed version of Q1 1996
gm833x3
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HALF-BAND FILTER SERIES
Digital Half-Band Filter gm2242 High-quality single-channel Broadcast, video editing Q3 1995
(8 bit), digital decimator
by 2 and interpolator by 2
filter
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DICE SERIES
Digital Video gmVLD8 High-quality (8 bit), DVD/PCs, home theater, Q3 1996
De-Interlacing real-time digital video PDP TVs, scan converters,
(Line Doubling) de-interlacer (line digital projection systems,
Manipulation doubler) video walls, broadcast,
video editing
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Digital Video gmVLD10 High-quality (10 bit), Q3 1996
De-Interlacing real-time digital video
(Line Doubling) de-interlacer
Manipulation
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ADVANCED IMAGE MANIPULATION ("AIM") SERIES
Digital Video gmZ1 Integrated high-quality Digital projection Q3 1997
and Graphics three channel (8 bit), systems, LCD monitors,
Manipulation real-time digital image digital televisions,
zoom and digital video home theater
de-interlacer with
display synchronization
capability
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FRAME REFRESH RATE CONVERSION ("FRC") SERIES
Digital Video and gmFCI High speed DRAM Digital projection Q2 1998
Graphics Frame based frame rate systems, LCD monitors,
Refresh Rate converter (8 bit) with digital televisions,
Converter direct to the gmZ1 video walls, home theater
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*Calendar quarters
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GENSCALE SERIES
GenScale, the Company's first product series, is designed to provide
video, graphics and image scaling (shrink and zoom) capabilities to markets such
as advanced image processing markets. A distinguishing characteristic of this
series of products is that all of the memory necessary for image reduction is
included in the IC, while external memory is required for zoom.
gm865x1. This product is a single channel 8-bit IC implementing
proprietary algorithms that allow smooth and continuous image shrink or zoom.
Specifically, shrink uses up to 65 tap Finite Impulse Response ("FIR") filtering
in either or both horizontal and vertical directions (the greater the number of
taps or sampling pixels used for interpolation, the higher the fidelity of the
scaling). For zoom, advanced interpolation techniques are implemented.
Monochrome applications require a single gm865x1, YUV (i.e. video) applications
require two ICs, and computer graphics or Red Green Blue ("RGB") applications
require three ICs. The gm865x1 is no longer available from its third party
manufacturer. However, the Company has procured an inventory of this product
which is believed to be sufficient to satisfy the requirements of the Company's
customers until replacement products can be designed and procured. The gm865x1
was manufactured using a 0.8 micron 5 volt CMOS process.
gm833x2. This product is a two-channel 8-bit IC implementing proprietary
algorithms that allow smooth and continuous high-quality image shrink or zoom.
Specifically, shrink uses up to 33 tap FIR filtering in either or both
horizontal and vertical directions. For zoom, advanced interpolation techniques
are implemented. Since digital video consists of YUV-encoded image data, digital
video applications require a single gm833x2 IC. The gm833x2 is manufactured
using a 0.8 micron 5 volt CMOS process.
gm833x3. This product is a three-channel 8-bit RGB IC implementing
proprietary algorithms that allow smooth and continuous, high-quality image
shrink or zoom. Specifically, shrink uses up to 33 tap FIR filtering in either
or both horizontal and vertical directions. For zoom, advanced interpolation
techniques are implemented. Since graphics applications consist of RGB image
data, applications of up to 40MHz require a single gm833x3 IC for image
manipulation. The gm833x3 is manufactured using a 0.8 micron 5 volt CMOS
process.
gm833x3F. This product is a faster version of the gm833x3 and operates at
speeds of up to 68MHz. The product is used in applications that require higher
data rates involving a greater number of pixels processed per second. The
gm833x3F is manufactured using a 0.35 micron 3.3 volt ASIC CMOS process.
HALF-BAND FILTER SERIES
The Half-Band Filter Series consists of ICs that filter images by removing
high-frequency noise or fine detail from video source images. The filters are
used in television broadcasts and video editing.
gm2242B and gm2242BB. The 8-bit gm2242B and gm2242BB Half-Band Filters are
compatible with Raytheon and Logic Device's 2242B Half-Band Filters and offer
additional features that allow higher image quality system designs. The gm2242
was manufactured using a 0.8 micron 5 volt CMOS process.
DICE SERIES
The gmVLD8 and gmVLD10 were the first commercially available digital
video de-interlacing ICs. These products process video using temporal and
spatial filtering algorithms that yield high-quality progressive scan images.
These products are used in applications such as digital projection systems, home
theater, broadcasting and video editing, among others.
gmVLD8. This product is an 8-bit high-quality digital video de-interlacing
IC that implements advanced algorithms to process digital video sources,
including North American and European (NTSC, PAL and SECAM) broadcast standards
in YUV format, into RGB progressive scan outputs suitable for high-quality
digital displays. The gmVLD8 is manufactured using a 0.8 micron 5 volt CMOS
process.
gmVLD10. This product is a high-quality 10-bit digital video
de-interlacing IC that implements advanced algorithms to process interlaced
digital video sources, including NTSC, PAL or SECAM standards (in YUV or D1
format), into RGB progressive scan outputs suitable for high-quality digital
displays. The gmVLD10 is manufactured using a 0.8 micron 5 volt CMOS process.
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AIM Series
The Advanced Image Manipulation ("AIM") series includes highly-integrated
high image quality cost-effective products that are designed for high volume
display markets, including digital projection systems, LCD monitors and digital
television.
gmZ1. The gmZ1 is the first IC in the AIM series. The gmZ1 is a high image
quality three channel 8-bit RGB IC implementing advanced algorithms that allow
smooth and continuous image zoom and synchronized direct interface with LCD
panels. The gmZ1 also incorporates advanced algorithms for digital video spatial
de-interlacing. The image zoom quality processed by the gmZ1 yields crisp and
sharp results suitable for video, graphics and images. The gmZ1 is offered in
two speed versions, 65MHz and 84MHz, and is manufactured using a 0.35 micron 3.3
volt ASIC CMOS process.
FRC Series
The Frame Refresh Rate Conversion ("FRC") series of ICs includes
high-speed graphics and video memory buffer control ICs used to reduce or
increase input frame refresh rates as required by fixed frame rate displays
such as certain LCD panels. These products are used in applications such as
digital projection systems, LCD monitors and home theater.
gmFC1. The gmFC1 is the first IC in the FRC series. The gmFC1 is a
three-channel frame buffer controller that requires no extra components to
connect to SDRAM memory and to the gmZ1. The gmFC1 works with the gmZ1 and
external memory to increase or maintain, as required, the frame refresh rates of
high data rate video or graphics inputs for fixed frame rate displays such as
typical current generation LCD panels. The gmFC1 is manufactured using a 0.5
micron 3.3 volt CMOS process.
TECHNOLOGY
Genesis has developed a substantial intellectual property portfolio of
image manipulation technologies that address the problems of standards
translation while maintaining image integrity and improving perceived image
quality. The Company's IC solutions solve resolution, format and frame refresh
rate conversion problems by utilizing patented algorithms and IC architectures
as well as advanced IC design and system design expertise. The Company's
technologies include shrink (reducing the number of pixels), zoom (increasing
the number of pixels), de-interlace (converting display formats), synchronize
(coordinating different pixel or image frame refresh rates) and warp (creating
image special effects).
Shrink. Shrink is the creation of a new, reduced set of pixels from an
image source containing a greater number of pixels. Shrink technology is
required for resolution conversion from a high definition source to a lower
definition display, and is used for viewing video in a window, either on a
television or PC. Shrinking an image can be accomplished through a number of
techniques. The least sophisticated technique involves dropping entire rows or
columns of pixels from an image source, which results in visible artifacts in
the displayed image. Another technique, bilinear filtering (averaging two
adjacent pixel lines), while better than pixel dropping still causes visible
image degradation. Higher quality image manipulation can be achieved using other
techniques that are not cost-effective because they require large amounts of
circuitry. With its patented and proprietary filtering technologies (including
technology licensed from NorthShore), the Company's IC products can reduce by
any factor the resolution of an image smoothly and continuously with appropriate
filtering to minimize visible artifacts, while requiring far less circuitry than
other high-quality approaches. See "Intellectual Property and Licenses."
Zoom. Zoom is the creation of a new, larger set of pixels from an image
source containing a smaller number of pixels. Zoom technology is required for
resolution conversion from a low definition source to a higher definition
display. High resolution displays place greater demands on real-time performance
because they require processing of up to 230 million pixels per second.
Alternative zoom techniques include pixel replication or bilinear filtering,
both of which result in low-quality images, jaggedness or artifacts. The
Company's patented and proprietary and silicon-efficient zoom technologies can
continuously and smoothly enlarge a video or graphic source to higher
resolutions while delivering sharp and crisp images.
De-interlace. De-interlacing is the process of converting a source of
interlaced images to a progressively scanned sequence of images, such as the
conversion of a television source image for display on a computer monitor.
Interlacing is the process of separating one video frame into two overlapping
fields for sequential transmission and display on a television screen. For
example, an NTSC television signal has 525 horizontal lines and displays all of
the odd-numbered lines in one pass, then all the even-numbered lines in a second
pass occurring 16 milliseconds later. Displaying half of the lines at a time
provides reasonable vertical
7
<PAGE> 11
cal resolution when the scene has no motion and reasonable temporal resolution
when the scene has motion. While only showing half of the picture each sixtieth
of a second saves bandwidth, it creates a shimmering, known as interline
flicker. Interline flicker can be avoided by displaying the lines of a frame by
sequentially progressing from one line to the next, which is how a computer
monitor typically presents high resolution graphics. Poor de-interlacing
techniques can result in a number of visible artifacts, including "zippering"
of objects in motion or from film sources and "stair-stepping" of diagonal
lines. Genesis has licensed rights to use and filed patents for temporal and
spatial filtering technologies for converting interlaced source images to
progressively scanned images. The Company's de-interlacing techniques deliver
high spatial resolution on static images and high temporal resolution on moving
pictures, while avoiding the problems created by alternative methods.
Synchronize. Synchronizing is the process of converting the timing of
source images to the timing required by the display system so that the image can
be displayed with high perceived image quality. An image source may have image
characteristics such as line timing, pixel timing and frame refresh rates that
are different from the characteristics of the targeted display system. Examples
of varying frame rates include NTSC at 30 frames per second, PAL and SECAM at 25
frames per second, and computer graphic sources at 60, 72, 75, 80 or 85 frames
per second. High frequency frame refresh rates are used in computer monitors to
reduce eye strain caused by wide area flicker. Poor synchronization can result
in two source image frames being combined into one display image frame,
resulting in "tear." Because displays require real-time performance, the Company
has incorporated synchronizing circuitry into its recent IC solutions. Genesis
has filed a patent claim for a line-based re-timing method which has low memory
requirements. This technique is used in the Company's gmZ1 product, which
requires no external memory. The Company also offers a frame refresh rate
conversion solution in the gmFC1 product that provides flexibility and
eliminates frame tear.
Warp. The Company's patented warp technology provides rotation, shrink,
zoom, offset and optical distortion correction, while maintaining the correct
filter characteristics at each point. The Company is currently developing a
product that incorporates its three-dimensional warp technology. Potential
applications include military and medical imaging, surveillance, headset
displays, virtual reality games and video production two-dimensional and
three-dimensional special effects. There can be no assurance that the Company
will successfully develop and introduce a product incorporating its warp
technology.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are performed within
specialized groups consisting of algorithm development, IC product development
and systems engineering. The algorithm development group is focused on
developing silicon-efficient and high-quality image manipulation technologies to
better address potential mass markets targeted by the Company. The Company has
invested significant resources in the development of systems which enable it to
simulate and optimize algorithms in real-time for specific markets that it
believes provide a competitive advantage in addressing the needs of the
Company's targeted markets. The IC product development group is focused on
reducing its customers' time-to-market, achieving first time silicon success and
developing modular technologies to reduce the development time of the Company's
IC products. The Company has strengthened its IC design capabilities by
investing in design automation software, sophisticated computer servers and
hardware accelerators. The systems engineering group concentrates on evaluation
boards and manufacture-ready reference designs which facilitate the integration
of the Company's IC products into those of its customers. The Company invests
considerable time and effort understanding the systems issues related to
specific applications to ensure that its reference designs and next generation
IC products better meet specific market needs.
The Company believes that the continued enhancement of its image
manipulation solutions for existing markets and the development and
introduction of products for emerging markets is essential to its growth. The
Company is currently developing its next generation DICE product which is
intended to cost-effectively address certain potential mass markets including
home theater, DVD, PDP/TV, DTV and HDTV. The Company is also developing its
next generation AIM and FRC products targeted at the LCD monitor market.
Finally, the Company is developing a new IC product that is primarily designed
to address the needs of the next generation of digital projection systems, as
well as a new IC product that incorporates the Company's Warp technology. There
can be no assurance that these products will be developed and introduced to
market in a timely and cost-effective manner or that they will address the
evolving needs of the target markets.
A key element of the Company's strategy is to work closely with industry
leaders in the digital display market to design products with improved
performance, cost and functionality. These collaborative design relationships
enable the Company to
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<PAGE> 12
anticipate the demands of its customers, to understand market trends and to
develop products on an accelerated basis that address the requirements of these
customers. The Company has collaborated with industry leaders such as Apple
Computer, Samsung and In Focus Systems in defining image manipulation
requirements that led directly to the development of IC products incorporating a
number of image manipulation technologies on single ICs ("system-on-a-chip").
The Company typically commits significant research and development resources to
such design activities, often diverting financial and personnel resources from,
or foregoing entirely, other development projects. Furthermore, the Company
typically undertakes such design activities without entering into formal
agreements under which these companies are obligated to continue the
collaborative design project or to purchase the resulting products.
Consequently, these companies may terminate the collaborative design project at
any time without penalty. In addition, these companies may terminate a
collaborative design project for a variety of reasons including the Company's
failure to meet agreed-upon performance standards, or for reasons beyond the
Company's control, including changing market conditions, increased competition,
discontinued product lines and product obsolescence. The failure of a company to
complete development of a collaborative design project or to purchase the
products resulting from such projects may result in the unproductive utilization
of the Company's research and development resources and the loss of potential
revenues from the development and sale of alternative products. There can be no
assurance that the Company will be able to continue to identify industry leaders
willing to work with the Company on collaborative design projects in the future.
In view of the rapid technological change and evolving industry standards that
characterize the Company's potential target markets, the Company's failure to
identify or establish such relationships on an ongoing basis could render its
products less competitive, which would materially adversely affect its business,
financial condition and results of operations. See "Risk Factors-Dependence on
New Product Development; Rapid Technological Change."
As of May 31, 1998, the Company had 58 full-time employees engaged in
research and development. Gross expenditures for research and development for
fiscal 1998, fiscal 1997 and fiscal 1996, were $4.5 million, $3.4 million and
$2.6 million, respectively.
SALES AND MARKETING
The Company sells and markets its products through authorized distributors
or directly with the support of regional sales representatives. The Company's
sales and marketing personnel work closely with customers, industry leaders,
sales representatives and authorized distributors to define product features,
performance, price and market timing of new products. In North America, Taiwan
and Korea, the Company sells its products to customers primarily through
technically-trained sales representatives. In Europe and Japan, the Company
sells its products through authorized distributors. The Company provides
technical support and design assistance directly to OEM customers, regardless of
the sales channels used. In many cases, display products are designed and
manufactured by OEMs on behalf of brand-name systems companies. The Company
focuses on developing long-term customer relationships with both the OEMs and
with the brand-name systems companies. The Company believes that this approach
increases the likelihood of design wins, improves the overall quality of support
and enables the timely release of customer products to market.
The Company believes that a high level of customer support is necessary to
successfully develop and maintain long-term relationships with its customers.
These relationships begin at the design-in phase and develop as customer needs
change and evolve. The Company provides direct service and support to its
customers through its offices in Canada and the United States. The Company's
customers are also serviced through its sales representative offices in Taiwan
and Korea. In addition, the Company's distributors assist in providing ongoing
support and service functions. In particular, the Company's Japanese
distributor, Kanematsu Semiconductor Corporation, has a dedicated team,
including field application engineering, focused on selling and supporting the
Company's IC products. The Company provides support through both on-site
customer service and remote support from various facilities. The Company
generally provides a warranty for all of its products for a period of one year
from the date of shipment.
Sales to customers located outside of North America accounted for 47%, 19%
and 7% of the Company's total revenues for fiscal 1998, fiscal 1997 and fiscal
1996, respectively. In fiscal 1998 a large portion of the Company's revenues
were from sales to customers outside of North America, particularly to
manufacturers located in the Asia-Pacific region (primarily Japan, Korea and
Taiwan) who sell their products worldwide. The Company's sales are derived from
a limited number of customers, with the top five OEM customers accounting for
56%, 35% and 51% of total revenues during fiscal 1998, fiscal 1997 and fiscal
1996,
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<PAGE> 13
respectively. See "Risk Factors--Customer Concentration," "--Dependence on Sales
Outside of North America" and Note 9 of the Notes to Consolidated Financial
Statements.
The Company's marketing programs include trade shows, training seminars,
public relations and advertising. In cooperation with key OEM customers, the
Company is developing the "ImEngine" branding program, a multifaceted campaign
with the goal of educating and informing consumers about the Company's display
technology. The program is expected to include point of sale displays,
cooperative advertising and publications in target media.
As of August 31, 1998, the Company employed a sales and marketing force of
28 people with a high level of technical expertise and industry knowledge to
support a lengthy and complex sales process. This sales and marketing
organization includes a highly-trained team of nine field applications engineers
to assist customers in designing, testing and qualifying system designs that
incorporate the Company's IC products. The Company believes that the depth and
quality of this design support are key to improving customers' time-to-market
and maintaining a high level of customer satisfaction. See "Risk
Factors--Lengthy Sales Cycle."
MANUFACTURING
The Company's products are manufactured by third parties with
state-of-the-art fabrication equipment and technology. The Company has
established a strategic relationship with certain suppliers to produce certain
of the Company's products as fully-assembled and tested ICs. These suppliers
typically subcontract with other parties to assemble, package and test the
products that they manufacture for the Company. This approach enables the
Company to focus on product design and development of IC solutions, minimizes
capital expenditures related to IC fabrication and provides access to advanced
manufacturing facilities. The Company's IC products are generally designed for
production in accordance with the suppliers' specific design rules and
manufacturing processes. The suppliers typically provide design teams to support
the Company's product development. The Company designs the overall product,
including the logic circuitry and the suppliers then assist the Company in
design verification prior to production. The suppliers manufacture the wafers,
perform product testing and sell finished products to the Company.
Currently, most of the Company's IC products are being manufactured,
assembled and tested by IBM in France and the United States, and the Company
expects that it will continue to rely upon IBM to manufacture, assemble and test
many of its products. The Company is dependent on IBM to produce wafers of
acceptable quality and with acceptable manufacturing yields, to deliver those
wafers to assembly and testing subcontractors on a timely basis and to allocate
to the Company a portion of its manufacturing capacity sufficient to meet the
Company's needs. The Company has at times experienced delivery delays and long
manufacturing lead times. There can be no assurance that IBM will continue to
devote adequate resources to the production of the Company's products or deliver
sufficient quantities of finished products on a timely basis or at an acceptable
cost. Given the Company's reliance on IBM, any such difficulties could have a
material adverse effect on the company's business, financial condition and
results of operations.
The Company is in the process of qualifying and commissioning additional
suppliers of silicon wafers and assembly and test services in Asia in order to
take advantage of competition for pricing and lead-times. Even so, there is
currently no single product that is being manufactured or planned to be
manufactured in more than one location or by more than one source. There are
many risks associated with the Company's dependence upon third party
manufacturing, assembling and product testing relationships. These include
reduced control over delivery schedules, quality assurance, manufacturing yields
and costs, potential lack of adequate capacity during periods of excess demand,
unavailability or interruption of access to certain process technologies and
potential misappropriation of the Company's intellectual property.
The Company is dependent on its suppliers to produce wafers of acceptable
quality and with acceptable manufacturing yields, to deliver those wafers to
assembly and testing subcontractors on a timely basis and to allocate to the
Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. The Company has at times experienced delivery delays and long
manufacturing lead times. There can be no assurance that the Company's suppliers
will continue to devote adequate resources to the production of the Company's IC
products or to deliver sufficient quantities of finished products on a timely
basis or at an acceptable cost. Given the Company's reliance on these IC product
suppliers, any such difficulties could have a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE> 14
Two of the Company's IC products are no longer available from their third
party manufacturers. However, the Company has procured an inventory of these
products which is believed to be sufficient to satisfy the requirements of the
Company's customers until replacement products can be designed and procured. In
addition, IBM has informed the Company that its IC products produced on IBM's
0.8 micron manufacturing process will be discontinued at the end of December
1998. A substantial percentage of the Company's IC products are manufactured
using this process. The Company has one replacement product in production using
a 0.35 micron manufacturing process and is in the process of designing
replacement products using a 0.35 micron manufacturing process or other similar
advanced process for the other products affected by the discontinuance.
However, there can be no assurance that such replacement products will function
to the Company's specifications, satisfy customers requirements or be
cost-effectively produced before or after the 0.8 micron manufacturing process
is discontinued. The failure of the Company to successfully design replacement
products could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company will make a final
purchase from IBM of products using the 0.8 micron manufacturing process prior
to the end of September 1998 based on its forecast of future demand for the
products. In the event that the forecast were to prove inaccurate and the
Company were to purchase excess inventory, write downs would result which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has negotiated a new supply agreement with IBM for the
manufacture of foundry products in the United States, and is currently in
negotiations with companies in Asia for similar supply agreements. While the
Company believes that these supply agreements may result in lower pricing to the
Company for products manufactured under these agreements, a portion of the risk
of yield in the manufacturing process will pass to the Company for these
products. Under these foundry manufacturing relationships, the Company will
purchase wafers from these foundries paying the wafer prices stipulated in the
supply agreements and thereby bearing the risk of final yield of good die. The
foundries, for their part, must manufacture the wafers in accordance with the
process technology parameters defined in the respective agreements. Furthermore,
wafers with process yields lower than a specified percentage of the wafer target
yield stipulated in the agreements for each IC product will not be shipped
without the Company's written approval, the withholding of which will not result
in any liability of the Company.
