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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-29592
GENESIS MICROCHIP INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NOVA SCOTIA, CANADA Not applicable
(State of incorporation) (IRS employer identification number)
</TABLE>
<TABLE>
<S> <C>
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 May
31, 2000 was approximately $323,941,000, based on the last reported sale price
of our common shares on The Nasdaq National Market on that date of $18.0625 per
share. We had 19,252,145 common shares outstanding at May 31, 2000.
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
14, 2000.
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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, digital CRT monitors and digital television.
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.
In addition to our image processing technologies, we have developed
communications technologies, primarily through our merger with Paradise
Electronics, Inc. in 1999. These communications technologies focus
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on the reception of data by display devices, such as a computer monitor
receiving signals from a computer. Our communications technologies include both
analog and digital receivers that meet or exceed industry standard
requirements, such as VGA standards for analog and DVI standards for digital
receivers. Our integrated circuit products contain various combinations of our
image processing or communications technologies, depending on the needs of the
targeted market.
We are incorporated in Canada, and operate through subsidiaries in the
United States. Our business is conducted globally, with the majority of our
suppliers and customers located in Japan, Korea or Taiwan.
Markets, applications and customers
Our primary 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 year ended March
31, 2000 the flat panel computer monitor market represented 69.0% of our
total revenues. Companies whose flat panel computer monitors incorporate
our products include Acer, Apple, Dell, Fujitsu, IBM, HP, Philips,
Samsung, Sony, ViewSonic, Silicon Graphics and NEC.
. Digital CRT Monitors. We are currently developing products for the
emerging digital CRT monitor markets. The products are based on patent
pending technologies for digital CRT monitors. We believe that this
market will develop into a major market as the computer industry adopts
the digital monitor interface as a standard feature available on all
PCs, and that multimedia content providers will demand that their
content be protected by copy protection systems that are only available
for digital monitors.
. Consumer Digital Television. We intend to leverage our technologies to
create products for consumer digital television markets as they develop.
These potential markets include 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 principal integrated circuit products at March
31, 2000:
<TABLE>
<CAPTION>
Production
Product Description Markets Product Features Release (1)
-------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C>
gmZAN1 Video/graphic Multi-synchronous LCD Fully integrated analog-to- Q2 2000
processor monitors (with analog- digital converter (ADC),
only interfaces) and high-quality scaling
other fixed-resolution algorithm, on-chip
pixelated displays programmable onscreen
display
-------------------------------------------------------------------------------------------------
gmZRX1 Digital Standalone and bundled Integrated TMDS receiver; Q2 2000
video/graphic LCD monitors (with built-in display timing
processor digital interfaces), generator; auto-
projection systems, configuration and auto-
fixed-resolution detection
pixelated displays
-------------------------------------------------------------------------------------------------
gmB135 Video/graphic Multi-synchronous LCD Enhanced scaling engine, Q1 2000
processor monitors; other fixed- integrated ADC, integrated
resolution pixelated RAM-based onscreen display
displays controller
-------------------------------------------------------------------------------------------------
gmAFMC Adaptive film Progressive-scan Optimal de-interlacing for Q1 2000
mode televisions and DVDs, 3:2 pull-down (film
controller home theater, projection sources), real-time
systems, scan doublers switching and detection of
various de-interlacing modes
-------------------------------------------------------------------------------------------------
gmZ4 Video/graphic Multi-frequency LCD Supports resolutions up to Q4 1999
processor monitors (dual-interface UXGA, integrated frame-rate
with frame-rate conversion, embedded
conversion), projection microcontroller
systems; home theater
-------------------------------------------------------------------------------------------------
gmVLX1A-X Digital video Home theater, PCTV, DVD, Genesis proprietary Q1 1999
processor plasma panels, vertical-temporal filtering,
projection systems, scan advanced film mode, advanced
doublers scaling engine, built-in
display controller
-------------------------------------------------------------------------------------------------
gmFC1A Video/graphic Digital projection High-speed DRAM-based frame Q1 1999
frame refresh systems, flat panel rate converter (8 bit) with
rate converter monitors, digital direct interface to the gmZ1
televisions, video
walls, home theater
-------------------------------------------------------------------------------------------------
gmZ2/Z3 Video/graphic Multi-frequency LCD Three-channel scaling Q4 1998
processor monitors (dual-interface engine, spatial de-
without frame-rate interlacing, RGB and YUV
conversion), projection inputs, resolution support
systems, home theater up to XGA (gmZ2) or SXGA
(gmZ3)
-------------------------------------------------------------------------------------------------
gmB120 LCD monitor A wide variety of active Integrated ADC, clock Q2 1998
controller matrix TFT panels generator, image processor
and panel controller
-------------------------------------------------------------------------------------------------
gmZ1 Video/graphic Digital projection Integrated high-quality Q3 1997
processor systems, flat panel three channel, real-time
monitors, digital digital image zoom and
televisions, home digital video de-interlacing
theater with display synchronization
capability, resolutions up
to XGA
</TABLE>
(1) Calendar quarters
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Research and development
Our research and development efforts are performed within the following four
specialized groups:
. Algorithm Development Group: focuses on developing high-quality image
processing technologies and their implementation in silicon.
. Product Development Group: focuses on developing standard semiconductor
components to service our monitor and computer OEM customers and
providing them with a complete turn-key solution, which reduces their
time-to-market
. 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.
. Software Engineering Group: develops the software environment required
for our products to work within their corresponding systems. The
software engineering group occasionally customizes the software to meet
specific customer needs.
As of March 31, 2000, we had 79 full-time employees engaged in research and
development. Expenditures for research and development for the year ended March
31, 2000, net of investment tax credits and government assistance, were $15.1
million. For the ten months ended March 31, 1999 they were $9.3 million, and
for the fiscal year ended May 31, 1998 they were $6.2 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 34% of total revenues for the year ended March 31,
2000, 47% during fiscal 1999, and 55% during fiscal 1998. In particular, sales
to Samsung Electronics Co., Ltd. accounted for 10% of total revenues during the
year ended March 31, 2000.
As of March 31, 2000, our sales and marketing force totaled 42 people. This
included 16 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 USC, TSMC, ASE, SPIL, and DTS.
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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
are discontinued. However, our devices are mainly .35 micron technology and
this geometry will likely be available for the next two to three years. 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.
All of our products are single sourced with only one supplier for each
device. Based on our current volumes of production this approach of single
sourcing is reasonable. As our target markets grow, it will be important to
secure sufficient fab capacity. Both of our fabrication suppliers are in the
process of adding additional capacity to respond to a worldwide capacity
shortage for wafers.
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 10 patents in the United States and
six 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, 10
pending Japanese patent applications, 10 pending Korean patent applications,
two pending Taiwanese patent applications and four 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., ST
Microelectronics, 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, 2000, we employed a total of 165 full-time employees,
including 79 in research and development, 42 in sales and marketing, 27 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.
