SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER:
000-29592
GENESIS MICROCHIP INCORPORATED
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (905) 889-5400
Former name, former address and former fiscal year if
changed since last report.
Former address: N/A
Former Fiscal Year: N/A
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
There were 19,405,892 shares of the registrant's common shares issued
and outstanding as of December 31, 2000.
GENESIS MICROCHIP INCORPORATED
FORM 10-Q
THREE MONTHS ENDED DECEMBER 31, 2000
Index
Item Number Page
----------- ----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 2000 1
Condensed Consolidated Statements of Operations for the three and nine month
periods ended December 31, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
December 31, 2000 and December 31, 1999 3
Notes To Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II: Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 14
Signature
* No information has been provided because this item is not applicable.
-i-
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
ASSETS
December 31, March 31,
2000 2000
(unaudited)
---------------------------
Current assets:
Cash and cash equivalents $ 38,733 $42,942
Accounts receivable trade, net of allowance for doubtful accounts
of $230 at December 31, 2000 and March 31, 2000
11,747 6,023
Income taxes recoverable 1,659 1,111
Inventory 13,487 4,714
Investment held for resale 1,100 1,100
Other 3,410 797
---------------------------
Total current assets 70,136 56,687
Capital assets 10,305 12,000
Deferred income taxes 3,429 3,024
Investment, at cost 100 80
---------------------------
Total assets $ 83,970 $71,791
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,337 $1,963
Accrued liabilities 2,598 3,967
Current portion of loans payable 92 96
---------------------------
Total current liabilities 11,027 6,026
Long-term liabilities:
Loans payable 418 518
---------------------------
Total liabilities 11,445 6,544
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - no shares at December 31 or
March 31 Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 19,405,892 shares at
December 31, 2000 and 19,140,482 shares
at March 31, 2000 73,929 72,225
Additional paid in capital 1,293 1,293
Cumulative other comprehensive loss (94) (94)
Deferred compensation (207) (273)
Deficit (2,396) (7,904)
---------------------------
Total shareholders' equity 72,525 65,247
---------------------------
Total liabilities and shareholders' equity $ 83,970 $ 71,791
===========================
See accompanying notes to condensed consolidated financial statements.
-1-
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
December December December December
31, 2000 31, 1999 31, 2000 31, 1999
--------------------------------------------------------
Revenues $17,304 $10,059 $45,156 $42,727
Cost of revenues 7,697 3,263 17,654 13,529
-------------------------------------------------------
Gross profit 9,607 6,796 27,502 29,198
Operating expenses:
Research and development 4,792 4,351 13,257 11,917
Selling, general and administrative 3,833 2,991 10,575 9,376
Merger-related costs - - - 3,455
-------------------------------------------------------
Total operating expenses 8,625 7,342 23,832 24,748
-------------------------------------------------------
Income (loss) from operations 982 (546) 3,670 4,450
Interest and other income 642 550 1,895 1,482
-------------------------------------------------------
Income before income taxes 1,624 4 5,565 5,932
Provision for (recovery of) income taxes
(354) (196) 57 433
-------------------------------------------------------
Net income $ 1,978 $ 200 $ 5,508 $ 5,499
=======================================================
Earnings per share:
Basic $ 0.10 $ 0.01 $ 0.29 $ 0.29
Diluted $ 0.10 $ 0.01 $ 0.28 $ 0.28
Weighted average number of common
shares outstanding (in thousands):
Basic 19,378 18,923 19,293 18,669
Diluted 19,860 19,807 19,869 19,878
See accompanying notes to condensed consolidated financial statements.