The Company expects that each of its IC products will be manufactured by a
sole source manufacturer for the foreseeable future. Currently, all but one of
the Company's IC products under volume manufacture are being supplied by IBM.
The Company's gmFCI frame refresh rate conversion IC is being supplied by Chip
Express. However, the Company expects that several of its future IC products
will be manufactured, assembled and tested by new Asian manufacturing partners.
The lead time necessary to establish a strategic relationship with a new
manufacturing partner is considerable, and the estimated time for IBM or any of
the Company's other current or potential manufacturing partners to switch to a
new product line is four to six months. Accordingly, there is no readily
available alternative source of supply for any specific product. This lack of
portability of the Company's products and the related dependence on sole source
manufacturing subjects the Company to risks associated with an interruption in
supply. A manufacturing disruption experienced by IBM or any of the Company's
other current or potential manufacturing partners could impact the production of
the Company's products for a substantial period of time, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Under the supply agreements with IBM, the Company is obligated to provide
rolling 12 month forecasts of anticipated monthly purchases and to place
purchase orders which become binding approximately four months prior to
shipment. If the Company cancels a purchase order, it must pay cancellation
penalties based on the status of the work in process. In addition, although the
Company may order products that exceed the numbers previously forecasted and
accepted by IBM, such orders are subject to rejection by IBM for any reason,
including but not limited to resource availability. Thus, the Company must make
forecasts and place purchase orders for its IC products several months before it
receives purchase orders from its own customers. This limits the Company's
ability to react to fluctuations in demand for its products, which can be
unexpected and dramatic, and may cause the Company to have an excess or a
shortage of a particular product. There can be no assurance that IBM will supply
the quantities of products stated in the rolling forecast. In the event of line
capacity constraints, IBM reserves the right to reduce shipments to all
customers on a pro-rata basis. As a result of the long lead time for ordering
and obtaining wafers, the Company may be required from time to time to take
charges for excess inventory. In addition, should the market for semiconductor
wafers decline, there is a possibility that the contracted price may be
significantly greater than prevailing market prices at the time the Company
takes delivery of its orders. In fiscal 1997, the Company recorded provisions
totaling $1.3 million for potential declines in inventory value and for write
downs of excess inventory. Significant write downs of excess inventory or
declines in inventory
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<PAGE> 15
value could materially adversely affect the Company's business, financial
condition, and results of operations. Conversely, the failure to order
sufficient products would cause the Company to miss revenue opportunities which,
if significant, could impact sales by the Company's customers, thereby adversely
affecting the Company's customer relationships and the Company's business,
financial condition and results of operations.
INTELLECTUAL PROPERTY AND LICENSES
The Company seeks to protect its technology through a combination of
patents, copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. In the United States, the Company has
nine issued patents, each covering certain aspects of the algorithms, design or
architecture of certain of the Company's image manipulation ICs. These patents
expire at various times from 2011 to 2014, provided that maintenance fees are
paid on a timely basis. In addition, the Company has six patent applications
pending in the United States Patent and Trademark Office, two pending Canadian
patent applications, nine pending Japanese patent applications, nine pending
Korean patent applications, two pending Taiwanese patent applications and nine
pending European patent applications.
To supplement its proprietary technology, the Company has licensed
perpetual, exclusive and worldwide rights to use certain patents held by third
parties with rights to sub-license such rights. In particular, pursuant to an
agreement entered into on March 2, 1993, the Company has licensed from
NorthShore Laboratories, Inc. ("NorthShore") its patented shrink technology. In
accordance with such agreement, the Company pays royalties to NorthShore based
on sales of its IC products that incorporate NorthShore's shrink technology. The
license is exclusive vis-a-vis third parties, but does not prohibit NorthShore
from commercializing software products that employ its proprietary technology,
as long as those products do not directly compete with the Company's products,
nor does it prohibit the Company from sublicensing the NorthShore shrink
technology. If the license were terminated by the Company without cause by
NorthShore due to material breach of the license by the Company, or because the
Company decided not to renew the license, the Company would lose the right to
incorporate NorthShore's shrink technology in its IC products. In such event,
the Company would be required to exclude NorthShore's shrink technology from the
Company's existing and future products that have not already been sold to
customers and either license or develop internally alternative technologies.
There can be no assurance that the Company would be able to license alternative
technologies on commercially reasonable terms, or at all, or that the Company
would be capable of developing internally such technologies. If the license were
otherwise terminated by NorthShore, the Company would no longer be required to
pay royalties to NorthShore for the use of the technology and the Company would
retain the right to incorporate NorthShore's shrink technology into its IC
products, although such rights would no longer be exclusive.
While the Company intends to protect its intellectual property rights
vigorously, there can be no assurance that the Company's pending or submitted
patent applications will be approved, or that any issued or licensed patents
will provide the Company with competitive advantages or will not be challenged,
invalidated, or circumvented by third parties. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around any patents that may be issued to the
Company or licensed from third parties. Moreover, the laws of certain countries
in which the Company's products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as the laws of the United
States, and thus, may increase the likelihood of theft of the Company's
technology and product designs. There can be no assurance that the steps taken
by the Company to protect its intellectual property rights will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company has certain
indemnification obligations with respect to the infringement of third-party
intellectual property rights by its IC products. Although the Company has not
been notified that its products infringe any third-party intellectual property
rights, there can be no assurance that the Company will not receive such a
notification in the future. Any litigation to determine the validity of third
party infringement claims, whether or not determined in the Company's favor or
settled by the Company, would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that any infringement claims by third parties or any claims for
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<PAGE> 16
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the event
of an adverse ruling in any such matter, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing IC
products, discontinue the use of certain processes or be required to obtain a
license under the intellectual property rights of the third party claiming
infringement. There can be no assurance that a license would be available on
reasonable terms or at all. Any limitations on the Company's ability to market
its products, or delays and costs associated with redesigning its products or
payments of license fees to third parties, or any failure by the Company to
develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The markets in which the Company operates are intensely competitive and
are characterized by rapid technological change,evolving industry standards and
declining average selling prices. The Company believes that the principal
competitive factors in its markets are product design and performance, price,
functionality and features, size, reliability, reputation, time to market and
customer support. The Company's ability to successfully compete in its target
markets depends upon a number of other factors, including the Company's success
in subcontracting the manufacture and assembly of new products that implement
new technologies, product quality and availability, production efficiency, the
ability to achieve design wins and to begin volume production of the Company's
products for particular OEM customers, end-user acceptance of the OEM
customers' products, the timing of new product introductions by the Company,
market acceptance of competitors' products, protection of the Company's
proprietary technology and general economic conditions. There can be no
assurance that the Company will be able to compete successfully in the future
with respect to these or any other competitive factors.
The Company competes with large OEM companies that have internally
developed image manipulation IC solutions for their products. In the future,
current or potential customers may develop their own proprietary image
manipulation solutions, which may be more cost-effective and provide similar or
more advanced functionality than the Company's products. The Company anticipates
that as the markets for its products develop, competition from diversified
electronic and semiconductor companies will intensify. Such competitors include
companies with greater financial and other resources than the Company. In
addition, the Company competes with start-up companies that are seeking to
capitalize on the emergence of market opportunities for image manipulation ICs.
Such companies may develop advanced technologies enabling them to offer more
cost-effective and higher quality solutions to OEM customers than those offered
by the Company. The Company is aware of several companies that have announced or
introduced products that address markets targeted by the Company. Such increased
competition could have an adverse impact on the Company's business, financial
condition and results of operation by, among others, putting pressure on the
Company's profit margins and causing the Company to lose some of its product
orders.
The markets for the Company's IC products are characterized by rapidly
changing technologies, evolving industry standards and changes in customer
requirements. The introduction of new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. New standards may be
developed that will eliminate the need for the Company's IC solutions and which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
BACKLOG
Sales of the Company's products are made pursuant to purchase orders that
may be canceled without significant penalty. In addition, purchase orders are
subject to price negotiations and to changes in quantities of products and
delivery schedules in order to reflect changes in customer requirements and
manufacturing availability. A large portion of the Company's sales are made
pursuant to short lead time orders. In addition, the Company's actual shipments
depend on the manufacturing capability of the Company's suppliers and the
availability of products from such suppliers. As a result of the foregoing
factors, the Company does not believe the backlog at any given time is a
meaningful indicator of future revenues.
EMPLOYEES
As of August 31, 1998, the Company employed a total of 120 full-time
employees, including 64 in research and development, 28 in sales and marketing
(including 11 in technical customer support), 13 in manufacturing operations and
15 in finance
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<PAGE> 17
and administration. The Company employs, from time to time, a number of
temporary and part-time employees, co-op students and consultants on a contract
basis. The Company's employees are not represented by a collective bargaining
organization, and the Company believes that its relations with its employees are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate headquarters, which also serve as its
principal administrative, selling and marketing, customer support, applications
engineering and product development facility, which is located in Markham,
Ontario, Canada. The Company also leases a sales and marketing and customer
support office in Mountain View, California. The Company believes its existing
facilities are adequate to meet its needs for the immediate future and that
future growth can be accomplished by leasing additional or alternative space on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. CONTROL OF REGISTRANT
The Company is not owned or controlled by another corporation or by any
foreign government.
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Shares as of August
31, 1998, by (i) each person who is known by the Company to beneficially own
more than ten percent of the outstanding Common Shares, and (ii) all current
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OWNED
- ------------------------------------ ------------------- ----------
<S> <C> <C>
Rocco A. Schiralli (2) 2,319,583 16.5%
121 Harrington Sound Road
Smith's Parish, Bermuda
All directors and executive officers
as a group (12 persons) (3) 2,251,132 15.5%
</TABLE>
- -----------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, Common Shares subject to options held by that person that are
currently exercisable or exercisable with 60 days of August 31, 1998 are
deemed outstanding. To the Company's knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws,
each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such person's name.
(2) Includes (i) 1,041,501 Common Shares held by Resolve Limited, which is
wholly owned by The Didmartin Investment Trust, a trust established for
the benefit of Mr. Schiralli and his family, and over which Mr. Schiralli
does not exercise dispository or voting control; however, Mr. Schiralli
can appoint a new trustee for The Didmartin Investment Trust at any time,
(ii) 192,400 Common Shares held by Puglia Corporation, which is wholly
owned by The Parkdale Investment Trust, a trust established for the
benefit of Mr. Schiralli and his family, and over which Mr. Schiralli does
not exercise dispository or voting control; however, Mr. Schiralli can
appoint a new trustee for The Parkdale Investment Trust at any time, (iii)
736,812 Common Shares held by The Farouk Investment Trust, a trust
established for the benefit of Mr. Schiralli and his family, and over
which Mr. Schiralli does not exercise dispository or voting control;
however, Mr. Schiralli can appoint a new trustee for The Farouk Investment
Trust at any time, and (iv) 55,000 Common Shares held by Sandra A.
Schiralli, Mr. Schiralli's wife.
(3) Includes 438,286 Common Shares subject to options exercisable within 60
days after August 31, 1998, held by the twelve directors and executive
officers of the Company.
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<PAGE> 18
ITEM 5. NATURE OF TRADING MARKET
The Common Shares are quoted on the Nasdaq National Market under the
symbol "GNSSF". The Common Shares are not listed or quoted on any other
quotation system or securities exchange. The following table sets forth the
range of quarterly high and low sale prices of the Common Shares on the Nasdaq
National Market since the Company's initial public offering on February 24,
1998.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1998:
Third Quarter (from February 24, 1998)........ $14 1/2 $12 7/8
Fourth Quarter................................ $17 3/8 $11 1/4
</TABLE>
On August 31, 1998 the last sale price for the Common Shares as reported
on the Nasdaq National Market was $6 3/4 per share.
On August 31, 1998 approximately 32% of the outstanding Common Shares were
held by shareholders of record in the United States, represented by
approximately 155 holders.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
EXCHANGE CONTROLS
Canada has no system of exchange controls. There is no law, government
decree or regulation in Canada restricting the export or import of capital or
affecting the remittance of dividends, interest or other payments to a
non-resident holder of Common Shares, other than withholding tax requirements.
See Item 7, "Taxation."
INVESTMENT CANADA ACT
There is no limitation imposed by Canadian law or by the articles or other
charter documents of the Company on the right of a non-resident to hold or vote
Common Shares or Special Shares of the Company with voting rights (collectively,
"Voting Shares"), other than as provided in the Investment Canada Act (the
"Investment Act"), as amended by the World Trade Organization ("WTO") Agreement
Implementation Act. The Investment Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a "Canadian," as
defined in the Investment Act (a "non-Canadian"), unless, after review, the
minister responsible for the Investment Act is satisfied that the investment is
likely to be a net benefit to Canada. An investment in Voting Shares of the
Company by a non-Canadian (other than a "WTO Investor," as defined below) would
be reviewable under the Investment Act if it were an investment to acquire
direct control of the Company, and the value of the assets of the Company were
CDN $5.0 million or more. An investment in Voting Shares of the Company by a WTO
Investor would be reviewable under the Investment Act if it were an investment
to acquire direct control of the Company, and the value of the assets of the
Company equaled or exceeded CDN $172 million. A non-Canadian, whether a WTO
Investor or otherwise, would be deemed to acquire control of the Company for
purposes of the Investment Act if he or she acquired a majority of the Voting
Shares of the Company. The acquisition of less than a majority, but at least
one-third of the Voting Shares of the Company, would be presumed to be an
acquisition of control of the Company, unless it could be established that the
Company was not controlled in fact by the acquiror through the ownership of
Voting Shares. In general, an individual is a WTO Investor if he or she is a
"national" of a country (other than Canada) that is a member of the World Trade
Organization ("WTO Member") or has a right of permanent residence in a WTO
Member. A corporation or other entity will be a WTO investor if it is a "WTO
investor-controlled entity" pursuant to detailed rules set out in the Investment
Act. The United States is a WTO Member.
Certain transactions involving Voting Shares of the Company would be
exempt from the Investment Act, including: (a) an acquisition of Voting Shares
of the Company if the acquisition were made in connection with the person's
business as a trader or dealer in securities; (b) an acquisition of control of
the Company in connection with the realization of a security interest granted
for a loan or other financial assistance and not for any purpose related to the
provisions of the Investment Act; and (c) an acquisition of control of the
Company by reason of an amalgamation, merger, consolidation or corporate
reorganization, following which the ultimate direct or indirect control in fact
of the Company, through the ownership of voting interests, remains unchanged.
15
<PAGE> 19
ITEM 7. TAXATION
The following discussion is intended to be a general description of the
Canadian federal and U.S. federal income tax considerations material to the
ownership of Common Shares and is not intended to be, nor should it be
construed to be, legal or tax advice to any prospective investors, and no
opinion or representation with respect to the income tax consequences to any
such prospective investor is made. It does not take into account the individual
circumstances of any particular investor and does not address consequences
peculiar to any investor subject to special provisions of Canadian or U.S.
income tax law. Therefore, investors should consult their own tax advisors with
respect to the tax consequences of an investment in the Common Shares.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summary is based upon the current provisions of the Income
Tax Act (Canada) (the "ITA") and the regulations thereunder, all proposed
amendments to the ITA and the regulations thereunder publicly announced by the
Department of Finance, Canada prior to the date hereof, the current published
administrative and assessing practices of Revenue Canada, the Canada-United
States Income Tax Convention (1980) (the "Convention") and amendments thereto.
Except for the foregoing, this summary does not take into account or anticipate
changes in the law or the administrative or assessing practices of Revenue
Canada whether by legislative, governmental or judicial action and does not take
into account or anticipate provincial,territorial or foreign tax considerations.
This summary relates to the principal Canadian income tax considerations
under the ITA and the regulations thereunder generally applicable to purchasers
of Common Shares who: (i) for purposes of the ITA, are not, have not been and
will not be or be deemed to be resident in Canada at any time while they held
or hold Common Shares, deal at arm's length with the Company, will hold their
Common Shares as capital property, do not use or hold, and will not and will
not be deemed to use or hold their Common Shares in, or in the course of
carrying on a business in Canada, and is not a "financial institution" for the
purposes of the mark-to-market rules, and (ii) for purposes of the Convention,
are residents of the United States and not residents of Canada and will not
hold their Common Shares as part of the business property of a permanent
establishment or in connection with a fixed base in Canada (a "U.S. Holder").
Amounts in respect of Common Shares paid or credited or deemed to be paid
or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a U.S. Holder will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a rate of 25%, which may be
reduced pursuant to the terms of the Convention. Under the Convention, the rate
of Canadian non-resident withholding tax on the gross amount of dividends
beneficially owned by a U.S. Holder is 15%. However, where such beneficial owner
is a company which owns at least 10% of the voting stock of the Company, the
rate of such withholding is 5%.
A U.S. Holder will not be subject to tax under the ITA in respect of any
disposition of Common Shares unless at the time of such disposition such Common
Shares constitute "taxable Canadian property" of the holder for purposes of the
ITA. If the Common Shares are listed on a prescribed stock exchange for the
purposes of the ITA at the time they are disposed for, they will generally not
constitute "taxable Canadian property" of the U.S. Holder at the time of a
disposition of such shares unless at any time during the five year period
immediately preceding the disposition of the Common Shares, 25% or more of the
issued shares of any class or series of the Company, or an interest therein or
an option in respect thereof, were owned by the U.S. Holder, by persons with
whom the U.S. Holder did not deal at arm's length or by the U.S. Holder and
persons with whom the U.S. Holder did not deal at arm's length. Under the
Convention, gains derived by a U.S. Holder from the disposition of Common
Shares that constitute "taxable Canadian property" will generally not be
taxable in Canada unless the value of the Common Shares is derived principally
from real property situated in Canada.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion summarizes certain U.S. Federal Income tax
considerations relevant to an investment in the Common Shares by purchasers who,
for income tax purposes, hold Common Shares as capital assets, do not use or
hold the Common Shares in carrying on a business through a permanent
establishment or in connection with a fixed base in Canada. This summary
addresses only the U.S. Federal income tax considerations of holders who are
citizens or residents of the United States, partnerships or corporations created
in or under the laws of the United States or any political subdivision thereof
or therein, estates the income of which is subject to U.S. Federal income
taxation regardless of its source, or trusts if (i) a court within the United
States is able to exercise primary supervision over its administration, and (ii)
one or more United States persons have the authority to control all substantial
decisions ("United States Holders").
16
<PAGE> 20
This summary is of a general nature only and holders and prospective
holders of Common Shares are advised to consult their own tax advisors with
respect to the U.S. Federal, state and local tax consequences, as well as with
respect to the tax consequences in Canada of the ownership of Common Shares
applicable in their particular tax situations. In particular, the following
summary does not address tax considerations applicable to holders that may be
subject to special tax rules, such as banks, insurance companies, dealers in
securities or currencies, tax-exempt entities, persons that will hold Common
Shares as a position in a "straddle" or as part of a "hedging" or "conversion"
or other risk reduction transaction for tax purposes, persons that have a
"functional currency" other than the U.S. dollar or holders of 10% or more (by
voting power or value) of the Common Shares.
This summary is based on the tax laws of the U.S., as interpreted in
published rulings and procedures (including the Code, its legislative history,
existing and proposed regulations thereunder, and in court decisions and as
interpreted in published rulings) and as in effect on the date hereof, as
well as on the Convention, all of which are subject to change (or changes in
interpretation), possibly with retroactive effect.
United States Holders generally will treat the gross amount of dividends
paid by the Company, without reduction for the Canadian withholding tax, as
dividend income for U.S. Federal income tax purposes to the extent of the
Company's current or accumulated earnings and profits. However, the amount of
Canadian tax withheld generally will give rise to a foreign tax credit or
deduction for U.S. Federal income tax purposes. United States Holders should be
aware that dividends paid by the Company generally will constitute "passive
income" for purposes of the foreign tax credit. The Internal Revenue Code
applies various limitations on the amount of foreign tax credit that may be
available to a U.S. taxpayer. United States Holders should consult their own tax
advisors with respect to the potential consequences of those limitations.
Dividends paid on the Common Shares will not generally be eligible for the
"dividends received deduction." To the extent that distributions exceed current
and accumulated earnings and profits of the Company, they will be treated first
as a return of capital, up to the amount of the United States Holders' adjusted
basis in Common Shares, and thereafter as gain from the sale or exchange of the
Common Shares. If dividends are paid in Canadian dollars, the amount of the
dividend distribution includible in the income of a United States Holder will be
the U.S. dollar value of the payments made in Canadian dollars, determined at a
spot exchange rate between Canadian and U.S. dollars applicable to the date such
dividend is includible in the income of the United States Holder, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, gain or
loss (if any) resulting from currency exchange fluctuations during the period
from the date the dividend is paid to the date such payment is converted into
U.S. dollars will be treated as ordinary income or loss.
