SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 2001
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)
NOVA SCOTIA, CANADA Not applicable
(State of incorporation) (IRS employer identification number)
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
(905) 889-5400
(Registrant's telephone number)
Securities registered pursuant to section 12(g) of the Act:
Common shares, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common shares held by non-affiliates at May 31,
2001 was approximately $513,023,000 based on the last reported sale price of our
common shares on The Nasdaq National Market on that date of $27.29 per share. We
had 19,782,321 common shares outstanding at May 31, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
None. This amendment to Form 10-K is being filed for the sole purpose of
including the information required by Items 10 through 13 pursuant to General
Instruction G(3)
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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 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 Genesis Display
Perfection (TM), SmartSCAN (TM), RealColor (TM), Real Recovery, Ultra-
Reliable DVI (TM), Diamond Cinema, Platinum Cinema and Crystal Cinema are
our trademarks. This report also refers to the trademarks of other
companies.
PART I
ITEM 1. BUSINESS:
Overview
We design, develop and market integrated circuits which receive and process
digital video and graphic images. Our integrated circuits are typically
located inside a display device and process images for viewing on that
display. 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.
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 in the number of pixels in an image,
. zoom, which is an increase in the number of pixels in an image,
. de-interlace, which is the conversion of an image's display format,
and
. synchronize, which is the coordination of different pixel rates and
image frame refresh rates.
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.
Today, the LCD flat panel monitor market represents one of the fastest
growing segments in the electronics industry.
In addition to our image-processing technologies, we have developed
communications technologies. These communications technologies focus on the
reception of signals or 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 and our communications technologies,
depending on the needs of the targeted market.
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We were incorporated in Canada in 1987 and on May 28, 1999, we merged with
Paradise Electronics, Inc. We operate through subsidiaries and offices in
the United States and Taiwan. Our business is conducted globally, with the
majority of our suppliers and customers located in Japan, Korea or Taiwan.
For a geographical breakdown of our revenues and long-lived assets, see
Note 10 to the Consolidated Financial Statements.
Markets, applications and customers
Our primary targeted markets include the following:
. Flat-Panel Computer Monitors. Flat panel computer monitors are
increasingly replacing monitors which use cathode ray tubes, or CRTs.
For the year ended March 31, 2001, the flat panel computer monitor
market represented 72.2% of our total revenues. Companies whose flat-
panel computer monitors incorporate our products include Acer, Dell,
Fujitsu, IBM, HP, Philips, Samsung, Sony, ViewSonic, NEC and many other
leading brands.
. Digital CRT Monitors. We have developed products for the emerging
digital CRT monitor markets. The products are based on patent-pending
technologies for digital CRT monitors. We believe this market will
develop into a major market as the computer industry adopts the digital
DVI monitor interface as a standard output interface available on all
PCs. In addition, we believe multimedia content providers will demand
that their content be protected by copy-protection systems which are
available only for digital monitors.
. Consumer Digital Television. We are leveraging our technologies and
continue to produce products for consumer digital television markets.
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.
Products
The following table shows our principal integrated circuit products at
March 31, 2001:
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Product Description Markets Product Features Production
Release (1)
------------------------------------------------------------------------------------------------------------------------------------
gm5010 LCD monitor controller Multi-synchronous LCD monitors Integrated TMDS receiver; Q1 2001
(for XGA-resolution (with dual analog and digital analog-to-digital converter (ADC);
monitors) interfaces) and other High-Bandwidth Digital Content
fixed-resolution pixelated displays Protection (HDCP); "RealColor"
color adjustment technology;
advanced OSD controller
------------------------------------------------------------------------------------------------------------------------------------
gm5060 LCD monitor controller Multi-synchronous LCD monitors Integrated TMDS receiver; Q1 2001
(for UXGA-resolution (with dual analog and digital analog-to-digital converter (ADC);
monitors) interfaces) and other High-Bandwidth Digital Content
fixed-resolution pixelated displays Protection (HDCP); "RealColor"
color adjustment technology;
advanced OSD controller
------------------------------------------------------------------------------------------------------------------------------------
gm5020 LCD monitor controller Multi-synchronous LCD monitors Integrated TMDS receiver; Q4 2000
(for SXGA-resolution (with dual analog and digital analog-to-digital converter (ADC);
monitors) interfaces) and other integrated frame-rate conversion;
fixed-resolution pixelated displays variable scaling and sharpening
algorithms
------------------------------------------------------------------------------------------------------------------------------------
gm3020 LCD monitor controller Standalone and bundled LCD monitors Integrated TMDS receiver; built-in Q3 2000
(with digital interfaces), display timing generator;
projection systems, auto-configuration and
fixed-resolution pixelated displays auto-detection
------------------------------------------------------------------------------------------------------------------------------------
gmZAN1 LCD monitor controller Multi-synchronous LCD monitors Fully integrated analog-to-digital Q2 2000
(with analog-only interfaces) and converter (ADC), high-quality
other fixed-resolution pixelated scaling algorithm, on-chip
displays programmable onscreen display
------------------------------------------------------------------------------------------------------------------------------------
gmVLX1A-X Digital video processor Home theater, PCTV, DVD, plasma Genesis proprietary vertical Q1 1999
panels, projection systems, temporal filtering, advanced film
------------------------------------------------------------------------------------------------------------------------------------
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scan doublers mode, advanced scaling engine,
built-in display controller
------------------------------------------------------------------------------------------------------------------------------------
(1) Calendar quarters. References in this report to fiscal year 2001 mean
the fiscal year ended March 31, 2001
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, 2001, we had 97 full-time employees engaged in research and
development. Expenditures for research and development for the year ended
March 31, 2001 were $17.4 million. For the year ended March 31, 2000 they
were $16.1 million, and for the ten months ended March 31, 1999 they were
$10.3 million.