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ITEM 2. PROPERTIES:
We lease offices in Thornhill, Ontario, Canada and Alviso, 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.
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, 2000.
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. We have not listed our shares 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.............................................. $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
Second Quarter............................................. $28.125 $16.250
Third Quarter.............................................. $30.688 $16.625
Fourth Quarter............................................. $27.875 $15.000
2000 Calendar year
First Quarter.............................................. $25.250 $14.875
</TABLE>
As of May 31, 2000, we had approximately 330 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.
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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 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
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. 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%.
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.
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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
Year Ended Ended
March 31, March 31, Year Ended May 31,
---------- ---------- -------------------------
2000 1999 1998 1997 1996
---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues..................... $53,332 $37,738 $15,988 $ 4,527 $ 1,524
Cost of revenues............. 17,021 14,062 4,869 2,983 434
------- ------- ------- ------- -------
Gross profit................. 36,311 23,676 11,119 1,544 1,090
Operating expenses:
Research and development... 15,098 9,275 6,210 2,888 2,097
Selling, general and
administrative............ 12,364 10,307 6,137 4,833 2,665
Merger related costs....... 3,455 -- -- -- --
------- ------- ------- ------- -------
Total operating
expenses................ 30,917 19,582 12,347 7,721 4,762
------- ------- ------- ------- -------
Income (loss) from
operations.................. 5,394 4,094 (1,228) (6,177) (3,672)
Interest income (expense).... 1,941 1,436 773 184 (143)
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 7,335 5,530 (455) (5,993) (3,815)
Provision for income taxes... 1,327 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)............ $ 6,008 $ 5,530 $ (455) $(5,993) $(3,815)
======= ======= ======= ======= =======
Earnings (loss) per share
Basic....................... $ 0.32 $ 0.31 $ (0.04) $ (0.63) $ (0.63)
Diluted..................... $ 0.30 $ 0.29 $ (0.04) $ (0.63) $ (0.63)
Weighted average number of
common shares outstanding:
Basic....................... 18,756 18,027 11,634 9,447 6,071
Diluted..................... 19,922 19,365 11,634 9,447 6,071
Balance Sheet Data:
Cash and cash equivalents.... $42,942 $38,479 $38,401 $ 4,714 $ 1,533
Working capital.............. 50,661 50,131 42,996 7,743 1,689
Total assets................. 71,791 64,815 53,452 11,027 5,200
Total long-term debt, net of
current portion............. 518 504 1,235 794 1,406
Shareholders' equity......... 65,247 55,408 47,163 9,081 1,322
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Overview
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.
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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.
Until 1999 our costs of finished products from our semiconductor suppliers
were negotiated at fixed prices on an annual basis, and were not dependent on
our suppliers' manufacturing yields. If we cancelled a purchase order to a
supplier, we paid cancellation penalties based on the status of the work in
process. We had limited ability to reschedule our purchase orders and,
therefore, we had to place purchase orders for products before we received
purchase orders from our customers. This restricted our ability to react to
fluctuations in demand for our products and exposed us to the risk of having
either too much or not enough of a particular product. We regularly evaluate
the carrying value of inventory held. For the year ended March 31, 2000, we
recorded provisions totaling $550,000 for declines in inventory value and for
write downs of excess inventory. In 1999 we signed agreements with suppliers in
Asia and now 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 can be carried forward for periods in excess of ten years, and in
some cases, indefinitely. 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 10 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, we
adopted a new fiscal year. Our fiscal year now runs 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 in this Form 10-K has been restated to combine our past
results with those of Paradise, as required by pooling-of-interests accounting
for business combinations.
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Results of operations
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>
Year Ended Ten Months Ended Year Ended
March 31, 2000 March 31, 1999 May 31, 1998
-------------- ---------------- ------------
<S> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0%
Cost of revenues.............. 31.9 37.3 30.5
----- ----- -----
Gross profit.................. 68.1 62.7 69.5
Operating expenses:
Research and development.... 28.3 24.6 38.8
Selling, general and
administrative............. 23.2 27.3 38.4
Merger related costs........ 6.5 -- --
----- ----- -----
Total operating expenses.. 58.0 51.9 77.2
----- ----- -----
Income (loss) from
operations................... 10.1 10.8 (7.7)
Interest income............... 3.7 3.8 4.8
----- ----- -----
Income (loss) before income
taxes........................ 13.8 14.6 (2.9)
Provision for income taxes.... 2.5 -- --
----- ----- -----
Net income (loss)............. 11.3% 14.6% (2.9)%
===== ===== =====
</TABLE>
Total Revenues
Total revenues for the year ended March 31, 2000 increased by $15.6 million
to $53.3 million from $37.7 million in the ten months ended March 31, 1999, an
increase of 41.3%. Total revenues for the ten months ended March 31, 1999
increased $21.7 million or 136% from $16.0 million in the year ended May 31,
1998. The increase in total revenues over the last two fiscal periods was
primarily due to increased demand for our products in the flat panel monitor
market.
Revenues from the flat panel monitor market increased to $36.8 million or
69.0% of total revenues in the year ended March 31, 2000 from $26.4 million or
70.0% of total revenues in the ten months ended March 31, 1999, and from $5.9
million or 37.2% in the year ended May 31, 1998. This increase was a result of
our increasing our share of that market and its overall growth and a longer
fiscal period, 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
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.
During calendar 1999 there was a lack of capacity to manufacture a
sufficient number of LCD panels to satisfy the increasing demand. This lack of
panel availability resulted in an increase in the cost of LCD panels, which in
turn, resulted in an increase in the retail selling price of flat panel
computer monitors to about $1,200 by the end of the year. The increase in
retail selling prices in 1999 resulted in a reduced rate of growth for the flat
panel monitor market through reduced end consumer demand, which caused a build-
up of analog interface monitor inventories. This inventory build-up temporarily
reduced demand for our products in the second half of fiscal 2000, as vendors
sought to reduce their monitor inventory levels.
Gross Profit. Gross profit for the year ended March 31, 2000 increased to
$36.3 million from $23.7 million in the ten months ended March 31, 1999 and
from $11.1 million in fiscal 1998. This represents 68.1% of total revenues in
the 2000 period, 62.7% of total revenues in the 1999 fiscal period and 69.5% of
total
12
<PAGE>
revenues in fiscal 1998. The increase in gross profit percentage in the fiscal
2000 period was primarily attributable to a more favorable mix of products
sold, including the transition of customers to newer, cost-reduced products and
products that have more integrated functionality.
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 year ended March 31, 2000 increased
to $15.1 million from $9.3 million in the ten months ended March 31, 1999 and
from $6.2 million in fiscal 1998. These expenses represented 28.3% of total
revenues in the 2000 period, 24.6% in the 1999 period, and 38.8% of total
revenues in fiscal 1998. 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
increase in expense as a percentage of total revenues resulted from the slower
rate of growth in total revenues during the second half of fiscal 2000, while
we continued to make significant investment in research and development
activities.