Under current United States Treasury Regulations, dividends paid on Common
Shares, if any, generally will not be subject to information reporting and
generally will not be subject to U.S. backup withholding tax. However, dividends
paid, and the proceeds from the sale or redemption of, Common Shares in the
United States through a U.S. or U.S.-related paying agent (including a broker)
will be subject to U.S. information reporting requirements and may also be
subject to a 31% backup withholding tax, unless the paying agent is furnished
with a duly completed and signed Form W-9. Any amounts withheld under the U.S.
backup withholding rules will be allowed as a refund or credits against a United
States Holder's Federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
A United States Holder generally will recognize gain or loss, as the case
may be, on the sale or exchange of Common Shares equal to the difference between
the amount realized on such sale or exchange (determined in U.S. dollars) and
the United States Holder's tax basis in the Common Shares. Such gain or loss
will be capital gain or loss, and will be long-term capital gain or loss, as the
case may be, if the Common Shares were held for more than one year. Gains on
most capital assets held by an individual for more than one year are subject to
tax at a maximum rate of 20%.
PASSIVE FOREIGN INVESTMENT COMPANY
A non-U.S. corporation will be classified as a passive foreign investment
company (a "PFIC") for U.S. Federal income tax purposes if it satisfies either
of the following two tests: (i) 75% or more of its gross income for the taxable
year is passive income or (ii) on average for the taxable year (by value or, if
the Company so elects, by adjusted basis), 50% or more of its assets produce or
are held for the production of passive income.
17
<PAGE> 21
The Company does not believe that it satisfies either of the tests for
PFIC status. If the Company were to be a PFIC for any taxable year, United
States Holders would be required to either (i) pay an interest charge together
with tax calculated at maximum ordinary income rates on certain "excess
distributions" (defined to include gain on a sale or other disposition of Common
Shares),or (ii) if a Qualified Electing Fund election is made, to include in
their taxable income their pro rata share of certain undistributed amounts of
the Company's income.
ITEM 8. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the periods indicated. The selected financial data for the fiscal
years ended May 31, 1996, 1997 and 1998 have been derived from, and should be
read in conjunction with, the Company's audited Consolidated Financial
Statements and Notes thereto, which have been audited by KPMG, independent
chartered accountants, and included elsewhere in this Annual Report. The
selected financial data for each of the fiscal years ended May 31, 1994 and 1995
have been derived from the Company's audited consolidated financial statements
not appearing in this Annual Report. The financial information set forth below
is qualified by and should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Annual Report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Consolidated Financial Statements of the Company are stated in U.S.
dollars and are prepared in accordance with Canadian GAAP. Except as noted, the
financial data set forth below is presented in accordance with Canadian GAAP,
which differs in some respects from U.S. GAAP. For a description of the
principal differences between Canadian GAAP and U.S. GAAP, see Note 10 of the
Notes to Consolidated Financial Statements.
18
<PAGE> 22
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------------
Canadian GAAP 1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Products .............................................. $ 82 $ 283 $ 1,381 $ 4,164 $14,941
Design services and other ............................. 295 241 143 363 806
------- ------- ------- ------- -------
Total revenues ................................... 377 524 1.524 4,527 15,747
Cost of revenues ........................................ 115 107 434 2,983 4,819
------- ------- ------- ------- -------
Gross profit ............................................ 262 417 1,090 1,544 10,928
Operating expenses:
Research and development .............................. 1,743 1,925 2,605 3,351 4,538
Less investment tax credits and government
assistance ............................................ (503) (807) (508) (707) (890)
------- ------- ------- ------- -------
1,240 1,118 2,097 2,644 3,648
Selling and marketing ................................. 188 769 1,389 2,449 3,316
General and administrative ............................ 488 743 1,053 1,206 1,231
------- ------- ------- ------- -------
Total operating expenses ......................... 1,916 2,630 4,539 6,299 8,195
------- ------- ------- ------- -------
Income (loss) from operations ........................... (1,654) (2,213) (3,449) (4,755) 2,733
Interest income (expense) ............................... (48) (101) (143) (147) 675
------- ------- ------- ------- -------
Income (loss) before income taxes ....................... (1,702) (2,314) (3,592) (4,608) 3,408
Provision for income taxes .............................. -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) ....................................... $(1,702) $(2,314) $(3,592) $(4,608) $ 3,408
======= ======= ======= ======= =======
Earnings (loss) per share
Basic ............................................ $ (0.40) $ (0.48) $ (0.59) $ (0.62) $ 0.36
Fully diluted .................................... $ (0.40) $ (0.48) $ (0.59) $ (0.62) $ 0.29
Weighted average number of Common Shares outstanding
Basic ............................................ 4,270 4,824 6,071 7,463 9,559
Fully diluted .................................... 4,270 4,824 6,071 7,463 12,912
U.S. GAAP
Net income (loss) ....................................... $(1,755) $(2,314) $(3,815) $(5,815) $ 3,113
------- ------- ------- ------- -------
Earnings (loss) per share
Basic ............................................ $ (0.41) $ (0.48) $ (0.63) $ (0.70) $ 0.33
Diluted .......................................... $ (0.41) $ (0.48) $ (0.63) $ (0.70) $ 0.26
Weighted average number of Common Shares outstanding
Basic ............................................ 4,270 4,824 6,071 7,463 9,559
Diluted .......................................... 4,270 4,824 6,071 7,463 12,912
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
----------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1994 1995 1996 1997 1998
------- ------- ------- ------- -------
Canadian GAAP (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 1,346 $ 892 $ 1,533 $ 3,687 $35,904
Working capital .......................... 1,594 1,707 1,689 6,903 41,004
Total assets ............................. 2,412 2,541 5,200 9,613 47,446
Long-term debt, net of current portion ... 1,861 2,212 1,406 794 655
Shareholders' equity (deficiency) ........ 69 (91) 1,322 7,621 44,151
U.S. GAAP
Cash and cash equivalents ................ $ 1,332 $ 893 $ 1,533 $ 3,687 $35,904
Working capital .......................... 1,579 1,708 1,689 6,903 41,004
Total assets ............................. 2,388 2,543 5,200 9,613 47,446
Long-term debt, net of current portion ... 1,843 2,214 1,406 794 655
Shareholders' equity (deficiency) ........ 68 (91) 1,322 7,621 44,151
</TABLE>
19
<PAGE> 23
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this Form
20-F. This Form 20-F contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that may cause such
a difference include, but are not limited to, those discussed in the subsection
"Risk Factors" and elsewhere in this Form 20-F.
OVERVIEW
The Company designs, develops and markets sophisticated, real-time,
cost-effective, high-quality digital image manipulation IC solutions. Currently,
the Company is focused on the development and introduction of image manipulation
IC solutions for the LCD monitor market as well as other potential mass
markets. The Company markets and sells its products through authorized
distributors and with the support of regional sales representatives. Average
selling prices to distributors are typically less than average selling prices to
OEM customers. Average selling prices and product margins of the Company's image
manipulation IC products generally are highest during the initial months of
product introduction and decline over time as products mature. The Company
recognizes revenues from product sales upon shipment. Product returns and
allowances are estimated and provided for at the time of sale. To date, the
Company has not experienced any significant product returns.
In addition to product sales, the Company derives revenues from design
services that generally assist the Company's customers in developing products
that use its IC solutions. The Company also receives revenues from license fees
and royalties, which to date have been immaterial. The Company intends to
explore opportunities for licensing its technology to IC suppliers outside of
the Company's target markets.
The Company's costs of finished products from its semiconductor suppliers
have historically been negotiated at fixed prices on an annual basis, and have
not been dependent on the suppliers' manufacturing yields. Under the IBM
Agreements, the Company is obligated to provide rolling 12 month forecasts of
anticipated monthly purchases and to place purchase orders which become binding
approximately 4 months prior to shipment. If the Company cancels a purchase
order, it must pay cancellation penalties based on the status of the work in
process. The Company has a limited ability to make adjustments to its forecasts
and, therefore, the Company must make forecasts and place purchase orders for
products several months before it receives purchase orders from its own
customers. This restricts the Company's ability to react to fluctuations in
demand for its products and may cause the Company to have an excess or a
shortage of a particular product. For example, in the fiscal year ended May 31,
1997, the Company recorded provisions totaling $1.3 million for declines in
inventory value and for write downs of excess inventory.
Investment tax credits ("ITCs") are earned by the Company under the
provisions of the Income Tax Act (Canada) as a result of carrying out qualifying
research and development activities in Canada. As a Canadian-controlled Private
Company ("CCPC"), these investment tax credits were earned at a rate of 45% of
the first CDN$2.0 million in qualifying expenditures, and at a rate of 20% of
qualifying expenditures in excess of that amount. As a result of the Company's
initial public offering in February 1998, the Company lost its status as a CCPC.
Accordingly, ITCs are now earned at a rate of 20% on all qualifying
expenditures. As a CCPC, the ITCs earned at the 45% rate were refundable to the
Company. Upon loss of the CCPC status, the ITCs earned may only be applied to
reduce income taxes payable. See Notes 2 and 7 of the Notes to Consolidated
Financial Statements.
From time to time the Company also applies for and receives government
assistance in the form of grants related to specific research or development
projects. The amount of the grants are typically based on a portion of the cost
of the specific project. See Note 2 of the Notes to Consolidated Financial
Statements.
At May 31, 1998, the Company had $5.3 million of losses and deductions
available to reduce future years' taxable income in the United States. The
Company does not anticipate paying any income taxes until the benefit of these
losses and deductions has been fully utilized. See Note 7 of the Notes to
Consolidated Financial Statements.
The Company's revenues and cost of revenues are denominated in U.S.
dollars, while a substantial portion of the Company's operating expenses are
denominated in Canadian dollars. Accordingly, the Company's operating results
are affected by changes
20
<PAGE> 24
in the exchange rate between Canadian and U.S. dollars. Any future strengthening
of the Canadian dollar versus the U.S. dollar could negatively impact the
Company's operating results. The Company does not presently engage in any
hedging or other transactions intended to manage the risks relating to foreign
currency exchange rates or interest rate fluctuations. However, the Company may
in the future undertake such transactions if management determines that it is
necessary to offset such risks.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented by
certain items in the Company's consolidated statement of operations data for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
Canadian GAAP 1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues:
Products ................................................ 90.6 % 92.0 % 94.9 %
Design services and other ............................... 9.4 8.0 5.1
------- ------- -------
Total revenues .......................................... 100.0 100.0 100.0
Cost of revenues ........................................ 28.5 65.9 30.6
------- ------- -------
Gross profit .............................................. 71.5 34.1 68.4
Operating expenses:
Research and development ................................ 171.0 74.0 28.8
Less investment tax credits and government assistance ... (33.4) (15.6) (5.7)
------- ------- -------
137.6 58.4 23.1
Selling and marketing ................................... 91.1 54.1 21.1
General and administrative .............................. 69.1 26.6 7.8
------- ------- -------
Total operating expenses ........................... 297.8 139.1 52.0
------- ------- -------
Income (loss) from operations ............................. (226.3) (105.0) 17.4
Interest income (expense) ................................. (9.4) 3.2 4.2
------- ------- -------
Income (loss) before income taxes ......................... (235.7) (101.8) 21.6
Provision for income taxes ................................ 0.0 0.0 0.0
------- ------- -------
Net income (loss) ......................................... (235.7)% (101.8)% 21.6 %
======= ======= =======
</TABLE>
Total Revenues. Total revenues for the year ended May 31, 1998 increased
to $15.7 million from $4.5 million in the previous year, an increase of 247.8%.
Total revenues for fiscal 1997 increased by 197.0% over total revenues of $1.5
million in fiscal 1996. The increase in total revenues in fiscal 1998 over
fiscal 1997 is primarily due to the introduction and market acceptance of new
products, principally DICE and AIM products that were introduced in fiscal 1997
as well as FRC products that were introduced in the third quarter of fiscal
1998. Total revenues in fiscal 1998 were also positively impacted by an increase
in design services activities. The increase in total revenues in fiscal 1997
over fiscal 1996 resulted primarily from greater market acceptance of the
Company's GenScale products and to a lesser extent from the introduction of the
Company's DICE and AIM products in fiscal 1997. The Company does not expect to
sustain this rate of revenue growth in future periods.
Gross Profit. Gross profit for fiscal 1998 increased to $10.9 million from $1.5
million in fiscal 1997 and from $ 1.1 million in fiscal 1996, representing
69.4%, 34.1% and 71.5% of total revenues, respectively. The increase in gross
profit was attributable to higher sales volumes and a more favorable mix of
products sold. Gross profit was positively impacted in fiscal 1998 by higher
gross margins of the Company's AIM product line and, to a lesser extent, by
lower average component costs. Inventory write downs of $1.3 million in fiscal
1997 resulted in a decline in gross margins for that year, and were related to
IC products that had been replaced by follow-on products and to excess inventory
levels of certain other IC products. Gross margins may decline in future periods
as the Company enters higher volume markets.
Research and Development. Research and development expenses include
compensation and associated costs relating to research and development
personnel, development tools and prototyping costs, which are comprised of
prototyping and pre-production costs. Research and development expenses for the
year ended May 31, 1998 increased to $4.5 million from $3.4 million in the
previous fiscal year and from $2.6 million in fiscal 1996, representing 28.8%,
74.0% and 171.0% of total revenues, respectively.
21
<PAGE> 25
The increases in absolute dollars in fiscal years 1998 and 1997 reflect greater
personnel costs associated with an expansion in the Company's research and
development activities and increased prototype and pre-production expenses of
new products. The Company expects to continue to make substantial investments in
its research and development activities and anticipates that research and
development expenses will continue to increase in absolute dollars. The decline
in research and development expenses as a percentage of total revenue
resulted from the rate of growth in total revenues exceeding the rate of growth
of research and development expenses.
Investment tax credits and government assistance. Investment tax credits
and government assistance includes investment tax credits earned on qualified
research and development activities carried out in Canada as well as grants for
specifically funded research and development projects. Investment tax credits
and government assistance were $890,000, $707,000 and $508,000 in fiscal 1998,
1997 and 1996, respectively, and were 5.7%, 15.6% and 33.4% of total revenues,
respectively. This increase was a result of increased investment tax credits
earned on research and development expenditures, partially offset by a decline
in government grants received. The Company expects that investment tax credits
will increase in total dollars as research and development costs increase, but
that they will continue to decrease as a percentage of total revenues. The
decrease of investment tax credits and government assistance as a percentage of
total revenues was due to the growth in total revenues.
Selling and Marketing. Selling and marketing expenses consist primarily of
personnel and related overhead costs for sales, marketing and customer support
activities and commissions paid to regional sales representatives. Selling and
marketing expenses were $3.3 million, $2.4 million and $1.4 million in fiscal
1998, 1997 and 1996, respectively, and were 21.1%, 54.1% and 91.1% of total
revenues, respectively. The dollar increases in selling and marketing expenses
reflect increased personnel costs related to increased sales, marketing and
customer support activities and increased commissions associated with higher
sales volumes. The Company expects selling and marketing expenses to increase in
absolute dollars due to the addition of marketing, sales and customer support
personnel and continued expansion of its international operations. The decline
in selling and marketing expenses as a percentage of total revenue resulted from
the increase in total revenues for the period.
General and Administrative. General and administrative expenses consist
primarily of personnel and related overhead costs for finance, MIS activities,
human resources and general management. General and administrative expenses were
$1.2 million, $1.2 million and $1.1 million for fiscal 1998, 1997 and 1996,
respectively, and were 7.8%, 26.6% and 69.1% of total revenues,respectively. The
increase in dollars reflects increased personnel costs due to an increase in the
number of administrative personnel, and increased provisions for bad debts. The
Company expects general and administrative expenses to increase in absolute
dollars due to the addition of new finance and administrative personnel and
additional expenses related to being a public company. The decline in general
and administrative expenses as a percentage of total revenue resulted from the
increase in total revenues for the period.
Provision for Income Taxes. There was no provision for income taxes in the
year ended May 31, 1998 because the Company had investment tax credits,
non-capital losses and unclaimed research and development expenditures available
for carry-forward against taxes payable or taxable income. There was no
provision for income taxes in fiscal 1997 or 1996 because the Company had a net
loss in each year.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for the eight fiscal quarters ended May 31, 1998. The unaudited
data has been prepared on the same basis as the audited Consolidated Financial
Statements appearing elsewhere in this Annual Report, and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information for the periods presented. Such statements
of operations data should be read in conjunction with the Consolidated Financial
Statements of the Company and related Notes thereto appearing elsewhere in this
Annual Report.
22
<PAGE> 26
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
AUG. 31, NOV. 30, FEB. 28, MAY 31,
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: 1997 1997 1998 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Canadian GAAP (IN THOUSANDS)
Revenues:
Products ........................... $ 2,061 $ 2,940 $ 4,439 $ 5,501
Design services and other .......... 141 288 337 40
------- ------- ------- -------
Total revenues ................ 2,202 3,228 4,776 5,541
Cost of revenues ........................ 585 949 1,402 1,883
------- ------- ------- -------
Gross profit ............................ 1,617 2,279 3,374 3,658
Operating expenses:
Research and development ........... 840 1,036 1,295 1,367
Loss investment tax credits and
government assistance ......... (205) (218) (226) (241)
------- ------- ------- -------
635 818 1,069 1,126
Selling and marketing .............. 661 706 935 1,014
General and administrative ......... 280 289 304 358
------- ------- ------- -------
Total operating expenses ...... 1,576 1,813 2,308 2,498
------- ------- ------- -------
Income from operations .................. 41 466 1,066 1,160
Interest income ......................... 60 68 60 487
------- ------- ------- -------
Income before income taxes .............. 101 534 1,126 1,647
Provision for income taxes .............. -- -- -- --
------- ------- ------- -------
Net income .............................. $ 101 $ 534 $ 1,126 $ 1,647
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
AUG. 31, NOV. 30, FEB. 28, MAY 31,
1996 1996 1997 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Canadian GAAP (IN THOUSANDS)
Revenues:
Products ........................... $ 792 $ 1,008 $ 1,112 $ 1,252
Design services and other .......... 19 -- 89 255
------- ------- ------- -------
Total revenues ................ 811 1,008 1,201 1,507
Cost of revenues ........................ 650 483 462 1,388
------- ------- ------- -------
Gross profit ............................ 161 525 739 119
Operating expenses:
Research and development ........... 659 875 878 939
Loss investment tax credits and
government assistance ......... (175) (182) (223) (127)
------- ------- ------- -------
484 693 655 812
Selling and marketing .............. 425 509 688 827
General and administrative ......... 324 319 277 286
------- ------- ------- -------
Total operating expenses ...... 1,233 1,521 1,620 1,925
------- ------- ------- -------
Loss from operations .................... (1,072) (996) (881) (1,806)
Interest income (expense) ............... (95) 99 77 66
------- ------- ------- -------
Loss before income taxes ................ (1,167) (897) (804) (1,740)
Provision for income taxes .............. -- -- -- --
------- ------- ------- -------
Net loss ................................ $(1,167) $ (897) $ (804) $(1,740)
======= ======= ======= =======
</TABLE>
Gross profit in the three month periods ended August 31, 1996, November 30,
1996 and May 31, 1997 was negatively impacted by inventory write downs of
certain products in the Company's GenScale and DICE product lines. Gross profit
in the three month periods ended August 31, 1997, November 30, 1997 and February
28, 1998 was positively impacted by higher margins of the Company's AIM products
and, to a lesser extent, by lower average component costs. Gross margins in the
three month
23
<PAGE> 27
period ended May 31, 1998 was negatively impacted by higher component costs for
the Company's FRC products and lower design service revenues. Research and
development expenses have varied from quarter to quarter primarily due to the
timing of non-recurring engineering charges related to new product development.
Selling and marketing expenses for the three months ended May 31, 1997 increased
due to certain contract costs related to supporting customer development
activities.
The Company's results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future as a result of a number of
factors, many of which are beyond the Company's control. These factors include,
among others: growth rate of markets into which the Company sells its products;
market acceptance of and demand for the products of the Company and those of the
Company's customers; unanticipated delays or problems in the introduction of the
Company's products; the Company's ability to introduce new products in
accordance with OEM design requirements and design cycles; new product
announcements or product introductions by the Company and the Company's
competitors; availability and cost of manufacturing sources for the Company's
products; supply constraints for components incorporated into the Company's
customers' products; changes in the mix of sales to OEMs and distributors;
incorrect forecasting of future revenues; the volume of orders that are received
and can be fulfilled in a quarter; the rescheduling or cancellation of orders by
customers; costs associated with protecting the Company's intellectual property;
changes in product mix; changes in product costs and pricing; and, currency
exchange rate fluctuations. Any one or more of these factors could result in the
Company's failure to achieve its expectations as to future operating results.
The Company's gross profit is affected by a number of factors, including product
mix, product pricing and product costs. The Company may be required to reduce
prices in response to competitive pressure or other factors or increase spending
to pursue new market opportunities. Any decline in average selling prices of a
particular IC product which is not offset by a reduction in product costs or by
sales of other products with higher gross margins would decrease the Company's
overall gross profit and adversely affect the Company's business, financial
condition and results of operations.
Because a significant portion of the Company's business has been and is
expected to continue to be derived from orders placed by a limited number of
large customers, variations in the timing of such orders can cause significant
fluctuations in the Company's operating results. Anticipated orders from
customers may fail to materialize and delivery schedules may be deferred or
canceled for a number of reasons, including changes in specific customer
requirements. The Company's expenditures for research and development, selling
and marketing, and general and administrative functions are based in part on
future revenue projections. The Company may be unable to adjust spending in a
timely manner in response to any unanticipated declines in revenues, which may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may be required to reduce prices in
response to competitive pressure or other factors or increase spending to pursue
new market opportunities. Any decline in average selling prices of a particular
IC product which is not offset by a reduction in product costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross profit and adversely affect the Company's business, financial condition
and results of operations.