Sales and marketing
We sell and market our products directly to customers, through regional
sales representatives and through distributors. Our sales and marketing
personnel work closely with customers, industry leaders, sales
representatives and our distributors to define features, performance, price
and market timing of new products. In Taiwan, we sell our products though
our local sales and technical support office. In North America and Korea,
we sell through technically trained sales representatives. In Europe, we
sell our products through distributors. In Japan, we sell our products
through both technically trained sales representatives and through
distributors. Regardless of the sales channels used, we provide technical
support and design assistance directly to our customers. 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 the United States, Canada and Taiwan. Our sales representatives and our
distributors also provide ongoing support and service on our behalf. We
provide customer support through both on-site customer service and though
remote support from our various facilities. We generally provide a one-year
warranty for our integrated circuit products.
Our sales are derived from a limited number of customers, with our largest
five customers accounting for 31% of total revenues in fiscal 2001, 34% of
total revenues for fiscal 2000, and 47% during fiscal 1999.
For the year ended March 31, 2001, no customer accounted for more than 10%
of total revenues. For the year ended March 31, 2000, one customer
accounted for 10% of total revenues. At March 31, 2001, one customer
represented 10% of accounts receivable trade. At March 31, 2000, two
customers represented 16% and 10% of accounts receivable trade,
respectively.
As of March 31, 2001, our sales and marketing force totaled 36 people. This
included 12 field applications engineers whose role is to create reference
designs and assist our customers to incorporate our integrated circuits
into their products.
Manufacturing
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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 or tested by UMC, TSMC, ASE, SPIL or ISE Labs.
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 0.35 and 0.25 micron technology
and these geometries 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.
We purchase products from several suppliers, but no single product is purchased
from more than one supplier. 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 25 patents in the United States and have 17
patent applications pending there. In addition to filing patents in the United
States, we apply for and have been granted patents in other jurisdictions,
including Europe, Japan, Taiwan and Korea. Our patents relate to various
aspects of algorithms, product design or architectures and expire from 2011 to
2016. To supplement our proprietary technology, we also 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, Pixelworks, Inc., Sage, Inc., Silicon Image,
Inc. and ST Microelectronics, Inc. We believe that the principal competitive
factors in our markets are:
. product design features and performance,
. product price,
. the time to market of our products, and
. the quality and speed of customer support.
Backlog
Our customers typically order products by way of purchase orders that may be
canceled or rescheduled 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. Most of our sales have historically been 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, 2001, we employed a total of 173 full-time employees, including
97 in research and development, 36 in sales and marketing, 16 in manufacturing
operations and 24 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 Alviso, California, Thornhill, Ontario, and Taipei, Taiwan.
We believe 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. See Note 9 to
the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS:
On April 24, 2001, Silicon Image, Inc. filed a patent infringement lawsuit
against us in the United States District Court for the Eastern District of
Virginia. They simultaneously filed a complaint before the International Trade
Commission in Washington, D.C. The complaint and suit allege that all of our
products which contain digital receivers infringe on various claims of one of
their patents. We believe the lawsuit and the complaint are baseless and
without merit and we intend to vigorously defend our position. The financial
impact of these claims is not yet determinable and no provision has been made in
our consolidated financial statements for any costs associated with them.
We are not a party to any other 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, 2001.
PART II
ITEM 5. MARKET FOR OUR COMMON SHARES AND RELATED SHAREHOLDER MATTERS:
Market information
Our common shares have traded on the Nasdaq National Market under the symbol
"GNSS" since February 8, 1999. Before that, from February 24, 1998 until
February 5, 1999, they traded under the symbol "GNSSF". 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:
High Low
---- ---
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
Second Quarter........................ $21.000 $15.375
Third Quarter......................... $20.125 $16.625
Fourth Quarter........................ $18.250 $ 8.563
2001 Calendar year
First Quarter......................... $18.875 $ 9.313
As of May 31, 2001, we had approximately 270 holders of record of our common
shares and a substantially greater number of beneficial owners.
Dividend policy
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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.
Exchange controls
Canada has no system of exchange controls. There is no law, government decree or
regulation in Canada restricting the export or import of capital or affecting
the payment of dividends, interest or other payments to a non-resident holder of
common shares, other than withholding tax requirements.