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 $12.4 million in the year ended March
31, 2000, $10.3 million in the ten months ended March 31, 1999, and $6.1
million in fiscal 1998. These expenses represented 23.2% of total revenues in
the 2000 period, 27.3% of total revenues in the 1999 fiscal period, and 38.4%
of total revenues in fiscal 1998. 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 year ended March 31, 2000 was $1.9
million, compared with $1.4 million in fiscal 1999, and $0.8 million in fiscal
1998. The increase in interest income from fiscal 1999 was primarily because of
the longer fiscal period and higher average balances of cash and cash
equivalents. The increase from fiscal 1998 resulted from 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.
Provision for Income Taxes. In previous fiscal periods, non-capital losses
have been available to reduce any tax expense to zero. Having utilized all
Canadian federal non-capital losses, a tax expense was recorded against income
in the current fiscal year. However, there were no cash taxes payable at March
31, 2000 due to the availability of investment tax credits which eliminated any
tax liability. Future income tax provisions will depend on our effective tax
rates and the distribution of taxable income between taxation jurisdictions.
13
<PAGE>
Quarterly results of operations
The following table shows our unaudited quarterly statement of operations
data for the most recent seven quarters reported. This includes the four fiscal
quarters ended March 31, 2000 and the three 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
------------------------------------------------------------
March December September June February November August
2000 1999 1999 1999 1999 1998 1998
------- -------- --------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $10,605 $10,059 $16,362 $16,306 $15,760 $10,627 $6,672
Cost of revenues........ 3,492 3,263 5,002 5,264 5,817 4,315 2,170
------- ------- ------- ------- ------- ------- ------
Gross profit............ 7,113 6,796 11,360 11,042 9,943 6,312 4,502
Operating expenses:
Research and
development.......... 3,875 4,082 3,741 3,400 2,993 2,412 2,187
Selling, general and
administrative....... 2,988 2,991 3,112 3,273 3,459 2,889 2,117
Merger related costs.. -- -- -- 3,455 -- -- --
------- ------- ------- ------- ------- ------- ------
Total operating
expenses............... 6,863 7,073 6,853 10,128 6,452 5,301 4,304
------- ------- ------- ------- ------- ------- ------
Income (loss) from
operations............. 250 (277) 4,507 914 3,491 1,011 198
Interest income......... 459 550 515 417 415 503 419
------- ------- ------- ------- ------- ------- ------
Income before income
taxes.................. 709 273 5,022 1,331 3,906 1,514 617
Provision for income
taxes.................. 200 73 996 58 -- -- --
------- ------- ------- ------- ------- ------- ------
Net income.............. $ 509 $ 200 $ 4,026 $ 1,273 $ 3,906 $ 1,514 $ 617
======= ======= ======= ======= ======= ======= ======
</TABLE>
Sales in the quarters ended September 30, 1999 and June 30, 1999 were
positively impacted by significant reductions in retail selling prices of the
end products, which declined from approximately $2,500 in early calendar 1998
to under $1,000 in early calendar 1999. However, during calendar 1999 there was
a lack of capacity to manufacture a sufficient number of LCD panels to satisfy
the increasing demand. This lack of panel availability resulted in an increase
in the cost of LCD panels, which in turn, resulted in an increase in the retail
selling price of flat panel computer monitors to about $1,200 by the end of the
year. The increase in retail selling prices in 1999 resulted in a reduced rate
of growth for the flat panel monitor market, temporarily negatively impacting
demand for our products in the quarters ended March 31, 2000 and December 31,
1999. 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 varied
from quarter to quarter due to increased staff for sales and customer support
activities, and variable commissions based on sales levels.
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
14
<PAGE>
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 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 $42.9 million at March 31, 2000, $38.5
million at March 31, 1999, and $38.4 million at May 31, 1998. Net cash
generated from operations was $13.5 million for the year ended March 31, 2000
compared to cash used in operations of $1.4 million in both the ten months
ended March 31, 1999 and the year ended May 31, 1998. The increase in cash flow
compared with prior periods was primarily a result of lower working capital
balances, due in part to effective working capital management, and to lower
sales levels during the second half of the fiscal year. The significant revenue
growth experienced during fiscal 1999 resulted in a need to grant larger
amounts of credit to our customers and therefore to increase investment in
accounts receivable. It also resulted in a need to stock additional quantities
of products to meet increased customer demands, thereby increasing our
investment in inventories.
Net cash used in investing activities was $11.2 million in the year ended
March 31, 2000, $1.9 million in the ten months ended March 31, 1999, and $2.3
million in fiscal 1998. This was used for the purchase of capital assets. The
increase in fiscal 2000 resulted from the continued expansion of our business
through development of new products which requires higher levels of capital
equipment purchases and investments in leasehold improvements in new facilities
in Thornhill and Alviso. 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 $2.2 million for the year
ended March 31, 2000 and $3.3 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 $37.5 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 and $5.2 million received on issue of Paradise stock
prior to our merger.
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.
15
<PAGE>
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:
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 year ended March 31, 2000, 69.0% of our revenues were derived from
sales to customers in the flat panel computer monitor market. This and other
potential markets may not develop as expected, which would harm our business.
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. Our ability to sell
products into these markets will depend upon demand for the functionality
provided by our products. For example, some computer industry participants have
proposed that the image processing functions performed by our products should
be incorporated within the computer itself rather than in the flat panel
computer monitor. If this were to occur, we would be subject to direct
competition from suppliers of graphics integrated circuits, many of whom have
resources greater than ours. The failure of our products to be accepted in the
flat panel computer monitor market in particular would harm our business.
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.
16
<PAGE>
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., ST Microelectronics, 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 semiconductor products are complex and are difficult to manufacture cost-
effectively.
The manufacture of semiconductors is a complex process. It is often
difficult for semiconductor foundries to achieve acceptable product yields.
Product yields depend on both our product design and the manufacturing process
technology unique to the semiconductor foundry. Since low yields may result
from either design or process difficulties, identifying yield problems can only
occur well into the production cycle, when actual product exists which can be
analyzed and tested.
Defects in our products could increase our costs and delay our product
shipments.
Although we test our products, they are complex and may contain defects and
errors. In the past we have encountered defects and errors in our products.
Delivery of products with defects or reliability, quality or compatibility
problems may damage our reputation and our ability to retain existing customers
and attract new customers. In addition, product defects and errors could result
in additional development costs, diversion of technical resources, delayed
product shipments, increased product returns, and product liability claims
against us which may not be fully covered by insurance. Any of these could harm
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 or environmental risks in the countries where the
manufacturing facilities are located,
. reduced control over quality assurance,
. difficulty of management of manufacturing costs and quantities,
. potential lack of adequate capacity during periods of excess demand, and
. potential unauthorized use of intellectual property.
