<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended .....................
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from June 1, 1998 to March 31, 1999
Commission file number: 000-29592
GENESIS MICROCHIP INCORPORATED
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA Not applicable
(State of incorporation) (IRS employer identification number)
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
(905) 889-5400
(Registrant's telephone number)
Securities registered pursuant to section 12(g) of the Act:
Common shares, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of common shares held by non-affiliates at July 30,
1999 was approximately $350,368,000, based on the last reported sale price of
our common shares on The Nasdaq National Market on that date of $20.625 per
share. We had 18,693,788 common shares outstanding at July 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference information from our proxy statement for our
annual and special general shareholders' meeting to be held on September 28,
1999.
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Statement regarding forward-looking information
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward-looking statements relate to expectations concerning matters
that are not historical facts. Words such as "projects," "believes,"
"anticipates," "plans," "expects," "intends," and similar words and expressions
are intended to identify forward-looking statements. We believe that the
expectations reflected in the forward-looking statements are reasonable but we
cannot assure you that those expectations will prove to be correct. Important
factors that could cause our actual results to differ materially from those
expectations are disclosed in this report, including, without limitation, in the
"Risk Factors" described in Item 7. All forward-looking statements are expressly
qualified in their entirety by these factors and all related cautionary
statements. We do not undertake any obligation to update any forward-looking
statements.
Trademarks
Genesis with its logo(R) is our registered trademark, and AIM(TM), DICE(TM),
GenScale(TM) and ImEngine(TM) are our trademarks. This report also refers to
trademarks of other companies.
PART I
ITEM 1. BUSINESS:
Overview
We design, develop and market integrated circuits that process digital video and
graphic images. Our integrated circuits are typically located inside a display
device and process images so that they can be viewed on that display. We
currently focus on digital display systems such as flat panel computer monitors,
projection systems or flat panel televisions.
The transition from analog display systems, such as most televisions and
computer monitors that use cathode ray tubes, to digital display systems that
use a fixed matrix of pixels to represent an image, requires sophisticated
digital image processing solutions. Our products solve resolution, format and
frame refresh rate conversion problems while maintaining critical image
information and improving perceived image quality. Our products utilize patented
algorithms and integrated circuit architectures as well as advanced integrated
circuit design and system design expertise.
Our image processing technologies include:
. shrink, which is a reduction of the number of pixels in an image,
. zoom, which is an increase in the number of pixels in an image,
. de-interlace, which is a conversion of an image's display format,
. synchronize, which is the coordination of different pixel rates or
image frame refresh rates, and
. warp, which is the creation of image special effects.
We began developing our image processing technologies and products in order to
serve specialized markets such as medical imaging applications and avionics,
where there is a requirement for high-quality images. As larger markets for
display products have developed, such as projection systems and flat panel
computer monitors, we have leveraged our image processing technologies and
expertise to develop products targeting those markets.
We are incorporated in Canada, and operate through subsidiaries in the United
States. Our business in conducted globally, with the majority of our suppliers
and customers located in Japan, Korea or Taiwan.
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Markets, applications and customers
Our targeted markets include the following:
. Flat Panel Computer Monitors. Flat panel computer monitors are increasingly
replacing monitors that use cathode ray tubes. We commenced commercial
shipments of our products to the flat panel computer monitor market in the
fourth quarter of calendar 1997. For the ten months ended March 31, 1999
the flat panel computer monitor market represented 62% of our total
revenues. Companies whose flat panel computer monitors incorporate our
products include Acer Peripherals, Apple, Dell, Fujitsu, IBM, Philips,
Samsung, Sony and ViewSonic.
. Digital Projection Systems. Our products give digital projection systems
the flexibility to display a variety of images from personal computer and
video sources while maintaining image quality. We have established
ourselves as a principal supplier to leaders in this market. Digital
projection system manufacturers using our products include Hitachi, In
Focus Systems, Sharp and Texas Instruments.
. Advanced Image Processing. Our products continue to address imaging markets
that are not necessarily cost sensitive but that require a high level of
performance and image quality. These markets include aerospace,
broadcasting, document management, medical imaging, scan converters,
surveillance, video compression, video conferencing, video editing, video
walls and workstations. Some of our customers in these markets include Avid
Technology, IBM, Scitex Corporation and Silicon Graphics.
. Potential Electronics Markets. We intend to leverage our technologies to
create products for electronics markets as they develop. These potential
markets include digital CRTs, home theater, DVD, flat panel and digital
television, and HDTV. We have secured a number of design wins with leading
manufacturers in these markets.
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Products
The following table shows our integrated circuit products at March 31, 1999:
<TABLE>
<CAPTION>
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Production
Applications Product Product Features Markets Release (1)
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<S> <C> <C> <C> <C>
GenScale Series
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Digital Image gm865x1 High-quality, single- Aerospace, broadcast, Q4 1995
Manipulation channel, real-time document management,
(Still, Video & digital image shrink medical imaging
Computer Graphics) and zoom
- -----------------------------------------------------------------------------------------------------
Digital Image gm833x2* High-quality, Surveillance, digital Q4 1995
Manipulation (Still two-channel real-time projection systems,
Video) digital image shrink video editing, video
and zoom walls, workstations
- -----------------------------------------------------------------------------------------------------
Digital Image gm833x3* High-quality, Digital television, scan Q4 1995
Manipulation (Still three-channel, converters,
& Computer Graphics) real-time digital image workstations, digital
shrink and zoom projection systems,
aerospace, medical
imaging
gm833x3F High speed version of Q1 1996
gm833x3
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Half-Band Filter Series
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Digital Half-Band gm2242 High-quality Broadcast, video editing Q3 1995
Filter single-channel, digital
filter
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DICE Series
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Digital Video gmVLD8* High-quality, real-time DVDs, home theater, Q3 1996
De-Interlacing gmVLD10* digital video digital television, scan Q3 1996
de-interlacer converters, digital
projection systems,
video walls, broadcast,
video editing
Digital Video gmVLX1A High-quality, real-time DVDs, digital projection Q1 1997
De-Interlacing digital video systems
de-interlacer with
shrink and zoom
- -----------------------------------------------------------------------------------------------------
Advanced Image Manipulation Series
- -----------------------------------------------------------------------------------------------------
Digital Video and gmZ1 Integrated high-quality Digital projection Q3 1997
Graphics Manipulation three channel, systems, flat panel
real-time digital image monitors, digital
zoom and digital video televisions, home theater
de-interlacing with
display synchronization
capability, resolutions
up to XGA
gmZ2 Replacement for gmZ1, Q4 1998
enhanced mode detect,
resolutions up to XGA
Replacement for gmZ1,
gmZ3 enhanced mode detect, Q4 1998
resolutions up to SXGA
- -----------------------------------------------------------------------------------------------------
Frame Refresh Rate Conversion Series
- -----------------------------------------------------------------------------------------------------
Digital Video and gmFC1* High speed DRAM based Digital projection Q2 1998
Graphics Frame frame rate converter (8 systems, flat panel
Refresh Rate bit) with direct monitors, digital
Converter interface to the gmZ1 televisions, video
walls, home theater
gmFC1A Replacement for gmFC1 Q1 1999
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Calendar quarters
* Customers have been notified that production of these parts will be
discontinued
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Research and development
Our research and development efforts are performed within the following three
specialized groups:
. Algorithm Development Group: focuses on developing silicon-efficient and
high-quality image processing technologies.
. Product Development Group: focuses on reducing our customers' time-to-
market, achieving first-time silicon success and reducing the development
time of our products, and
. System Engineering Group: concentrates on producing evaluation boards and
manufacture-ready reference designs that facilitate the integration of our
products into the products of our customers.
We work closely with industry leaders to design products with improved
performance and functionality. For example, our gmZ1 product was designed in
cooperation with Apple Computer and In Focus Systems.
As of March 31, 1999, we had 66 full-time employees engaged in research and
development. Expenditures for research and development for the ten months ended
March 31, 1999, net of investment tax credits and government assistance, were
$4.8 million. For the fiscal year ended May 31, 1998 they were $3.6 million, and
for the fiscal year ended May 31, 1997 they were $2.6 million.
Sales and marketing
We sell and market our products primarily through authorized regional sales
representatives and through authorized distributors. Our sales and marketing
personnel work closely with customers, industry leaders, sales representatives
and authorized distributors to define features, performance, price and market
timing of new products. In North America, Taiwan and Korea, we sell our products
to customers primarily through technically trained sales representatives. In
Europe and Japan, we sell our products through authorized distributors. We
provide technical support and design assistance directly to our customers,
regardless of the sales channels used. We focus on developing long-term customer
relationships with both system manufacturers and equipment manufacturers.
We provide direct service and support to our customers through our offices in
Canada and the United States. Our sales representatives in Taiwan and Korea also
provide service to our customers. In addition, our distributors provide ongoing
support and service functions. In particular, our Japanese distributor,
Kanematsu Semiconductor Corporation, has a dedicated team, including field
application engineering, focused on selling and supporting our products. We
provide support through both on-site customer service and remote support from
various facilities. We generally provide a one-year warranty for all of our
products.
Our sales are derived from a limited number of customers, with the top five
customers accounting for 51% of total revenues during the ten months ended March
31, 1999, 56% during fiscal 1998, and 35% during fiscal 1997. In particular,
sales to Samsung Electronics Co., Ltd. accounted for 20% of total revenues
during the ten months ended March 31, 1999.
As of March 31, 1999, our sales and marketing force totaled 33 people. This
included 13 field applications engineers whose role is to assist our customers
to incorporate our integrated circuits into their products.
Manufacturing
Our products are manufactured by third parties with state-of-the-art fabrication
equipment and technology. This approach enables us to focus on product design
and development, minimizes capital expenditures and provides us with access to
advanced manufacturing facilities. Currently, our products are being fabricated,
assembled and tested by IBM, USC or Samsung.
As semiconductor manufacturing technologies advance, manufacturers typically
retire their older manufacturing processes in favor of newer processes. When
this occurs, the manufacturer generally provides notice to its customers of its
intent to discontinue a process, and its customers will either retire the
affected part or design a newer version of the part which can be manufactured on
the more advanced process. Consequently, our products may become unavailable
from their current manufacturers if the processes on which they are produced
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are discontinued. This has occurred in the past year, when IBM retired its 0.8
micron manufacturing process so that parts manufactured on that process are no
longer available. We must manage the transition to new parts from the older
parts. We have commitments from our suppliers to provide two years notice of any
discontinuance of their manufacturing processes in order to assist us in
managing these types of product transitions.
None of our products are procured from more than one supplier. In the past, IBM
supplied most of our products. With the recent introduction of new products such
as the gmZ2 and the gmFC1A, each of which are being procured from different
sources in Asia, IBM has ceased to be the dominant supplier of our products.