U.S. taxation
Under the Convention between the United States of America and Canada with
Respect to Taxes on Income and on Capital (the "1980 Convention") we are not
subject to U.S. income tax unless we engage in a trade or business in the United
States through a permanent establishment. Our Canadian business currently does
not have direct operations in the United States. We expect to be able to conduct
our Canadian 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 engage in U.S. business operations
through U.S. subsidiaries that are subject to U.S. taxation.
Taxation of dividends. For U.S. federal income tax purposes the gross amount of
any dividend paid to you will be included in your gross income and treated as
foreign source dividend income to the extent of our current or accumulated
earnings and profits. Dividends paid in excess of our earnings and profits will
be applied against and will reduce your basis in our common shares and will be
treated as gain from the sale or exchange of our common shares to the extent
they are in excess of your basis. 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
converted into U.S. dollars. Generally, your gain or loss 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:
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. pay an interest charge together with tax calculated at maximum ordinary
income rates on certain "excess distributions", defined to include a gain
on a sale or other disposition of our common shares, or
. include in your taxable income certain undistributed amounts of our
income, if you make a qualified electing fund election.
You should consult with your tax adviser before making a qualified electing fund
election.
Canadian taxation
Canadian corporations are taxed on their worldwide income. They are subject to a
Canadian federal income tax of 29%. In addition, Canadian corporations are
subject to provincial income tax by each Canadian province in which they have a
permanent establishment. The result is that a corporation resident in Canada
will pay a combined federal and provincial rate of approximately 45%. Dividends
received from foreign affiliates engaged in an active business in a treaty
country such as the United States are not taxed in Canada. These dividends may
be subject to the withholding tax applied by the foreign country, at a rate that
may vary according to the 1980 Convention.
Taxation of dividends. Amounts paid or credited as dividends to you may be
subject to Canadian non-resident withholding tax. Withholding tax will also
apply to amounts that are deemed to be paid or credited to you as dividends. The
withholding tax is levied at a rate of 25%, which may be reduced according to
the terms of the 1980 Convention. Under the 1980 Convention, the rate of
Canadian non-resident withholding tax on the gross amount of dividends
beneficially owned by you is 15%. If you are a company that owns at least 10% of
our voting shares, the rate of withholding is 5%.
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.
However, 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
Selected consolidated financial data for the last five years appear below (in
thousands, except per share data):
Ten Months
Ended
Year Ended March 31, March 31, Year Ended May 31,
----------------------- ------------ --------------------
2001 2000 1999 1998 1997
----------- ----------- ------------ --------- ----------
Statement of Operations Data:
Revenues....................................... $63,627 $53,332 $37,738 $15,988 $ 4,527
Cost of revenues............................... 32,416 17,021 14,062 4,869 2,983
------- ------- ------- ------- -------
Gross profit................................... 31,211 36,311 23,676 11,119 1,544
Operating expenses:............................
Research and development..................... 17,413 16,065 10,261 7,100 3,595
Selling, general and administrative.......... 15,947 12,364 10,307 6,137 4,833
Merger related costs......................... - 3,455 - - -
------- ------- ------- ------- -------
Total operating expenses.................... 33,360 31,844 20,568 13,237 8,428
------- ------- ------- ------- -------
Income (loss) from operations.................. (2,149) 4,427 3,108 (2,118) (6,884)
Interest and other income...................... 2,328 1,941 1,436 773 184
------- ------- ------- ------- -------
Income (loss) before income taxes.............. 179 6,368 4,544 (1,345) (6,700)
Provision for (recovery of) income taxes....... (2,483) 360 (986) (890) (707)
------- ------- ------- ------- -------
Net income (loss).............................. $ 2,662 $ 6,008 $ 5,530 $ (455) $(5,993)
======= ======= ======= ======= =======
Earnings (loss) per share
-8-
Basic........................................ $ 0.14 $ 0.32 $ 0.31 $ (0.04) $ (0.63)
Diluted...................................... $ 0.13 $ 0.30 $ 0.29 $ (0.04) $ (0.63)
Weighted average number of common shares
outstanding:
Basic........................................ 19,406 18,756 18,027 11,634 9,447
Diluted...................................... 19,884 19,922 19,365 11,634 9,447
Balance Sheet Data: Mar. 2001 Mar. 2000 Mar. 1999 May 1998 May 1997
Cash and cash equivalents...................... $ 32,827 $ 42,942 $ 38,479 $ 38,401 $ 4,714
Working capital................................ 53,190 50,661 50,131 42,996 7,743
Total assets................................... 81,446 71,791 64,815 53,452 11,027
Total long-term debt, net of current portion... 410 518 504 1,235 794
Shareholders' equity........................... 70,389 65,247 55,408 47,163 9,081
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Overview
We design, develop and market integrated circuits which receive and 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 volume increases. We recognize revenues from product
sales when they are shipped. Product returns and allowances are estimated and
provided for at the time of sale. To date, we have not experienced any
significant product returns.
In addition to product sales, we derive revenues from providing design services.
We provide these services in order to assist our customers to develop products
that include our chips in their designs or to accelerate the development of our
products to meet customer demand. We also earn revenues from leasing out
portions of our premises that are not required for current operations, and from
license fees and royalties.