We depend upon outside manufacturers to fabricate silicon wafers on which
our integrated circuits are imprinted. These wafers must be of acceptable
quality and in sufficient quantity and the manufacturers must deliver them to
assembly and testing subcontractors on time for packaging into final products.
We have at times experienced delivery delays and long manufacturing lead times.
These manufacturers fabricate, test and assemble products for other companies.
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.
17
<PAGE>
Our third-party wafer foundries, third-party assembly and test subcontractors
and significant customers are located in an area susceptible to earthquakes.
All of our outside foundries and most of our third party assembly and test
subcontractors are located in Taiwan, which is an area susceptible to
earthquakes. In addition, some of our significant customers are located in
Taiwan. Damage caused by earthquakes in Taiwan may result in shortages in water
or electricity or transportation which could limit the production capacity of
our outside foundries and the ability of subcontractors to provide assembly and
test services. Any reduction in production capacity or the ability to provide
assembly and test services could cause delays or shortages in our product
supply, which would harm our business. Customers located in Taiwan were
responsible for 37.1% of our product revenue for the year ended March 31, 2000.
If the facilities or equipment of these customers are damaged by future
earthquakes, they could reduce their purchases of our products, which would
harm our business. In addition, the operations of suppliers to our outside
foundries and our Taiwanese customers could be disrupted by future earthquakes,
which could in turn harm our business by resulting in shortages in our product
supply or reduced purchases of our products.
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 34% of our revenues for the year ended March 31, 2000. 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. The decision by any large customer to decrease or
cease using our products would harm our business.
We do not have long-term commitments from our customers, and we allocate
resources based on our estimates of customer demand.
Our sales are made on the basis of purchase orders rather than long-term
purchase commitments. In addition, our customers may cancel or defer purchase
orders. We manufacture our products according to our estimates of customer
demand. This process requires us to make multiple demand forecast assumptions,
each of which may introduce error into our estimates. If we overestimate
customer demand, we may allocate resources to manufacturing products which we
may not be able to sell. As a result, we would have excess inventory, which
would increase our losses. Conversely, if we underestimate customer demand or
if sufficient manufacturing capacity is unavailable, we would forego revenue
opportunities, lose market share and damage our customer relationships.
Our lengthy sales cycle can result in uncertainty and delays in generating
revenues.
Because our products are based on new technology and standards, a lengthy
sales process, typically requiring several months or more, is often required
before potential customers begin the technical evaluation of our products. This
technical evaluation can then exceed six months. It can take an additional six
months before a customer commences volume shipments of systems that incorporate
our products. However, even when a manufacturer decides to design our products
into its systems, the manufacturer may never ship systems incorporating our
products. Given our lengthy sales cycle, we experience a delay between the time
we increase expenditures for research and development, sales and marketing
efforts and inventory and the time we generate revenues, if any, from these
expenditures. As a result, our business could be harmed if a significant
customer reduces or delays orders or chooses not to release products
incorporating our products.
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
18
<PAGE>
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 year ended March 31, 2000, sales to regions
outside of North America amounted to 78% 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.
The cyclical nature of the semiconductor industry may lead to significant
variances in the demand for our products.
In the past, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, the
industry has experienced significant fluctuations in anticipation of changes in
general economic conditions, including economic conditions in Asia. This
cyclicality has led to significant variances in product demand and production
capacity. It has also accelerated erosion of average selling prices per unit.
We may experience periodic fluctuations in our future financial results because
of changes in industry-wide conditions.
We may be unable to adequately protect our intellectual property. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect our proprietary
technologies.
We have been issued patents and have a number of pending United States and
foreign patent applications. However, we cannot assure you that any patent will
issue as a result of any applications or, if issued, that any claims allowed
will be sufficiently broad to protect our technology. In addition, it is
possible that existing or future patents may be challenged, invalidated or
circumvented. It may be possible for a third party to copy or otherwise obtain
and use our products, or technology without authorization, develop similar
technology independently or design around our patents. Effective copyright,
trademark and trade secret protection may be unavailable or limited in foreign
countries.
19
<PAGE>
Others may bring infringement claims against us which could be time-consuming
and expensive to defend.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. This litigation is
widespread in the high-technology industry and is particularly prevalent in the
semiconductor industry, where a number of companies aggressively use their
patent portfolios by bringing numerous infringement claims. In addition, in
recent years, there has been an increase in the filing of so-called "nuisance
suits" alleging infringement of intellectual property rights, which pressure
defendants into entering settlement arrangements to quickly dispose of such
suits, regardless of their merits. We may become a party to litigation in the
future to protect our intellectual property or as a result of an alleged
infringement of others' intellectual property. These lawsuits could subject us
to significant liability for damages and invalidate our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. stop selling products or using technology that contain the allegedly
infringing intellectual property;
. attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
. attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of these actions, we may be unable to
manufacture and sell some of our products, which could harm our business.
We are growing rapidly, which strains our management and resources.
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. To manage our
growth effectively, we must:
. implement and improve operational and financial systems;
. train and manage our employee base; and
. attract and retain qualified personnel with relevant experience.
We must also manage multiple relationships with customers, business
partners, and other third parties, such as our foundry and test partners.
Moreover, we will spend substantial amounts of time and money in connection
with our rapid growth and may have unexpected costs. Our systems, procedures or
controls may not be adequate to support our operations and we may not be able
to expand quickly enough to exploit potential market opportunities. Our future
operating results will also depend on expanding sales and marketing, research
and development and administrative support. If we cannot attract qualified
people or manage growth effectively, our business would be seriously harmed.
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.
We may make future acquisitions where advisable and acquisitions involve
numerous risks.
Our growth is dependent upon market growth and our ability to enhance our
existing products and introduce new products on a timely basis. One of the ways
we may address this need to develop new products is through acquisitions of
other companies. Acquisitions involve numerous risks, including the following:
. We may experience difficulty in assimilating the acquired operations and
employees;
20
<PAGE>
. We may be unable to retain the key employees of the acquired operation;
. The acquisition may disrupt our ongoing business;
. We may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures; and
. We may lack the experience to enter into new markets, products or
technologies.
Acquisitions of high-technology companies are inherently risky, and no
assurance can be given that our future acquisitions, if any, will be successful
and will not adversely affect our business, operating results or financial
condition. We must also maintain our ability to manage any such growth
effectively. Failure to manage growth effectively and successfully integrate
acquisitions made by us could materially harm our business and operating
results.
Other factors to consider.
You should also consider the following factors:
The price of our stock fluctuates substantially and may continue to do so.