Intellectual property and licenses
We protect our technology through a combination of patents, copyrights, trade
secret laws, trademark registrations, confidentiality procedures and licensing
arrangements. We have been issued nine patents in the United States and four in
Europe, each covering aspects of algorithms, design or architectures. These
patents expire from 2011 to 2014. In addition, we have five patent applications
pending in the United States Patent and Trademark Office, two pending Canadian
patent applications, 10 pending Japanese patent applications, 10 pending Korean
patent applications, three pending Taiwanese patent applications and six pending
European patent applications. To supplement our proprietary technology, we
license several patents from third parties.
Competition
The markets in which we operate are intensely competitive and are characterized
by rapid technological change, evolving industry standards and declining average
selling prices. We face competition from both large companies and start-up
companies, including Macronix International Co., Ltd., Philips Semiconductors, a
division of Philips Electronics NV, Silicon Image Inc., Arithmos Inc.,
Pixelworks Inc. and Sage Inc. We believe that the principal competitive factors
in our markets are:
. product design and performance,
. price of products,
. functionality and features of products,
. time to market of products, and
. quality and speed of customer support provided to customers.
Backlog
Our customers typically order products by way of purchase orders that may be
canceled without significant penalty. These purchase orders are subject to price
negotiations and to changes in quantities of products and delivery schedules in
order to reflect changes in their requirements and manufacturing availability.
Large portions of our sales are made pursuant to short lead-time orders. In
addition, our actual shipments depend on the manufacturing capability of our
suppliers and the availability of products from those suppliers. As a result of
the foregoing factors, we do not believe the backlog at any given time is a
meaningful indicator of our future revenues.
Employees
As of March 31, 1999, we employed a total of 131 full-time employees, including
66 in research and development, 33 in sales and marketing, 15 in manufacturing
operations and 17 in finance and administration. We employ a number of temporary
and part-time employees as well as consultants on a contract basis. Our
employees are not represented by a collective bargaining organization. We
believe that relations with our employees are satisfactory.
ITEM 2. PROPERTIES:
We lease our corporate headquarters, which are located in Thornhill, Ontario,
Canada. We also lease a sales, marketing and customer support office in Mountain
View, California. We believe that our existing facilities are adequate to meet
our needs for the immediate future and that future growth can be accomplished by
leasing additional or alternative space on commercially reasonable terms.
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ITEM 3. LEGAL PROCEEDINGS:
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of our security holders during the three
months ended March 31, 1999.
PART II
ITEM 5. MARKET FOR OUR COMMON SHARES AND RELATED SHAREHOLDER MATTERS:
Market information
Our common shares traded on the Nasdaq National Market under the symbol "GNSSF"
from February 24, 1998 until February 5, 1999. They have traded under the
symbol "GNSS" since February 8, 1999. Our shares are not listed on any other
markets or exchanges. The following table shows the high and low closing prices
for our common shares as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998 Calendar year
First Quarter (From February 24, 1998)............... $16.875 $12.000
Second Quarter....................................... $14.813 $ 7.938
Third Quarter........................................ $ 9.438 $ 6.125
Fourth Quarter....................................... $24.250 $ 8.250
1999 Calendar year
First Quarter........................................ $35.000 $22.000
</TABLE>
As of July 30, 1999, we had approximately 410 holders of record of our common
shares and a substantially greater number of beneficial owners.
Dividend policy
We have never declared or paid dividends on our common shares. We intend to
retain our earnings for use in our business and therefore we do not anticipate
declaring or paying any cash dividends in the foreseeable future. Our loan
facility restricts our ability to pay dividends when borrowings are outstanding.
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 payment of dividends, interest or other payments to a non-resident holder of
common shares, other than withholding tax requirements.
U.S. taxation
Under the Convention between the United States of America and Canada with
Respect to Taxes on Income and on Capital (the "1980 Convention") we are not
subject to U.S. income tax unless we engage in a trade or business in the United
States through a permanent establishment. We currently do not have direct
operations in the United States. We expect to be able to conduct our business
activities in a manner that will not result in our being considered to be
engaged in a trade or business or to have a permanent establishment in the
United States. We have U.S. subsidiaries that are engaged in a U.S. business and
are therefore subject to U.S. taxation.
Taxation of dividends. For U.S. federal income tax purposes, the gross amount of
any dividend paid to you, to the extent of our current or accumulated earnings
and profits, will be included in your gross income and treated as foreign source
dividend income. Dividends paid in excess of our earnings and profits will be
applied against and will reduce your basis in our common shares and, to the
extent they are in excess of your basis, will be treated as gain from the sale
or exchange of our common shares. The dividend is not eligible for the
dividends-received deduction available for dividends received from U.S.
corporations. The amount to include in your
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income will be the U.S. dollar value of the payment on the date of payment
regardless of whether the payment is, in fact, converted into U.S. dollars.
Generally, your gain or loss, if any, resulting from currency fluctuations
during the period beginning on the date any dividend is paid and ending on the
date the payment is converted into U.S. dollars will be treated as ordinary
income or loss.
You will have the option of claiming the amount of Canadian tax withheld at
source on the distribution of dividends to you as either a deduction from your
adjusted gross income or as a dollar-for-dollar credit against your U.S. federal
income tax liability. If you elect to claim a credit for the Canadian tax, the
election will be binding for all foreign taxes paid or accrued by you for that
taxation year. You should consult with your tax advisers as to the availability
of a U.S. foreign tax credit and the application of the U.S. foreign tax credit
limitations to your particular situation.
Taxation of capital gains. Subject to the discussion below under the heading,
"Passive Foreign Investment Company Considerations," you will be liable for U.S.
federal income tax on gains related to our common shares to the same extent as
any other gains from sales or disposition of shares. That is, you will recognize
a taxable gain or loss on the sale, exchange or other disposition of our common
shares in an amount equal to the difference between the amount realized on your
sale, exchange or other disposition and your adjusted tax basis in the shares.
The tax basis of your shares will equal its initial cost to you, reduced by any
dividends on our common shares that you have treated as a return of capital. The
gain or loss will be capital gain or loss. Capital gains of individuals derived
from capital assets held for more than twelve months are eligible for reduced
rates of taxation. The deductibility of capital losses is subject to
limitations.
Passive foreign investment company considerations
We will be classified as a passive foreign investment company ("PFIC") for U.S.
federal income tax purposes if we satisfy either of the following two tests:
. 75% or more of our gross income is passive income, or
. 50% or more of our assets by value or, if we so elect, by adjusted
basis, produce or are held for the production of passive income.
We do not believe that we satisfy either of the tests for PFIC status. If we
were a PFIC for any taxation year, you would be required to either:
. pay an interest charge together with tax calculated at maximum ordinary
income rates on certain "excess distributions", defined to include a
gain on a sale or other disposition of our common shares, or
. include in your taxable income certain undistributed amounts of our
income, if you make a qualified electing fund election.
You should consult with your tax adviser before making a qualified electing fund
election.
Canadian taxation
Canadian corporations are taxed on their worldwide income. They are subject to a
Canadian federal income tax of 29%. In addition, Canadian corporations are
subject to provincial income tax by each Canadian province in which they have a
permanent establishment. The result is that a corporation resident in Canada
will pay a combined federal and provincial rate of approximately 45%. Dividends
received from foreign affiliates engaged in an active business in a treaty
country such as the United States are not taxed in Canada. These dividends may
be subject to the withholding tax applied by the foreign country, at a rate that
may vary according to the 1980 Convention.
Taxation of dividends. Amounts paid or credited as dividends to you may be
subject to Canadian non-resident withholding tax. Withholding tax will also
apply to amounts that are deemed to be paid or credited to you as dividends. The
withholding tax is levied at a rate of 25%, which may be reduced according to
the terms of the 1980 Convention. Under the 1980 Convention, the rate of
Canadian non-resident withholding tax on the gross amount of dividends
beneficially owned by you is 15%. If you are a company that owns at least 10% of
our voting shares, the rate of withholding is 5%.
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Taxation of capital gains. You will not be subject to tax under the Income Tax
Act (Canada) (the "ITA") for a disposition of our common shares unless, at the
time of your disposition, those common shares constituted "taxable Canadian
property" for purposes of the ITA. Our common shares will not constitute
"taxable Canadian property" if they are listed on a prescribed stock exchange
for the purposes of the ITA at the time the shares are disposed of by you. If
you or persons with whom you did not deal at arm's length owned 25% or more of
the issued shares of any class or series of our shares at any time during the
five year period before your share disposition, then our common shares will
constitute "taxable Canadian property."
Our common shares are currently listed on a prescribed stock exchange for the
purposes of the ITA.
Under the 1980 Convention, gains derived by you from the disposition of our
common shares that constitute "taxable Canadian property" will not be taxable in
Canada unless the value of your common shares is derived principally from real
property situated in Canada.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
Selected consolidated financial data for the last five years appear below (in
thousands, except per share data):
<TABLE>
<CAPTION>
Ten Months
Ended
March 31, Year Ended May 31,
---------- ----------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................................... $29,664 $15,747 $ 4,527 $ 1,524 $ 524
Cost of revenues............................... 12,082 4,819 298 434 107
------- ------- ------- ------- -------
Gross profit................................... 17,582 10,928 1,544 1,090 417
Operating expenses:............................
Research and development..................... 4,838 3,648 2,644 2,097 1,119
Selling, general and administrative.......... 7,606 4,842 4,245 2,665 1,511
------- ------- ------- ------- -------
Total operating expenses.................... 12,444 8,490 6,889 4,762 2,630
------- ------- ------- ------- -------
Income (loss) from operations.................. 5,138 2,438 (5,345) (3,672) (2,213)
Interest income (expense)...................... 1,511 675 147 (143) (101)
------- ------- ------- ------- -------
Income (loss) before income taxes.............. 6,649 3,113 (5,198) (3,815) (2,314)
Provision for income taxes..................... -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss).............................. $ 6,649 $ 3,113 $(5,198) $(3,815) $(2,314)
======= ======= ======= ======= =======
Earnings (loss) per share
Basic........................................ $ 0.47 $ 0.33 $ (0.70) $ (0.63) $ (0.48)
Diluted...................................... $ 0.45 $ 0.26 $ (0.70) $ (0.63) $ (0.48)
Weighted average number of common shares
outstanding:
Basic........................................ 14,163 9,559 7,463 6,071 4,824
Diluted...................................... 14,850 12,204 7,463 6,071 4,824
Balance Sheet Data:
Cash and cash equivalents...................... $35,928 $35,904 $ 3,687 $ 1,533 $ 893
Working capital................................ 49,018 41,004 6,903 1,689 1,708
Total assets................................... 58,829 47,446 9,613 5,200 2,543
Total long-term debt, net of current portion... 524 655 794 1,406 2,214
Shareholders' equity........................... 53,130 44,151 7,621 1,322 (91)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Overview
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We design, develop and market integrated circuits that process digital video and
graphic images. We also supply reference boards and designs that incorporate our
proprietary integrated circuits. We are focused on developing and marketing
image processing solutions. We are currently targeting the flat panel computer
monitor market and other potential mass markets. We market and sell our products
through authorized distributors and directly to customers with the support of
regional sales representatives. Average selling prices to distributors are
typically less than average selling prices to direct customers. Average selling
prices and product margins of our products are typically highest during the
initial months following product introduction and decline over time and as
volumes increase. We recognize revenues from product sales when they are
shipped. Product returns and allowances are estimated and provided for at the
time of sale. To date, we have not experienced any significant product returns.