The Company believes that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance. It is
likely that in some future period the Company's operating results or business
outlook will be below the expectations of securities analysts or investors,
which would likely result in a significant reduction in the market price for the
Common Shares.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $35.9 million, $3.7 million and $1.5 million
at May 31, 1998, 1997 and 1996 respectively. The Company generated net cash from
operations of $2.1 million in fiscal 1998. Net cash used in operations was $5.7
million and $4.0 million in fiscal 1997 and 1996, respectively. Net cash
generated from operations in fiscal 1998 consisted primarily of net income plus
increases in accounts payable and accrued liabilities, offset by increases in
accounts receivable and inventory. In fiscal 1997, the net cash used in
operations was primarily due to the net loss and the funding of increased levels
of receivables and inventory, partially offset by increases in accrued
liabilities. For fiscal 1996, net cash used in operations was due primarily to
the net loss, increases in funding of current assets partially offset by
increases in current liabilities. Net cash used in investing activities in
fiscal 1998, 1997 and 1996 was approximately $1.4 million, $1.0 million and
$303,000, respectively, for the purchase of capital assets. Continued expansion
of the Company's business may require higher levels of capital equipment
purchases. The Company has no significant capital spending or purchase
commitments other than purchase commitments made in the ordinary course of
business. Net cash provided by financing activities was $31.5 million in fiscal
1998, primarily a result of raising $31.7
24
<PAGE> 28
million in net proceeds from the Company's initial public offering of its Common
Shares in February 1998. In fiscal 1997 and 1996, net cash provided by financing
activities was $8.8 million and $4.9 million, respectively, which included $10.9
million and $5.0 million of net proceeds from private equity financings. The
Company had net repayments of debt financing of $62,000, $2.0 million, and
$64,000 in fiscal 1998, 1997 and 1996, respectively.
Since inception, the Company has satisfied its liquidity needs primarily
through sales of equity securities and, to a lesser extent, through long-term
debt and bank indebtedness for working capital purposes. The Company believes
that its existing cash balances together with any cash generated from its
operations will be sufficient to meet the Company's capital requirements through
at least the next 12 months, although the Company could be required, or could
elect, to seek to raise additional capital during such period.
From time to time the Company evaluates acquisitions of businesses,
products or technologies that complement the Company's business. Any such
transactions, if consummated, may use a portion of the Company's working capital
or require the issuance of equity securities that may result in further dilution
to the Company's shareholders.
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs, including
operating systems, financial and administrative systems and other information
technology ("IT") systems, as well as a number of non-IT systems, typically
embedded technologies, in its internal operations. To the extent that the
Company's IT and non-IT systems are unable to appropriately interpret the
upcoming calendar year "2000," modification or replacement of such systems will
be necessary. The Company has established a committee to identify the IT and
non-IT systems that are not Year 2000 compliant. The committee will also review
the IT and non-IT systems of the Company's suppliers and major customers to
determine whether or not their systems are Year 2000 compliant. The Company has
been communicating with its suppliers and major customers regarding this issue.
The committee is currently reviewing potential Year 2000 issues and their
impact, as well as investigating possible methods of remediation. The Company
intends to implement remediation programs by the end of 1998, and to be fully
Year 2000 compliant by mid-1999. The Company's costs to date related to Year
2000 compliance have not been material, and while the total estimated costs of
remediation have not yet been determined, the Company anticipates that any
future costs will not be material. The Company is not yet certain as to what a
reasonably likely worst case Year 2000 scenario will be. This issue will be
reviewed by the Company's Year 2000 committee. Consequently, the Company has not
yet established a contingency plan to handle such a scenario, although it plans
to by mid-1999.
Given the information known at this time about the Company's systems,
coupled with the Company's 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 the Company's
business, financial condition and results of operations. However, the Company is
still analyzing its IT and non-IT systems, as well as those of its suppliers and
major customers and, to the extent they are not fully Year 2000 compliant, there
can be no assurance that the costs necessary to update or replace such systems
or the potential systems or business interruptions that could occur would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK FACTORS
In addition to the other information contained and incorporated by
reference in this Form 20-F, the following factors should be carefully
considered in evaluating the Company and its business:
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company recorded operating losses in each year from inception through
the end of its 1997 fiscal year. Although the Company first achieved
profitability on a quarterly basis during the three months ended August 31,
1997, there can be no assurance that the Company will remain profitable on a
quarterly or annual basis. Although the Company has experienced revenue growth
in recent periods, such growth rates are not indicative of future operating
results and there can be no assurance that the Company will be able to sustain
revenue growth or profitability in future periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
25
<PAGE> 29
DEPENDENCE ON GROWTH OF LCD MONITOR AND OTHER POTENTIAL MARKETS
The Company's ability to generate increased revenues will depend on the
growth of the LCD monitor market, which is at an early stage of development, and
the development of other new markets for its image manipulation integrated
circuits ("ICs"). The potential size of the LCD monitor market and the timing of
its development are uncertain and will depend upon a number of factors, all of
which are beyond the Company's control. These factors include a reduction in the
cost of high-performance LCD monitors, the availability in high volume of
required components, the relative cost and performance level of CRTs and the
emergence of competing technologies. The Company's growth will also depend upon
the emergence and subsequent development of other potential markets for its
image manipulation ICs, such as home theater, DVD, PDP/TV, DTV and HDTV. All of
these markets are currently in the early stages of development, and the growth
of these markets is highly uncertain. Factors beyond the Company's control may
adversely affect the development of these potential markets. The failure of the
LCD monitor and other potential markets to develop as expected by the Company
within anticipated time frames would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Markets, Applications and Customers."
MARKET ACCEPTANCE OF COMPANY'S PRODUCTS FOR THE LCD MONITOR MARKET
The Company's success in the LCD monitor market will depend upon the extent
to which OEMs incorporate the Company's image manipulation ICs into their
products. To date, the Company has shipped commercial quantities of its IC
products to several LCD monitor OEMs, but there can be no assurance that such
OEMs will purchase significant quantities of the Company's products in the
future. Although the Company has achieved design wins with certain additional
LCD monitor OEMs, there can be no assurance that such design wins will translate
into future orders for the Company's image manipulation ICs. The Company
commenced commercial shipments of its products for the LCD monitor market in the
first quarter of calendar 1998 and expects to introduce additional products on
an ongoing basis. There can be no assurance that the Company will receive
significant orders for any of these products. The Company's ability to obtain
significant orders for its products will depend upon a number of factors, many
of which are beyond the Company's control, including the Company's ability to
effectively adapt its existing technologies to the requirements of the LCD
monitor market and the potential introduction by competitors of new, more
functional and cost-effective products. The failure of the Company's products to
achieve market acceptance in the LCD monitor market would have a material
adverse affect upon the Company's business, financial condition and results of
operations. See "--Competition."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future as a result of a number of
factors, many of which are beyond the Company's control. These factors include,
among others: the growth rate of markets into which the Company sells its
products; market acceptance of and demand for the products of the Company and
those of the Company's customers; unanticipated delays or problems in the
introduction of the Company's products; the Company's ability to introduce new
products in accordance with OEM design requirements and design cycles; new
product announcements or product introductions by the Company and the Company's
competitors; availability and cost of manufacturing sources for the Company's
products; supply constraints for components incorporated into the Company's
customers' products; changes in the mix of sales to OEMs and distributors;
incorrect forecasting of future revenues; the volume of orders that are received
and can be fulfilled in a quarter; the rescheduling or cancellation of orders by
customers; costs associated with protecting the Company's intellectual property;
changes in product mix; changes in product costs and pricing; and currency
exchange rate fluctuations. Any one or more of these factors could result in
fluctuations as to future operating results.
Because a significant portion of the Company's business has been and is
expected to continue to be derived from orders placed by a limited number of
large customers, variations in the timing of such orders can cause significant
fluctuations in the Company's operating results. Anticipated orders from
customers may fail to materialize and delivery schedules may be deferred or
canceled for a number of reasons, including changes in specific customer
requirements. The Company's expenditures for research and development, selling
and marketing, and general and administrative functions are based in part on
future revenue projections. The Company may be unable to adjust spending in a
timely manner in response to any unanticipated declines in revenues, which may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may be required to reduce prices in
response to competitive pressure or other factors or increase spending to pursue
new market opportunities. Any decline in average selling prices of a particular
IC product which is not offset by a reduction in product costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross profit and adversely affect the Company's business, financial condition
and results of operations.
26
<PAGE> 30
As a result of the factors listed above and other factors, the Company
believes that period-to-period comparisons of its operating results should not
be relied upon as an indication of future performance. It is likely that in some
future period the Company's operating results or business outlook will be below
the expectations of securities analysts or investors, which would likely result
in a significant reduction in the market price of the Common Shares. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely manner new products and enhancements to its
existing image manipulation IC products. These products and product enhancements
must incorporate technological changes and innovations and meet evolving
customer or industry standards. Although the Company expects to continue to make
significant investments in research and development to enhance existing products
and develop new products that incorporate new and existing technologies, there
can be no assurance that such new products or product enhancements will be
successfully developed or, if developed, that any such new products or product
enhancements will be developed in time to capture market opportunities or
achieve a significant or sustainable level of acceptance in new and existing
markets. The development of new, technologically-advanced products and product
enhancements is a complex and uncertain process requiring accurate anticipation
of technological and market trends. Any failure on the part of the Company to
successfully design, develop and introduce new products and product enhancements
may have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, development and manufacturing
schedules for technology products are difficult to predict and there can be no
assurance that the Company will achieve timely initial customer shipments of new
products. The timely introduction of these products and their acceptance by
customers are important to the future success of the Company. Any future delays,
whether due to manufacturing, product design and development, lack of market
acceptance or otherwise could adversely affect customer acceptance of the
Company's products and have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Research and
Development."
The markets for the Company's IC solutions are characterized by rapidly
changing technologies, evolving industry standards and changes in customer
requirements. The introduction of new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. New standards may be
developed that will eliminate the need for the Company's IC solutions and which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
PRODUCT TRANSITIONS
From time to time, the Company or its competitors may announce new
products, capabilities or technologies that may replace or shorten the life
cycles of the Company's existing products. No assurance can be given that
announcements of currently planned or other new products will not cause
customers to defer or stop purchasing the Company's products until the Company's
or its competitors' new products become available. Furthermore, the introduction
of new or enhanced products requires the Company to manage the transition from
older products to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. The Company's failure
to effectively manage transitions from older products could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Inventory Risk."
LENGTHY SALES CYCLE
The sale of the Company's image manipulation IC products typically involves
a significant technical evaluation and commitment of capital and other resources
by potential customers, as well as delays frequently associated with customers'
internal procedures to deploy new technologies within their products and to test
and accept new technologies. For these and other reasons, the sales cycle
associated with the Company's products is typically lengthy, lasting three
months or longer, and is subject to a number of significant risks, including
customers' internal acceptance reviews, that are beyond the Company's control.
Because of the lengthy sales cycle and the large size of customers' orders, if
orders forecasted for a specific customer for a particular quarter are not
realized in that quarter, the Company's operating results for that quarter could
be materially adversely affected. See "Business--Sales and Marketing."
27
<PAGE> 31
DEPENDENCE ON RELATIONSHIPS WITH INDUSTRY LEADERS
A key element of the Company's strategy is to work closely with industry
leaders in the digital display market to design products with improved
performance, cost and functionality. The Company typically commits significant
research and development resources to such design activities, often diverting
financial and personnel resources from, or foregoing entirely, other development
projects. Furthermore, the Company typically undertakes such design activities
without entering into agreements under which these companies are obligated to
continue the collaborative design project or to purchase the resulting products.
Consequently, these companies may terminate the collaborative design project at
any time without penalty. In addition, these companies may terminate a
collaborative design project for a variety of reasons including the Company's
failure to meet agreed-upon performance standards, or for reasons beyond the
Company's control, including changing market conditions, increased competition,
discontinued product lines and product obsolescence. The failure of a company to
complete development of a collaborative design project or to purchase the
products resulting from such projects may result in the unproductive utilization
of the Company's research and development resources and the loss of potential
revenues from the development and sale of alternative products. There can be no
assurance that the Company will be able to continue to identify industry leaders
willing to work with the Company on collaborative design projects in the future.
In view of the rapid technological change and evolving industry standards that
characterize the Company's potential target markets, the Company's failure to
identify or establish such relationships on an ongoing basis could render its
products less competitive, which would materially adversely affect its business,
financial condition and results of operations.
DEPENDENCE ON THIRD PARTY MANUFACTURING, ASSEMBLING AND PRODUCT TESTING
RELATIONSHIPS
Genesis does not have its own fabrication facilities or assembly and
testing operations. Instead, it relies on third parties to manufacture, assemble
and test all of the Company's image manipulation IC products. While IBM is
currently the primary supplier of the Company's IC products, Genesis is in the
process of qualifying and commissioning additional suppliers of silicon wafers
and assembly and test services in Asia in order to take advantage of competition
for pricing and lead-times. Currently, no single product is being manufactured
or planned to be manufactured in more than one location or by more than one
source. There are many risks associated with the Company's dependence upon third
party manufacturing, assembling and product testing relationships. These include
reduced control over delivery schedules, quality assurance, manufacturing yields
and costs, potential lack of adequate capacity during periods of excess demand,
unavailability or interruption of access to certain process technologies and
potential misappropriation of the Company's intellectual property.
The Company is dependent on its suppliers to produce wafers of acceptable
quality and with acceptable manufacturing yields, to deliver those wafers to
assembly and testing subcontractors on a timely basis and to allocate to the
Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. The Company has at times experienced delivery delays and long
manufacturing lead times. There can be no assurance that the Company's suppliers
will continue to devote adequate resources to the production of the Company's IC
products or deliver sufficient quantities of finished products on a timely basis
or at an acceptable cost. Given the Company's reliance on these IC product
suppliers, any such difficulties could have a material adverse effect on the
Company's business, financial condition and results of operations.
Currently, most of the Company's image manipulation IC products are being
manufactured, assembled and tested by IBM or its subcontractors in France and
the United States, and the Company expects that it will continue to rely upon
IBM to manufacture, assemble and test many of its IC products. In this regard,
IBM intends to discontinue its 0.8 micron manufacturing process upon which
certain of the Company's IC products are based at the end of September 1999. The
Company has one replacement product in production using a 0.35 micron
manufacturing process and is in the process of designing replacement products
using a 0.35 micron manufacturing process or other similar advanced process for
the other products affected by the discontinuance. However, there can be no
assurance that such replacement products will function to the Company's
specifications, satisfy customer requirements, or be cost effectively produced
before or after the 0.8 micron process is discontinued. A failure by the Company
to successfully design replacement products could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company will make a final purchase from IBM of products using the 0.8 micron
manufacturing process prior to the end of October 1998 based on its forecast of
future demand for the products. In the event that the forecast were to prove
inaccurate and the Company were to purchase excess inventory, write downs would
result which could have a material adverse effect on the Company's business,
financial condition and results of operations.
28
<PAGE> 32
The Company expects that each of its IC products will be manufactured by a
sole source manufacturer for the foreseeable future. Currently, all but one of
the Company's products under volume manufacture are being supplied by IBM. The
Company's gmFC1 frame refresh rate conversion IC is supplied by Chip Express.
However, the Company expects that several of its future IC products will be
manufactured, assembled and tested by new Asian manufacturing partners. The lead
time necessary to establish a strategic relationship with a new manufacturing
partner is considerable, and the estimated time for IBM or any of the Company's
other current or potential manufacturing partners to switch to a new product
line is four to six months. Accordingly, there is no readily available
alternative source of supply for any specific product. This lack of portability
of the Company's products and the related dependence on sole source
manufacturing subjects the Company to risks associated with an interruption in
supply. A manufacturing disruption experienced by IBM or any of the Company's
other current or potential manufacturing partners could impact the production of
the Company's products for a substantial period of time, which would have a
material adverse effect on the Company's business, financial condition and
result of operations. See "Business--Manufacturing."
INVENTORY RISK
Under its supply agreements with IBM, the Company is obligated to provide
rolling 12 month forecasts of anticipated monthly purchases and to place
purchase orders which become binding approximately five months prior to
shipment. If the Company cancels a purchase order, it must pay cancellation
penalties based on the status of the work in process. In addition, although the
Company may order products that exceed the numbers previously forecasted and
accepted by IBM, such orders are subject to rejection by IBM for any reason,
including but not limited to resource availability. Thus, the Company may have
to make forecasts and place purchase orders for its IC products several months
before it receives purchase orders from its own customers. This limits the
Company's ability to react to fluctuations in demand for its products, which can
be unexpected and dramatic, and may cause the Company to have excess inventory,
or a shortage, of a particular product. There can be no assurance that IBM will
supply the quantities of products stated in the rolling forecast. In the event
of line capacity constraints, IBM reserves the right to reduce shipments to all
customers on a pro-rata basis. In this regard, IBM has informed the Company that
IBM's 0.8 micron manufacturing process will be discontinued at the end of
September 1999. The Company will be required to make a final purchase of IC
products that are manufactured using this process based on its forecast of
future demand for these IC products. In the event that the forecast was to prove
inaccurate and the Company was to purchase excess inventory, write downs would
result. As a result of the long lead time for ordering and obtaining wafers, the
Company may be required from time to time to write off (or down) excess
inventory. In addition, should the market for semiconductor wafers decline,
there is a possibility that the contracted price may be significantly greater
than prevailing market prices at the time the Company takes delivery of its
orders. In fiscal 1997, the Company recorded provisions totaling $1.3 million
for potential declines in inventory value and for write downs of excess
inventory. Significant write downs of excess inventory or declines in inventory
value could materially adversely affect the Company's business, financial
condition and results of operations. Conversely, the failure to order sufficient
products would cause the Company to miss revenue opportunities which, if
significant, could impact sales by the Company's customers, thereby adversely
affecting the Company's customer relationships and the Company's business,
financial condition and results of operations. See "--Product Transitions" and
"Business--Manufacturing."
MANUFACTURING YIELDS
The fabrication of semiconductor wafers is a complex process. Minute levels
of contaminants in the manufacturing environment, defects in photomasks used to
print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. Many of these
problems are difficult to detect at an early stage of the manufacturing process
and may be time consuming and expensive to correct. As a result, semiconductor
manufacturers often experience problems in achieving acceptable wafer
manufacturing yields, which are represented by the number of good die as a
proportion of the total number of die on any particular wafer. Poor yields by
the Company's suppliers may result in insufficient good die to meet customer
orders and, consequently, would materially adversely affect the Company's
business, financial condition and results of operations. Under its Agreement for
ASIC Design and Purchase of Products with IBM, the Company purchases certain
fully-assembled and tested ICs, not wafers, and pays an agreed upon price for
each die meeting certain acceptance criteria. Under its Custom Sales Agreement
with IBM, the Company has a foundry manufacturing relationship with IBM, who
will assemble and test certain other of the Company's IC products, but a portion
of the manufacturing yield risk will pass to the Company. Under the foundry
manufacturing relationship with IBM, the Company will purchase wafers from IBM,
paying an agreed price for each wafer, and thereby bearing the risk of final
yield of good die. IBM, for their part, must manufacture the wafers in
accordance with the CMOS 5SF process technology's process parameters
29
<PAGE> 33
as defined by the agreement. Furthermore, wafers with process yields of less
than 20 percent of the wafer target yield for a specific IC product will not be
shipped, without the Company's written approval which if not given will not
result in any liability to the Company. Because the Company's IC products
feature the integration of large amounts of memory with logic circuitry on a
single chip, a manufacturer must obtain acceptable yields of both the memory and
logic portions of such products, compounding the complexity of the manufacturing
process. The inability of the Company to achieve acceptable yields from its
manufacturers would have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, the Company also
faces the risk of product recalls resulting from design or manufacturing defects
which are not discovered during the manufacturing and testing process. A
significant number of product returns could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing."
COMPETITION
The markets in which the Company operates are expected to become intensely
competitive and are characterized by rapid technological change, evolving
industry standards and declining average selling prices. The Company believes
that the principal competitive factors in its markets are product design and
performance, price, functionality and features, size, reliability, reputation,
time to market and customer support. The Company's ability to successfully
compete in its target markets depends upon a number of other factors, including
the Company's success in subcontracting the manufacture and assembly of IC
products that implement new technologies, product quality and availability,
production efficiency, the ability to achieve design wins and to begin volume
production of the Company's IC products for particular OEM customers, end-user
acceptance of the OEM customers' products, the timing of new IC product
introductions by the Company, market acceptance of competitors' products,
protection of the Company's proprietary technology and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future with respect to these or any other competitive
factors.
The Company competes with large OEM companies that have internally
developed image manipulation IC solutions for their products. In the future,
current or potential customers may develop their own proprietary image
manipulation solutions, which may be more cost-effective and provide similar or
more advanced functionality than the Company's IC products. The Company
anticipates that as the markets for its products develop, competition from
diversified electronic and semiconductor companies will intensify. Such
competitors include companies with greater financial and other resources than
the Company. In addition, the Company competes with start-up companies that are
seeking to capitalize on the emergence of market opportunities for image
manipulation ICs. Such companies may develop advanced technologies enabling them
to offer more cost-effective and higher quality solutions to OEM customers than
those offered by the Company. The Company is aware of several companies which
have recently announced or introduced image manipulation products that address
markets targeted by the Company. Such competition could have a material adverse
effect on the Company's business, financial condition and results of operation
by, among others, increasing pressure on the Company's profit margins and
causing the Company to lose product orders.
CUSTOMER CONCENTRATION
The Company's products are primarily sold into video, graphics and image
display markets which are highly concentrated. Accordingly, the Company's sales
are derived from a limited number of customers, with the top five OEM customers
accounting for 56%, 35% and 51% of total revenues during fiscal 1998, fiscal
1997 and fiscal 1996, respectively. In particular, direct and indirect sales to
In Focus Systems, Inc. accounted for 23%, 23% and 14% of total revenues fiscal
1998, fiscal 1997 and fiscal 1996, respectively. The Company expects that a
small number of customers will continue to account for a substantial portion of
its total revenues for the foreseeable future. All of the Company's sales are
made on the basis of purchase orders rather than pursuant to long-term
agreements, and therefore, any customer could cease purchasing the Company's IC
products at any time. The decision of any key customer to cease using the
Company's IC products or a material decline in the number of units purchased by
a significant customer could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Markets,
Applications and Customers."