The stock market has experienced large price and volume fluctuations that
have affected the market price of many technology companies that have often
been unrelated to the operating performance of these companies. These factors,
as well as general economic and political conditions, may materially adversely
affect the market price of our common stock in the future. The market price of
our common stock may fluctuate significantly in response to a number of
factors, including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance;
. changes in financial estimates of securities analysts;
. changes in market valuations of other technology companies;
. announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions;
. the operating and stock price performance of other comparable companies;
and
. the number of our shares that are available for trading by the public
and the trading volume of our shares.
Due to these factors, the price of our stock may decline and the value of
your investment would be reduced. In addition, the stock market experiences
volatility that often is unrelated to the performance of particular companies.
These market fluctuations may cause our stock price to decline regardless of
our performance.
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.
21
<PAGE>
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, 2000 a near-term 10% appreciation
or depreciation would have an immaterial effect on our operating results of
financial condition.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Financial Statements Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Auditors' Report......................................................... 24
Consolidated Balance Sheets.............................................. 25
Consolidated Statements of Operations.................................... 26
Consolidated Statements of Shareholders' Equity.......................... 27
Consolidated Statements of Cash Flows.................................... 28
Notes to Consolidated Financial Statements............................... 29
</TABLE>
23
<PAGE>
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 March 31, 2000 and the consolidated
statements of operations, shareholders' equity and cash flows for the year
ended March 31, 2000, the ten month period ended March 31, 1999, and the year
ended May 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards 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 March 31, 2000 and the results of operations and its cash flows for
the year ended March 31, 2000, the ten month period ended March 31, 1999, and
the year ended May 31, 1998 in accordance with generally accepted accounting
principles in the United States.
Toronto, Canada KPMG LLP
April 28, 2000 Chartered Accountants
24
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
March 31, March 31,
ASSETS 2000 1999
------ --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $42,942 $ 38,479
Accounts receivable trade, net of allowance for doubtful
accounts of $230 in 2000 and $124 in 1999.................... 6,023 9,413
Income taxes recoverable...................................... 1,111 1,221
Inventory..................................................... 4,714 6,963
Other......................................................... 1,897 2,958
------- --------
Total current assets........................................ 56,687 59,034
Capital assets (note 4)......................................... 12,000 3,871
Deferred income taxes (note10).................................. 3,024 1,830
Other........................................................... 80 80
------- --------
Total assets................................................ $71,791 $ 64,815
======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.............................................. $ 1,963 $ 2,428
Accrued liabilities........................................... 3,967 4,865
Current portion of loan payable (note 6)...................... 96 1,610
------- --------
Total current liabilities................................... 6,026 8,903
Long-term liabilities:
Loan payable (note 6)......................................... 518 504
------- --------
Total liabilities........................................... 6,544 9,407
------- --------
Shareholders' equity (note 7):
Share capital:
Special shares:
Authorized--1,000,000,000 special shares
Issued and outstanding--none at March 31, 1999 and
2000................................................... -- --
Common shares:
Authorized--1,000,000,000 common shares
Issued and outstanding--19,140,482 at March 31, 2000 and
18,345,093 shares at March 31, 1999.................... 72,225 68,447
Additional paid in capital.................................... 1,293 1,293
Cumulative other comprehensive loss........................... (94) (94)
Deferred compensation......................................... (273) (326)
Deficit....................................................... (7,904) (13,912)
------- --------
Total shareholders' equity.................................. 65,247 55,408
------- --------
Total liabilities and shareholders' equity.................. $71,791 $ 64,815
======= ========
Commitments and contingencies (note 12)
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................... $53,332 $37,738 $15,988
Cost of revenues............................. 17,021 14,062 4,869
------- ------- -------
Gross profit................................. 36,311 23,676 11,119
Operating expenses:
Research and development (note 9).......... 15,098 9,275 6,210
Selling, general and administrative........ 12,364 10,307 6,137
Merger related costs (note 3).............. 3,455 -- --
------- ------- -------
Total operating expenses................. 30,917 19,582 12,347
------- ------- -------
Income (loss) from operations................ 5,394 4,094 (1,228)
Interest income.............................. 1,941 1,436 773
------- ------- -------
Income (loss) before income taxes............ 7,335 5,530 (455)
Provision for income taxes (note 10)......... 1,327 -- --
------- ------- -------
Net income (loss)............................ $ 6,008 $ 5,530 $ (455)
======= ======= =======
Earnings (loss) per share:
Basic...................................... $ 0.32 $ 0.31 $ (0.04)
Diluted.................................... $ 0.30 $ 0.29 $ (0.04)
Weighted average number of common shares
outstanding (in thousands):
Basic...................................... 18,756 18,027 11,634
Diluted.................................... 19,922 19,365 11,634
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Common share
Preference purchase Special and bonus Share
shares Common shares Additional warrants warrants purchase
---------------- ------------------- paid in ---------------- -------------------- loans
Number Amount Number Amount Capital Number Amount Number Amount receivable
-------- ------ ---------- ------- ---------- -------- ------ ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, May
31, 1997........ 227,200 $1,121 10,004,214 $15,651 $ 690 946,349 $ 1 17,800,000 $10,809 $(36)
Loss............ -- -- -- -- -- -- -- -- -- --
Issued.......... -- -- 3,995,170 40,330 -- -- -- -- -- --
Issued in
exchange for
shareholder
loans
receivable...... -- -- 230,568 1 39 -- -- -- -- (40)
Additional paid
in capital
related to
shares issued... -- -- -- 214 -- -- -- -- -- --
Issued on
exercise of
common share
purchase
warrants........ -- -- 2,000 4 -- (2,000) -- -- -- --
Issued on
exercise of
stock options... -- -- 141,998 169 -- -- -- -- -- (88)
Issue costs..... -- -- -- (2,036) -- -- -- -- -- --
Conversion of
preference
shares.......... (227,200) (1,121) 227,280 1,121 -- -- -- -- -- --
Conversion of
common share
purchase
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........ -- -- 17,534,260 66,303 729 -- -- -- -- (164)
Net income...... -- -- -- -- -- -- -- -- -- --
Repurchased at
cost and
cancellation of
shareholder note
receivable...... -- -- (230,568) (1) (39) -- -- -- -- 40
Issue of common
share purchase
warrants........ -- -- -- -- 58 -- -- -- -- --
Issued on
exercise of
stock options... -- -- 1,041,401 2,145 157 -- -- -- -- --
Repayment of
share purchase
loans
receivable...... -- -- -- -- -- -- -- -- -- 124
Deferred
compensation
related to stock
options......... -- -- -- -- 388 -- -- -- -- --
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- -- -- -- --
-------- ------ ---------- ------- ------ -------- --- ----------- ------- ----
Balances, March
31, 1999........ -- -- 18,345,093 68,447 1,293 -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- --
Issued on
exercise of
stock options... -- -- 795,389 3,778 -- -- -- -- -- --
Amortization of
deferred
compensation
related to stock
options......... -- -- -- -- -- -- -- -- -- --
-------- ------ ---------- ------- ------ -------- --- ----------- ------- ----
Balances, March