In addition to product sales, we derive revenues from providing design services.
We provide these services in order to assist our customers to develop products
that include our chips in their designs or to accelerate the development of our
products to meet customer demand . We may also receive revenues from license
fees and royalties, although to date these amounts have been immaterial. We
intend to explore opportunities for licensing our technology to other integrated
circuit suppliers outside of our target markets.
Our costs of finished products from our semiconductor suppliers have
historically been negotiated at fixed prices on an annual basis, and have not
been dependent on our suppliers' manufacturing yields. If we cancel a purchase
order to a supplier, we must pay cancellation penalties based on the status of
the work in process. We have a limited ability to reschedule our purchase orders
and, therefore, we must place purchase orders for products before we receive
purchase orders from our customers. This restricts our ability to react to
fluctuations in demand for our products and may cause us to have either too much
or not enough of a particular product. For example, in the fiscal year ended May
31, 1997, we recorded provisions totaling $1.3 million for declines in inventory
value and for write downs of excess inventory. We have recently signed
agreements with suppliers in Asia. Under the terms of those agreements, we have
shorter lead time requirements for the placing of our orders with these new
suppliers, although we are now dependent on the suppliers' manufacturing yields.
We earn investment tax credits under the provisions of the Income Tax Act
(Canada) because we carry out qualifying research and development activities in
Canada. These tax credits are earned at a rate of 20% of those qualifying
expenditures. The tax credits earned may only be applied to reduce income taxes
payable.
We have losses and deductions available to reduce future years' taxable income
in both Canada and the United States. Most of these aggregate losses and
deductions have no time limitation on them. We do not anticipate paying any
income taxes until the benefit of these losses and deductions has been fully
utilized. Details of these losses and deductions can be found in Note 9 to our
consolidated financial statements, which are included in Item 8 of this report.
Effective June 1, 1998, we changed our functional currency from the Canadian
dollar to the U.S. dollar. This was done based on a review and weighting of
numerous factors influencing the determination of the currency of the primary
economic environment in which we operate. A key factor considered by us was the
increased significance of U.S. dollar denominated revenues and expenditures in
relation to our Canadian dollar denominated transactions. In addition,
commencing with our initial public offering in February of 1998, our financing
is now denominated primarily in U.S. dollars.
On May 28, 1999, we merged with Paradise Electronics, Inc. On that date, our
Board of Directors adopted a new fiscal year. Our new fiscal year will run from
April 1 to March 31, aligning our fiscal quarters with calendar quarters. We
believe that this will make our results more easily comparable to other
companies in our industry. Historical information will continue to be reported
in its existing time periods. The amounts in those periods will be restated to
combine our past results with those of Paradise, as required by pooling-of-
interests accounting for business combinations. Because the date of the
financial statements in this transition report on Form 10-K precedes the date of
the merger, the financial information presented here does not include the
financial results of Paradise. Future financial reports that have a financial
statement date after the merger date will retroactively include the results of
Paradise for all historical time periods.
Results of operations
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The following table shows the percentage of total revenues represented by each
category of cost or expense in our consolidated statement of operations for the
periods indicated:
<TABLE>
<CAPTION>
Ten Months
Ended March 31, Year Ended May 31,
--------------- -----------------------------------
1999 1998 1997
--------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Products...................................... 95.4 % 94.9 % 91.9 %
Design services and other..................... 4.6 5.1 8.1
----- ----- --------
Total revenues............................... 100.0 100.0 100.0
Cost of revenues................................ 40.7 30.6 65.9
----- ----- --------
Gross profit.................................... 59.3 69.4 34.1
Operating expenses:
Research and development...................... 16.3 23.2 58.4
Selling, general and administrative........... 25.6 30.7 93.8
----- ----- --------
Total operating expenses..................... 41.9 53.9 152.2
----- ----- --------
Income (loss) from operations................... 17.4 15.5 (118.1)
Interest income................................. 5.0 4.3 3.2
----- ----- --------
Income (loss) before income taxes............... 22.4 19.8 (114.9)
Provision for income taxes...................... -- -- --
----- ----- --------
Net income (loss)............................... 22.4 % 19.8 % (114.9) %
===== ===== ========
</TABLE>
Total Revenues. Total revenues for the ten months ended March 31, 1999 increased
to $29.7 million from $15.7 million in the year ended May 31, 1998, an increase
of 88.3%. Total revenues for the year ended May 31, 1998 increased from $4.5
million in the previous year, an increase of 247.8%. The increase in total
revenues in the 1999 period over the 1998 period was primarily due to increased
demand for our products in the flat panel monitor market. The increase in total
revenues in fiscal 1998 over fiscal 1997 was primarily due to the introduction
and market acceptance of new products, principally the gmVLD8 and gmZ1 products
that were introduced in fiscal 1997. These products were principally sold into
the projection system market and into the flat panel monitor market.
Revenues from the flat panel monitor market increased to $18.3 million or 61.6%
of total revenues in the ten months ended March 31, 1999 from $5.7 million or
30.0% of total revenues in the year ended May 31, 1998. This increase was a
result of our increasing our share of that market and its overall growth,
partially offset by declining average selling prices.
The overall growth of the flat panel monitor market was positively impacted by
significant reductions in retail selling prices of the end products, which have
declined from approximately $2,500 in early calendar 1998 to under $1,000 in
early calendar 1999. This decline was primarily as a result of reductions in the
cost of LCD panels used in flat panel monitors, caused by improved manufacturing
yields for the panels and by the devaluation of currencies in the countries,
principally in Asia, where LCD panels are manufactured. It is unlikely that this
rate of decline in retail selling prices will continue. There have been reports
of a lack of current capacity to manufacture a sufficient number of LCD panels
to meet the demand for flat panel computer monitors. A lack of supply of LCD
panels could reduce the rate of growth of the flat panel monitor market by
limiting product availability, or by causing the retail price of flat panel
monitors to increase such that demand would be reduced.
We began shipping resale products called analog to digital converters, or ADCs,
in fiscal 1999. We sold these products to flat panel monitor customers who had
difficulty in purchasing them directly from the manufacturer. We arranged to
procure and supply these ADCs in order to assist our customers into production
so that they would also purchase our proprietary parts. We intend to discontinue
the sales of these ADCs. For the ten months ended March 31, 1999, total revenue
from sales of ADCs was $589,000. We have also indicated that other proprietary
products will be discontinued. Those products are being replaced and no material
impact on revenues is expected as a result of this replacement.
Revenues from our second largest market, the projection systems market,
increased to $6.3 million or 21.1% of total revenues in the ten months ended
March 31, 1999, from $5.7 million or 36.0% of total revenues in the year ended
May 31, 1998. This increase in revenue was primarily a result of greater unit
shipments into that market.
-11-
<PAGE>
As a result of the factors described above, we do not expect to sustain the past
rate of revenue growth in future periods.
Gross Profit. Gross profit for the ten months ended March 31, 1999 increased to
$17.6 million from $10.9 million in the year ended May 31, 1998 and from $1.5
million in fiscal 1997. This represents 59.3% of total revenues in the 1999
period, 69.4% of total revenues in the 1998 fiscal year and 34.1% of total
revenues in fiscal 1997. The decrease in gross profit percentage in the fiscal
1999 period is attributable to higher sales volumes coupled with lower average
selling prices, and to a less favorable mix of products sold. The reduction in
average selling prices resulted in a decline in the gross profit percentage of
6.4% and the change in product mix resulted in a decline of 5.1% in the 1999
period over fiscal 1998. The increase in gross profit percentage in fiscal 1998
over fiscal 1997 was attributable to a more favorable mix of products sold.
Gross profit was positively impacted in fiscal 1998 by higher gross margins of
our AIM product line and, to a lesser extent, by lower average component costs.
Inventory write downs of $1.3 million in the 1997 fiscal year resulted in a
decline in gross margins for that year, and were related to older products that
had been replaced by newer products and to surplus inventory levels of other
products.
In the ten months ended March 31, 1999, we began increasing shipments of our
gmFC1 product. This product has a lower gross profit percentage than our other
products. We also began to sell the lower margin resale ADC products in the 1999
fiscal year. As a result, our overall gross profit percentage declined in the
ten months ended March 31, 1999. We expect to discontinue selling the resale ADC
products.
As unit shipments into the flat panel monitor market continue to grow, we expect
a continued decline in our average selling prices as a result of volume
discounts and competition. In order to maintain our gross margins, we intend to
continue to introduce new, lower cost versions of our products. We also intend
to introduce additional features into subsequent generations of our products to
increase their value to customers. For example, in early calendar 1999 we
introduced the gmZ2 as a replacement for the gmZ1, and the gmFC1A as a
replacement for the gmFC1. These chips are sold primarily into the flat panel
monitor market.
Research and Development. Research and development expenses include costs
associated with research and development personnel, development tools and
prototyping costs, less investment tax credits and government assistance.
Research and development expenses for the ten months ended March 31, 1999
increased to $4.8 million from $3.6 million in the previous year and from $2.6
million in fiscal 1997. These expenses represented 16.3% of total revenues in
the 1999 period, 23.2% of total revenues in fiscal 1998 and 58.4% of total
revenues in fiscal 1997. The increase in absolute dollars in each period
reflects greater personnel costs associated with an expansion in our research
and development activities and increased prototype and pre-production expenses
of new products. We expect to continue to make substantial investments in our
research and development activities and anticipate that research and development
expenses will continue to increase in absolute dollars. The decline in research
and development expenses as a percentage of total revenues resulted from the
rate of growth in total revenues exceeding the rate of growth of research and
development expenses.
Selling, General and Administrative. Selling, general and administrative
expenses consist of personnel and related overhead costs for selling, marketing,
customer support, finance, human resources and general management functions and
of commissions paid to regional sales representatives. Selling, general and
administrative expenses were $7.6 million in the ten months ended March 31,
1999, $4.8 million in the previous fiscal year, and $4.2 million in fiscal 1997.