-2-
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
(unaudited)
Nine Months Ended
December December
31, 2000 31, 1999
----------------------------
Cash flows from operating activities:
Net income $ 5,508 $ 5,499
Adjustments to reconcile net income to cash
used in operating activities:
Amortization 2,750 1,973
Loss on sale of capital assets 106 -
Stock compensation expense 66 31
Gain on sale of investment (100) -
Inventory provision (306) 550
Deferred income taxes (405) (1,860)
Change in operating assets and liabilities:
Accounts receivable trade (5,724) 2,895
Income taxes recoverable (548) 1,333
Inventory (8,467) 637
Other current assets (2,613) 2,166
Accounts payable 6,374 1,354
Accrued liabilities (1,369) (2,157)
----------------------------
Net cash (used in) from operating activities (4,728) 12,421
Cash flows from investing activities:
Additions to capital assets (1,161) (6,884)
Other 80 (1,100)
----------------------------
Cash used in investing activities (1,081) (7,984)
Cash flows from financing activities:
Proceeds from issue of common shares, net of
issue costs 1,704 2,507
Repayment of bank indebtedness - net - (145)
Repayment of loans payable (90) (1,371)
----------------------------
Net cash from financing activities 1,614 991
Effect of currency translation on cash balances (14) 55
----------------------------
(Decrease) increase in cash and cash equivalents (4,209) 5,483
Cash and cash equivalents, beginning of period 42,942 38,479
----------------------------
Cash and cash equivalents, end of period $38,733 $43,962
============================
See accompanying notes to condensed consolidated financial statements.
-3-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
We have prepared the accompanying unaudited condensed consolidated financial
statements in accordance with United States generally accepted accounting
principles and according to the rules and regulations of the Securities and
Exchange Commission for interim financial reporting. Consequently, they do not
include all of the information and footnotes required by United States generally
accepted accounting principles for complete financial statements. These
condensed financial statements should be read in conjunction with our financial
statements and notes thereto for the year ended March 31, 2000 that are included
in our most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission. We believe that the accompanying financial statements
reflect all adjustments, consisting solely of normal, recurring adjustments,
that are necessary for fair presentation of the results for the interim periods
presented. The results of operations for the period ended December 31, 2000 are
not necessarily indicative of the results to be expected for the full fiscal
year.
2. Earnings per share
Basic earnings per share are computed by dividing the net income in a period by
the weighted average number of common shares outstanding during that period.
Diluted earnings per share are calculated in order to give effect to all
potential common shares issuable during the period. The weighted average number
of diluted shares outstanding is calculated by assuming that any proceeds from
potential common shares, such as stock options, are used to repurchase common
shares at the average share price in the period.
Per share information calculated on this basis is as follows (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December
2000 1999 2000 31, 1999
---------------------------- --------------------------
Numerator:
Net income $ 1,978 $ 200 $ 5,508 $ 5,499
============================ ==========================
Denominator for basic earnings per share-
Weighted average common shares outstanding 19,378 18,923 19,293 18,669
============================ ==========================
Basic earnings per share $ 0.10 $ 0.01 $ 0.29 $ 0.29
============================ ==========================
Denominator for diluted earnings per share-
Weighted average common shares outstanding 19,378 18,923 19,293 18,669
Stock options and warrants 482 884 576 1,209
---------------------------- --------------------------
Shares used in computing diluted earnings per share 19,860 19,807 19,869 19,878
============================ ==========================
Diluted earnings per share $ 0.10 $ 0.01 $ 0.28 $ 0.28
============================ ==========================
-4-
3. Segmented information
We operate and track our results in one operating segment. We design, develop
and market integrated circuits that manipulate and process digital images.
Revenues from our unaffiliated customers by geographic region were as follows
(in thousands):
Three Months Ended Nine Months Ended
December 31, December December 31, December 31,
2000 31, 1999 2000 1999
------------------------------------------------------
United States $ 2,393 $ 2,663 $ 7,583 $ 9,600
Japan and Asia 12,728 7,001 33,303 32,057
Canada 1,794 95 2,506 279
Rest of World 389 300 1,764 791
------------------------------------------------------
$17,304 $10,059 $45,156 $42,727
======================================================
Net long-lived assets by country of location were as follows (in thousands):
December March 31,
31, 2000 2000
---------------------------
United States $ 4,540 $ 3,000
Canada 5,765 9,000
---------------------------
$10,305 $12,000
===========================
The following table shows the percentage of our revenue in each period that was
derived from customers who individually accounted for more than 10% of revenue
in that period:
Three Months Ended Nine Months Ended
December 31, December 31, December December
2000 1999 31, 2000 31, 1999
---------------------------------------------------
Customer A 11% 15% - 11%
Customer B - 12% - -
At December 31, 2000 one customer accounted for 14% of accounts receivable
trade. At March 31, 2000, two customers represented 16% and 10% of accounts
receivable trade, respectively.
4. Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," or SFAS 133.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The impact of adopting
SFAS 133, which is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 is not expected to be material to Genesis' operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The Company does not expect the adoption of SAB 101 to have a material effect on
its consolidated financial position or results of operations. The Company is
required to adopt SAB 101 in the fourth quarter of fiscal 2001.