UNCERTAINTY REGARDING INTELLECTUAL PROPERTY AND LICENSES
The Company seeks to protect its technology through a combination of
patents, copyrights, trade secret laws, trademark registrations, confidentiality
procedures and licensing arrangements. In the United States, the Company has
nine issued patents, each covering certain aspects of the algorithms, design or
architecture of certain of the Company's image manipulation IC products. These
patents expire at various times from 2011 to 2014, provided that maintenance
fees are paid on a timely basis. In addition, the Company has four patent
applications pending in the United States Patent and Trademark Office, two
pending Canadian patent
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applications, five pending Japanese patent applications, five pending Korean
patent applications and five pending European patent applications.
To supplement its proprietary technology, the Company has licensed
perpetual, exclusive and worldwide rights to use certain patents held by third
parties with rights to sub-license such rights. In particular, pursuant to an
agreement entered into on March 2, 1993, the Company has licensed from
NorthShore Laboratories, Inc. ("NorthShore") its patented shrink technology. In
accordance with such agreement, the Company pays royalties to NorthShore based
on sales of its IC products that incorporate NorthShore's shrink technology. The
license is exclusive vis-a-vis third parties, but does not prohibit NorthShore
from commercializing software products that employ its proprietary technology,
as long as those products do not directly compete with the Company's products,
nor does it prohibit the Company from sublicensing the NorthShore shrink
technology. If the license were terminated by the Company without cause, by
NorthShore due to material breach of the license by the Company, or because the
Company decided not to renew the license, the Company would lose the right to
incorporate NorthShore's shrink technology in its IC products. In such event,
the Company would be required to exclude NorthShore's shrink technology from the
Company's existing and future products that have not already been sold to
customers and either license or develop internally alternative technologies.
There can be no assurance that the Company would be able to license alternative
technologies on commercially reasonable terms, or at all, or that the Company
would be capable of developing internally such technologies. If the license were
otherwise terminated by NorthShore, the Company would no longer be required to
pay royalties to NorthShore for the use of the technology and the Company would
retain the right to incorporate NorthShore's shrink technology into its IC
products, although such rights would no longer be exclusive.
While the Company intends to protect its intellectual property rights
vigorously, there can be no assurance that the Company's pending or submitted
patent applications will be approved, or that any issued or licensed patents
will provide the Company with competitive advantages or will not be challenged,
invalidated, or circumvented by third parties. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's IC products or design around any patents that may be issued to the
Company or licensed from third parties. Moreover, the laws of certain countries
in which the Company's products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect the Company's IC products
or intellectual property rights to the same extent as the laws of the United
States, and thus, may increase the likelihood of theft of the Company's
technology or IC product designs. There can be no assurance that the steps taken
by the Company to protect its intellectual property rights will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company has certain
indemnification obligations with respect to the infringement of third-party
intellectual property rights by its IC products. Although the Company has not
been notified that its products infringe any third-party intellectual property
rights, there can be no assurance that the Company will not receive such a
notification in the future. Any litigation to determine the validity of third
party infringement claims, whether or not determined in the Company's favor or
settled by the Company, would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that any infringement claims by third parties or any claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. In the event
of an adverse ruling in any such matter, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing IC
products, discontinue the use of certain processes or be required to obtain a
license under the intellectual property rights of the third party claiming
infringement. There can be no assurance that a license would be available on
reasonable terms or at all. Any limitations on the Company's ability to market
its products, or delays and costs associated with redesigning its products or
payments of license fees to third parties, or any failure by the Company to
develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Intellectual Property and
Licenses."
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DEPENDENCE ON SALES OUTSIDE OF NORTH AMERICA
Sales to customers located outside of North America accounted for 47%, 19%
and 7% of the Company's total revenues for fiscal years 1998, 1997 and 1996,
respectively. In fiscal 1998 a large portion of the Company's revenues were from
sales to customers located in Japan, Korea and Taiwan who sell their products
worldwide. These sales are subject to a variety of risks including tariffs,
import restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles and potentially adverse
tax consequences and export license requirements. In addition, the Company is
subject to the risks inherent in conducting business internationally, including
political and economic instability and unexpected changes in diplomatic and
trade relationships. In particular, the economies of certain countries in the
Asia-Pacific region are experiencing considerable economic instability and
downturns. Because the Company's sales to date have been denominated in United
States dollars, increases in the value of the United States dollar relative to
local currencies could increase the price in local currencies of the Company's
IC products in non-U.S. markets and make the Company's products more expensive
than competitors' products that are denominated in local currencies. Certain of
the Company's accounts receivable resulting from sales outside of North America
have been insured against loss by the Canadian Export Development Corporation.
However, there can be no assurance that insurance coverage will be available to
the Company at commercially reasonable terms in the future, if at all, or that
one or more of the factors described above will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Customers, Applications and Markets."
MANAGEMENT OF GROWTH
The Company has experienced, and may continue to experience, periods of
rapid growth and expansion, which have placed, and could continue to place, a
significant strain on the Company's limited financial, management and other
resources. To manage its expanded operations effectively, the Company will be
required to continue to improve its existing operational, financial and
management systems and to implement new systems. The Company relies upon its
ability to successfully hire, train, motivate and manage its employees,
especially management and research and development personnel. If the Company's
management is unable to manage its expanded operations effectively, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the
continued service of its key engineering, sales, marketing, manufacturing,
finance and executive personnel, and its ability to identify, hire and retain
additional personnel. There is intense competition for qualified personnel in
the semiconductor industry, and there can be no assurance that the Company will
be able to continue to retain, attract and train qualified personnel necessary
for the development of its products and business. From time to time, the Company
has experienced difficulty in locating candidates with appropriate
qualifications. In addition, due to the complex nature of the Company's
technologies and products and the significant training required for new
personnel, retention of existing personnel is particularly important. There can
be no assurance that the Company will be successful in retaining or attracting
such personnel. Loss of the services of, or failure to recruit in a timely
manner, key technical or management personnel would adversely impact the
Company's product development programs and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has obtained key-man life insurance on the life of Paul M. Russo,
Chairman of the Board and Chief Executive Officer, in the amount of
CDN$1,250,000, with the Company being the designated beneficiary as to 50% of
the total amount. See "Management--Executive Compensation."
YEAR 2000 COMPLIANCE
The Company uses a number of computer software programs, including
operating systems, financial and administrative systems and other information
technology ("IT") systems, as well as a number of non-IT systems, typically
embedded technologies, in its internal operations. To the extent that the
Company's IT and non-IT systems are unable to appropriately interpret the
upcoming calendar year "2000," modification or replacement of such systems will
be necessary. The Company has established a committee to identify the IT and
non-IT systems that are not Year 2000 compliant. The committee will also review
the IT and non-IT systems of the Company's suppliers and major customers to
determine whether or not their systems are Year 2000 compliant. The Company has
been communicating with its suppliers and major customers regarding this issue.
The committee is currently reviewing potential Year 2000 issues and their
impact, as well as investigating possible methods of remediation. The Company
intends to implement remediation programs by the end of 1998, and to be fully
Year 2000 compliant by mid-1999. The Company's costs to date related to Year
2000 compliance have not been material, and while the total estimated costs of
remediation
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<PAGE> 36
have not yet been determined, the Company anticipates that any future costs will
not be material. The Company is not yet certain as to what a reasonably likely
worst case Year 2000 scenario will be. This issue will be reviewed by the
Company's Year 2000 committee. Consequently, the Company has not yet established
a contingency plan to handle such a scenario, although it plans to by mid-1999.
Given the information known at this time about the Company's systems,
coupled with the Company's 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 the Company's
business, financial condition and results of operations. However, the Company is
still analyzing its IT and non-IT systems, as well as those of its suppliers and
major customers and, to the extent they are not fully Year 2000 compliant, there
can be no assurance that the costs necessary to update or replace such systems
or the potential systems or business interruptions that could occur would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL FUTURE ACQUISITIONS
In the future, the Company may pursue acquisitions of product lines,
technologies or businesses. Future acquisitions by the Company may result in the
use of significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to goodwill and
other intangible assets, each of which could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies and products acquired, the diversion of
management's attention from other business concerns, the risk of entering
markets in which the Company has limited or no prior experience, and the
potential loss of key employees. There are currently no commitments or
agreements with respect to any acquisition. In the event that an acquisition
does occur, such acquisition may have a material adverse effect on the Company's
business, financial condition and results of operations.
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly to finance inventory and accounts receivable and for capital
expenditures. The Company believes that its existing capital resources will be
sufficient to meet the Company's capital requirements through at least the next
12 months, although the Company could be required, or could elect, to seek to
raise additional capital during such period. The Company's future capital
requirements will depend on many factors, including the rate of revenue growth,
the Company's profitability, the timing and extent of spending to support
research and development programs, the expansion of selling and marketing and
administrative activities, the timing of introductions of new IC products and
product enhancements, and market acceptance of the Company's IC products. The
Company expects that it may need to raise additional equity or debt financing in
the future. There can be no assurance that additional equity or debt financing,
if required, will be available on acceptable terms or at all. If the Company is
unable to obtain such additional capital, the Company may be required to reduce
the scope of its planned product development, selling and marketing and
administrative activities, which would have a material adverse effect on the
Company's business, financial condition and results of operation. In the event
that the Company does raise additional equity financing, further dilution to
shareholders will result. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
ANTI-TAKEOVER PROVISIONS
The authorized capital of the Company consists of an unlimited number of
Common Shares and an unlimited number of Special Shares (the "Special Shares")
issuable in one or more series. The Board of Directors has the authority to
issue Special Shares and to determine the price, designation, rights,
preferences, privileges, restrictions and conditions, including voting and
dividend rights, of these shares without any further vote or action by the
shareholders. The rights of the holders of Common Shares will be subject to, and
may be adversely affected by, the rights of holders of any Special Shares that
may be issued in the future. The issuance of Special Shares, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a
majority of the outstanding voting shares of the Company. The Company has no
present plans to issue any Special Shares. The Company has adopted a shareholder
rights plan with respect to its Common Shares, which is specifically designed to
make an unsolicited, non-negotiated takeover attempt more difficult. The Company
also has a Board of Directors with three-year staggered terms, which may, in
certain circumstances, make an unsolicited, non-negotiated takeover attempt more
difficult.
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POTENTIAL PRODUCT LIABILITY CLAIMS
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
Although the Company has not experienced product liability claims to date, the
Company may be subject to such claims in the future. In the event a successful
product liability claim is brought against the Company, the Company's business,
financial condition and results of operations could be materially adversely
affected.
RISKS INHERENT IN FOREIGN OPERATIONS; CURRENCY FLUCTUATION RISK
The Company has invested substantial resources, including all of its
research and development activities, in operations outside of the United States
and plans to make additional international investments in the future. Risks
inherent in foreign operations include loss of revenue, property and equipment
from expropriation, nationalization, war, insurrection, terrorism and other
political risks, risks of increases in taxes and governmental royalties and fees
and involuntary renegotiation of contracts with or licenses from foreign
governments. The Company is also exposed to the risk of changes in foreign and
domestic laws and policies that govern operations of foreign-based companies.
Additionally, because a significant portion of the Company's operating expenses
are denominated and paid in Canadian dollars, and all of its revenues and costs
of revenues are denominated and received in U.S. dollars, fluctuations in the
exchange rate between the Canadian and U.S. dollars could increase the Company's
operating expenses and, as a result, could materially adversely affect the
Company's profitability. The Company does not presently engage in any hedging or
other transactions intended to manage the risks relating to currency exchange
rates or interest rate fluctuations. However, the Company may in the future
undertake such transactions if management determines that it is necessary to
offset such risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CANADIAN CORPORATE LAW
The Company is incorporated under the laws of the Province of Ontario,
Canada, and accordingly is governed by the Ontario Business Corporations Act
("OBCA"). The OBCA differs in certain material respects from laws applicable to
United States corporations and shareholders, including the provisions relating
to interested directors, mergers and similar arrangements, takeovers,
shareholders' suits, indemnification of directors and inspection of corporate
records.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
The Company expects to manage its affairs so that the Company will not be
classified as a passive foreign investment company ("PFIC") under the United
States Internal Revenue Code of 1986, as amended. If the Company were a PFIC,
then each United States shareholder of the Company would, upon certain
distributions by the Company or upon disposition (including certain pledges of
such Common Shares) of the Common Shares at a gain, be liable to pay tax at the
then prevailing highest rates on ordinary income plus an interest charge, as if
the distribution or gain had been recognized ratably over the United States
shareholder's holding period for the Common Shares, or if a "qualified electing
fund" election were made by the United States shareholder, a pro rata share of
the Company's earnings and net capital gain would be required to be included in
the United States shareholder's income each year. While the Company intends to
manage its affairs so as to avoid PFIC status, there can be no assurance that
the Company will be successful in this endeavor. See "Certain Tax
Considerations--United States Federal Income Taxation Passive Foreign Investment
Company."
ENFORCEABILITY OF CIVIL LIABILITIES
The enforcement by investors of civil liabilities under the federal
securities laws of the United States may be adversely affected by the fact that
the Company is incorporated under the laws of the Province of Ontario, Canada,
that some or all of its directors and officers are residents of Canada, that
some or all of the experts named in the registration statement are residents of
Canada and that all or a substantial portion of the assets of the Company and
said persons may be located outside the United States. As a result, it may be
difficult for holders of the Common Shares to effect service of process within
the United States upon directors and officers of the Company who are not
residents of the United States or experts named in the Registration Statement of
which this Prospectus is a part who are not residents of the United States or to
realize in the United States upon judgments of courts of the United States
predicated upon civil liabilities under the federal securities laws of the
United States. The Company has been advised by Weir & Foulds, its Canadian
counsel, that there is some doubt as to the enforceability in Canada against the
Company or its directors or officers who are not residents of the United States
or experts named in the Registration Statement of which this Prospectus is a
part who are not residents of the United States in original actions or in
actions for enforcement of judgments of United States courts of liabilities
predicated solely upon the federal securities laws of the United States.
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ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table lists the names and positions held by each of the Company's
executive officers and directors as of August 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul M. Russo .......................... 55 Chairman of the Board and Chief Executive Officer
Scott Baker ............................ 36 Director, Product Development
Peter Dakin ............................ 57 Vice President, Manufacturing Operations
J. Eric Erdman ......................... 40 Vice President, Finance and Administration
Chief Financial Officer
Hamid Farzaneh ......................... 49 Vice President, Worldwide Sales
Stephen J. Solari ...................... 42 Vice President, Marketing and Business Development
Brian S. Campbell(1).................... 36 Director
James E. Donegan ....................... 53 Director
George A. Duguay(1)(2) ................. 45 Director
A. David Ferguson(2) ................... 39 Director
Ronald A. Rohrer ....................... 59 Director
William H. Welling(2) .................. 65 Director
</TABLE>
- --------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Paul M. Russo is a co-founder of the Company and has served as Chief
Executive Officer and Director of the Company since its inception in January
1987. Mr. Russo has also served as Chairman of the Board of the Company since
November 1995, and as President of the Company from the Company's inception to
November 1995. From October 1983 to December 1985, Mr. Russo served as General
Manager of the Microelectronics Center, and from 1980 to September 1983, he
served as Senior Manager in the Industrial Electronics Group of General Electric
Corporation. From 1976 to 1980, Mr. Russo was Manager of the Microsystems
Research Group, and from 1970 to 1976, Mr. Russo was a member of the technical
staff at RCA's David Sarnoff Research Center. Mr. Russo holds a B.Eng. degree
in Physics from McGill University and M.S. and Ph.D. degrees in Electrical
Engineering from the University of California at Berkeley.
Scott Baker joined the Company in September 1992 and has served as
Director, Product Development since February 1996. Prior to joining Genesis,
Mr. Baker was a lead engineer with Litton Systems Canada Ltd., an electronic
devices company, from January 1989 to August 1992. Mr. Baker has a B. Technology
degree in electrical engineering from Ryerson Polytechnical Institute and is a
member of IEEE and of the Professional Engineers of Ontario.
Peter Dakin is a co-founder of the Company and has served as Vice
President, Manufacturing Operations of the Company since May 1994. From May 1991
to May 1994, Mr. Dakin served as the Director of Procurement and Sourcing for
the Semiconductor Division at Mitel Corporation, a telecommunications company.
From 1982 to 1985, Mr. Dakin served as Vice President, Operations/Plant Manager
at Mitel Corporation. Mr. Dakin holds a B.S. degree in Physics from Carleton
University.
I. Eric Erdman joined the Company in July 1995 and has served as Vice
President, Finance and Administration, Chief Financial Officer and Secretary of
the Company since July 1996, December 1997 and October 1995, respectively. From
October 1995 to September 1996, Mr. Erdman served as a Director of the Company
and from July 1995 to July 1996, he served as Director, Finance and
Administration of the Company. From August 1993 to July 1995, Mr. Erdman was
Controller of Vistar Telecommunications Inc., a telecommunications company, and
from October 1991 to August 1993, Mr. Erdman was Controller of COM DEV Ltd., a
satellite communications devices company. Mr. Erdman holds a B. Math degree from
the University of Waterloo. Mr. Erdman is a member of the Canadian Institute of
Chartered Accountants and a member of the American Institute of Certified Public
Accountants.
Hamid Farzaneh joined the Company in September 1994 and has served as Vice
President, Worldwide Sales of the Company since January 1997 and from September
1994 to June 1995. From June 1995 to January 1997, Mr. Farzaneh served as Vice
President, Sales and Marketing of the Company. From February 1990 to September
1994, Mr. Farzaneh served as Vice President, Sales and Marketing of ASAT
Corporation, an IC subcontract assembly company. Mr. Farzaneh holds a B.S.
degree in Mechanical Engineering and an M.S. degree in Industrial Engineering
from the Institut National des Sciences Appliquees in Lyon, France and an
M.B.A. degree from Golden Gate University.
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<PAGE> 39
Stephen J. Solari joined the Company in January 1997 as Vice President,
Marketing and Business Development. From January 1996 to November 1996, Mr.
Solari served as Director of Marketing for Video CD at C-Cube Microsystems, a
semiconductor company. From August 1990 to January 1996, Mr. Solari served as
Marketing Manager at Phillips Semiconductors, B.V. a semiconductor company. Mr.
Solari holds a B.S. degree in Electrical Engineering and an M.B.A. degree from
the University of California at Berkeley.
Brian S. Campbell has served as a Director of the Company since July 1996.
Mr. Campbell has served as a Director of Yorkton Securities Inc., a Canadian
investment banking firm, since February 1996. From May 1992 to February 1996,
Mr. Campbell served as a Vice President of Midland Walwyn Capital Inc., a
Canadian investment banking firm. Mr. Campbell serves as a member on the Board
of Directors of Linmor Technologies Inc., a network management software company.
Mr. Campbell holds a Bachelor of Electrical Engineering degree from the
University of Waterloo and an M.B.A. degree from the University of Western
Ontario.
James E. Donegan has served as a Director of the Company since September
1997. Since 1985, Mr. Donegan has served as the Chairman of the Board, President
and Chief Executive Officer of Sipex Corporation, a semiconductor company. Mr.
Donegan holds a B.A. degree from Villanova University.
George A. Duguay has served as a Director of the Company since May 1993.
Since May 1985, Mr. Duguay has served as the President of a partner of Duguay
and Ringler Corporate Services, which provides bookkeeping and corporate
secretarial services.
A. David Ferguson has served as a Director of the Company since September
1996. Mr. Ferguson serves as a Vice-President and Director of The VenGrowth
Investment Fund Inc., a Canadian venture capital fund. From January 1990 to
August 1994, Mr. Ferguson served as a Managing Director of Cohen & Ferguson
Translink Inc., a corporate merger and acquisition firm. Mr. Ferguson serves on
the Board of Directors of Andaurex Industries Inc., an engineering firm. Mr.
Ferguson holds a Bachelor of Commerce degree from the University of Manitoba and
an M.B.A. degree from the University of Western Ontario.
Ronald A. Rohrer has served as a Director of the Company since November
1994. Mr. Rohrer is a semiconductor industry consultant. From September 1985 to
August 1996, Mr. Rohrer served as a professor at Carnegie Mellon University. Mr.
Rohrer holds a B.S. degree in Electrical Engineering from the Massachusetts
Institute of Technology and M.S. and Ph.D. degrees in Electrical Engineering
from the University of California at Berkeley.
William H. Welling has served as a Director of the Company since November
1993. Mr. Welling has served as Managing Partner of Venture Growth Associates,
an investment firm since 1983. Mr. Welling serves as Chief Executive Officer and
Chairman of the Board of Xiox Corp., a telecommunications company, and as a
director of Western Micro Technology, Inc., a distributor of computer systems
and products. Mr. Welling holds a B.S. degree in Mechanical Engineering from
Marquette University.
LIMITATION ON LIABILITY; INDEMNIFICATION MATTERS
The by-law of the Company provides that, subject to the limitations
contained in the OBCA, the Company shall indemnify all past, present and future
directors and officers of the Company, and all persons who are now or may
hereafter be, acting or have previously acted, at the Company's request, as a
director or officer of a body corporate of which the Company is or was a
shareholder or creditor, and his heirs and legal representatives, against all
costs, charges and expenses, including any amount paid to settle an action or
satisfy a judgment, reasonably incurred by him in respect of any civil, criminal
or administrative action or proceeding to which he is made a party by reason of
being or having been a director or officer of the Company or body corporate, if
he acted honestly and in good faith with a view to the best interests of the
Company, and, in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for believing
that his conduct was lawful. The Company may also indemnify any such person in
such other circumstances as the OBCA or law permits or requires.