These expenses represented 25.6% of total revenues in the 1999 period, 30.7% of
total revenues in the 1998 fiscal year, and 93.8% of total revenues in fiscal
1997. The dollar increase in selling, general and administrative expenses
reflects increased personnel costs related to increased selling, administrative
and customer support activities and increased commissions associated with higher
sales volumes. We expect selling, general and administrative expenses to
increase in absolute dollars due to the addition of administrative, marketing,
selling and customer support personnel and because of continued expansion of our
international operations. The decline in selling, general and administrative
expenses as a percentage of total revenues resulted from the rate of growth in
total revenues exceeding the rate of growth of selling, general and
administrative expenses.
Interest Income. Interest income in the ten months ended March 31, 1999 was $1.5
million, compared with $675,000 in fiscal 1998 and $147,000 in fiscal 1997. The
increase in interest income was primarily because of the additional balances of
cash and cash equivalents held by us following our initial public offering in
February 1998. Future interest income will depend on the amount of funds
available to invest and on future interest rates.
-12-
<PAGE>
Provision for Income Taxes. There was no provision for income taxes in the ten
months ended March 31, 1999 or in fiscal 1998 or 1997 because we had investment
tax credits, non-capital losses or unclaimed research and development
expenditures available to reduce taxes payable or taxable income.
Quarterly results of operations
The following table shows our unaudited quarterly statement of operations data
for the seven fiscal quarters ended February 28, 1999. This unaudited data has
been prepared on the same basis as our audited consolidated financial statements
that are included in Item 8 of this report, and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information for the periods presented. The statement of
operations data should be read in conjunction with our consolidated financial
statements and their related notes. Amounts in this table are in thousands of
U.S. dollars.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
February November August May February November August
1999 1998 1998 1998 1998 1997 1997
-------- -------- ------ ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products.......................... $11,125 $8,140 $5,813 $5,501 $4,439 $2,940 $2,061
Design services and other......... 404 559 400 40 337 288 141
------- ------ ------ ------ ------ ------ ------
Total revenues................... 11,529 8,699 6,213 5,541 4,776 3,228 2,202
Cost of revenues.................... 4,892 3,723 2,039 1,883 1,402 949 585
------- ------ ------ ------ ------ ------ ------
Gross profit........................ 6,637 4,976 4,174 3,658 3,374 2,279 1,617
Operating expenses:.................
Research and development.......... 1,524 1,301 1,183 1,126 1,069 818 635
Selling, general and administrative 2,648 2,049 1,535 1,391 1,258 1,199 994
------- ------ ------ ------ ------ ------ ------
Total operating expenses......... 4,172 3,350 2,718 2,517 2,327 2,017 1,629
------- ------ ------ ------ ------ ------ ------
Income (loss) from operations....... 2,465 1,626 1,456 1,141 1,047 262 (12)
Interest income..................... 457 541 411 487 60 68 60
------- ------ ------ ------ ------ ------ ------
Income before income taxes.......... 2,922 2,167 1,867 1,628 1,107 330 48
Provision for income taxes.......... -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------
Net income.......................... $ 2,922 $2,167 $1,867 $1,628 $1,107 $ 330 $ 48
======= ====== ====== ====== ====== ====== ======
</TABLE>
Gross profit in the quarters ended August 31, 1997, November 30, 1997 and
February 28, 1998 was positively impacted by higher margins of our AIM products
and, to a lesser extent, by lower average component costs. Gross margins in the
quarter ended May 31, 1998 were negatively impacted by higher component costs
for our gmFC1 product and lower design service revenues. A higher proportion of
revenues from resale ADC and our gmFC1 products negatively impacted Our gross
margins in the quarters ended November 30, 1998 and February 28, 1999 were
negatively impacted by a higher proportion of revenues from lower-margin ADCs
and gmFC1s. 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, general and administrative expenses have
increased due to increased staff for sales and customer support activities,
increased commissions on higher sales levels, and higher costs associated with
being a public company.
Our 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 our control. These factors include those described under the
caption "Risk Factors," among others. Any one or more of these factors could
result in our failure to achieve our expectations as to future operating
results. Our expenditures for research and development, selling, general and
administrative functions are based in part on future revenue projections. We
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
our business, financial condition and results of operations. We may be required
to reduce our selling 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 our overall gross profit and adversely affect our
business, financial condition and results of operations.
Period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. It is likely that in some future period
our operating results or business outlook will be below the
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<PAGE>
expectations of securities analysts or investors, which would likely result in a
significant reduction in the market price for our common shares.
Liquidity and capital resources
Cash and cash equivalents were $35.9 million at March 31, 1999, $35.9 million at
May 31, 1998 and $3.7 million at May 31, 1997. Net cash used in operations was
$704,000 for the ten months ended March 31,1999. We generated net cash from
operations of $2.1 million in fiscal 1998. Net cash used in operations was $5.7
million in fiscal 1997. Net cash used in operations in the ten months ended
March 31, 1999 was primarily a result of cash invested in accounts receivable,
inventory and other current assets exceeding cash generated from the net income
and from increases in accrued liabilities. The increase in other current assets
was primarily deferred costs related to the merger with Paradise Electronics,
Inc. which closed on May 28, 1999. Net cash generated from operations in fiscal
1998 consisted primarily of net income plus increases in accounts payable and
accrued liabilities, partially offset by increases in accounts receivable and
inventory. In fiscal 1997, net cash used in operations was primarily a result of
the net loss and cash invested in inventory exceeding cash generated from
increases in accrued liabilities. Increases in accounts receivable and inventory
are generally a result of growth in the business. Increased revenue results in a
need to grant larger amounts of credit to our customers and therefore to carry
larger accounts receivable. It also results in a need to stock additional
quantities of products to meet increased customer demands. Increases in accounts
payable and accrued liabilities result from increases in operating expenses and
increased purchases from manufacturers of our products.
Net cash used in investing activities was approximately $1.5 million in the ten
months ended March 31, 1999, $1.4 million in fiscal 1998 and $1.0 million in
fiscal 1997, for the purchase of capital assets. Continued expansion of our
business may require higher levels of capital equipment purchases. We have no
significant capital spending or purchase commitments other than purchase
commitments made in the ordinary course of business.
Net cash provided by financing activities was $2.1 million in the ten months
ended March 31, 1999. This consisted primarily of amounts received for the
purchase of shares under our share purchase and stock option plans. Net cash
provided by financing activities was $31.5 million in fiscal 1998, consisting
primarily of $31.7 million received as net proceeds from our initial public
offering of common shares in February 1998. Net cash provided by financing
activities was $8.8 million in fiscal 1997, which included $10.9 million of net
proceeds from a private equity financing. We had net repayments of $107,000 of
debt financing in the ten months ended March 31, 1999, and had net repayments of
debt financing of $62,000 in fiscal 1998 and $2.0 million in fiscal 1997.
Since inception, we have satisfied our liquidity needs primarily through sales
of equity securities and, to a lesser extent, through long-term debt and bank
indebtedness for working capital purposes. We believe that our existing cash
balances together with any cash generated from our operations will be sufficient
to meet our capital requirements on a short-term basis.
On a long-term basis, we may be required to raise additional capital to fund
investments in operating assets such as accounts receivable or inventory to
assist in the growth of our business, or for capital assets such as land,
buildings or equipment. Because we do not have our own semiconductor
manufacturing facility, we may be required to make deposits to secure supply in
the event there is a shortage of manufacturing capacity in the future. Although
we currently have no plans to raise additional funds for such uses, we could be
required or could elect to seek to raise additional capital in the future. In
addition, from time to time we evaluate acquisitions of businesses, products or
technologies that complement our business. Any such transactions, if
consummated, may use a portion of our working capital or require the issuance of
equity securities that may result in further dilution to you.
Year 2000 compliance
Many businesses face issues relating to the inability of some computer systems
to correctly recognize dates starting January 1, 2000. We have evaluated our
products and believe that they will function in the year 2000. We do not
currently expect year 2000 compliance to have a material impact on our business
or future results of operations, however, there could be interruptions of
operations or other limitations of system functionality, and we may have to
incur significant costs to avoid such interruptions or limitations. In
addition, we currently do not have complete information about the year 2000
compliance status of all of our suppliers and customers. In
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<PAGE>
the event that any of our significant suppliers or customers cannot successfully
achieve year 2000 compliance, our financial condition or results of operations
could be adversely affected.
We use a number of computer software programs, including operating systems,
financial and administrative systems and other information technology, or IT
systems, and a number of non-IT systems, typically embedded technologies, in our
internal operations. To the extent that our IT and non-IT systems are unable to
appropriately interpret the upcoming calendar year 2000, modification or
replacement of those systems will be necessary. We have established a committee
to identify the IT and non-IT systems that are not year 2000 compliant. Our
committee is reviewing our IT and non-IT systems, as well as those of our
suppliers and major customers to determine whether or not their systems are year
2000 compliant, and has been communicating with our suppliers and major
customers regarding this issue. Our committee is currently reviewing potential
year 2000 issues and their impact, as well as investigating possible methods of
remediation. We have now substantially implemented remediation programs and
expect to be year 2000 compliant in the fourth quarter of calendar 1999. Our
costs to date related to year 2000 compliance have not been material. Although
the total estimated costs of remediation have not yet been determined, we
anticipate that any future costs will also not be material. We believe that a
reasonably likely worst case year 2000 scenario would be limitations in the
transportation of our products by third parties, either to us from our
suppliers, or from us to our customers. This issue is still under review by our
year 2000 committee. Our contingency plan to handle such a scenario is to hold
additional inventory on our premises, in order to mitigate potential delays in
receiving products from our suppliers.
Given the information known at this time about our systems, coupled with our
ongoing efforts to upgrade or replace critical business systems as necessary, it
is currently anticipated that known year 2000 compliance costs will not have a
material adverse impact on our business, financial condition and results of
operations. We are still analyzing our IT and non-IT systems, as well as those
of its suppliers and major customers. Consequently, we cannot assure you that
that the costs necessary to update or replace these systems or the potential
systems or business interruptions that could occur will not have a material
adverse effect on our business, financial condition and results of operations.
RISK FACTORS
You should carefully consider the risks described below, elsewhere in this
report and in the documents that we have incorporated by reference into this
report. This report contains forward-looking statements that involve known and
unknown risks and uncertainties. See "Statement regarding forward-looking
information" at the beginning of this report. The factors described below are
cautionary statements identifying important matters that you should consider,
including risks and uncertainties that could cause our actual results to differ
materially and adversely from our forward-looking statements.
Factors that may affect future operating results
The following factors may have a harmful impact on our business:
We subcontract our manufacturing, assembly and test operations.
We do not have our own fabrication facilities, assembly or testing operations.