We have limited ability to reschedule our purchase orders and, therefore, we
have to place purchase orders for products before we receive purchase orders
from our customers. This restricts our ability to react to fluctuations in
demand for our products and exposes 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, 2001, we recorded provisions
totaling $1.3 million for declines in inventory value and for write downs of
excess inventory. For the year ended March 31, 2000, we recorded provisions
totaling $0.6 million. We have agreements with suppliers in Asia such that we
are 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. Details of these losses and deductions can be
found in Note 7 to our consolidated financial statements, which are included in
Item 8 of this report. As a result of the available tax losses and ongoing tax
credits, we anticipate that our average tax rate will be approximately 10% in
fiscal 2002.
On May 28, 1999, we merged with Paradise Electronics, Inc. and adopted a new
fiscal year effective April 1, 1999. Our fiscal year now runs from April 1 to
March 31, aligning our fiscal quarters with calendar quarters. We believe that
this makes our results more easily comparable to other companies in our
industry. Information
-9-
in this Form 10-K combines our past results with those of Paradise for all
periods presented, as required by pooling-of-interests accounting for business
combinations.
Results of operations
The following table shows the percentage of total revenues represented by each
category of cost or expense in our consolidated statements of operations for the
periods indicated:
Year Ended Year Ended Ten Months
March 31, March 31, Ended March
2001 2000 31, 1999
-------------- --------------- -------------
Revenues........................................ 100.0 % 100.0 % 100.0 %
Cost of revenues................................ 50.9 31.9 37.3
------ ------ ------
Gross profit.................................... 49.1 68.1 62.7
Operating expenses:
Research and development...................... 27.4 30.1 27.2
Selling, general and administrative........... 25.1 23.2 27.3
Merger related costs.......................... -- 6.5 --
------ ------ ------
Total operating expenses..................... 52.5 59.8 54.5
------ ------ ------
Income (loss) from operations................... (3.4) 8.3 8.2
Interest and other income....................... 3.7 3.7 3.8
------ ------ ------
Income before income taxes...................... 0.3 12.0 12.0
Provision for (recovery of) income taxes........ (3.9) 0.7 (2.6)
------ ------ ------
Net income ..................................... 4.2 % 11.3 % 14.6 %
====== ====== ======
Total Revenues.
Total revenues for the year ended March 31, 2001 increased by $10.3 million to
$63.6 million from $53.3 million in the year ended March 31, 2000, an increase
of 19.3%. Total revenues for the year ended March 31, 2000 increased by $15.6
million or 41.3% from $37.7 million in the ten months ended March 31, 1999. The
increase in total revenues over the last two fiscal periods is primarily because
of increased demand for our products in the flat panel monitor market.
Revenues from the flat panel monitor market increased to $45.9 million or 72.2%
of total revenues in the year ended March 31, 2001 from $36.8 million or 69.0%
of total revenues in the year ended March 31, 2000, and from $26.4 million or
70.0% in the ten months ended March 31, 1999. This increase was a result of
overall growth of that market together with our increased share of that market,
partially offset by declining average selling prices.
The overall growth of the flat panel monitor market was positively impacted by
reductions in retail selling prices of the end products. This decline was
primarily as a result of reductions in the cost of LCD panels used in flat panel
monitors, caused by additional manufacturing capacity and improved manufacturing
yields for the panels.
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. In fiscal 2001, retail prices of flat
panel computer monitors continued to decline, increasing the size of the overall
flat-panel computer monitor market.
Revenue from other markets, primarily the video and projector markets, increased
to $17.7 million from 16.5 million.
We expect that our revenues will continue to grow in fiscal 2002 because the
flat-panel market is expected to grow substantially in units over fiscal 2001.
We anticipate that average selling prices will continue to decline but at a
slower rate than the growth of the market.
Gross Profit. Gross profit for the year ended March 31, 2001 decreased to $31.2
million from $36.3 million in the year ended March 31, 2000, and compared to
$23.7 million in the ten months ended March 31, 1999. This
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represents 49.1% of total revenues in the 2001 period, 68.1% of total revenues
in the 2000 fiscal year and 62.7% of total revenues in the fiscal 1999 period.
The decrease in gross profit percentage in the fiscal 2001 year was primarily
attributable to costs incurred in the fourth quarter of the 2001 fiscal year.
These costs, which totaled $5.5 million, included costs attributable to the
write down of our prior-generation products and initial low manufacturing yield
associated with the line buffer sections in one of our new products. $1.3
million of these costs related to the write down of inventory on hand at March
31, 2001. Excluding these costs, our gross margin would have been 57.7% in
fiscal 2001. We expect that our gross margins in fiscal 2002 will average 46% to
47%, as a result of declining average selling prices and competition.
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 year ended March
31, 2001 increased to $17.4 million from $16.1 million in the year ended March
31, 2000 and from $10.3 million in the ten months ended March 31, 1999. These
expenses represented 27.4% of total revenues in the 2001 fiscal year, 30.1% in
fiscal 2000, and 27.2% of total revenues in the fiscal 1999 period. 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 decrease in expense as a percentage of total revenues
resulted from the faster rate of growth in total revenues compared to growth in
research and development expenses.