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains numerous statements of a
forward-looking nature relating to potential future events or to our future
financial performance. Our actual future results may differ significantly from
those forward-looking statements. You should consider the various factors
identified under the caption "Factors that may affect future operating results"
in evaluating those statements.
Overview
We design, develop and market integrated circuits, or chips, that process
digital video and graphic images. Our chips translate source video, graphics and
digital images in order to be able to show them on various display systems such
as flat panel computer monitors or digital televisions. We do not manufacture
our chips. We procure them from third party manufacturers, such as IBM
Corporation, Taiwan Semiconductor Manufacturing Corporation, United
Semiconductor Corporation, and Samsung Semiconductor, Inc.
Applications for our products include:
. flat panel computer monitors,
. digital CRT computer monitors,
. consumer electronics applications, such as digital television and DVD, .
digital projection systems, and
. advanced image processing applications such as video editing, medical and
security systems.
Results of operations
The following table shows unaudited statement of operations data for the three
month and nine month periods ended December 31, 2000 and December 31, 1999,
expressed as a percentage of revenues:
Three Months Ended Nine Months Ended
December 31, December December 31, December 31,
2000 31, 1999 2000 1999
--------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 44.5 32.4 39.1 31.7
--------------------------------------------------------
Gross profit 55.5 67.6 60.9 68.3
Operating expenses:
Research and development 27.7 43.3 29.4 27.9
Selling, general and administrative 22.1 29.7 23.4 21.9
Merger-related costs - - - 8.1
--------------------------------------------------------
Total operating expenses 49.8 73.0 52.8 57.9
--------------------------------------------------------
Income from operations 5.7 (5.4) 8.1 10.4
Interest and other income 3.7 5.5 4.2 3.5
--------------------------------------------------------
Income before income taxes 9.4 0.1 12.3 13.9
Provision for (recovery of) income taxes (2.0) (1.9) 0.1 1.0
--------------------------------------------------------
Net income 11.4% 2.0% 12.2% 12.9%
========================================================
Revenues: Revenues for the three months ended December 31, 2000 increased to
$17.3 from $10.1 million in the three months ended December 31, 1999, an
increase of 72.0%. This resulted from an increase in units shipped offset in
part by a decline in average selling prices. The company expects that its
revenues in calendar 2001 will continue to be dominated by shipments of product
into the flat-panel monitor market. Consequently, it expects its revenues for
calendar 2001 to grow substantially as this market continues to experience rapid
growth. For the March 2001 quarter, the company is targeting its revenues to
grow about $1 million over the December 2000 quarter. This reflects a more
conservative approach to the quarter than previously anticipated as a result of
current macroeconomic conditions. For the balance of calendar 2001, the company
is targeting solid double-digit sequential percentage revenue growth per
quarter, with overall revenues in calendar 2001 targeted to increase in excess
of 60% over calendar 2000 actual revenues of $55.8 million.
-6-
Gross Profit. Gross profit for the three months ended December 31, 2000
increased to $9.6 million from $6.8 million in the three months ended December
31, 1999. As a percentage of revenues, gross profit represented 55.5% of
revenues in the three months ended December 31, 2000, down from 67.6% of
revenues in the three months ended December 31, 1999. The decrease in gross
profit percentage in 2000 over 1999 was primarily attributable to a different
mix of products sold, with the newer products generally having lower average
gross margins, and as a result of our pricing strategy for further increasing
our share of the flat panel computer monitor market. The company continues to
target its gross margins to average about 50% for calendar 2001.
Research and Development. Research and development expenses include costs
associated with research and development personnel, development tools and
prototyping costs. Research and development expenses for the three months ended
December 31, 2000 increased to $4.8 million from $4.4 million in the three
months ended December 31, 1999. These expenses represented 27.7% of revenues in
the 2000 period and 43.3% of revenues in the 1999 period.
The dollar increase in the 2000 period over the comparative period in 1999
reflects increased prototype and pre-production expenses for new products
brought forward ahead of plan. We expect to continue to make substantial
investments in our research and development activities and anticipate that the
dollar amount of research and development expenses will continue to increase in
the longer term, although we do expect to see a decrease in the March quarter,
due to the aforementioned timing of pre-production expenses for new products .