Instead, we rely on others to fabricate, assemble and test all of our products.
We have our products manufactured by IBM, United Semiconductor Corporation,
Taiwan Semiconductor Manufacturing Corporation and Samsung Semiconductor, Inc.
No single product is purchased from more than one supplier. There are many
risks associated with our dependence upon outside manufacturing, including:
. reduced control over manufacturing and delivery schedules of products,
. potential political risks in the countries where the manufacturing
facilities are located,
. reduced control over quality assurance,
. difficulty of management of manufacturing costs and quantities,
. potential lack of adequate capacity during periods of excess demand, and
. potential unauthorized use of intellectual property.
-15-
<PAGE>
We depend upon outside manufacturers to fabricate silicon wafers on which our
integrated circuits are imprinted. These wafers must be of acceptable quality
and in sufficient quantity and the manufacturers must deliver them to assembly
and testing subcontractors on time for packaging into final products. We have
at times experienced delivery delays and long manufacturing lead times. We
cannot be sure that our manufacturers will devote adequate resources to the
production of our products or deliver sufficient quantities of finished products
to us on time or at an acceptable cost. The lead-time necessary to establish a
strategic relationship with a new manufacturing partner is considerable. We
would be unable to readily obtain an alternative source of supply for any of our
products if this proves necessary. Any occurrence of these manufacturing
difficulties could harm our business.
We face intense competition and may not be able to compete effectively
We compete with both large companies and start-up companies, including Macronix
International Co., Ltd., Philips Semiconductors, a division of Philips
Electronics N.V., Silicon Image, Inc., Arithmos, Inc., Pixelworks Inc., and Sage
Inc. We anticipate that as the markets for our products develop, our current
customers may develop their own products and competition from diversified
electronic and semiconductor companies will intensify. Some competitors are
likely to include companies with greater financial and other resources than us.
Increased competition could harm our business, by, for example, increasing
pressure on our profit margins or causing us to lose customers.
Our success will depend on the growth of the flat panel computer monitor market
and other electronics markets
Our ability to generate increased revenues will depend on the growth of the flat
panel computer monitor market. This market is at an early stage of development.
Our continued growth will also depend upon emerging markets for digital CRT
monitors, and for consumer electronics markets, such as home theater, DVD, flat
screen and digital television, and HDTV. The potential size of these markets
and the timing of their development is uncertain and will depend in particular
upon:
. a significant reduction in the costs of products in the respective
markets,
. the availability of components required by such products, and
. the emergence of competing technologies.
For the ten months ended March 31, 1999, 62% of our revenues were derived from
sales to customers in the flat panel computer monitor market. This and other
potential markets may not develop as expected, which would harm our business.
We must develop new products and enhance our existing products to react to rapid
technological change
We must develop new products and enhance our existing products with improved
technologies to meet rapidly evolving customer requirements and industry
standards. We need to design products for customers that continually require
higher functionality at lower costs. This requires us to continue to add
features to our products and to include all of these features on a single chip.
The development process for these advances is lengthy and will require us to
accurately anticipate technological innovations and market trends. We may be
unable to successfully develop new products or product enhancements. Any new
products or product enhancements may not be accepted in new or existing markets.
If we fail to develop and introduce new products or product enhancements, that
failure will harm our business.
Our products may not be accepted in the flat panel computer monitor market and
other emerging markets
Our success in the flat panel computer monitor market, as well as the markets
for digital CRTs, home theater, DVD, flat panel and digital television, and HDTV
will depend upon the extent to which manufacturers of those products incorporate
our integrated circuits into their products. We have only recently begun
shipping our products in quantity to manufacturers of flat panel computer
monitors, and have only recently begun shipping limited commercial quantities of
products to manufacturers in some of the other developing consumer electronics
markets. Our ability to sell products into these markets will depend upon
demand for the functionality provided by our products. For example, some
computer industry participants have proposed that the image processing functions
performed by our products should be incorporated within the computer itself
-16-
<PAGE>
rather than in the flat panel computer monitor. If this were to occur, we would
be subject to direct competition from suppliers of graphics integrated circuits,
many of whom have resources greater than ours. The failure of our products to
be accepted in the flat panel computer monitor market in particular would harm
our business.
A large percentage of our revenues come from sales to a small number of large
customers
The markets for our products are highly concentrated. Our sales are derived
from a limited number of customers. Sales to our largest five customers
accounted for 51.1% of our revenues for the ten months ended March 31, 1999. We
expect that a small number of customers will continue to account for a large
amount of our revenues. All of our sales are made on the basis of purchase
orders rather than long-term agreements so that any customer could cease
purchasing products at any time without penalty. For example, In Focus Systems,
Inc., our largest customer in our second largest market, projection systems,
temporarily ceased placing orders in May 1998 in order to reduce its inventory
levels. This would have had a significant impact on the first quarter of fiscal
1999 had there not been offsetting growth in the flat panel computer monitor
market. The decision by any large customer to decrease or cease using our
products would harm our business.
Our business depends on relationships with industry leaders that are non-binding
We work closely with industry leaders in the markets we serve to design products
with improved performance, cost and functionality. We typically commit
significant research and development resources to such design activities. We
often divert financial and personnel resources from other development projects
without entering into agreements obligating these industry leaders to continue
the collaborative design project or to purchase the resulting products. The
failure of an industry leader to complete development of a collaborative design
project or to purchase the products resulting from such projects would have an
immediate and serious impact on our business, financial condition and results of
operations. Our inability to establish such relationships in the future would,
similarly, harm our business.
A large percentage of our revenues will come from sales outside of North
America, which creates additional business risks
A large portion of our revenues will come from sales to customers outside of
North America, particularly to equipment manufacturers located in Japan and
other parts of Asia. For the ten months ended March 31, 1999, sales to regions
outside of North America amounted to 74% of revenues. These sales are subject
to numerous risks, including:
. fluctuations in currency exchange rates, tariffs, import restrictions
and other trade barriers,
. unexpected changes in regulatory requirements,
. longer payment periods,
. potentially adverse tax consequences,
. export license requirements,
. political and economic instability, and
. unexpected changes in diplomatic and trade relationships.
Because our sales are denominated in United States dollars, increases in the
value of the United States dollar could increase the price of our products in
non-U.S. markets and make our products more expensive than competitors' products
denominated in local currencies.
We may not be able to attract or retain the key personnel we need to succeed
Competition for qualified management, engineering and technical employees is
intense. As a result, employees could leave with little or no prior notice. We
cannot assure you that we will be able to attract and retain employees.
If we cannot attract and retain key employees, our business would be harmed
Other factors to consider
You should also consider the following factors:
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<PAGE>
It may be difficult for our shareholders to enforce civil liabilities under the
United States federal securities laws because we are incorporated in Canada
The enforcement by our shareholders of civil liabilities under the federal
securities laws of the United States may be adversely affected because:
. we are incorporated under the laws of Nova Scotia, Canada,
. some of our directors and officers are residents of Canada, and
. substantial portions of our assets are located outside the United
States.
As a result, it may be difficult for holders of our common shares to effect
service of a legal claim within the United States upon our directors and
officers or upon other individuals who are not residents of the United States.
It may also be difficult to satisfy any judgements of courts of the United
States based upon civil liabilities under the federal securities laws of the
United States.
Our anti-takeover defense provisions may deter potential acquirers
Our authorized capital consists of 1,000,000,000 special shares issuable in one
or more series and 1,000,000,000 common shares. Our board of directors has the
authority to issue special shares and to determine the price, designation,
rights, preferences, privileges, restrictions and conditions of these shares
without any further vote or action by our shareholders, including voting and
dividend rights. The rights of holders of our common shares will be subject to,
and may be adversely affected by, rights of holders of any special shares that
we may issue in the future. The issuance of special shares could make it more
difficult for a third party to acquire a majority of our outstanding voting
shares. We have no present plans to issue any special shares. We have adopted
a shareholder rights plan with respect to our common shares. This plan is
specifically designed to make an unsolicited, non-negotiated takeover attempt
more difficult. We also have a board of directors with three-year staggered
terms, which may, in certain circumstances, make an unsolicited, non-negotiated
takeover attempt more difficult.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
We are exposed to financial market risks including changes in interest rates and
foreign currency exchange rates.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 10% increase or decrease in interest rates
due mainly to the short term nature of the major portion of our investment
portfolio.
We carry out a significant portion of our operations in Canada. Although
virtually all of our revenues and costs of revenues are denominated in U.S.
dollars, a portion of our operating expenses is denominated in Canadian dollars.
Accordingly, our operating results are affected by changes in the exchange rate
between the Canadian and U.S. dollars. Any future strengthening of the Canadian
dollar against the U.S. dollar could negatively impact our operating results by
increasing our operating expenses as measured in U.S. dollars. We do not
currently engage in any hedging or other transactions intended to manage the
risks relating to foreign currency exchange rate fluctuations, other than
natural hedges that occur as a result of holding both Canadian dollar
denominated assets and Canadian dollar denominated liabilities. We may in the
future undertake hedging or other such transactions if we determine that it is
necessary to offset exchange rate risks. Based on our overall currency rate
exposure at March 31, 1999 a near-term 10% appreciation or depreciation would
have an immaterial effect on our operating results of financial condition.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Financial Statements Table of Contents
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Auditors' Report.............................................................. [1]
Consolidated Balance Sheets................................................... [2]
Consolidated Statements of Operations......................................... [3]
Consolidated Statements of Shareholders' Equity............................... [4]
Consolidated Statements of Cash Flows......................................... [5]
Notes to Consolidated Financial Statements.................................... [6]
</TABLE>
-19-
<PAGE>
August 23, 1999
AUDITORS' REPORT
To the Shareholders of
Genesis Microchip Incorporated
We have audited the consolidated balance sheets of Genesis Microchip
Incorporated as at March 31, 1999 and May 31, 1998 and the consolidated
statements of operations, shareholders' equity and cash flows for the ten months
ended March 31, 1999 and the years ended May 31, 1998 and May 31, 1997. 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
in Canada. 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 March 31, 1999
and May 31, 1998 and the results of its operations and its cash flows for the
ten months ended March 31, 1999 and the years ended May 31, 1998 and May 31,
1997 in accordance with generally accepted accounting principles in the United
States.