The Company currently maintains directors' and officers' liability
insurance for its directors and officers and plans to continue such insurance.
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APPOINTMENT OF OFFICERS
Each officer of the Company was appointed by the Board of Directors and
serves at the discretion of the Board of Directors until his or her successor is
appointed or until his or her earlier resignation or removal in accordance with
applicable law. There are no family relationships among the directors and
executive officers of the Company.
ELECTION OF DIRECTORS
The Company's Articles of Amalgamation (the "Articles") provide for a
rotating Board of Directors, and in accordance with the By-law of the Company,
the Board of Directors has fixed the number of directors at seven. Three
directors, Messrs. Russo, Rohrer and Donegan, have been elected to hold office
until the annual meeting of the Company to be held in fiscal 2001; two
directors, Messrs. Welling and Campbell, have been elected to hold office until
the annual meeting of the Company to be held in fiscal 2000; and, two directors,
Messrs. Duguay and Ferguson, have been elected to hold office until the next
annual meeting of the Company. A director may be removed by holders of a
majority of the shares voted at a special or annual shareholder meeting. After a
director has completed his or her term of office, the successor director holds
office until the third annual meeting of shareholders after the election of the
successor director.
The number of directors may be increased or decreased by decision of the
Board of Directors, but pursuant to the Company's Articles, the Board must
consist of a minimum of one and a maximum of eleven directors. Under the OBCA, a
majority of the members of the Board of Directors must be "resident Canadians"
as that term is defined in the OBCA.
BOARD COMMITTEES
Compensation Committee. The Compensation Committee consists of Messrs.
Campbell and Duguay. The Compensation Committee reviews and recommends to the
Board of Directors the compensation arrangements and benefits for all executive
officers of the Company and reviews general policy matters relating to
compensation arrangements and benefits for employees of the Company. The
Compensation Committee also makes grants of stock options under the 1997
Employee Stock Option Plan.
Audit Committee. The Audit Committee of the Board of Directors consists of
Messrs. Duguay, Ferguson and Welling. The Audit Committee reviews the internal
accounting procedures of the Company, recommends independent accountants to the
Company to audit the Company's financial statements, discusses the scope and
results of the audit with the independent accountants, reviews with the
Company's executive officers and the independent accountants the Company's
year-end operating results and the non-audit services to be performed by the
Company's retained independent accountants, and considers the adequacy of the
internal accounting controls and audit procedures of the Company.
Under the OBCA, a majority of the members of any committee of the Board of
Directors must be "resident Canadians" as that term is defined in the OBCA.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board was, at any
time since the formation of the Company, an officer or employee of the Company.
No interlocking relationship exists between the Company's Board of Directors or
Compensation Committee and the Board of Directors or Compensation Committee of
any other company, nor did any such interlocking relationship exist during the
past fiscal year.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate of salary and bonus payments made or accrued to all of the
directors and executive officers of the Company named in Item 10 (12 persons) in
fiscal 1998 was approximately $972,000. This amount excludes amounts paid as
automobile allowances to the executive officers as reimbursement for the use of
personal automobiles in the ordinary course of business, expenses reimbursed to
directors or executive officers and other fringe benefits commonly reimbursed.
The executive officers receive bonuses based on overall Company performance, as
determined by the Compensation Committee. No amount was contributed in the
fiscal year on behalf of any of the directors or executive officers to a
retirement account for the benefit of such persons.
37
<PAGE> 41
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
At August 31, 1998, there were a total of 1,669,850 outstanding options to
purchase Common Shares of the Company, exercisable at prices ranging from $1.32
to $9.00 and with expiration dates ranging from 1998 to 2008. At August 31,
1998, the persons named in Item 10 as a group (12 persons) held options to
acquire 879,300 Common Shares.
STOCK OPTION PLANS
(i) 1987 Stock Option Plan:
The 1987 Stock Option Plan (the "1987 Plan") was established for the
benefit of full-time employees and directors of the Company and
consultants engaged by the Company. Options granted under the 1987
Plan vest over periods of two to four years and expire from five to
seven years from the dates of the grants, unless extended by the Board
of Directors. As a result of the establishment of the 1997 Employee
Stock Option Plan, no additional options will be granted under the
1987 Plan. Upon exercise, expiration or cancellation of all of the
options granted under the 1987 Plan, this plan will be terminated. All
options granted under the 1987 Plan are exercisable in Canadian
dollars. As of August 31, 1998 options with respect to an aggregate of
912,550 shares were outstanding under this plan at exercise prices
ranging from CDN $2.00 per share to CDN $9.00 per share.
(ii) 1997 Employee Stock Option Plan:
The 1997 Employee Stock Option Plan (the "1997 Employee Plan")
provides for the granting to employees of incentive stock options,
non-statutory stock options and stock purchase rights for up to
800,000 common shares of the Company. The exercise price of incentive
stock options granted under the 1997 Employee Plan may not be less
than 100% (110% in the case of any options granted to a person who
holds more than 10% of the total combined voting power of all classes
of shares of the Company) of the fair market value of the common
shares subject to the option on the date of the grant. The term of the
options may not exceed 10 years (five years in the case of any options
granted to a person who holds more than 10% of the total combined
voting power of all classes of shares of the Company) and generally
vest over four years. As of August 31, 1998 options with respect to an
aggregate of 714,800 shares were outstanding under this plan at
exercise prices ranging from $6.88 per share to $9.00 per share and
options to purchase 93,200 shares remained available for grant.
(iii) 1997 Non-Employee Stock Option Plan:
The 1997 Non-Employee Stock Option Plan (the "Non-Employee Plan")
provides for the granting to non-employee directors and consultants of
the Company of up to 150,000 common shares of the Company. The
exercise price of stock options granted under the Non-Employee Plan
may not be less than 100% of the fair market value of the common
shares subject to the option on the date of the grant. Options granted
under the Non-Employee Plan have a term of up to ten years and
generally vest over periods of up to two years. As of August 31, 1998
options with respect to an aggregate of 42,500 shares were outstanding
under this plan at exercise prices ranging from $8.94 per share to
$9.00 per share and options to purchase 107,500 shares remained
available for grant.
(iv) Employee Stock Purchase Plan:
The Company has established an employee stock purchase plan under
which employees may authorize payroll deductions of up to 15% of their
compensation (as defined in the plan) to purchase common shares at a
price equal to 85% of the lower of the fair market values as of the
beginning or the end of the offering period.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
On October 31, 1997, Paul M. Russo arranged to borrow up to approximately
CDN$1.4 million from the Royal Bank of Canada for the purpose of repaying a
debt to Rocco A. Schiralli, a principal shareholder. This obligation to the
Royal Bank of Canada is evidenced by a promissory note, with interest calculated
and payable monthly at a rate equal to the Royal Bank of Canada's prime interest
rate per annum in effect from time to time plus .50% per annum. Interest is
payable monthly, and the principal becomes due on demand. This loan is
guaranteed by the Company and effectively reduces the Company's ability to
borrow under its credit facility with the Royal Bank of Canada to the extent of
Mr. Russo's outstanding loan balance. In exchange for the Company's guarantee of
this loan, Paul M. Russo has pledged to the Company 100,000 Common Shares.
38
<PAGE> 42
On October 25, 1996, the Company loaned CDN$150,000 to Paul M. Russo. This
obligation is evidenced by a promissory note. No interest is payable on this
loan and the Company may not demand payment of the principal amount of the loan
until the earlier of: (i) October 25, 1998; (ii) the date which is the 180th day
following the earlier of the date on which the initial public offering of Common
Shares of the Company is closed or the date on which the Common Shares of the
Company otherwise become publicly traded; and (iii) the date on which Mr. Russo
sells any Common Shares of the Company. Once this amount becomes payable on
demand, interest accrues on the principal amount at 1% above the prime rate of
the Royal Bank of Canada. Mr. Russo, the Company and Weir & Foulds, counsel to
the Company, have entered into a Pledge Agreement dated October 25, 1996 whereby
Mr. Russo pledged 25,000 Common Shares as security for the foregoing
obligations. The share certificate representing such Common Shares is held by
Weir & Foulds as escrow agent.
On July 25, 1997, Mr. Russo borrowed an additional CDN$80,000 from the
Company. This obligation is evidenced by a promissory note. No interest is
payable regarding this loan and the principal amount of the loan becomes due on:
(i) the date which is 18 months following the earlier of (a) the date on which
the initial public offering of Common Shares of the Company is closed and (b)
the date the Common Shares of the Company otherwise become publicly traded; or
(ii) the date from time to time on which the obligor under the note shall sell
any shares of the Company in which case the amount payable is the lesser of (a)
the balance of the principal sum owing under the note and (b) 50% of the gross
proceeds payable to the obligor as a result of such sale. Mr. Russo has entered
into a Pledge Agreement with Weir & Foulds and the Company dated July 25, 1997
pursuant to which he pledged 40,000 Common Shares of the Company as security for
his obligation. The share certificates representing such Common Shares are held
by Weir & Foulds as escrow agent.
On July 25, 1997, Lance Greggain, a former officer of the Company, borrowed
CDN$50,000 from the Company. This obligation is evidenced by a promissory note.
No interest is payable regarding this loan and the principal amount of the loan
becomes due on: (i) the date which is 18 months following the earlier of (a) the
date on which the initial public offering of Common Shares of the Company is
closed and (b) the date the Common Shares of the Company otherwise become
publicly traded; or (ii) the date from time to time on which the obligor under
the note shall sell any shares of the Company in which case the amount payable
is the lesser of (a) the balance of the principal sum owing under the note and
(b) 50% of the gross proceeds payable to the obligor as a result of such sale.
Mr. Greggain has entered into a Pledge Agreement with Weir & Foulds and the
Company dated July 25, 1997 pursuant to which he pledged 30,000 Common Shares of
the Company as security for his obligation. The share certificates representing
such Common Shares are held by Weir & Foulds as escrow agent.
39
<PAGE> 43
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed
as part of this Annual Report on Form 20-F.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following financial statements, schedule and exhibit together with
the report of KPMG, Chartered Accountants thereon, are filed as part
of this Form 20-F.
<TABLE>
<S> <C>
Report of KPMG, Chartered Accountants ................................... 41
Consolidated Balance Sheets ............................................. 42
Consolidated Statements of Operations ................................... 43
Consolidated Statements of Shareholders' Equity ......................... 44
Consolidated Statements of Cash Flows ................................... 45
Notes to Consolidated Financial Statements .............................. 46
Financial Statement Schedule - Valuation and Qualifying Accounts ........ 57
</TABLE>
40
<PAGE> 44
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Genesis Microchip Inc.
as at May 31, 1997 and 1998 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three year
period ended May 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at May 31, 1997
and 1998 and the results of its operations and its cash flows for each of the
years in the three year period ended May 31, 1998 in accordance with generally
accepted accounting principles in Canada, which, except as disclosed in note 10
to the financial statements, also conform in all material respects with
generally accepted accounting principles in the United States.
/s/ KPMG
Chartered Accountants
Toronto, Canada
July 10, 1998
41
<PAGE> 45
GENESIS MICROCHIP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
ASSETS
May 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 3,687 $ 35,904
Accounts receivable trade, net of allowance for doubtful accounts
of $75 in 1997 and $90 in 1998 ................................ 915 2,523
Employee loan receivable ........................................ 72 69
Investment tax credits receivable ............................... 1,516 1,735
Inventory ....................................................... 1,753 3,278
Other ........................................................... 158 135
-------- --------
Total current assets ....................................... 8,101 43,644
Capital assets (note 3) .............................................. 1,432 2,080
Deferred income taxes ................................................ -- 1,642
Other ................................................................ 80 80
-------- --------
Total assets ............................................... $ 9,613 $ 47,446
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 646 $ 1,498
Accrued liabilities ............................................. 488 1,045
Current portion of loan payable (note 5) ........................ 64 97
-------- --------
Total current liabilities .................................. 1,198 2,640
Long-term liabilities:
Loan payable (note 5) ........................................... 794 655
-------- --------
Total liabilities ............................................... $ 1,992 $ 3,295
-------- --------
Shareholders' equity (note 6):
Share capital:
Special shares:
Authorized - an unlimited number of shares
Issued and outstanding - nil shares at
May 31, 1997 and 1998 ...................................... -- --
Preference shares:
Authorized - an unlimited number of shares
Issued and outstanding - 227,200 shares at
May 31, 1997 and nil shares at May 31, 1998 ................ 901 --
Common shares:
Authorized - an unlimited number of shares
Issued and outstanding - 7,498,834 shares at
May 31, 1997 and 13,808,132 shares at
May 31, 1998 ............................................... 12,627 57,688
Common share purchase warrants:
Issued and outstanding - 946,349 warrants at
May 31, 1997 and nil warrants at May 31, 1998 ................. 1 --
Special and bonus warrants:
Issued and outstanding - 17,800,000 warrants at
May 31, 1997 and nil warrants at May 31, 1998 ................. 10,809 --
Share purchase loans receivable ................................. (36) (124)
Cumulative translation adjustment ............................... 31 (109)
Deficit ......................................................... (16,712) (13,304)
-------- --------
Total shareholders' equity ................................. 7,621 44,151
Commitments and contingencies (note 8)
Subsequent event (note 6)
-------- --------
Total liabilities and shareholders' equity ................. $ 9,613 $ 47,446
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Approved by the Board:
/s/ George A. Duguay, Director /s/ A. David Ferguson, Director
42
<PAGE> 46
GENESIS MICROCHIP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended May 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Products ............................................... $ 1,381 $ 4,164 $ 14,941
Design services and other .............................. 143 363 806
-------- -------- --------
Total revenues ...................................... 1,524 4,527 15,747
Cost of revenues .......................................... 434 2,983 4,819
-------- -------- --------
Gross profit .............................................. 1,090 1,544 10,928
Operating expenses:
Research and development ............................... 2,605 3,351 4,538
Less investment tax credits and government assistance .. (508) (707) (890)
-------- -------- --------
2,097 2,644 3,648
Selling and marketing .................................. 1,389 2,449 3,316
General and administrative ............................. 1,053 1,206 1,231
-------- -------- --------
Total operating expenses ............................ 4,539 6,299 8,195
-------- -------- --------
Income (loss) from operations ............................. (3,449) (4,755) 2,733
Interest income (expense) ................................. (143) 147 675
-------- -------- --------
Income (loss) before income taxes ......................... (3,592) (4,608) 3,408
Provision for income taxes ................................ -- -- --
-------- -------- --------
Net income (loss) ......................................... $ (3,592) $ (4,608) $ 3,408
======== ======== ========
Earnings (loss) per share:
Basic ............................................... $ (0.59) $ (0.62) $ 0.36
Fully diluted ....................................... $ (0.59) $ (0.62) $ 0.29
Weighted average number of common shares
outstanding (in thousands):
Basic ............................................... 6,071 7,463 9,559
Fully diluted ....................................... 6,071 7,463 12,912
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE> 47
GENESIS MICROCHIP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARE
PREFERENCE COMMON PURCHASE
SHARES SHARES WARRANTS
---------------------------- --------------------------- ----------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 1, 1995 ...... 227,200 $ 901 5,375,066 $ 7,511 1,484,352 $ 9
Loss ........................ -- -- -- -- -- --
Issued ...................... -- -- 929,299 3,400 533,369 --
Issued on exercise
of warrants ................ -- -- 1,071,172 1,576 (1,071,172) (8)
Expired ..................... -- -- -- -- (200) --
Issued on exercise
of stock options ........... -- -- 34,297 37 -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1996 ...... 227,200 901 7,409,834 12,524 946,349 1
Loss ........................ -- -- -- -- -- --
Issued ...................... -- -- 3,000 11 -- --
Issued on exercise
of stock options ........... -- -- 86,000 92 -- --
Issue costs ................. -- -- -- -- -- --
Currency
translation adjustment ..... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1997 ...... 227,200 901 7,498,834 12,627 946,349 1
Net income .................. -- -- -- -- -- --
Issued ...................... -- -- 3,119,488 35,210 -- --
Issued on exercise
of warrants ................ -- -- 2,000 4 (2,000) --
Issued on exercise
of stock options ........... -- -- 117,500 169 -- --
Issue costs ................. -- -- -- (2,036) -- --
Conversion of
preference shares .......... (227,200) (901) 227,900 901 -- --
Conversion of warrants ...... -- -- 2,843,110 10,813 (944,349) (1)
Currency
translation adjustment ..... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1998 ...... -- $ -- 13,808,132 $ 57,688 -- $ --
=========== =========== =========== =========== =========== ===========
<CAPTION>
SPECIAL & BONUS SHARE
WARRANTS PURCHASE CUMULATIVE
---------------------------- LOANS TRANSLATION
NUMBER AMOUNT RECEIVABLE ADJUSTMENT DEFICIT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 1, 1995 ...... -- $ -- $ -- $ -- $ (8,512) $ (91)
Loss ........................ -- -- -- -- (3,592) (3,592)
Issued ...................... -- -- -- -- -- 3,400
Issued on exercise
of warrants ................ -- -- -- -- -- 1,568
Expired ..................... -- -- -- -- -- --
Issued on exercise
of stock options ........... -- -- -- -- -- 37
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1996 ...... -- -- -- -- (12,104) 1,322
Loss ........................ -- -- -- -- (4,608) (4,608)
Issued ...................... 17,800,000 11,653 -- -- -- 11,664
Issued on exercise
of stock options ........... -- -- (36) -- -- 56
Issue costs ................. -- (844) -- -- -- (844)
Currency
translation adjustment ..... -- -- -- 31 -- 31
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1997 ...... 17,800,000 10,809 (36) 31 (16,712) 7,621
Net income .................. -- -- -- -- 3,408 3,408
Issued ...................... -- -- -- -- -- 35,210
Issued on exercise
of warrants ................ -- -- -- -- -- 4
Issued on exercise
of stock options ........... -- -- (94) -- -- 75
Issue costs ................. -- -- -- -- -- (2,036)
Conversion of
preference shares .......... -- -- -- -- -- --
Conversion of warrants ...... (17,800,000) (10,809) -- -- -- 3
Currency
translation adjustment ..... -- -- 6 (140) -- (134)
----------- ----------- ----------- ----------- ----------- -----------
Balances, May 31, 1998 ...... -- $ -- $ (124) $ (109) $ (13,304) $ 44,151
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE> 48
GENESIS MICROCHIP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ (3,592) $ (4,608) $ 3,408
Adjustments to reconcile income (loss) to cash used in operating
activities:
Amortization ................................................. 434 510 670
Inventory provision .......................................... -- 1,293 86
Change in operating assets and liabilities:
Accounts receivable trade .................................... (334) (403) (1,628)
Investment tax credits receivable ............................ (243) (407) (301)
Inventory .................................................... (641) (2,321) (1,637)
Other ........................................................ (177) 52 26
Accounts payable ............................................. 505 (51) 902
Accrued liabilities .......................................... 50 191 623
-------- -------- --------
Net cash from (used in) operating activities ................. (3,998) (5,744) 2,149
Cash flows from investing activities:
Additions to capital assets ...................................... (303) (979) (1,388)
-------- -------- --------
Cash used in investing activities ............................ (303) (979) (1,388)
Cash flows from financing activities:
Proceeds from:
Issue of common shares and common share
purchase warrants, net of issue costs .................... 5,005 103 31,708
Issue of special and bonus warrants,
net of issue costs ....................................... -- 10,809 --
Loan payable ................................................. 45 118 --
Repayment of:
Loan payable ................................................. -- (64) (62)
Debentures payable ........................................... -- (1,275) --
Obligations under capital leases ............................. (109) (810) --
Issuance of share purchase loans ................................. -- (36) (96)
-------- -------- --------
Net cash provided by financing activities .................... 4,941 8,845 31,552
Effect of currency translation on cash balances ...................... -- 32 (96)
-------- -------- --------
Increase in cash and cash equivalents ................................ 640 2,154 32,217
Cash and cash equivalents, beginning of year ......................... 893 1,533 3,687
-------- -------- --------
Cash and cash equivalents, end of year ............................... $ 1,533 $ 3,687 $ 35,904
======== ======== ========
Supplemental cash flow information:
Cash paid for interest ............................................... $ 207 $ 181 $ 5
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease obligations incurred for purchase
of property and equipment ............................................ $ 755 $ -- $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE> 49
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Genesis Microchip Inc. (the "Company") designs, develops and markets
sophisticated real-time, cost-effective, high-quality, digital image
manipulation semiconductor solutions.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are stated in U.S. dollars, except as otherwise
noted. They have been prepared in accordance with Canadian generally accepted
accounting principles which, except as disclosed in note 10, conform in all
material respects with accounting principles generally accepted in the United
States.
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary Genesis Microchip Corporation. All material
inter-company transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or
less at the date of acquisition are classified as cash equivalents.
INVENTORY
Inventory consists principally of finished goods and is stated at the lower
of cost (first-in, first-out) or market.
CAPITAL ASSETS
Capital assets are stated at cost. Amortization is recorded using the
following methods and annual rates over the estimated useful lives of the
assets:
<TABLE>
<CAPTION>
ASSET BASIS RATE
----- ----- ----
<S> <C> <C>
Property and equipment Declining balance 20% to 30%
Computer software Straight line 100%
Leasehold improvements Straight line over the term of the lease
Patents Straight line over the life of the patent
</TABLE>
The Company regularly reviews the carrying values of its capital assets. If the
carrying value of its capital assets exceeds the amount recoverable, a
write-down is charged to the consolidated statement of operations.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment. Product
returns and allowances are estimated and provided for at the time of sale.