Selling, General and Administrative. Selling, general and administrative
expenses consist of personnel, commissions and related overhead costs for
selling, marketing, customer support, finance, human resources and general
management functions. Selling, general and administrative expenses were $15.9
million in the year ended March 31, 2001, $12.4 million in the year ended March
31, 2000, and $10.3 million in fiscal 1999. These expenses represented 25.1% of
total revenues in the 2001 fiscal year, 23.2% of total revenues in the 2000
fiscal year, and 27.3% of total revenues in fiscal 1999. 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. In addition, in
fiscal 2001 we incurred $0.9 million in costs of employee terminations and for
professional fees and expenses associated with strategic initiatives that we
terminated due to economic and market conditions. Excluding those costs,
selling, general and administrative costs in fiscal 2001 would have been 23.6%
of total revenues. We expect selling, general and administrative expenses to
increase in the future in absolute dollars due to the addition of
administrative, marketing, selling and customer support personnel and because of
continued expansion of our international operations.
Interest and Other Income. Interest and other income in the year ended March 31,
2001 was $2.3 million, compared with $1.9 million in fiscal 2000, and $1.4
million in fiscal 1998. Future interest income will depend on the amount of
funds available to invest and on future interest rates.
Provision for Income Taxes. Our tax provision is a combination of taxes on
income offset by the substantial research and development tax credits earned in
Canada. Future income tax provisions will depend on our effective tax rates and
the distribution of taxable income between taxation jurisdictions, the amount of
research and development performed in Canada, and the likelihood of being able
to utilize available tax credits or losses.
Quarterly results of operations
The following table shows our unaudited quarterly statement of operations data
for the most recent eight quarters reported. 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.
Three Months Ended
--------------------------------------------------------------------------
Mar. Dec. Sep. Jun. Mar. Dec. Sep. Jun.
2001 2000 2000 2000 2000 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
Revenues....................... $18,471 $17,304 $15,040 $12,812 $10,605 $10,059 $16,362 $16,306
Cost of revenues............... 14,762 7,697 5,603 4,354 3,492 3,263 5,002 5,264
------- ------- ------- ------- ------- ------- ------- -------
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Gross profit................... 3,709 9,607 9,437 8,458 7,113 6,796 11,360 11,042
Operating expenses:............
-12-
Research and development..... 4,156 4,792 4,417 4,048 4,149 4,351 3,986 3,579
Selling, general and
administrative............. 5,372 3,833 3,553 3,189 2,988 2,991 3,112 3,273
Merger related costs......... -- -- -- -- -- -- -- 3,455
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 9,528 8,625 7,970 7,237 7,137 7,342 7,098 10,307
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.. (5,819) 982 1,467 1,221 (24) (546) 4,262 735
Interest income................ 433 642 739 514 459 550 515 417
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (5,386) 1,624 2,206 1,735 435 4 4,777 1,152
Provision for (recovery of)
income taxes.................. (2,540) (354) 241 170 (74) (196) 751 (121)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $(2,846) $ 1,978 $ 1,965 $ 1,565 $ 509 $ 200 $ 4,026 $ 1,273
======= ======= ======= ======= ======= ======= ======= =======
The majority of our revenues come from sales of semiconductors to manufacturers
of flat-panel computer monitors. Retail selling prices for flat-panel computer
monitors declined to approximately $1,000 in early calendar 1999 from about
$2,500 in early calendar 1998. 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. Retail prices increased to about
$1,200 by the end of calendar 1999. By the end of calendar 2000, selling prices
of flat-panel computer monitors had declined to approximately $850 as a result
of increased manufacturing capacity for LCD panels. The increase in retail
selling prices in 1999 resulted in a reduced rate of growth for the flat-panel
monitor market, negatively impacting demand for our products in the quarters
ended March 31, 2000 and December 31, 1999. The subsequent reduction in retail
prices has increased the growth rate of our markets. Gross margins have
declined over time as a result of reductions in blended average selling prices
driven by volume increases and competition. In addition, we incurred costs of
$5.5 million in the March 2001 quarter attributable to the write down of our
prior-generation products and initial low manufacturing yield associated with
the line buffer sections in one of our new products. 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
increases in levels of staff for sales and customer support activities, and
variable commissions based on sales levels. In addition, in the March 2001
quarter we incurred $0.9 million in costs of employee terminations and for
professional fees and expenses associated with strategic initiatives that we
terminated due to economic and market conditions.
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 or to defend
ourselves against lawsuits that may be brought against us. Any decline in
average selling prices of a particular IC product which is not offset by a
reduction in product costs or by sales of other products with higher gross
margins would decrease our overall gross profit and adversely affect our
business, financial condition and results of operations.
Period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. It is likely that in some future period
our operating results or business outlook will be below the 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 $32.8 million at March 31, 2001, $42.9 million at
March 31, 2000, and $38.5 million at March 31, 1999. Net cash used in operations
was $10.1 million for the year ended March 31, 2001, compared to cash generated
from operations of $13.5 million for the year ended March 31, 2000 and cash used
in operations of $1.4 million in the ten months ended March 31, 1999. The
decrease in cash flow from operations in fiscal 2001 compared with the prior
year was primarily a result of higher working capital balances,
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primarily increases in accounts receivable and an increase in inventories to
support a higher sales level. The significant revenue growth experienced during
fiscal 2001 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 $2.3 million in the year ended March
31, 2001, $11.2 million in the year ended March 31, 2000, and $1.9 million in
the ten months ended March 31, 1999. This was used for the purchase of capital
assets, less sales of assets determined to be surplus to our needs. 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 $2.3 million for the year ended
March 31, 2001, $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.