Toronto, Canada KPMG LLP
July 9, 1999 Chartered Accountants
-20-
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
March 31, May 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $35,928 $35,904
Accounts receivable trade, net of allowance for doubtful accounts of $124 in 1999
and $90 in 1998................................................................... 8,009 2,523
Employee loan receivable........................................................... - 69
Investment tax credits receivable.................................................. 1,221 1,735
Inventory.......................................................................... 6,448 3,278
Other.............................................................................. 2,587 135
------- -------
Total current assets.............................................................. 54,193 43,644
Capital assets (note 3).............................................................. 2,726 2,080
Deferred income taxes................................................................ 1,830 1,642
Other................................................................................ 80 80
------- -------
Total assets...................................................................... $58,829 $47,446
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 1,053 $ 1,498
Accrued liabilities................................................................ 4,028 1,045
Current portion of loan payable (note 5)........................................... 94 97
------- --------
Total current liabilities......................................................... 5,175 2,640
Long-term liabilities:
Loan payable (note 5).............................................................. 524 655
------- --------
Total liabilities................................................................. 5,699 3,295
------- --------
Shareholders' equity (note 6):
Share capital:
Special shares:
Authorized - 1,000,000,000 special shares
Issued and outstanding - nil shares at March 31, 1999 and May 31, 1998........ - -
Common shares:
Authorized - 1,000,000,000 common shares
Issued and outstanding - 14,478,536 shares at March 31, 1999
and 13,808,132 at May 31, 1998.............................................. 61,764 59,619
Share purchase loans receivable.................................................... - (124)
Cumulative other comprehensive loss................................................ (94) (94)
Deferred compensation.............................................................. (108) (169)
Deficit............................................................................ (8,432) (15,081)
------- --------
Total shareholders' equity..................................................... 53,130 44,151
------- --------
Total liabilities and shareholders' equity..................................... $58,829 $ 47,446
======= ========
Commitments and contingencies (note 11)
Subsequent event (note 13)
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Ten months
ended Year ended
March 31, May 31,
---------- -----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Products................................. $28,301 $14,941 $ 4,164
Design services and other................ 1,363 806 363
------- ------- -------
Total revenues......................... 29,664 15,747 4,527
Cost of revenues.......................... 12,082 4,819 2,983
------- ------- -------
Gross profit.............................. 17,582 10,928 1,544
Operating expenses:
Research and development (note 8)........ 4,838 3,648 2,644
Selling, general and administrative...... 7,606 4,842 4,245
------- ------- -------
Total operating expenses............... 12,444 8,490 6,889
------- ------- -------
Income (loss) from operations............. 5,138 2,438 (5,345)
Interest income........................... 1,511 675 147
------- ------- -------
Net income (loss)......................... $ 6,649 $ 3,113 $(5,198)
======= ======= =======
Earnings (loss) per share:
Basic.................................... $ 0.47 $ 0.33 $ (0.70)
Diluted.................................. $ 0.45 $ 0.26 $ (0.70)
Weighted average number of common shares
outstanding (in thousands):
Basic.................................... 14,163 9,559 7,463
Diluted.................................. 14,850 12,204 7,463
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE>
SHAREHOLDERS' EQUITY STATEMENT
-23-
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Share
Common share Special and bonus
Preference shares Common shares purchase warrants warrants
---------------------- -------------------- -------------------- -----------------------
Number Amount Number Amount Number Amount Number Amount
--------- ---------- ---------- -------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1996..... 227,200 $ 1,121 7,409,834 $ 13,181 946,349 $ 1 - $ -
Loss....................... - - - - - - - -
Issued for cash........... - - 3,000 11 - - 17,800,000 11,653
Issue costs................ - - - - - - - (844)
Issued on exercise of
stock options............. - - 86,000 92 - - - -
Currency translation
adjustment................ - - - - - - - -
Additional paid in capital
related to stock options.. - - - 514 - - - -
Deferred compensation
related to stock options.. - - - 290 - - - -
Amortization of deferred
compensation
related to stock options... - - - - - - - -
--------- ---------- ---------- -------- --------- --------- ----------- ----------
Balances, May 31, 1997..... 227,200 1,121 7,498,834 14,088 946,349 1 17,800,000 10,809
Net income................. - - - - - - - -
Issued..................... - - 3,119,488 35,210 - - - -
Additional paid in capital
related to shares issued.. - - - 214 - - - -
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) (1,121 227,200 1,121 - - - -
Conversion of warrants..... - - 2,843,110 10,813 (944,349) (1) (17,800,000) (10,809)
Currency translation
adjustment................ - - - - - - - -
Deferred compensation
related to stock options.. - - - 36 - - - -
Amortization of deferred
compensation related to
stock options............. - - - - - - - -
--------- ---------- ---------- -------- --------- --------- ----------- ----------
Balances, May 31, 1998..... - - 13,808,132 59,619 - - - -
Net income................. - - - - - - - -
Issued on exercise of
stock options............. - - 670,404 2,145 - - - -
Repayment of share
purchase loans receivable. - - - - - - - -
Amortization of deferred
compensation related
to stock options........... - - - - - - - -
--------- ---------- ---------- -------- --------- --------- ----------- ----------
Balances, March 31, 1999... - $ - 14,478,536 $ 61,764 - $ - - $ -
========= ========== ========== ======== ========= ========= =========== ==========
<CAPTION>
Cumulative
purchase other Total
loans comprehensive Deferred shareholders'
receivable income (loss) compensation Deficit equity
---------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances, May 31, 1996..... $ - $ 15 $ - $ (12,996) $ 1,322
Loss....................... - - - (5,198) (5,198)
Issued for cash........... - - - - 11,664
Issue costs................ - - - (844)
Issued on exercise of
stock options............. (36) - - - 56
Currency translation
adjustment................ - 31 - - -
Additional paid in capital
related to stock options.. - - - - 514
Deferred compensation
related to stock options.. - - (290) - -
Amortization of deferred
compensation
related to stock options... - - 76 - 76
---------- ------------- ------------ -------------- ----------
Balances, May 31, 1997..... (36) 46 (214) (18,194) 7,621
Net income................. - - - 3,113 3,113
Issued..................... - - - - 35,210
Additional paid in capital
related to shares issued.. - - - - 214
Issued on exercise of
warrants.................. - - - - 4
Issued on exercise of
stock options............. (88) - - - 81
Issue costs................ - - - - (2,036)
Conversion of preference
shares.................... - - - - -
Conversion of warrants..... - - - - 3
Currency translation
adjustment................ - (140) - - (140)
Deferred compensation
related to stock options.. - - (36) - -
Amortization of deferred
compensation related to
stock options............. - - 81 - 81
---------- ------------- ------------ -------------- ----------
Balances, May 31, 1998..... (124) (94) (169) (15,081) 44,151
Net income................. - - - 6,649 6,649
Issued on exercise of
stock options............. - - - - 2,145
Repayment of share
purchase loans receivable. 124 - - - 124
Amortization of deferred
compensation related
to stock options........... - - 61 - 61
---------- ------------- ------------ --------------- ----------
Balances, March 31, 1999... $ - $ (94) $ (108) $ (8,432) $ 53,130
========== ============= ============ =============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Ten months
ended Year ended
March 31, May 31,
---------- --------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 6,649 $ 3,113 $(5,198)
Adjustments to reconcile net income
(loss) to cash used in operating activities:
Amortization.................................... 810 670 510
Non-cash compensation expense related
to stock options and shares issued.............. 61 295 590
Inventory provision............................. - 86 1,293
Change in operating assets and liabilities:
Accounts receivable trade...................... (5,497) (1,628) (403)
Investment tax credits receivable.............. 419 (301) (407)
Inventory...................................... (3,191) (1,637) (2,321)
Other current assets........................... (2,572) 26 52
Accounts payable............................... (431) 902 (51)
Accrued liabilities............................ 3,048 623 191
------- ------- -------
Net cash from (used in) operating activities.. (704) 2,149 (5,744)
Cash flows from investing activities:
Additions to capital assets....................... (1,455) (1,388) (979)
------- ------- -------
Cash used in investing activities............. (1,455) (1,388) (979)
Cash flows from financing activities:
Proceeds from:
Issue of common shares and
common share purchase warrants,
net of issue costs............................. 2,145 31,708 103
Issue of special and bonus warrants,
net of issue costs............................. - - 10,809
Loan payable.................................... - - 118
Repayment of:
Loan payable.................................... (107) (62) (64)
Debentures payable.............................. - - (1,275)
Obligations under capital leases................ - - (810)
Repayment (issuance) of share
purchase loans.................................. 119 (94) (36)
------- ------- -------
Net cash provided by financing activities..... 2,157 31,552 8,845
Effect of currency translation on cash balances...... 26 (96) 32
------- ------- -------
Increase in cash and cash equivalents................ 24 32,217 2,154
Cash and cash equivalents, beginning of period....... 35,904 3,687 1,533
------- ------- -------
Cash and cash equivalents, end of period............. $35,928 $35,904 $ 3,687
======= ======= =======
Supplemental cash flow information:
Cash paid for interest............................. $ 15 $ 5 $ 181
Cash paid for income taxes......................... $ 56 $ - $ -
Supplemental disclosure of non-cash investing
and financing activities:
Deferred compensation related to stock options..... $ - $ 250 $ 804
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
Genesis Microchip Incorporated ("Genesis") designs, develops and markets
integrated circuits that manipulate and process digital video and graphic
images.
2. Significant accounting policies
Basis of consolidation
These consolidated financial statements include the accounts of Genesis and
its wholly owned subsidiary, Genesis Microchip Corporation. All material inter-
company transactions and balances have been eliminated.
Change in year end
In May 1999, Genesis announced that its Board of Directors approved a
change in Genesis' fiscal year to April 1 through March 31, effective for the
ten months ended March 31, 1999. Genesis previously reported results on the
basis of a fiscal year of June 1 through May 31.
The following is selected financial data for the ten-month transition
period ending March 31, 1999 and the comparable prior year period (in thousands,
except per share data):
<TABLE>
<CAPTION>
Ten months
ended
March 31,
--------------------
1999 1998
--------------------
(Unaudited)
<S> <C> <C>
Total revenues......................................... $ 29,664 $ 11,909
Gross profit........................................... 17,582 8,427
Income from operations................................. 5,138 1,685
Provision for income taxes............................. - -
Net income............................................. 6,649 2,034
Earnings per share:
Basic............................................. $ 0.47 $ 0.23
Diluted........................................... $ 0.45 $ 0.17
Weighted average number of common shares outstanding:
Basic............................................. 14,163 8,706
Diluted........................................... 14,850 11,750
</TABLE>
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.
-26-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Property and equipment 20% to 30% declining balance
Computer software 100% straight line
Leasehold improvements Straight line over the term of the lease
Patents Straight line over the life of the patent
Genesis 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
Genesis recognizes revenue from product sales upon shipment. Product
returns and allowances are estimated and provided for at the time of sale. To
date, Genesis has not experienced any significant product returns. Design
services revenues are recognized as Genesis performs engineering services for
the customer or completes phases of the project defined by the applicable
development agreement.