31, 2000........ -- $ -- 19,140,482 $72,225 $1,293 -- $-- -- $ -- $ --
======== ====== ========== ======= ====== ======== === =========== ======= ====
<CAPTION>
Cumulative
other Total
comprehensive Deferred shareholders'
income (loss) compensation Deficit Equity
------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Balances, May
31, 1997........ $ 46 $(214) $(18,987) $ 9,081
Loss............ -- -- (455) (455)
Issued.......... -- -- -- 40,330
Issued in
exchange for
shareholder
loans
receivable...... -- -- -- --
Additional paid
in capital
related to
shares issued... -- -- -- 214
Issued on
exercise of
common share
purchase
warrants........ -- -- -- 4
Issued on
exercise of
stock options... -- -- -- 81
Issue costs..... -- -- -- (2,036)
Conversion of
preference
shares.......... -- -- -- --
Conversion of
common share
purchase
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........ (94) (169) (19,442) 47,163
Net income...... -- -- 5,530 5,530
Repurchased at
cost and
cancellation of
shareholder note
receivable...... -- -- -- --
Issue of common
share purchase
warrants........ -- -- -- 58
Issued on
exercise of
stock options... -- -- -- 2,302
Repayment of
share purchase
loans
receivable...... -- -- -- 124
Deferred
compensation
related to stock
options......... -- (388) -- --
Amortization of
deferred
compensation
related to stock
options......... -- 231 -- 231
------------- ------------ --------- -------------
Balances, March
31, 1999........ (94) (326) (13,912) 55,408
Net income...... -- -- 6,008 6,008
Issued on
exercise of
stock options... -- -- -- 3,778
Amortization of
deferred
compensation
related to stock
options......... -- 53 -- --
------------- ------------ --------- -------------
Balances, March
31, 2000........ $(94) $(273) $ (7,904) $65,247
============= ============ ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 6,008 $ 5,530 $ (455)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Amortization.............................. 3,071 1,132 913
Non-cash compensation expense related to
stock options and shares issued.......... 53 231 295
Inventory provision....................... 550 -- 86
Deferred income taxes..................... 258 -- --
Change in operating assets and
liabilities:
Accounts receivable trade............... 3,390 (6,682) (1,847)
Income taxes recoverable................ (1,025) 419 (301)
Inventory............................... 1,699 (3,513) (1,830)
Other................................... 1,084 (2,916) 7
Accounts payable........................ (485) 632 1,000
Accrued liabilities..................... (1,086) 3,813 694
-------- ------- -------
Net cash from (used in) operating
activities........................... 13,517 (1,354) (1,438)
Cash flows from investing activities:
Additions to capital assets................. (11,200) (1,901) (2,293)
-------- ------- -------
Cash used in investing activities..... (11,200) (1,901) (2,293)
Cash flows from financing activities:
Proceeds from:
Issue of common shares and common share
purchase warrants, net of issue costs.... 3,778 2,359 37,090
Loans payable............................. -- 1,034 518
Repayment of:
Loans payable............................. (1,550) (205) --
Repayment (issuance) of share purchase
loans...................................... -- 119 (94)
-------- ------- -------
Net cash provided by financing
activities........................... 2,228 3,307 37,514
Effect of currency translation on cash
balances..................................... (82) 26 (96)
-------- ------- -------
Increase in cash and cash equivalents......... 4,463 78 33,687
Cash and cash equivalents, beginning of
period....................................... 38,479 38,401 4,714
-------- ------- -------
Cash and cash equivalents, end of period...... $ 42,942 $38,479 $38,401
======== ======= =======
Supplemental cash flow information:
Cash paid for interest...................... $ 24 $ 15 $ 5
Cash paid for income taxes.................. $ 1,368 $ 56 $ --
Supplemental disclosure of non-cash
operating activities:
Interest expense............................ $ -- $ 132 $ --
Issuance of warrants........................ $ -- $ 58 $ --
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of common stock for notes
receivable................................. $ -- $ -- $ 40
Repurchase of common stock by cancellation
of notes receivable........................ $ -- $ 40 $ --
Deferred compensation related to stock
options.................................... $ -- $ 388 $ 250
</TABLE>
See accompanying notes to consolidated financial statements.
28
<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 subsidiaries. All material inter-company transactions and balances have
been eliminated.
The balance sheet as at March 31, 1999, and the statements of operations,
shareholders' equity and cash flows for the ten months ended March 31, 1999 and
the year ended May 31, 1998 have been restated to reflect the business
combination described in Note 3.
In May 1999, Genesis' Board of Directors approved a change in the fiscal
year end to March 31, effective March 31, 1999. Genesis previously reported its
results on the basis of a fiscal year of June 1 through May 31.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and cash equivalents
All highly liquid investments with an original maturity of three months or
less at the date of acquisition are classified as cash equivalents.
Inventory
Inventory consists principally of finished goods and is stated at the lower
of cost (first-in, first-out) or market.
Capital assets
Capital assets are stated at cost. Amortization is recorded using the
following methods and annual rates over the estimated useful lives of the
assets:
<TABLE>
<S> <C>
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
</TABLE>
29
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Genesis regularly reviews the carrying values of its capital assets. If the
carrying value of its capital assets exceeds the estimated 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.
Currency translation
Effective June 1, 1998, the U.S. dollar became the functional currency of
Genesis and of its subsidiaries 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.
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 subsidiaries 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 classified 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, 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
30
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Credit losses have been within management's range of expectations.
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
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 periods ended March 31, 2000 and 1999, there is no difference for Genesis
between net income and comprehensive income. For the fiscal year ended May 31,
1998, the difference between net income and comprehensive income arises solely
from foreign currency translation adjustments. As a result, total comprehensive
loss is $595,000 for the year ended May 31, 1998.
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.
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,
31
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, as
amended by SFAS 137, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 is not expected to be material to Genesis'
operations.
3. Business combination
On May 28, 1999, Genesis issued 3,966,557 common shares for all the
outstanding common shares, preference shares and warrants of Paradise
Electronics, Inc. ("Paradise"). Paradise designs, develops and markets analog
and digital mixed-signal integrated circuits for controlling flat panel
monitors. Genesis also assumed remaining outstanding stock options that were
converted to options to purchase 533,333 shares of Genesis common stock. This
business combination has been accounted for as a pooling-of-interests
combination. No adjustments were necessary to conform accounting policies of
the two entities. Genesis' historical consolidated financial statements
presented in these financial statements have been restated to include the
accounts and results of operations of Paradise, as presented in the table below
(in thousands):
<TABLE>
<CAPTION>
Ten Months
Ended Year Ended
March 31, May 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenue
Genesis........................................... $29,664 $15,747
Paradise.......................................... 8,074 241
------- -------
Total........................................... $37,738 $15,988
======= =======
Net income (loss)
Genesis........................................... $ 6,649 $ 3,113
Paradise.......................................... (1,119) (3,568)
------- -------
Total........................................... $ 5,530 $ (455)
======= =======
</TABLE>
Merger related costs of $3,455,000 associated with the business combination
were expensed during the year ended March 31, 2000.