Design services revenues are recognized as the Company performs engineering
services for the customer or completes phases of the project defined by the
applicable development agreement.
46
<PAGE> 50
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CURRENCY TRANSLATION
Monetary assets and liabilities of the Company and of its wholly owned
subsidiary that are denominated in foreign currencies are translated into
Canadian dollars (which is considered to be the measurement currency) at the
exchange rate prevailing at the balance sheet date. Transactions included in
operations are translated at the average rate for the period. Exchange gains and
losses resulting from the translation of these amounts are reflected in the
consolidated statement of operations in the period in which they occur. As the
Company's reporting currency is the U.S. dollar, the Company translates
consolidated assets and liabilities denominated in Canadian dollars into U.S.
dollars at the exchange rate prevailing at the balance sheet date, and the
consolidated results of operations at the average rate for the period.
Cumulative net translation adjustments are included as a separate component of
shareholders' equity.
RESEARCH AND DEVELOPMENT EXPENSES
Research costs are expensed as incurred. Expenses related to development
projects are deferred and capitalized only when they meet the criteria set out
under Canadian generally accepted accounting principles. To date, no development
costs have been capitalized.
INVESTMENT TAX CREDITS
The Company is entitled to Canadian federal and provincial investment tax
credits which are earned as a percentage of eligible current and capital
research and development expenditures incurred in each taxation year. Certain
investment tax credits earned prior to the taxation year in which the Company's
shares became publicly traded are fully refundable to the Company. All other
investment tax credits are available to be applied against future income tax
liabilities, subject to a 10-year carry forward period. Investment tax credits
are accounted for as a reduction of the related expenditure for items of a
current nature and a reduction of the related asset cost for items of a
long-term nature, provided that the Company has reasonable assurance that the
tax credits will be realized.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments consist of cash and cash equivalents, accounts
receivable trade, employee loan receivable, accounts payable, accrued
liabilities and loan payable. The Company determines the fair value of its
financial instruments based on quoted market values or discounted cash flow
analyses. Unless otherwise indicated, the fair values of financial assets
approximate their recorded amounts.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable trade. Cash equivalents consist of deposits with or guaranteed by
major commercial banks, the maturities of which are three months or less from
the date of purchase. The Company performs periodic credit evaluations of the
financial condition of its customers and typically does not require collateral
from them. Allowances are maintained for potential credit losses consistent with
the credit risk of specific customers, historical trends and other information,
and have been within management's range of expectations.
EARNINGS PER SHARE
Earnings (loss) per share have been calculated on the basis of earnings
divided by the weighted average number of common shares outstanding during each
year. Fully diluted earnings (loss) per share have been calculated assuming that
preference shares, common share purchase warrants, special and bonus warrants
and options outstanding at the end of the year had been converted or exercised
at the later of the beginning of the year or their date of issuance, where such
conversion or exercise would not be anti-dilutive.
47
<PAGE> 51
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL ASSETS
Capital assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Property and equipment ................. $ 2,039 $ 2,623
Computer software ...................... 580 1,085
Leasehold improvements ................. 30 87
Patents ................................ 260 326
------- -------
2,909 4,121
Less accumulated amortization .......... (1,477) (2,041)
------- -------
$ 1,432 $ 2,080
======= =======
</TABLE>
4. BANK CREDIT FACILITY
The Company has a $3.5 million credit facility with the Royal Bank of
Canada. The credit facility is subject to a borrowing formula, and may be drawn
in either Canadian or US. dollars. It is secured by way of a general security
agreement covering all of the Company's assets, excluding intellectual property.
The interest rate on the credit facility is at bank prime rate plus one-half of
one percent, based on either Canadian or U.S. prime rates, as applicable. At May
31, 1997 and 1998 there were no borrowings outstanding under this facility.
5. LOAN PAYABLE
The loan payable is non-interest bearing and is unsecured. It is payable in
annual principal installments by fiscal year as follows (in thousands):
<TABLE>
<S> <C>
1999 ............................................. $ 97
2000 ............................................. 97
2001 ............................................. 97
2002 ............................................. 97
2003 ............................................. 97
2004 and thereafter .............................. 267
-----
752
Less current portion ............................. (97)
-----
$ 655
=====
</TABLE>
The fair value of the loan payable was $717,000 at May 31, 1997 and
$613,000 at May 31, 1998, based on the present value of contractual future
payments, discounted at the current market rate of interest available to the
Company for the same or similar debt instrument.
6. SHAREHOLDERS' EQUITY
The Company's share capital and earnings per share information has been
restated to reflect the ten-for-one reverse split of the Company's common shares
effective November 14, 1997.
SPECIAL SHARES
The Board of Directors of the Company is authorized to issue an unlimited
number of special shares from time to time in one or more series, to fix the
number of special shares of such series and to determine the designation, rights
(including voting rights, dividend rights, rights of retraction and rights of
redemption), privileges, restrictions and conditions attaching to the shares of
each such series, without further vote or action by the shareholders. No series
of special shares may have a priority over any other series of special shares
with respect to dividends or liquidation rights. The special shares may have
voting rights superior to the common shares or other series of special shares
and may rank senior to the common shares as to dividends and as to the
distribution of assets in the event of liquidation, dissolution or winding-up of
the Company.
48
<PAGE> 52
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERENCE SHARES
In September 1997, all of the outstanding preference shares were converted
into common shares on the basis of one common share for each preference share.
On November 14, 1997, the Company amended its articles of amalgamation to remove
the authorized preference shares and to authorize a new class of special shares.
CONVERSION OF SPECIAL AND BONUS WARRANTS
The 17,800,000 special and bonus warrants were converted into a total of
2,136,000 common shares for no additional consideration upon the Company's
initial public offering becoming effective in February 1998.
CONVERSION OF COMMON SHARE PURCHASE WARRANTS
On November 1, 1997, all of the 944,349 outstanding common share purchase
warrants were converted into 707,110 common shares for proceeds of $3,000. This
conversion was made pursuant to an offer made by the Company to the holders of
each class of its common share purchase warrants. The offer was made in order to
simplify the capital structure of the Company prior to the Company's initial
public offering of common shares. Each class of warrant holder was provided with
the option of either converting their common share purchase warrants into common
shares at the specified exercise price for that class of warrant or of choosing
to convert their common share purchase warrants into a specified lesser number
of common shares without the payment of additional consideration. The exercise
price offered to each class of warrant holder was determined by calculating the
present value of the existing exercise price for each class of warrant with
reference to the original expiry date of the warrant. This amount was also used
to calculate the equivalent number of common shares to be offered on conversion
where the warrant holder chose to select the cashless option offered by the
Company.
STOCK OPTION PLANS
1987 Stock Option Plan
The 1987 Stock Option Plan (the "1987 Plan") was established for the
benefit of full-time employees and directors of the Company and consultants
engaged by the Company. Options granted under the 1987 Plan vest over periods of
two to four years and expire from five to seven years from the dates of the
grants, unless extended by the Board of Directors. As a result of the
establishment of the 1997 Employee Stock Option Plan, no additional options will
be granted under the 1987 Plan. Upon exercise, expiration or cancellation of all
of the options granted under the 1987 Plan, this plan will be terminated. All
options granted under the 1987 Plan are exercisable in Canadian dollars.
1997 Employee Stock Option Plan
The 1997 Employee Stock Option Plan (the "1997 Employee Plan") provides
for the granting to employees of incentive stock options, non-statutory stock
options and stock purchase rights for up to 800,000 common shares of the
Company. The exercise price of incentive stock options granted under the 1997
Employee Plan may not be less than 100% (110% in the case of any options granted
to a person who holds more than 10% of the total combined voting power of all
classes of shares of the Company) of the fair market value of the common shares
subject to the option on the date of the grant. The term of the options may not
exceed 10 years (five years in the case of any options granted to a person who
holds more than 10% of the total combined voting power of all classes of shares
of the Company) and generally vest over four years. There are 545,300 shares
available for grant under the 1997 Employee Plan.
1997 Non-Employee Stock Option Plan
The 1997 Non-Employee Stock Option Plan (the "Non-Employee Plan") provides
for the granting to non-employee directors and consultants of the Company of up
to 150,000 common shares of the Company. The exercise price of stock options
granted under the Non-Employee Plan may not be less than 100% of the fair market
value of the common shares subject to the option on the date of the grant.
Options granted under the Non-Employee Plan have a term of up to ten years and
generally vest over periods of up to two years. There are 112,500 shares
available for grant under the 1997 Non-Employee Plan.
49
<PAGE> 53
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Purchase Plan
The Company has established an employee stock purchase plan under which
employees may authorize payroll deductions of up to 15% of their compensation
(as defined in the plan) to purchase common shares at a price equal to 85% of
the lower of the fair market values as of the beginning or the end of the
offering period. As at May 31, 1998, no common shares had been issued and there
were 100,000 common shares available for issuance under this plan.
Details of stock option transactions are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- ---------- ---------
<S> <C> <C> <C>
Balances, June 1, 1995 ................. 619,050 $0.07 - 4.21 $ 2.39
Issued ............................... 65,500 3.51 3.51
Exercised ............................ (34,297) 0.07 - 3.51 1.08
Cancelled ............................ (40,203) 3.51 - 4.21 4.00
---------
Balances, May 31, 1996 ................. 610,050 0.70 - 3.51 2.53
Issued ............................... 486,500 3.51 - 4.91 3.58
Exercised ............................ (86,000) 0.70 - 3.51 1.07
Cancelled ............................ (28,900) 3.51 3.51
---------
Balances, May 31, 1997 ................. 981,650 0.70 - 4.91 3.09
Issued ............................... 489,000 4.80 -14.00 8.17
Exercised ............................ (117,500) 0.70 - 3.43 1.45
Cancelled ............................ (19,250) 3.43 - 4.80 3.86
---------
Balances, May 31, 1998 ................. 1,333,900 1.37 -14.00 5.09
=========
</TABLE>
At May 31, 1998, there were 659,000 options that had vested and were
exercisable, with a weighted average exercise price per share of $3.31. The
weighted average remaining contractual life of the options outstanding May 31,
1998 is 5.06 years.
YORKTON SECURITIES INC. OPTIONS
As a condition of the issuance of the special and bonus warrants in July
1996, the Company granted Yorkton Securities Inc. ("Yorkton") an option to
purchase 213,600 common shares at any time prior to July 31, 1998 at an exercise
price of Cdn. $9.00 (U.S. $6.18) per share. On June 17, 1998, in lieu of
purchasing the entire number of shares for cash, Yorkton chose a cashless
exercise alternative, whereby it received 113,252 common shares for no
additional cash consideration in complete settlement of the above option on that
date.
SHARE PURCHASE LOANS RECEIVABLE
In October 1996, the Company loaned $107,000 to an executive officer of the
Company. The loan is non-interest bearing and the Company may not demand payment
of the principal until the earlier of August 23, 1998 or the date that the
executive sells any common shares of the Company. The executive officer has
pledged 25,000 common shares of the Company as security for the loan.
In July 1997, the Company loaned $94,000 to two executive officers of the
Company to assist these individuals in purchasing common shares of the Company
through the exercise of 70,000 options previously issued to them at an exercise
price ranging from $0.70 to $1.40 per common share. The loans are non-interest
bearing and are repayable on the earlier of August 23, 1999 or the date on which
the obligor under the note sells any common shares of the Company, in which case
the amount payable is the lesser of (i) the balance of the principal sum owing
and (ii) 50% of the gross proceeds realized on the sale of the common shares.
The executive officers pledged an aggregate of 70,000 common shares of the
Company as security for the loans.
50
<PAGE> 54
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income (loss) before taxes. The sources and tax
effects of the differences are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Basic rate applied to income (loss) before taxes ........... $(1,602) $(2,055) $ 1,520
Adjustments resulting from:
Provincial research and development deductions ......... (176) (99) (95)
Small business deduction ............................... 35 34 (22)
Foreign tax and exchange rate differences .............. 108 194 473
Utilization of tax loss carry forwards ................. -- -- (1,744)
Other items ............................................ 11 (63) (132)
------- ------- -------
(1,624) (1,989) --
------- ------- -------
Unrecognized benefit of losses carried forward ............. 1,624 1,989 --
$ -- $ -- $ --
======= ======= =======
</TABLE>
Pretax loss from foreign operations was $1,015,000 in the year ended May
31, 1996, $1,832,000 in the year ended May 31, 1997 and $4,465,000 in the year
ended May 31, 1998.
At May 31, 1998, the Company has investment tax credits of $700,000 that
expire beginning in 1999 if not utilized. The Company has $5,300,000 of U.S.
federal net operating losses that expire in the years 2010 to 2013.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------
1997 1998
------- -------
<S> <C> <C>
Research and development expenses deferred
for income tax purposes ..................... $ 5,028 $ 1,708
Net operating loss carryforwards ................. 1,915 1,806
Investment tax credit carryforwards .............. 268 388
Deferred interest charges ........................ 262 796
Issue costs ...................................... 300 1,868
Other ............................................ 3 193
------- -------
Net deferred tax asset ........................... 7,776 6,759
Less valuation allowance ......................... (7,776) (5,117)
------- -------
$ -- $ 1,642
======= =======
</TABLE>
During the year ended May 31, 1998, the valuation allowance decreased by
approximately $2,659,000 primarily as a result of utilization of net operating
losses. During the year ended May 31, 1997, the valuation allowance increased by
approximately $2,242,000.
51
<PAGE> 55
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases premises in Markham, Ontario and Mountain View,
California under operating leases that expire on May 31, 1999 and September 1,
1998, respectively. In addition, certain equipment is leased under
non-cancellable operating leases expiring in various years through 2003. Future
minimum lease payments by fiscal year are as follows (in thousands):
<TABLE>
<S> <C>
1999 ........................... $ 466
2000 ........................... 131
2001 ........................... 83
2002 ........................... 20
2003 ........................... 25
------
725
======
</TABLE>
SUPPLY AGREEMENTS
The Company has supply agreements with certain manufacturers for the supply
of its semiconductor products. Through May 31, 1998, a sole source manufacturer
produced each of the Company's semiconductor products, with the majority of
these products being supplied by a single company. Should that source of
products cease to be available, management believes that this would have a
material adverse effect on the Company's business, financial condition and
results of operations. Under the terms of the supply agreements, the Company has
no guarantees of minimum capacity from its suppliers and is not liable for
minimum purchase commitments.
LOAN GUARANTEE
The Company has guaranteed an obligation of its chief executive officer to
the Royal Bank of Canada up to an amount of Cdn. $1.4 million (U.S. $961,000).
The amount of the loan has been made available under the credit facility that
the Company has with the Royal Bank of Canada in the amount of Cdn. $5.0 million
(U.S. $3.4 million) and effectively decreases the Company's effective borrowings
under the facility to Cdn. $3.6 million (U.S. $2.4 million). As of May 31, 1998,
the Company has guaranteed Cdn. $1,355,000 (U.S. $930,000), being the amount
borrowed by the chief executive officer. In exchange for the guarantee of his
loan, the chief executive officer has pledged as security 100,000 common shares
of the Company.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
9. SEGMENT INFORMATION
The Company operates in one industry segment, which is the design,
development and marketing of sophisticated real-time, cost-effective,
high-quality, digital image manipulation semiconductor solutions.
The Company sells its products internationally. The following table
summarizes revenues by geographical region (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
United States ........... $1,309 $3,293 $ 8,163
Japan and Asia .......... 36 443 6,620
Europe .................. 78 408 729
Canada .................. 101 383 235
------ ------ -------
$1,524 $4,527 $15,747
====== ====== =======
</TABLE>
52
<PAGE> 56
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the year ended May 31, 1996, two customers accounted for 16% and 14% of
total revenues, respectively. For the year ended May 31, 1997, one customer
accounted for 14% of total revenues. For the year ended May 31, 1998, two
customers accounted for 24% and 23% of total revenues, respectively. At May 31,
1997, one customer represented 33% of total accounts receivable trade. At May
31, 1998, one customer represented 12% of total accounts receivable trade.
The Company conducts operations in the United States and Canada. Total
revenues, income (loss) from operations and identifiable assets applicable to
operations by geographic segment were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total revenues:
United States .......................... $ 1,165 $ 3,100 $ 7,609
Canada ................................. 359 1,427 8,138
-------- -------- --------
Total revenues ........................... $ 1,524 $ 4,527 $ 15,747
======== ======== ========
Income (loss) from operations:
United States .......................... $ (886) $ (1,190) $ (2,893)
Canada ................................. (2,563) (3,565) 5,626
-------- -------- --------
Total income (loss) from operations... $ (3,449) $ (4,755) $ 2,733
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-------------------
1997 1998
------- -------
<S> <C> <C>
Identifiable assets:
United States ........................ $ 442 $ 1,584
Canada ............................... 9,171 45,862
------- -------
Total assets ....................... $ 9,613 $47,446
======= =======
</TABLE>
10. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND
THE UNITED STATES
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP") which conform, in all
material respects applicable to the Company, with generally accepted accounting
principles in the United States ("U.S. GAAP") during the periods presented,
except with respect to the following:
CHANGE IN REPORTING CURRENCY
Under Canadian GAAP, the Company's change in reporting currency to U.S.
dollars from Canadian dollars in the 1997 fiscal year requires that all prior
years' comparative figures be restated through a "translation of convenience"
using the exchange rate in effect at May 31, 1996. Under U.S. GAAP, prior years'
comparative figures are restated using applicable historical rates for the prior
period.
For U.S. GAAP purposes, at May 31, 1997, the balance of preference share
capital would be increased by $220,000, the balance of common share capital
would be increased by $434,000, the deficit would be increased by $669,000 and
the cumulative translation adjustment would be increased by $15,000. At May 31,
1998, the balance of common share capital would be increased by $654,000, the
deficit would be increased by $669,000 and the cumulative translation adjustment
would be reduced by $15,000. The difference in translating the revenues,
expenses and loss for the year ended May 31, 1996 at historical rates for U.S.
GAAP, as opposed to at the exchange rate in effect at May 31, 1996 for Canadian
GAAP, is not material.
ACCOUNTING FOR STOCK OPTIONS AND SHARE ISSUANCES
Under Canadian GAAP, there is no requirement to record deferred
compensation liability or expense upon the grant of compensatory stock options
or upon the issuance of shares where such issuances are made at less than fair
market value.
53
<PAGE> 57
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under U.S. GAAP, there are alternative methods available for accounting for
employee stock options, Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SEAS 123"). The
Company has elected to follow APB 25 and related interpretations in accounting
for its employee stock options. Under APB 25, deferred compensation liability is
recorded at the option grant date in an amount equal to the difference between
the fair market value of a common share and the exercise price of the option.
Compensation expense is recognized over the vesting period of the option.
During the fiscal years ended May 31, 1996 and May 31, 1997, the Company
extended the expiration dates of certain employee stock options issued under the
1987 Plan. All other terms associated with the stock options remained unchanged.
Under U.S. GAAP, the extension is treated as the issuance of new stock options
requiring the fair market value of a common share at the date of the extension
to be compared to the exercise price of the option in order to calculate any
compensation expense.
Under U.S. GAAP, the issuance of shares for consideration that is less than
the fair market value of the shares results in compensation expense equal to the
excess of the fair market value of the shares over the value of the
consideration received.
Under U.S. GAAP, common share capital would be increased by $1,027,000 at
May 31, 1997, and by $1,277,000 at May 31, 1998. Deferred compensation charges
would be increased by $214,000 at May 31, 1997 and by $169,000 at May 31, 1998.
Stock compensation expense relating to option grants and common share issuances
would be $223,000 for the year ended May 31, 1996, $590,000 for the year ended
May 31, 1997, and $295,000 for the year ended May 31, 1998.
RECONCILIATION TO U.S. GAAP
The following table reconciles net income (loss) reported in the
accompanying consolidated statements of operations with that which would have
been reported had the statements been prepared in accordance with U.S. GAAP (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss) -
Canadian GAAP ....................... $(3,592) $(4,608) $ 3,408
Adjustment:
Stock compensation expense .......... (223) (590) (295
------- ------- -------
Net income (loss) - U.S. GAAP .......... $(3,815) $(5,198) $ 3,113
======= ======= =======
</TABLE>
The following table indicates the items in the balance sheet that would be
affected had the financial statements been prepared in accordance with U.S.
GAAP. The amounts would be as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Identifiable assets:
Preference shares ................................ $ 1,121 $ --
Common shares .................................... 14,088 59,619
Common share purchase warrants ................... 1 --
Special and bonus warrants ....................... 10,809 --
Share purchase loans receivable .................. (36) (124)
Cumulative translation adjustment ................ 46 (94)
Deferred compensation charge ..................... (214) (169)
Deficit .......................................... (18,194) (15,081
-------- --------
Total shareholders' equity .................... $ 7,621 $ 44,151
======== ========
</TABLE>
54
<PAGE> 58
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CALCULATION OF EARNINGS PER SHARE
Under both U.S. and Canadian GAAP, basic earnings per share are computed by
dividing the net income (loss) for the period available to common shareholders
as measured by the respective accounting principles (numerator), by the weighted
average number of common shares outstanding during that period (denominator).
Basic earnings per share excludes the dilutive effect of potential common
shares.
Fully diluted earnings per share under Canadian GAAP and diluted earnings
per share under U.S. GAAP give effect to all potential common shares outstanding
during the period. Under Canadian GAAP, fully diluted earnings per share is
calculated assuming that the proceeds from the exercise of potential common
shares are invested at an appropriate rate of return, and an imputed interest
amount is added to net income for the period. The number of fully diluted shares
outstanding represents the weighted average maximum number of potential common
shares outstanding. Under U.S. GAAP, the weighted average number of diluted
shares outstanding is calculated assuming that the proceeds from potential
common shares are used to repurchase common shares at the average share price in
the period. No adjustment is made to net income for imputed interest in
calculating diluted earnings per share under U.S. GAAP.