Currency translation
Effective June 1, 1998, the U.S. dollar became the functional currency of
Genesis and of its wholly owned subsidiary as all of their revenues and a
significant portion of their expenditures are denominated in U.S. dollars. This
change resulted from the increased significance of U.S. dollar denominated
revenues and expenditures in relation to Genesis' Canadian dollar denominated
transactions. In addition, Genesis' financing is primarily denominated in U.S.
dollars. Exchange gains and losses resulting from transactions denominated in
currencies other than U.S. dollars are included in the results of operations for
the period.
-27-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to June 1, 1998, the functional currency of Genesis and its
subsidiary was the Canadian dollar. Accordingly, monetary assets and liabilities
of Genesis and of its wholly owned subsidiary that were denominated in foreign
currencies were translated into Canadian dollars at the exchange rate prevailing
at the balance sheet date. Transactions included in operations were translated
at the average rate for the period. Exchange gains and losses resulting from the
translation of these amounts were reflected in the consolidated statement of
operations in the period in which they occurred. As Genesis' reporting currency
was the U.S. dollar, Genesis translated 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 were
included as a separate component of shareholders' equity.
Research and development expenses
Research and development costs are expensed as incurred.
Investment tax credits
Genesis 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.
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 Genesis 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. Genesis 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 and financial
liabilities approximate their recorded amounts.
Financial instruments that potentially subject Genesis 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. Genesis 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.
-28-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per share
Basic earnings (loss) per share has been calculated by dividing the net
income (loss) for the period available to common shareholders by the weighted
average number of common shares outstanding during that period. Basic earnings
(loss) per share excludes the dilutive effect of potential common shares.
Diluted earnings per share gives effect to all potential common shares
outstanding during the period. 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.
Stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting of Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standards Board, Statement No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing 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. 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.
Comprehensive income
Genesis adopted the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" (SFAS 130), in the first quarter of fiscal
1999. SFAS 130 established standards for the reporting and disclosure of
comprehensive income and its components, however, the disclosure has no material
impact on Genesis' consolidated results of operations, financial position or
cash flows. Comprehensive income is defined as the change in equity of a company
during a period resulting from investments by owners and distributions to
owners. For the ten months ended March 31, 1999, there is no difference for
Genesis between net income and comprehensive income. For the fiscal years ended
May 31, 1998 and 1997, the difference between net income and comprehensive
income arises solely from foreign currency translation adjustments. As a result,
total comprehensive income (loss) is $2,973,000 for the year ended May 31, 1998
and ($5,167,000) for the year ended May 31, 1997.
Income taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
-29-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The impact of adopting SFAS 133, which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000, has not been
determined.
3. Capital assets
Capital assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, May 31,
--------- -----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Property and equipment......... $ 3,211 $ 2,623 $ 2,039
Computer software.............. 1,733 1,085 580
Leasehold improvements......... 189 87 30
Patents........................ 431 326 260
------- ------- -------
5,564 4,121 2,909
Less accumulated amortization.. (2,838) (2,041) (1,477)
------- ------- -------
$ 2,726 $ 2,080 $ 1,432
======= ======= =======
</TABLE>
4. Bank credit facility
Genesis 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 U.S. dollars. It is secured by way of a general security
agreement covering all of Genesis' 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 March
31, 1999 and May 31, 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 instalments by fiscal year as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
2000.................................... $ 94
2001.................................... 94
2002.................................... 94
2003.................................... 94
2004.................................... 94
2005 and thereafter..................... 148
----
618
Less current portion.................... 94
----
$524
====
</TABLE>
-30-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the loan payable was $599,000 at March 31, 1999, 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 Genesis
for the same or similar debt instrument.
6. Shareholders' equity
Genesis' share capital and earnings per share information for the fiscal
years ended May 31, 1997 and May 31, 1996 has been restated to reflect the ten-
for-one reverse split of Genesis' common shares effective November 14, 1997.
On January 20, 1999, Genesis Microchip Inc. was continued as Genesis
Microchip Incorporated in the province of Nova Scotia. The effect of the
continuance was to change Genesis' jurisdiction of incorporation from Ontario to
Nova Scotia.
Special shares
The Board of Directors of Genesis is authorized to issue up to
1,000,000,000 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
Genesis.
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, Genesis amended its articles of amalgamation to remove the
authorized preference shares and to authorize a new class of common 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 Genesis' initial
public offering effective February 23, 1998.
-31-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Genesis to the holders of each
class of its common share purchase warrants. The offer was made in order to
simplify the capital structure of Genesis prior to Genesis' 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 Genesis.
Yorkton Securities Inc. options
As a condition of the issuance of the special and bonus warrants in July
1996, Genesis 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, Genesis loaned $107,000 to an executive officer. In July
1997, Genesis loaned $94,000 to two executive officers to assist these
individuals in purchasing common shares of Genesis through the exercise of
70,000 options previously issued to them.
The loans were repaid during the period ended March 31, 1999.
7. Stock option and stock purchase 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 Genesis and consultants engaged
by Genesis. 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.
-32-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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
Genesis) 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 Genesis) and
generally vest over four years. As at March 31, 1999, there were 452,659 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 Genesis of up to
150,000 common shares. 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 at March 31, 1999, there were 65,000 shares
available for grant under the 1997 Non-Employee Plan.
Employee Stock Purchase Plan
Genesis 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 March 31, 1999, 65,243 common shares were available for
issuance under this plan.
Details of stock option transactions are as follows:
<TABLE>
<CAPTION>
Weighted average
Option price exercise price
Number of shares per share per share
---------------- -------------- ----------------
<S> <C> <C>
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
Issued............... 650,300 6.75 - 31.50 10.86
Exercised............ (501,843) 1.37 - 16.69 3.53
Cancelled............ (43,859) 3.31 - 13.88 6.66
---------
Balances, March 31, 1999.. 1,438,498 3.31 - 31.50 9.24
=========
</TABLE>
-33-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were 421,000 options at March 31, 1999, 659,000 options at May 31,
1998, and 518,000 options at May 31, 1997 that had vested and were exercisable,
with a weighted average exercise price per share of $6.57 at March 31, 1999,
$3.31 at May 31, 1998, and $2.83 at May 31, 1997. The weighted average remaining
contractual life of the options outstanding at March 31, 1999 was 7.74 years, at
May 31, 1998 was 5.06 years, and at May 31, 1997 was 3.80 years.
During the fiscal year ended May 31, 1997, Genesis extended the expiration
dates of certain employee stock options issued under the 1987 Stock Option Plan.
All other terms associated with the stock options remained unchanged. Under APB
25, 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. Compensation expense related to the extension of the expiration dates
amounted to $514,000 for the year ended May 31, 1997.
Genesis recorded nil deferred compensation for the period ended March 31,
1999, $36,000 for the year ended May 31, 1998, and $290,000 for the year ended
May 31, 1997. The amortization of deferred compensation is charged to operations
and is amortized over the vesting period of the options. Amortization of
deferred compensation was $61,000 for the ten months ended March 31, 1999,
$81,000 for the year ended May 31, 1998, and $76,000 for the year ended May 31,
1997.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had Genesis 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 Genesis'
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. Genesis' calculations for fiscal years 1998 and
1999 were made using the Black-Scholes option pricing model using a dividend
yield of 0% and the assumptions noted below in the table. In fiscal 1997, the
fair value for each option grant was calculated using the minimum value method
using a dividend yield of 0% and the assumptions noted below in the table. 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>
Ten months
ended
March 31, Year ended May 31,
----------- --------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates.......... 5% 5% 4%
Volatility........................ 0.9174 0.8739 -
Expected life of option in years.. 5 5 4
</TABLE>
-34-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation expense been determined based on the fair value of awards
at the grant dates in accordance with the methodology prescribed in SFAS 123,
Genesis' net income and earnings per share for fiscal 1999 would have decreased
by approximately $2,926,000 or by $0.21 per share for both basic and diluted
earnings per share. The net income and net income per share for Genesis' fiscal
year ended May 31, 1998 would have decreased by approximately $219,000 or $0.02
per share for both basic and diluted earnings per share. The net loss and net
loss per share for the year ended May 31, 1997 would have increased by
approximately $74,000 or $0.01 per share for both basic and diluted earnings per
share. 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.
The weighted average fair values of options granted during fiscal 1999,
1998 and 1997 are $10.47, $5.85 and $0.56, respectively.
8. Research and development
Research and development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
Ten months
ended
March 31, Year ended May 31,
----------- --------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross research and development
expenditures................... $5,824 $4,538 $3,351
Less investment tax credits and
government assistance.......... (986) (890) (707)
------ ------ --------
$4,838 $3,648 $2,644
====== ====== ========
</TABLE>
9. Income taxes
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income (loss) before provision for income
taxes. The sources and tax effects of the differences are as follows (in
thousands):
<TABLE>
<CAPTION>
Ten months
ended
March 31, Year ended May 31,
----------- --------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic rate applied to income
(loss) before provision for income taxes......... $ 2,965 $ 1,388 $(2,318)
Adjustments resulting from:
Provincial research and development deductions.. - (95) (99)
Small business deduction........................ - (22) 34
Foreign tax and exchange rate differences....... (67) 473 194
Utilization of tax loss carryforwards........... (1,142) (1,744) -
Utilization of research and development expenses
deferred for income tax purposes.............. (1,621) - -
Other items..................................... (135) - 200
------- ------- -------
- - (1,989)
Unrecognized benefit of losses
carried forward.................................. - - 1,989
------- ------- -------
$ - $ - $ -
======= ======= =======
</TABLE>
-35-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pretax income from foreign operations was $3,909,000 for the ten months
ended March 31, 1999. Pretax loss from foreign operations was $4,465,000 in the
year ended May 31, 1998 and $1,832,000 in the year ended May 31, 1997.
Significant components of Genesis' deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, May 31,
1999 1998
---------- --------
<S> <C> <C>
Research and development expenses deferred
for income tax purposes.................... $ 87 $ 1,708
Net operating loss carryforwards............ 664 1,806
Investment tax credit carryforwards......... 350 388
Deferred interest charges................... 796 796
Issue costs................................. 1,355 1,868
Other....................................... 675 193
------- -------
Net deferred tax asset...................... 3,927 6,759
Less valuation allowance.................... (2,097) (5,117)
------- -------
$ 1,830 $ 1,642
======= =======
</TABLE>
During the ten months ended March 31, 1999, the valuation allowance
decreased by approximately $3,020,000 primarily as a result of utilization of
net operating losses and research and development expenses deferred for income
tax purposes. During the year ended May 31, 1998, the valuation allowance
decreased by approximately $2,659,000. During the year ended May 31, 1997, the
valuation allowance increased by approximately $2,242,000 primarily as a result
of utilization of net operating losses.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income uncertainties related to the industry in which
Genesis operates and tax planning strategies in making this assessment. In
order to fully realize the deferred tax asset, Genesis will need to generate
future taxable income of approximately $9,200,000 prior to the expiration of the
net operating loss carryforwards in the years 2010 to 2013. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not Genesis will realize the benefits of these
deductible differences, net of the existing valuation allowances.