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 our existing
shareholders.
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.
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For the year ended March 31, 2001, 72.2% 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. We typically need to determine the functionality of
our products and to complete their design in advance of our customers completing
the designs of their products. As a result, we may not be able to react to
changes in our customers' desired functionality in a timely manner. 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.
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. 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 a product exists which can be physically
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.
Virtually all of our products use silicon wafers manufactured either by Taiwan
Semiconductor Manufacturing Corporation or by United Semiconductor Corporation.
No
-15-
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 misappropriation 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 of water
or electricity or cause transportation difficulties that could limit the
production capacity of our outside foundries or the ability of our
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 47.1% of our product revenue
for the year ended March 31, 2001. If future earthquakes damage our customers'
facilities or equipment 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
31.0% of our revenues for the year ended March 31, 2001. 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 could 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 manufacture products that 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
-16-
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 its 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.
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, 2001, sales to regions outside
of North America represented 80.2% 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, significant downturns and wide fluctuations in supply and demand
have characterized the semiconductor industry. Also, the industry has
experienced significant fluctuations in anticipation of changes in general
economic conditions, including economic conditions in Asia. These cycles have
led to significant variances in product demand and production capacity. They
have also accelerated the 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
non-disclosure 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
-17-
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 that 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. For example, we are currently
defending claims brought against us by Silicon Image, Inc. as described in Item
3 of this Form 10-K.
Any such lawsuit 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
-18-
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 the 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.
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 often 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.
As a result, it may be difficult for holders of our common shares to effect
service of a legal claim within the United States on our directors and officers
or on 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
-19-
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, 2001 a near-term 10% appreciation or depreciation in the
Canadian dollar-U.S. dollar exchange rate would not have a material effect on
our operating results or financial condition.
-20-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Financial Statements Table of Contents
Page
Number
Auditors' Report................................................. 22
Consolidated Balance Sheets...................................... 23
Consolidated Statements of Operations............................ 24
Consolidated Statements of Shareholders' Equity.................. 25
Consolidated Statements of Cash Flows............................ 26
Notes to Consolidated Financial Statements....................... 27
-21-
AUDITORS' REPORT
To the Board of Directors and Shareholders of
Genesis Microchip Incorporated
We have audited the consolidated balance sheets of Genesis Microchip
Incorporated as at March 31, 2001 and March 31, 2000 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended March 31, 2001 and March 31, 2000, and the ten month period
ended March 31, 1999, as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about 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. We believe our audits to provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
March 31, 2001 and March 31, 2000 and the results of operations and its cash
flows for the years ended March 31, 2001 and March 31, 2000 and the ten month
period ended March 31, 1999 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
May 4, 2001 KPMG LLP
Toronto, Canada Chartered Accountants
-22-
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
March 31, March 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................................. $32,827 $42,942
Accounts receivable trade, net of allowance for doubtful accounts of $78 in 2001
and $230 in 2000........................................................................... 14,412 6,023
Income taxes recoverable................................................................... 1,029 1,111
Inventory.................................................................................. 10,505 4,714
Investment held for resale................................................................. 1,100 1,100
Other...................................................................................... 3,964 797
------- -------
Total current assets...................................................................... 63,837 56,687
Property and equipment (note 3)............................................................. 10,406 11,515
Deferred income taxes (note 7).............................................................. 6,561 3,024
Other........................................................................................ 642 565
------- -------
Total assets.............................................................................. $81,446 $71,791
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................... $ 6,851 $ 1,963
Accrued liabilities........................................................................ 3,707 3,967
Current portion of loan payable (note 4 )................................................. 89 96
------- -------
Total current liabilities................................................................. 10,647 6,026
Long-term liabilities:
Loan payable (note 4)..................................................................... 410 518
------- -------
Total liabilities......................................................................... 11,057 6,544
------- -------
Shareholders' equity (note 5):
Share capital:
Special shares:
Authorized - 1,000,000,000 special shares
Issued and outstanding - none at March 31, 2000 and 2001.............................. - -
Common shares:
Authorized - 1,000,000,000 common shares
Issued and outstanding - 19,559,103 at March 31, 2001
and 19,140,482 shares at March 31, 2000............................................... 74,619 72,225
Additional paid in capital................................................................. 1,293 1,293
Cumulative other comprehensive loss........................................................ (94) (94)
Deferred compensation...................................................................... (187) (273)
Deficit.................................................................................... (5,242) (7,904)
------- -------
Total shareholders' equity............................................................. 70,389 65,247
------- -------
Total liabilities and shareholders' equity............................................. $81,446 $71,791
======= =======
Commitments and contingencies (notes 9 and 11)
See accompanying notes to consolidated financial statements.