4. Capital assets
Capital assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Property and equipment............................... $ 9,238 $4,041
Computer software.................................... 4,537 2,679
Leasehold improvements............................... 3,610 189
Patents.............................................. 595 431
-------- ------
17,980 7,340
Less accumulated amortization........................ (5,980) (3,469)
-------- ------
$ 12,000 $3,871
======== ======
</TABLE>
5. 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
32
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000 and 1999 there were no borrowings outstanding
under this facility.
6. 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,
2000
---------
<S> <C>
2001............................................................ $ 96
2002............................................................ 96
2003............................................................ 96
2004............................................................ 96
2005............................................................ 96
2006 and thereafter............................................. 134
----
614
Less current portion............................................ 96
----
$518
====
</TABLE>
The fair value of the loan payable was $481,000 at March 31, 2000, and
$599,000 at March 31, 1999, 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.
7. Shareholders' equity
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.
33
<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 of the
Company. In July 1997, Genesis loaned $94,000 to two executive officers of
Genesis 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 by the executive officers during the year ended March
31, 1999.
8. 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.
1997 Employee Stock Option Plan
The 1997 Employee Stock Option Plan (the "1997 Employee Plan") provided for
the granting to employees of incentive stock options, non-statutory stock
options and stock purchase rights for up to 800,000 common shares plus an
annual increase to be added on the first day of each fiscal year equal to the
lesser of (i) 2,000,000 Shares, (ii) 3.5% of the outstanding shares on such
date, or (iii) a lesser amount determined by the Board. The exercise price of
incentive stock options granted under the 1997 Employee Plan was not to be less
than 100% (110% in the case of any options granted to a person who held more
than 10% of the total
34
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 do not exceed 10 years (five years in the case of any
options granted to a person who held more than 10% of the total combined voting
power of all classes of shares of Genesis) and vest over four years. As of
March 31, 2000, there were 91,767 shares available for grant under the 1997
Employee Plan.
1997 Paradise Stock Option Plan
The 1997 Paradise Stock Option Plan (the "Paradise Plan") provided for the
granting of Incentive Stock Options (ISOs) to Paradise employees and Non-
statutory Stock Options (NSOs) to Paradise employees, directors, and
consultants. As a result of the merger of Paradise with Genesis, each
outstanding option or right to purchase shares of Paradise common stock is
exercisable for Genesis common shares, adjusted to reflect the exchange ratio
of Genesis common shares for Paradise common stock in the merger. No additional
options will be granted under the Paradise Plan. Upon exercise, expiration or
cancellation of all of the options granted under the Paradise Plan, this plan
will be terminated.
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
options for 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, 2000,
there were 89,375 shares available for grant under the 1997 Non-Employee Plan.
2000 Non-Statutory Stock Option Plan
The 2000 Non-Statutory Stock Option Plan (the "the 2000 Employee Plan)
provides for the granting to employees of non-statutory stock options for up to
1,000,000. The exercise price of stock options granted under the 2000 Employee
Plan may not be less than 100% of the fair market value of the common shares
subject to the option at the date of grant. The term of the options may not
exceed 10 years and generally vest over four years. As at March 31, 2000, there
were 659,500 shares available for grant under the 2000 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, 2000, 48,979 common shares were available for
issuance under this plan.
35
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Details of stock option transactions are as follows:
<TABLE>
<CAPTION>
Number of Option price Weighted average
shares per share exercise price per share
--------- -------------- ------------------------
<S> <C> <C> <C>
Balances, May 31, 1997...... 981,650 $ 0.70 - 4.91 $ 3.09
Issued.................... 1,060,809 0.17 - 14.00 3.92
Exercised................. (118,941) 0.17 - 3.43 1.43
Cancelled................. (19,250) 3.43 - 4.80 3.86
---------
Balances, May 31, 1998...... 1,904,268 0.17 - 14.00 3.65
Issued.................... 1,089,340 0.78 - 31.50 8.33
Exercised................. (946,935) 0.17 - 16.69 2.04
Cancelled................. (79,405) 0.17 - 29.93 7.36
---------
Balances, March 31, 1999.... 1,967,268 0.17 - 31.50 7.64
Issued.................... 1,508,789 15.25 - 27.13 18.89
Exercised................. (616,717) 0.17 - 20.81 4.67
Cancelled................. (342,914) 0.78 - 31.50 12.97
---------
Balances, March 31, 2000.... 2,516,426 0.17 - 31.50 13.50
=========
</TABLE>
There were 533,580 options at March 31, 2000, 481,848 options at March 31,
1999, and 686,716 options at May 31, 1998 that had vested and were exercisable,
with a weighted average exercise price per share of $7.54 at March 31, 2000,
$5.80 at March 31, 1999, and $3.20 at May 31, 1998. The weighted average
remaining contractual life of the options outstanding at March 31, 2000 was
8.45 years, at March 31, 1999 was 8.12 years, and at May 31, 1998 was 6.32
years.
Genesis recorded no deferred compensation for the year ended March 31, 2000,
$388,000 for the ten months ended March 31, 1999, and $36,000 for the year
ended May 31, 1998. The amortization of deferred compensation is charged to
operations and is amortized over the vesting period of the options.
Amortization of deferred compensation was $53,000 for the year ended March 31,
2000, $231,000 for the ten months ended March 31, 1999, and $81,000 for the
year ended May 31, 1998.
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
were made using the Black-Scholes option pricing model using a dividend yield
of 0% and the assumptions noted below in the table.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rates....................... 5% 5% 5%
Volatility..................................... 0.8780 0.9174 0.8739
Expected life of option in years............... 5 5 5
</TABLE>
36
<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 2000 would have decreased
by approximately $9,557,000 or by $0.51 for basic earnings per share and by
$0.49 for diluted earnings per share. The net income and earnings per share for
fiscal 1999 would have decreased by approximately $3,010,000 or by $0.17 for
basic earnings per share and by $0.16 for diluted earnings per share. The net
income and earnings per share for fiscal 1998 would have decreased by
approximately $223,000 or by $0.02 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 2000, 1999
and 1998 are $15.45, $10.47 and $5.85, respectively.