-36-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Earnings per share
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation as required by SFAS 128 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Ten months
ended
March 31, Year ended May 31,
---------- -------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and diluted
net income (loss) per share:
Net income (loss)................. $ 6,649 $ 3,113 $(5,198)
Denominator for basic net income
(loss) per share:
Weighted average common shares.... 14,163 9,559 7,463
======= ======= =======
Basic net income (loss) per share.... $ 0.47 $ 0.33 $ (0.70)
======= ======= =======
Denominator for diluted net income
(loss) per share:
Weighted average common shares.... 14,163 9,559 7,463
Stock options and warrants........ 687 2,645 -
------- ------- -------
Shares used in computing diluted
net income (loss) per share......... 14,850 12,204 7,463
======= ======= =======
Diluted net income (loss) per share.. $ 0.45 $ 0.26 $ (0.70)
======= ======= =======
</TABLE>
Due to the net loss in the year ended May 31, 1997, all potential common
shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted net income (loss) per share.
11. Commitments and contingencies
Lease commitments
Genesis leases premises in Thornhill, Ontario and Mountain View, California
under operating leases that expire on May 31, 2009 and July 31, 2003,
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>
<CAPTION>
Amount
------
<S> <C>
2000........................................................... $1,086
2001........................................................... 1,060
2002........................................................... 990
2003........................................................... 964
2004........................................................... 654
Thereafter..................................................... 2,481
------
$7,235
======
</TABLE>
Rental expense for the fiscal years ending 1999, 1998, and 1997 was
$472,000, $318,000, and $220,000, respectively.
-37-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supply agreements
Genesis has supply agreements with several manufacturers for the supply of
its semiconductor products. Through March 31, 1999, a sole source manufacturer
produced each of Genesis' semiconductor products. Should the source of products
cease to be available, management believes that this would have a material
adverse effect on Genesis' business, financial condition and results of
operations. Under the terms of the supply agreements, Genesis has no guarantees
of minimum capacity from its suppliers and is not liable for minimum purchase
commitments.
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 Genesis, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
12. Segment information
Genesis adopted the Financial Accounting Standards Board's Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information, "(SFAS
131). The new standard revises the way operating segments are reported. Genesis
operates and tracks its results in one operating segment. Genesis designs,
develops and markets integrated circuits that manipulate and process digital
video and graphic images.
Enterprise wide information is provided in accordance with SFAS 131.
Geographic revenue information for the ten months ended March 31, 1999 and for
the years ended May 31, 1998 and 1997 is based on the shipment destination.
Long-lived assets include property, plant and equipment as well as intangible
assets including unamortized patent costs. Property, plant and equipment
information is based on the physical location of the asset and the end of each
fiscal period while the intangibles are based on the location of the owning
entity.
Revenues from unaffiliated customers by geographic region were as follows
(in thousands):
<TABLE>
<CAPTION>
Ten months
ended
March 31, Year ended May 31,
---------- ------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States... $ 7,535 $ 8,163 $3,293
Japan and Asia.. 20,502 6,620 443
Europe.......... 1,327 729 408
Canada.......... 300 235 383
------- ------- ------
$29,664 $15,747 $4,527
======= ======= ======
</TABLE>
-38-
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net long-lived assets by country were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 May 31, 1998
-------------- ------------
<S> <C> <C>
United States.. $ 146 $ 96
Canada......... 2,580 1,984
------ ------
$2,726 $2,080
====== ======
</TABLE>
For the ten months ended March 31, 1999, two customers accounted for 20%
and 10% of total revenues, respectively. For the year ended May 31, 1998, two
customers accounted for 24% and 23% of total revenues, respectively. For the
year ended May 31, 1997, one customer accounted for 14% of total revenues. At
March 31, 1999, one customer represented 25% of accounts receivable trade, and
at May 31, 1998, one customer represented 12% of accounts receivable trade.
13. Subsequent event
On May 28, 1999, Genesis issued 3,967,000 common shares for all the
outstanding common stock, preference stock and warrants of Paradise Electronics,
Inc. ("Paradise"). Paradise designs, develops and markets analog and digital
mixed-signal integrated circuits for controlling flat panel monitors. In
addition, Genesis assumed all the existing outstanding stock options of
Paradise. The full exercise of these stock options would result in an
additional issue of 533,000 common shares of Genesis. This business combination
will be accounted for as a pooling-of-interests combination and, accordingly,
Genesis' historical consolidated financial statements presented in future
reports will be restated to include the accounts and results of operations of
Paradise.
The following unaudited pro forma data summarizes the combined results of
operations of Genesis and Paradise as if the combination had been consummated on
March 31, 1999 (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Ten months
ended
March 31, Year ended May 31,
---------- --------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Revenues.................................. $37,738 $15,988 $ 4,527
Net income (loss)......................... 2,075 (455) (5,993)
Earnings per share:
Basic................................... 0.12 (0.04) (0.63)
Diluted................................. 0.11 (0.04) (0.63)
Weighted average number of common shares
outstanding:
Basic................................... 18,027 11,634 9,447
Diluted................................. 19,365 11,634 9,447
</TABLE>
There are no material adjustments required to conform the accounting
methods of Paradise to those of Genesis.
-39-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS:
The information required by this item with respect to the filing of reports
under Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from our proxy statement. That proxy statement is prepared in
connection with our annual and special general shareholders' meeting to be held
on September 28, 1999. We expect that the proxy statement will be filed with
the Commission not later than 21 days prior to the date of the meeting. The
information for this item can be found under the caption, "Compliance with
Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from our
proxy statement. That proxy statement is prepared in connection with our annual
and special general shareholders' meeting to be held on September 28, 1999. We
expect that the proxy statement will be filed with the Commission not later than
21 days prior to the date of the meeting. The information for this item can be
found under the caption, "Compensation and Other Information Concerning
Officers."
ITEM 12. SECURITY OWNERSHIP OF PRINCIPAL OWNERS AND MANAGEMENT:
The information required by this item is incorporated by reference from our
proxy statement. That proxy statement is prepared in connection with our annual
and special general shareholders' meeting to be held on September 28, 1999. We
expect that the proxy statement will be filed with the Commission not later than
21 days prior to the date of the meeting. The information for this item can be
found under the caption, "Share Ownership by our Directors, Officers and
Principal Shareholders."
ITEM 13. SIGNIFICANT RELATIONSHIPS AND TRANSACTIONS WITH DIRECTORS, OFFICERS OR
PRINCIPAL SHAREHOLDERS:
The information required by this item is incorporated by reference from our
proxy statement. That proxy statement is prepared in connection with our annual
and special general shareholders' meeting to be held on September 28, 1999. We
expect that the proxy statement will be filed with the Commission not later than
21 days prior to the date of the meeting. The information for this item can be
found under the caption, "Transactions with our Directors, Officers and
Principal Shareholders."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) Documents filed with this report:
1. Consolidated Financial Statements.
The following consolidated financial statements and related auditors' report are
incorporated in Item 8 of this report.
. Auditors' Report
. Consolidated Balance Sheets at March 31, 1999 and May 31, 1998
. Consolidated Statements of Operations for the ten months ended March 31, 1999
and for the years ended May 31, 1998 and 1997
. Consolidated Statements of Shareholders' Equity for the ten months ended
March 31, 1999 and for the years ended May 31, 1998 and 1997
-40-
<PAGE>
. Consolidated Statements of Cash Flows for the ten months ended March 31, 1999
and for the years ended May 31, 1998 and 1997
. Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules.
Consolidated financial statement schedules have been omitted because the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes to those
financial statements.
3. Exhibits.
The exhibits listed in the Exhibit Index are filed as a part of this Transition
Report on Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
SIGNATURES
The following authorized person has signed this report on our behalf, as
required by Section 13 or 15(d) of the Securities Exchange Act of 1934.
GENESIS MICROCHIP INCORPORATED
By: /s/ Paul M. Russo
--------------------
Paul M. Russo
Chairman and Chief Executive Officer
This report has been signed by the following persons in the capacities and on
the dates indicated as required by the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Paul M. Russo
- -------------------------------------
Paul M. Russo Chairman and Chief Executive Officer August 20, 1999
/s/ Eric Erdman
- -------------------------------------
Eric Erdman Chief Financial Officer and Secretary August 20, 1999
/s/ Brian S. Campbell
- -------------------------------------
Brian S. Campbell Director August 20, 1999
/s/ James E. Donegan
- -------------------------------------
James E. Donegan Director August 20, 1999
/s/ George A. Duguay
- -------------------------------------
George A. Duguay Director August 20, 1999
/s/ Lawrence G. Finch
- -------------------------------------
Lawrence G. Finch Director August 20, 1999
/s/ Alexander S. Lushtak
- -------------------------------------
Alexander S. Lushtak Director August 20, 1999
/s/ William H. Welling
- -------------------------------------
William H. Welling Director August 20, 1999
</TABLE>
-41-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
23.1 Consent of KPMG, independent accountant
27.1 Financial Data Schedule for the ten months ended March 31, 1999
-42-
<PAGE>
Exhibit 23.1
[LETTERHEAD OF KPMG APPEARS HERE]
The Board of Directors
Genesis Microchip Incorporated
We consent to incorporation by reference in the registration statement (No.
333-70469, 333-51001 and 333-81413) on Form S-8 of Genesis Microchip
Incorporated of our report dated July 9, 1999, relating to the consolidated
balance sheets of Genesis Microchip Incorporated as of March 31, 1999, and May
31, 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the ten months ended March 31, 1999 and the two years
ended May 31, 1998, which report appears in the March 31, 1999, annual report on
Form 10-K of Genesis Microchip Incorporated.
/s/ KPMG LLP
Toronto, Canada
August 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE TEN MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 35,928
<SECURITIES> 0
<RECEIVABLES> 8,009
<ALLOWANCES> 124
<INVENTORY> 6,448
<CURRENT-ASSETS> 54,193
<PP&E> 5,564
<DEPRECIATION> 2,838
<TOTAL-ASSETS> 58,829
<CURRENT-LIABILITIES> 5,175
<BONDS> 0
0
0
<COMMON> 61,764
<OTHER-SE> (8,634)
<TOTAL-LIABILITY-AND-EQUITY> 53,130
<SALES> 28,895
<TOTAL-REVENUES> 29,664
<CGS> 12,082
<TOTAL-COSTS> 12,082
<OTHER-EXPENSES> 12,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,649
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,649
<EPS-BASIC> .47
<EPS-DILUTED> .46
</TABLE>