-23-
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
------- ------- -------
Revenues........................................... $63,627 $53,332 $37,738
Cost of revenues................................... 32,416 17,021 14,062
------- ------- -------
Gross profit....................................... 31,211 36,311 23,676
Operating expenses:
Research and development.......................... 17,413 16,065 10,261
Selling, general and administrative............... 15,947 12,364 10,307
Merger related costs.............................. - 3,455 -
------- ------- -------
Total operating expenses........................ 33,360 31,844 20,568
------- ------- -------
Income (loss) from operations...................... (2,149) 4,427 3,108
Interest and other income.......................... 2,328 1,941 1,436
------- ------- -------
Income before income taxes......................... 179 6,368 4,544
Provision for (recovery of) income taxes (note 7).. (2,483) 360 (986)
------- ------- -------
Net income......................................... $ 2,662 $ 6,008 $ 5,530
======= ======= =======
Earnings per share:
Basic............................................. $ 0.14 $ 0.32 $ 0.31
Diluted........................................... $ 0.13 $ 0.30 $ 0.29
Weighted average number of common shares
outstanding (in thousands):
Basic............................................. 19,406 18,756 18,027
Diluted........................................... 19,884 19,922 19,365
See accompanying notes to consolidated financial statements.
-24-
SHAREHOLDERS' EQUITY STATEMENT
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollar amounts in thousands of U.S. dollars)
Share Cumulative
Additional Purchase Other Total
Common Shares Paid-In Loans Comprehensive Deferred Shareholders'
Number Amount Capital Receivable Loss Compensation Deficit Equity
Balances, May 31, 1998 17,534,260 $66,303 $ 729 $(164) $(94) $(169) $(19,442) $47,163
Net income - - - - - - 5,530 5,530
Repurchased at cost and
cancellation of shareholder
note receivable (230,568) (1) (39) 40 - - - -
Issue of common share
purchase warrants - - 58 - - - - 58
Issued from stock option
and stock purchase plans 1,041,401 2,145 157 - - - - 2,302
Repayment of share
purchase loans receivable - - - 124 - - - 124
Deferred compensation
related to stock options - - 388 - - (388) - -
Amortization of deferred
compensation relate
to stock options - - - - - 231 - 231
----------------------------------------------------------------------------------------------------
Balances, March 31, 1999 18,345,093 68,447 1,293 - (94) (326) (13,912) 55,408
Net income - - - - - - 6,008 6,008
Issued from stock option
and stock purchase plans 795,389 3,778 - - - - - 3,778
Amortization of deferred
compensation related
to stock options - - - - - 53 - 53
----------------------------------------------------------------------------------------------------
Balances, March 31, 2000 19,140,482 72,225 1,293 - (94) (273) (7,904) 65,247
Net income - - - - - - 2,662 2,662
Issued from stock option
and stock purchase plans 418,621 2,394 - - - - - 2,394
Amortization of deferred
compensation related
to stock options - - - - - 86 - 86
----------------------------------------------------------------------------------------------------
Balances, March 31, 2001 19,559,103 $74,619 $1,293 - $(94) $(187) $ (5,242) $70,389
====================================================================================================
See accompanying notes to consolidated financial statements.
-25-
GENESIS MICROCHIP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income.............................................................. $ 2,662 $ 6,008 $ 5,530
Adjustments to reconcile net income
to cash used in operating activities:
Amortization......................................................... 3,534 3,071 1,132
Gain on sale of capital assets....................................... (66) - -
Non-cash compensation expense related
to stock options and shares issued.................................. 86 53 231
Gain on sale of investment........................................... (100) - -
Deferred income taxes................................................ (3,537) (709) (986)
Change in operating assets and liabilities:
Accounts receivable trade........................................... (8,389) 3,390 (6,682)
Income taxes recoverable............................................ 82 (58) 1,405
Inventory........................................................... (5,791) 2,249 (3,513)
Other............................................................... (3,167) 1,084 (2,916)
Accounts payable.................................................... 4,888 (485) 632
Accrued liabilities................................................. (260) (1,086) 3,813
-------- -------- -------
Net cash from (used in) operating activities...................... (10,058) 13,517 (1,354)
Cash flows from investing activities:
Additions to capital assets............................................. (5,573) (11,200) (1,901)
Proceeds on disposal of capital assets.................................. 3,157 - -
Other................................................................... 80 - -
-------- -------- -------
Cash used in investing activities................................. (2,336) (11,200) (1,901)
Cash flows from financing activities:
Proceeds from:
Issue of common shares and
common share purchase warrants,
net of issue costs.................................................. 2,394 3,778 2,359
Loans payable........................................................ - - 1,034
Repayment of loans payable.............................................. (90) (1,550) (205)
Repayment of share purchase loans....................................... - - 119
-------- -------- -------
Net cash provided by financing activities......................... 2,304 2,228 3,307
Effect of currency translation on cash balances........................... (25) (82) 26
-------- -------- -------
Increase (decrease) in cash and cash equivalents.......................... (10,115) 4,463 78
Cash and cash equivalents, beginning of period............................ 42,942 38,479 38,401
-------- -------- -------
Cash and cash equivalents, end of period.................................. $ 32,827 $ 42,942 $38,479
======== ======== =======
Supplemental cash flow information:
Cash paid for interest.................................................. $ - $ 245 $ 15
Cash paid for income taxes.............................................. $ 1,390 $ 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:
Repurchase of common stock by cancellation of notes receivable.......... $ - $ - $ 40
Deferred compensation related to stock options.......................... $ - $ - $ 388
See accompanying notes to consolidated financial statements.