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation under U.S. GAAP as required by SFAS
128 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator for basic and diluted
net income (loss) per share:
Net income (loss) - U.S. GAAP .................................. $(3,815) $(5,198) $ 3,113
======= ======= =======
Denominator for basic net income (loss) per share:
Weighted average common shares .................................... 6,071 7,463 9,559
======= ======= =======
Basic net income (loss) per share .................................... $ (0.63) $ (0.70) $ 0.33
======= ======= =======
Denominator for diluted net income (loss) per share:
Weighted average common shares .................................... 6,071 7,463 9,559
Stock options and warrants ........................................ -- -- 2,645
------- ------- -------
Shares used in computing diluted net income (loss) per share ......... 6,071 7,463 12,204
======= ======= =======
Diluted net income (loss) per share .................................. $ (0.63) $ (0.70) $ 0.26
======= ======= =======
</TABLE>
Due to the net loss in the years ended May 31, 1996 and 1997, all potential
common shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted net income (loss) per share.
PRO FORMA DISCLOSURES - SFAS 123
As discussed above, the Company accounts for its stock option awards under
U.S. GAAP using the intrinsic value method in accordance with APB 25 and its
related interpretations. Accordingly, no compensation expense is recorded for
employee stock arrangements that are granted with the exercise prices equal to
the fair market value at the grant date.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of its
1996 fiscal year. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
for fiscal 1998 were made using the Black-Scholes option
55
<PAGE> 59
GENESIS MICROCHIP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pricing model using a dividend yield of 0% and the following weighted average
assumptions. In fiscal years 1997 and 1996, the fair value for each option grant
was calculated using the minimum value method using a dividend yield of 0% and
the following weighted average assumptions. The minimum value method differs
from other methods designed to estimate fair values, such as the Black-Scholes
method, in that it does not consider the effect of expected volatility.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Risk-free interest rates ............... 4% 4% 5%
Volatility ............................. -- -- 0.8739
Expected life of option in years ....... 4 4 5
</TABLE>
Had compensation expense been determined based on the fair value of the
awards at the grant dates in accordance with the methodology prescribed in SFAS
123, the Company's net income and earnings per share under U.S. GAAP for fiscal
1998 would have decreased by approximately $219,000 or by $0.02 per share for
both basic and diluted earnings per share. The net loss and net loss per share
for the Company's fiscal years ended May 31, 1997 and 1996 would have increased
by approximately $74,000 or $0.01 per share for both basic and diluted earnings
per share, and by approximately $46,000 or $0.01 per share for both basic and
diluted earnings per share, respectively. The effects on pro forma disclosure of
applying SFAS 123 are not likely to be representative of the effects on pro
forma disclosure in future years. Because SFAS 123 is applicable only to options
granted subsequent to June 1, 1995, the pro forma effect will not be fully
reflected until fiscal 1999.
The weighted average fair values of options granted during fiscal 1996,
1997 and 1998 are $0.52, $0.56 and $5.85, respectively.
RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The impact of adopting
SFAS 130, which is effective for the Company's 1999 fiscal year, has not been
determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires publicly
held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is available
and is utilized by the chief operating decision maker. Specific information to
be reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
The impact of adopting SFAS 131, which is effective for the Company's 1999
fiscal year, has not been determined.
56
<PAGE> 60
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTION OF YEAR
----------- ---------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
May 31, 1996
Allowance for doubtful accounts .... -- -- -- -- --
Inventory reserve .................. -- -- -- -- --
May 31, 1997
Allowance for doubtful accounts .... -- $ 75 -- -- $ 75
Inventory reserve .................. -- 1,293 -- -- 1,293
May 31, 1998
Allowance for doubtful accounts .... $ 75 15 -- -- 90
Inventory reserve .................. 1,293 86 -- $1,293 86
</TABLE>
57
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENESIS MICROCHIP INC.
By: /s/ PAUL M. RUSSO
------------------------------------
Paul M. Russo
Chairman and Chief Executive Officer
Dated: September 24, 1998
58
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Document Numbered Page
- ------- ----------------------- -------------
<S> <C> <C>
2.1 Custom Sales Agreement between Genesis Microchip Inc. and International Business Machines
Corporation dated March 9, 1998+ [#]
Articles of Amalgamation of Genesis Microchip Inc., dated June 1, 1992*
Articles of Genesis Microchip Inc., as amended dated July 30, 1996*
Articles of Genesis Microchip Inc., as amended dated November 14, 1997*
Articles of Amalgamation of Genesis Microchip Inc., dated January 31, 1998*
By-Law No. 1A of Genesis Microchip Inc.*
1987 Stock Option Plan*
1997 Employee Stock Option Plan*
1997 Non-Employee Stock Option Plan*
1997 Employee Stock Purchase Plan*
401(k) Plan*
Special Warrant Indenture between Genesis Microchip Inc. and Montreal Trust Company of Canada*
Bonus Warrant Indenture between Genesis Microchip Inc. and Montreal Trust Company of Canada*
Yorkton Securities Inc. Options to Purchase Common Shares of Genesis Microchip Inc.*
Resolution of Board of Directors dated December 11, 1997 amending the Yorkton Securities Inc.
Option to Purchase Common Shares*
Shareholder Rights Plan Agreement*
International Distributorship Agreement with Kanematsu Semiconductor Corporation dated May 10, 1993,
amended effective as of January 1, 1996*
1993 Supply Agreement with In Focus Systems, Inc. dated September 20, 1996*
Half-Band Filter IC Royalty Agreement with Miranda Technologies Inc. dated September 23, 1993*
IC Royalty Agreement with NorthShore Laboratories, Inc. dated March 2, 1993*
Supplemental IC Royalty Agreement with NorthShore Laboratories dated September 1, 1994*
Supplemental IC Royalty Agreement No. 2 with NorthShore Laboratories, Inc. dated October 8, 1997*
Agreement for ASIC Design and Purchase of Products with IBM Microelectronics Essex Junction, Vermont
dated November 19, 1996*
Amendment 1 to the Agreement for ASIC Design and Purchase of Products with IBM,
effective date January 1, 1997*
Loan Agreement with Royal Bank of Canada dated January 7, 1997*
Loan Agreement with Royal Bank of Canada dated October 24, 1997*
Pledge Agreement and Promissory Note of Paul M. Russo dated October 25, 1996*
Pledge Agreement and Promissory Note of Paul M. Russo Dated July 25, 1997*
Pledge Agreement and Promissory Note of Lance Greggain dated July 25, 1997*
Lease Agreement between Markham Executive Centre Building No. 2 Limited and related parties and
Genesis Microchip Inc. of 200 Town Centre Blvd., Suite 303, Markham, Ontario L3R 8G5,
commencing date April 1, 1997*
Lease Agreement between Markham Executive Building No. 2 Limited and related parties and
Genesis Microchip Inc. of 200 Town Centre Blvd., 4th Floor, Markham, Ontario L3R 8G5,
commencing date January 1, 1994*
Lease Agreement between The Landmark and Genesis Microchip Corporation for
2111 Landings Drive, Mountain View, CA 94043 dated September 15, 1994*
Modification No. 1 to Genesis Microchip Corporation Landmark Lease Agreement dated September 15, 1994*
Modification No. 2 to Genesis Microchip Corporation Landmark Lease Agreement dated September 15, 1994,
modifying the premises leased under the agreement to 2071 Landings Drive, Mountain View, CA*
Computation of earnings per share*
Subsidiary of the Registrant*
</TABLE>
+ This exhibit omits certain confidential information which has been filed
separately with the Securities and Exchange Commission.
* Incorporated by reference to the Registration Statement (Registration
Statement No. 333-8258) on Form F-1 effective on February 23, 1998.
<PAGE> 1
EXHIBIT 2.1
CUSTOM SALES AGREEMENT
BASE AGREEMENT
International Business Machines Corporation
281 Winters Street
Waltham, MA 02254
Signature Copy
Agreement No. X0723
Customer: Genesis Microchip, Inc. 200 Town Centre Blvd. Suite 400
Markham, Ontario, Canada L3R 8G5
This Custom Sales Agreement, which consists of this Base Agreement and Statement
of Work Attachments, shall be referred to as the "Agreement". The term of this
Agreement commences on March 9, 1998 and expires on March 8, 2001.
By signing below, the parties each agree to be bound by the terms and conditions
of this Agreement and the initial Statement of Work, Attachment No. 1, and no
additional signature on the initial Statement of Work is required. Subsequent
Statement of Work Attachments under this Agreement must be signed by the parties
to become effective.
Upon signature by both parties, it is agreed this Agreement constitutes the
complete and exclusive agreement between them superseding any prior agreements,
written or oral, relating to the subject matter notwithstanding anything
contained in any document issued by either party. This Agreement may not be
amended or modified except by a written amendment signed by both parties.
The parties expressly acknowledge that they have received and are in possession
of a copy of any referenced item which is not physically attached to the
Agreement and any such item will be treated as if attached.
Accepted and Agreed To:
Genesis Microchip, Inc.
By: /s/ Peter Dakin
Name: Peter Dakin
Title: V. P. of Manufacturing Operations
Date: March 16, 1998
International Business Machines Corporation
By: /s/ Peter Hansen
Name: Peter Hansen
Title: V. P. of North America Sales
Date: April 2, 1998
<PAGE> 2
1.0 DEFINITIONS Capitalized terms in this Agreement have the following meanings.
An Attachment may define additional terms; however, those terms apply only to
that Attachment.
1.1 "Item" shall mean any part, specification, design, document, report, data or
the like which Customer delivers to IBM under this Agreement.
1.2 "Product" shall mean production units to be sold or purchased under this
Agreement. Products shall not include Prototypes.
1.3 "Prototype" shall mean a preliminary version of a Product which may or may
not be functional, is intended for internal use and testing and not for resale,
and is not suitable for production in commercial quantities.
1.4 "Purchase Order Lead Time" shall mean the required minimum amount of time
between IBM's receipt of the purchase order issued by Customer and the requested
shipment date necessary to accommodate manufacturing cycle time.
1.5 "Related Company" of a party hereunder shall mean a corporation, company or
other entity which controls or is controlled by such party or by another Related
Company of such party, where control means ownership or control, direct or
indirect, of more than fifty (50) percent of: (i) the outstanding voting shares
or securities (representing the right to vote for the election of directors or
managing authority), or (ii) the ownership interests representing the right to
make decisions for such a corporation, company or other entity (as the case may
be in partnership, joint venture or unincorporated association having no
outstanding shares or securities). However, any such corporation, company or
other entity shall be deemed to be a Related Company of such party only so long
as such ownership or control exists.
1.6 "Service" shall mean any manufacturing activity or design, or engineering
work IBM performs.
1.7 "Shipment Date" shall mean IBM's estimated date of shipment.
2.0 AGREEMENT STRUCTURE
2.1 This Agreement consists of: (i) the Base Agreement which defines the basic
terms and conditions of the relationship between the parties; and (ii)
Attachments which specify the details of a specific work task. An Attachment may
include additional or differing terms and conditions, however such terms and
conditions apply only to that Attachment. Attachments also include any
specification documents agreed to by the parties applicable to the specific work
under that Attachment.
2.2 If there is a conflict among the terms and conditions of the various
documents, Attachment terms and conditions govern.
2.3 Purchase orders will be used to convey information only and any terms and
conditions on those are void and replaced by this Agreement.
2.4 Either party may include its Related Companies under this Agreement by
written agreement with the other party.
3.0 ORDER AND DELIVERY
3.1 Customer shall order Products and Services by issuing written purchase
orders, which are subject to acceptance by IBM. Purchase orders for Products
must be received by IBM in advance, with at least the Purchase Order Lead Time
specified in the applicable Attachment.
3.2 Products will be shipped to Customer FOB plant of manufacture, except for
Products shipped outside the United States which will be shipped EXWORKS (as
defined in ICC INCOTERMS 1990).
<PAGE> 3
3.3 Title to the Products and risk of loss shall pass to the Customer upon
delivery to the carrier for shipment to the Customer.
4.0 CANCELLATION AND RESCHEDULING
4.1 [***]
4.2 Customer may cancel or reschedule an order for Products and/or Services only
upon prior written notice to IBM. In the event of a cancellation or reschedule
which exceeds the rescheduling rights set forth in an applicable Attachment,
Customer shall pay the quoted price for Products and/or Services delivered or
ready for shipment and the cancellation charges set forth in the applicable
Attachment.
4.3 Customer agrees that if Customer decreases the total quantity of an order
that has a unit price based on an agreed to quantity Customer will pay an
applicable higher unit price for previous shipments and for new shipments.
5.0 PAYMENT
5.1 Prices for Products and Services shall be as set forth in an applicable
Attachment. IBM shall invoice Customer after the Products have been shipped or
the Services provided. Payment by the Customer will be due within thirty (30)
days from the date of invoice. Late payment of invoices will be assessed a
charge equal to the lesser of one and one-half percent (1.5%) per month or the
statutorily maximum rate of interest in accordance with the laws of the State of
New York. In addition, if Customer's account balance exceeds its credit limit
with IBM, or becomes delinquent, IBM may stop shipments to Customer or ship to
Customer on a prepaid basis until the account is current again.
6.0 TERMINATION
6.1 If either party materially breaches a term of this Base Agreement or an
Attachment, the other party may, at its option, terminate this Agreement or any
or all Attachments provided the party in breach is given written notice and
fails to cure such breach within 30 days or immediately in the event of (i)
insolvency, dissolution or liquidation by or against either party, (ii) any
assignment of either party's assets for the benefit of creditors, (iii) any act
or omission of an act by a party demonstrating its inability to pay debts
generally as they become due, (iv) any transfer of substantially all of either
party's business or assets to a third party, or (v) if IBM has a reasonable
basis to believe any of the Items infringe intellectual property rights.
6.2 [***]
6.3 If Customer terminates this Agreement or an Attachment, IBM will fill all
applicable previously accepted purchase orders for Products, but IBM shall not
be obligated to accept further applicable purchase orders after receiving
notice.
6.4 This Base Agreement will continue after its termination or expiration with
respect to any Attachments already in place until they expire, are terminated or
completed. Provided that no monies are due IBM, applicable Items shall be
disposed of as directed by Customer in writing at Customer's expense after a
termination or expiration.
7.0 CONFIDENTIAL INFORMATION
7.1 With the exception of prices and quantities of Products and/or Services
hereunder, no information exchanged between the parties shall be considered
confidential and/or proprietary to either party, or to any third party except as
may be specified pursuant to Section 7.2 below.
7.2 In the event IBM or Customer needs to disclose specific confidential
information to the other in order for IBM to furnish Products and/or Services
hereunder, such information shall be disclosed only pursuant to the terms of a
confidential information exchange agreement executed by the parties.
<PAGE> 4
8.0 LICENSE
8.1 [***]
9.0 TRADEMARK
9.1 Nothing in this Agreement grants either party any rights to use the other
party's trademarks or trade names, directly or indirectly, in connection with
any product, service, promotion, or to make any publication or publicity without
prior written approval of the other party or owner.
10.0 INTELLECTUAL PROPERTY AND INDEMNIFICATION
10.1 IBM agrees to indemnify Customer against damages assessed against Customer
as a result of a final judgment of a court of competent jurisdiction holding
that any Product sold or Service provided by IBM to Customer hereunder infringes
a patent or copyright of a third party in any country in which IBM sells or
provides similar products or services, up to the amount paid by Customer for
Products or Services provided hereunder; PROVIDED THAT Customer (1) promptly
notifies IBM, in writing, of the charge of infringement; or (2) allows IBM to
control and cooperates with IBM in the defense and any related settlement
action; and (3) upon the written request of IBM (a) allows IBM to modify or
replace the Product, or (b) returns the Product to IBM for a credit equal to
Customer's purchase price for the Product, provided Customer has followed
generally accepted accounting principles. Such indemnification does not apply to
a claim of infringement involving any Product sold or Service provided by IBM to
Customer which has been modified by Customer, used in combination with any
product not sold by IBM to Customer, or made, modified or provided by IBM in
compliance with Customer's specification(s). Customer agrees to indemnify IBM
against all damages and costs resulting from such a claim of infringement. The
foregoing states the entire obligation and exclusive remedy of IBM and Customer
regarding any claim of patent or copyright infringement relating to any Product
sold or Service provided hereunder.
10.2 Customer warrants that it is the originator, rightful owner or licensee of
all Items supplied to IBM hereunder and that to the best of Customer's knowledge
no part of such Items infringes any intellectual property rights.
11.0 LIMITATION OF LIABILITY
11.1 Neither party shall be entitled to indirect, incidental, consequential or
punitive damages, including lost profits based on any breach or default of the
other party, including those arising from infringement or alleged infringement
of any patent, trademark, copyright, mask work, or any other intellectual
property.
11.2 Except for nonpayment, no action, regardless of form, arising from this
Agreement may be brought by either party more than one (1) year after the cause
of action has arisen. IBM's liability for any and all causes of action shall be
limited in the aggregate to the greater of: (1) $50,000.00 or (2) the applicable
IBM price to Customer for the specific Products and/or Services that caused the
damages or that are the subject matter of, or directly related to, the cause of
action.
11.3 The limitation of Section 11.2 does not apply to: (1) payments referred to
in Section 10.1 and (2) damages for bodily injury (including death) and damage
to real property and tangible personal property caused by IBM's negligence.
11.4 Under no circumstances is IBM liable for any of the following: (A) third
party claims against Customer for losses or damages other than those in 11.3(1)
and (2) above; or (B) loss of, or damage to, Customer's or another parties'
records or data; or (C) when the Products and/or Services are used in
conjunction with medical devices or nuclear materials.
12.0 WARRANTIES
12.1 [***]
<PAGE> 5
12.2 THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS OR USAGE
FOR PARTICULAR PURPOSE.
12.3 No course of dealing, course of performance, usage of trade, or description
of Product, Prototype or Service shall be deemed to establish a warranty,
express or implied.
12.4 If Customer claims that any Products and any incidental Services are
nonconforming, Customer shall (1) promptly notify IBM, in writing, of the basis
for such nonconformity; (2) follow IBM's instructions for the return of the
Products; and (3) return such Products freight collect to IBM's designated
facility. If IBM determines the Products are nonconforming, IBM will, at its
option, repair or replace the defective Products, or issue a credit or rebate
for the purchase price.
12.5 IBM's sole liability and Customer's sole remedy for breach of warranty
shall be limited as stated in this Section 12.
13.0 TAXES
13.1 IBM shall bill Customer for all applicable sales, use and gross receipts
taxes, unless Customer provides IBM with appropriate exemption certificates.
14.0 NOTICES
14.1 All communications and notices between the parties concerning this
Agreement shall be given to the appropriate individual listed in the applicable
Attachment and shall be deemed sufficiently made on the date if given by
personal service, sent via mail, facsimile or electronic data interchange.
Communication by facsimile or electronic data interchange is acceptable as a
"writing". The autographs of representatives of the parties, as received by
facsimile or electronic data interchange, shall constitute "original"
signatures.
15.0 INDEPENDENCE OF ACTION
15.1 Each party agrees that this Agreement will not restrict the right of either
party to enter into agreements with other parties for same or similar work, or
to make, have made, use, sell, buy, develop, market or otherwise transfer any
products or services, now or in the future, so long as confidential information
is not disclosed. IBM shall not sell, market or otherwise transfer to any third
party any Products using the trademark or trade name of Customer without prior
written consent.
16.0 UTILIZATION OF PRODUCTS
16.1 [***]
17.0 GENERAL
17.1 Neither party shall be responsible for failure to fulfill its obligations
under this Agreement due to fire, flood, war or other such cause beyond its
reasonable control and without its fault or negligence (excluding labor disputes
or payment obligations) provided it promptly notifies the other party.
17.2 The substantive laws of the State of New York govern this Agreement without
regard to conflict of law principles. Both parties agree to waive their right to
a jury trial in any dispute arising out of this Agreement and agree any action
concerning this Agreement shall be brought in a court of competent jurisdiction
in the State of New York. The prevailing party in any legal action hereunder
shall be entitled to reimbursement by the other party for its expenses,
including without limitation, reasonable attorney's fees.
<PAGE> 6
17.3 Customer may not assign its rights or obligations without the prior written
consent of IBM.
17.4 No delay or failure by either party to act in the event of a breach or
default hereunder shall be construed as a waiver of that or any subsequent
breach or default of any provision of this Agreement.
17.5 If any part, term or provision of this Agreement is declared unlawful or
unenforceable, by judicial determination or performance, the remainder of this
Agreement shall remain in full force and effect.
17.6 Any terms of this Agreement which by their nature extend beyond expiration
or termination of this Agreement shall remain in effect until fulfilled and
shall bind the parties and their legal representatives, successors, heirs and
assigns.
17.7 The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
17.8 Each party will comply, at its own expense, with all applicable federal,
state and local laws, regulations and ordinances including, but not limited to,
the regulations of the U.S. Government relating to export and re-export.
Customer agrees that it is responsible for obtaining required government
documents and approvals prior to export and re-export of any commodity, machine,
software or technical data.
17.9 The UN Convention on Contracts for the International Sale of Goods shall
not apply to this Agreement.
<PAGE> 7
Semiconductor Contract Manufacturing Attachment No. 1
Custom Sales Agreement No. X0723
When signed by the parties below, the following Statement of Work shall be
incorporated into Custom Sales Agreement No. X0723 as Attachment No. 1 effective
on March 9, 1998. Attachments are governed by the terms and conditions of the
Base Agreement.
Statement of Work
CUSTOM SEMICONDUCTOR MANUFACTURING TASK ORDER
[***]
<PAGE> 8
[***] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