9. Research and development
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------------- ----------
<S> <C> <C> <C>
Gross research and development
expenditures.......................... $ 16,065 $10,261 $7,100
Less investment tax credits and
government assistance................. (967) (986) (890)
-------- ------- ------
$ 15,098 $ 9,275 $6,210
======== ======= ======
</TABLE>
10. Income taxes
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------------- ----------
<S> <C> <C> <C>
Current.................................. $ 1,069 $ -- $ --
Deferred................................. 258 -- --
------- ------ ------
$ 1,327 $ -- $ --
======= ====== ======
</TABLE>
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>
Year Ended Ten Months Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------------- ----------
<S> <C> <C> <C>
Basic rate applied to income (loss)
before provision for income taxes...... $ 3,227 $ 2,473 $ (182)
Adjustments resulting from:
Permanent difference arising from
stock option deduction............... (188) -- --
Non-deductible expenses............... 65 -- --
Provincial research and development
deductions........................... (670) -- (95)
Small business deduction.............. -- -- (22)
Foreign tax and exchange rate
differences.......................... -- 45 830
Utilization of loss carry-forwards.... -- (1,142) (1,744)
Utilization of research and
development expenses deferred for
income tax purposes.................. -- (1,621) --
Change in valuation allowance......... (1,096) -- --
Other items........................... (11) (135) --
------- ------- -------
1,327 (380) (1,213)
Unrecognized benefit of losses carried
forward................................ -- 380 1,213
------- ------- -------
$ 1,327 $ -- $ --
======= ======= =======
</TABLE>
37
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pretax income from foreign operations was $427,000 for the year ended March
31, 2000, $2,790,000 for the ten months ended March 31, 1999. Pretax loss from
foreign operations was $8,033,000 for the year ended May 31, 1998.
Significant components of Genesis' deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31
----------------
2000 1999
------- -------
<S> <C> <C>
Research and development expenses deferred for income tax
purposes................................................... $ -- $ 87
Net operating loss carryforwards............................ 4,282 2,724
Investment tax credit carryforwards......................... 1,035 350
Deferred interest charges................................... 1,492 796
Issue costs................................................. 983 1,355
Merger related costs........................................ 621 --
Other....................................................... (795) 650
------- -------
Net deferred tax asset...................................... 7,618 5,962
Less valuation allowance.................................... (4,594) (4,132)
------- -------
$ 3,024 $ 1,830
======= =======
</TABLE>
The valuation allowance increased by approximately $462,000 during the year
ended March 31, 2000, primarily as a result of not recognizing the benefit of
net operating losses. The valuation allowance decreased by $2,640,000 during
the ten months ended March 31, 1999, and by $1,446,000 during the year ended
May 31, 1998 primarily as a result of utilization of net operating losses and
research and development expenses deferred for income tax purposes.
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 $23,000,000 prior to the expiration of
the net operating loss carryforwards in the years 2009 to 2015. 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.
38
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. 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
Year Ended Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted net income
(loss) per share:
Net income (loss).......................... $6,008 $5,530 $ (455)
====== ====== ======
Denominator for basic net income (loss) per
share:
Weighted average common shares............. 18,756 18,027 11,634
====== ====== ======
Basic net income (loss) per share............ $ 0.32 $ 0.31 $(0.04)
====== ====== ======
Denominator for diluted net income (loss) per
share:
Weighted average common shares............. 18,756 18,027 11,634
Stock options and warrants................. 1,166 1,338 --
------ ------ ------
Shares used in computing diluted net income
per share................................... 19,922 19,365 11,634
====== ====== ======
Diluted net income (loss) per share.......... $ 0.30 $ 0.29 $(0.04)
====== ====== ======
</TABLE>
Due to the net loss in the year ended May 31, 1998, all potential common
shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted net income (loss) per share.
12. Commitments and contingencies
Lease commitments
Genesis leases premises in Ontario and 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> <C>
2001........................... $ 2,211
2002........................... 2,127
2003........................... 2,087
2004........................... 2,080
2005........................... 2,096
Thereafter..................... 5,930
--------
$ 16,531
========
</TABLE>
Rental expense was $1,187,000 for the year ended March 31, 2000, $651,000
for the ten months ended March 31, 1999, and $463,000 for the year ended May
31, 1998.
Supply agreements
Genesis has supply agreements with several manufacturers for the supply of
its semiconductor products. Through March 31, 2000, each of Genesis'
semiconductor products was produced by a sole source
39
<PAGE>
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
manufacturer. Should a 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.
13. Segment information
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.
Geographic revenue information 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:
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
March 31, March 31, May 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
United States........................... $11,288 $ 7,535 $ 8,165
Japan and Asia.......................... 40,139 28,576 6,859
Canada.................................. 624 300 235
Other................................... 1,281 1,327 729
------- ------- -------
$53,332 $37,738 $15,988
======= ======= =======
</TABLE>
Net long-lived assets by country were as follows:
<TABLE>
<CAPTION>
March 31
---------------
2000 1999
-------- ------
<S> <C> <C>
United States............................................. $ 3,000 $1,291
Canada.................................................... 9,000 2,580
-------- ------
$ 12,000 $3,871
======== ======
</TABLE>
For the year ended March 31, 2000, one customer accounted for 10% of total
revenues. For the ten months ended March 31, 1999, two customers accounted for
16% and 12% of total revenues, respectively. For the year ended May 31, 1998,
two customers accounted for 24% and 23% of total revenues, respectively. At
March 31, 2000, two customers represented 16% and 10% of accounts receivable
trade, respectively. At March 31, 1999, one customer represented 21% of
accounts receivable trade.
40
<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 14, 2000. 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 14, 2000. 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 14, 2000. 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 14, 2000. 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."
41
<PAGE>
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, 2000 and 1999
. Consolidated Statements of Operations for the year ended March 31, 2000,
for the ten months ended March 31, 1999 and for the year ended May 31,
1998
. Consolidated Statements of Shareholders' Equity for the year ended March
31, 2000, for the ten months ended March 31, 1999 and for the year ended
May 31, 1998
. Consolidated Statements of Cash Flows for the year ended March 31, 2000,
for the ten months ended March 31, 1999 and for the year ended May 31,
1998
. 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 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,
2000
42
<PAGE>
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
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>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul M. Russo Chairman June 29, 2000
____________________________________
Paul M. Russo
/s/ Amnon Fisher President and Chief June 29, 2000
____________________________________ Executive Officer
Amnon Fisher
/s/ Eric Erdman Chief Financial Officer and June 29, 2000
____________________________________ Secretary
Eric Erdman
/s/ James E. Donegan Director June 29, 2000
____________________________________
James E. Donegan
/s/ George A. Duguay Director June 29, 2000
____________________________________
George A. Duguay
/s/ Lawrence G. Finch Director June 29, 2000
____________________________________
Lawrence G. Finch
/s/ Alexander S. Lushtak Director June 29, 2000
____________________________________
Alexander S. Lushtak
</TABLE>
43
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
21 Subsidiaries
27.1 Financial Data Schedule for the year ended March 31, 2000
</TABLE>