The decrease in research and development expenses as a percentage of revenues is
a result of the increase in revenues from the previous period.
Selling, General and Administrative. Selling, general and administrative
expenses consist of personnel and related overhead costs for selling, marketing,
customer support, finance, human resources and general management functions and
of commissions paid to regional sales representatives. Selling, general and
administrative expenses were $3.8 million in the three months ended December 31,
2000 and $3.0 million in the three months ended December 31, 1999. These
expenses represented 22.1% of revenues in the 2000 period and 29.7% of revenues
in the 1999 period.
The dollar increase in 2000 from 1999 in selling, general and administrative
expenses reflects increased personnel costs related to increased administrative,
marketing, selling and customer support personnel, continued expansion of our
international operations, and an increase in the number of demonstration boards
built as part of our marketing strategy for new product introduction. The
decrease in selling, general and administrative expenses as a percentage of
revenues results from the increase in revenues from the previous period.
Total Operating Expenses. Total operating expenses for the three months ended
December 31, 2000 increased to $8.6 million from $7.3 million in the three
months ended December 31, 1999, for the reasons described above. The company is
targeting total operating expenses in the March quarter to decrease from the
December quarter by 7-9%, as a result of its having accelerated product
introduction costs into the December quarter. For calendar 2001 as a whole, it
is targeting its total operating expenses to grow by 6-10% over its operating
expenses in calendar 2000.
In the current fiscal year the company has tax losses and credits available to
it such that it anticipates no meaningful tax expense for the fiscal year as a
whole. The company continues to target a longer-term effective income tax rate
of about 20%.
As a result of the above, the company is targeting its after-tax diluted
earnings per share to grow from $0.30 in calendar 2000 to in excess of $0.60 in
calendar 2001. For the March 2001 quarter, the company is targeting double-digit
earnings per share percentage growth over the December quarter.
-7-
Interest and Other Income. Interest and other income in the three months ended
December 31, 2000 was $642,000, compared with $550,000 in the three months ended
December 31, 1999. Changes in interest income result from changes in the average
amount of cash and cash equivalents on hand, and from interest earned on income
taxes and tax credits recoverable. Future interest income will depend on the
amount of funds available to invest and on future interest rates.
Provision for Income Taxes. The provisions for income taxes for the three months
ended December 31, 2000, are calculated based on our expected effective tax rate
for the entire fiscal year. We have investment tax credits and non-capital
losses available to reduce taxes payable or taxable income. Future income taxes
will depend on our effective tax rates and the distribution of taxable income
between taxation jurisdictions. The company is targeting a longer-term effective
income tax rate of approximately 20%.
Liquidity and capital resources
Cash and cash equivalents were $38.7 million at December 31, 2000. Net cash used
in operations for the nine months ended December 31, 2000, was $4.7 million.
Prior to changes in operating assets and liabilities, cash of $7.6 million was
generated for the nine months ended December 31, 2000.
Net cash used in investing activities was $1.1 million in the nine months ended
December 31, 2000, primarily due to net capital spending of $1.2 million.
Continued expansion of our business may require higher levels of capital
equipment purchases. We have no significant capital spending or purchase
commitments other than purchase commitments made in the ordinary course of
business.
Net cash provided by financing activities in the nine months ended December 31,
2000 was $1.6 million. This was primarily a result of funds received for the
purchase of shares under the terms of our stock purchase plan and stock option
plans, offset by our repayment of indebtedness of $0.1 million.
We believe that our existing cash balances together with any cash generated from
our operations will be sufficient to meet our capital requirements on a short-
term basis.
Longer term, we may need to raise additional capital to fund investments in
operating assets to assist in the growth of our business, such as investments in
accounts receivable or inventory, or to purchase capital assets, such as land,
buildings or equipment. Because we do not have our own semiconductor
manufacturing facility, we may be required to make deposits to secure supply in
the future. Although we currently have no plans to raise additional funds, we
could be required or could decide to try and raise additional capital in the
future.
We periodically evaluate acquisitions of businesses, products or technologies
that complement our business. If we were to enter into a transaction of this
nature, we may either have to use a portion of our cash, issue debt or issue
additional equity securities. If we were to issue additional equity securities,
there could be further dilution to our shareholders.
-8-
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 three months ended December 31, 2000, a substantial portion 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. 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 meet OEM
design requirements and design cycles
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.
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., Pixelworks, Inc., Sage, Inc., Silicon Image, Inc., and ST
Microelectronics, Inc. Our business could be harmed by these existing
competitors announcing or introducing new products. Also, 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. This increased competition could
harm our business, by, for example, increasing pressure on our profit margins or
causing us to lose customers.
-9-
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, o 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.
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 38.7% of our product revenue for the three months ended December
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,
-10-
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
33.4% of our revenues for the three months ended December 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 for reasons outside our control, such as supply constraints for other
components incorporated into their products. 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 such design activities. We
often divert financial and personnel resources from other development projects
without entering into agreements obligating these industry leaders to continue
the collaborative design project or to purchase the resulting products. The
failure of an industry leader to complete development of a collaborative design
project or to purchase the products resulting from such projects would have an
immediate and serious impact on our business, financial condition and results of
operations. Our inability to establish such relationships in the future would,
similarly, harm our business.
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A large percentage of our revenues will come from sales outside of North
America, which creates additional business risks
A large portion of our revenues will come from sales to customers outside of
North America, particularly to equipment manufacturers located in Japan and
other parts of Asia. For the three months ended December 31, 2000, sales to
regions outside of North America amounted to 76% 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
be issued 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.
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
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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;
. 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.
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Other factors to consider
You should also consider the following factors:
It may be difficult for our shareholders to enforce civil liabilities under the
United States federal securities laws because we are incorporated in Canada
The enforcement by our shareholders of civil liabilities under the federal
securities laws of the United States may be adversely affected because:
. we are incorporated under the laws of Nova Scotia, Canada,
. some of our directors and officers are residents of Canada, and
. substantial portions of our assets are located outside the United States.
As a result, it may be difficult for holders of our common shares to effect
service of a legal claim within the United States upon our directors and
officers or upon other individuals who are not residents of the United States.
It may also be difficult to satisfy any judgements of courts of the United
States based upon civil liabilities under the federal securities laws of the
United States.
Our anti-takeover defense provisions may deter potential acquirers
Our authorized capital consists of 1,000,000,000 special shares issuable in one
or more series and 1,000,000,000 common shares. Our board of directors has the
authority to issue special shares and to determine the price, designation,
rights, preferences, privileges, restrictions and conditions of these shares
without any further vote or action by our shareholders, including voting and
dividend rights. The rights of holders of our common shares will be subject to,
and may be adversely affected by, rights of holders of any special shares that
we may issue in the future. The issuance of special shares could make it more
difficult for a third party to acquire a majority of our outstanding voting
shares. We have no present plans to issue any special shares. We have adopted a
shareholder rights plan with respect to our common shares. This plan is
specifically designed to make an unsolicited, non-negotiated takeover attempt
more difficult. We also have a board of directors with three-year staggered
terms, which may, in certain circumstances, make an unsolicited, non-negotiated
takeover attempt more difficult.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We carry out a significant portion of our operations in Canada. Although
virtually all our revenues and costs of revenues are denominated in U.S.
dollars, a substantial portion of our operating expenses are denominated in
Canadian dollars. Accordingly, our operating results are affected by changes in
the exchange rate between the Canadian and U.S. dollars. Any future
strengthening of the Canadian dollar against the US dollar could negatively
impact our operating results by increasing our operating expenses. We do not
presently engage in any hedging or other transactions intended to manage the
risks relating to foreign currency exchange rate fluctuations, other than
natural hedges that occur as a result of holding both Canadian dollar
denominated assets and Canadian dollar denominated liabilities. We may in the
future undertake hedging or other such transactions if management determines
that it is necessary to offset exchange rate risks. To date, net exchange gains
and losses on Canadian dollar denominated assets and liabilities has not been
material.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of December 31, 2000, we were not a party to any material legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are attached:
27.1 Financial Data Schedule
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b) Reports on Form 8-K:
We filed no reports on Form 8-K in the three months ended December 31,
2000.
SIGNATURE
Our authorized representative has signed this report on our behalf as required
by the Securities Exchange Act of 1934.
GENESIS MICROCHIP INCORPORATED
By: /s/ I. ERIC ERDMAN
-----------------------------------
I. Eric Erdman
Chief Financial Officer & Secretary
(Authorized Officer &
Principal Financial Officer)
Date: February 14, 2001
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