-26-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
Genesis Microchip Incorporated ("Genesis") designs, develops and markets
integrated circuits that receive 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.
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 net realizable value.
Property and Equipment
Property and equipment are stated at cost. Amortization is recorded using the
following methods and annual rates over the estimated useful lives of the
assets:
Property and equipment 20% to 30% declining balance
Computer software 50% straight line
Leasehold improvements Straight line over the term of the lease
Genesis regularly reviews the carrying values of its property and equipment
by comparing the carrying amount of the asset to the expected future cash flows
to be generated by the asset. If the carrying value exceeds the estimated amount
recoverable, a write-down equal to the excess of the carrying value over the
asset's fair value is charged to the consolidated statement of operations.
-27-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
Genesis recognizes revenue from product sales to customers when a contract is
established, the price is determined, shipment is made and collectibility is
reasonably assured. Genesis' policy on sales to distributors is to defer
recognition of sales and related cost of sales until the distributors resell the
product. 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
The U.S. dollar is the functional currency of Genesis and of its
subsidiaries. Transactions of the Company and its subsidiaries originating in
foreign currencies are translated into U.S. dollars at exchange rates
approximating those at the date of the transaction. Monetary assets and
liabilities are translated at the period-end rate of exchange and non-monetary
items are translated at historical exchange rates. Exchange gains and losses are
included in the consolidated statement of operations for the period.
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 available to be applied against future income tax liabilities, subject to a
ten year carry forward period.
Investment tax credits are classified as a reduction of income tax expense
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, amounts
receivable, accounts payable, accrued liabilities and loan payable. Genesis
determines the fair value of its financial instruments based on quoted market
values or discounted cash flow analyses. Unless otherwise indicated, the fair
values of financial assets and financial liabilities approximate their recorded
amounts.
Financial instruments that potentially subject Genesis to concentrations of
credit risk consist primarily of cash equivalents and accounts receivable trade.
Cash equivalents consist of deposits with or guaranteed by major commercial
banks, the maturities of which are three months or less from the date of
purchase. With respect to accounts receivable, 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
-28-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Basic earnings per share has been calculated by dividing the net income for
the period available to common shareholders by the weighted average number of
common shares outstanding during that period. Basic earnings 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
is recorded at the option grant date in an amount equal to the excess of the
market value of a common share over 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 market value of the
shares results in compensation expense equal to the excess of the market value
of the shares over the fair value of the consideration received.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during
a period resulting from transactions and other events and circumstances from
non-owner sources. For the periods ended March 31, 2001, 2000 and 1999, there
is no difference for Genesis between net income and comprehensive income.
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 for 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. To the extent that it is not considered to be more likely than
not that a deferred tax asset will be recognized, a valuation allowance is
provided.
Recent accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Hedging Activities" (SFAS No. 138"), which amended SFAS No. 133. SFAS No. 138
must be adopted concurrently with the adoption of SFAS No. 133. The Company
will be required to adopt these statements for the year ended March 31, 2002,
commencing with the quarter ended
-29-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2001. SFAS No. 133 and SFAS No. 138 establish methods of accounting for
derivative financial instruments and hedging activities. Because the Company
currently holds no derivative financial instruments and the Company does not
currently engage in hedging activities, the adoption of SFAS No. 133 and SFAS
No. 138 will not have a material impact on the Company's financial condition or
results of operations.
3. Property and equipment
Property and equipment consist of the following (in thousands):
March 31 March 31
2001 2000
---- ----
Property and equipment................................. $ 8,878 $ 9,238
Computer software...................................... 6,031 4,537
Leasehold improvements................................. 3,263 3,610
------- -------
18,172 17,385
Less accumulated amortization.......................... (7,766) (5,870)
------- -------
$10,406 $11,515
======= =======
4. Loan payable
The loan payable is non-interest bearing and is unsecured. It is payable in
annual principal installments by fiscal year as follows (in thousands):
March 31, 2001
--------------
2002................................................... $ 89
2003................................................... 89
2004................................................... 89
2005................................................... 89
2006................................................... 89
2007 and thereafter.................................... 54
----
499
Less current portion................................... 89
----
$410
====
The fair value of the loan payable was $ 420,000 at March 31, 2001, and $481,000
at March 31, 2000, based on the present value of contractual future payments,
discounted at the current market rate of interest available to Genesis for
similar term and security debt instruments.
5. 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
-30-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Underwriter options
As a condition of the issuance of special and bonus warrants in July 1996,
Genesis granted 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, the
underwriter 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.
6. 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") provides for
the granting to employees of incentive stock options, non-statutory stock
options and stock purchase rights for up to 800,000 common shares 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 may 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 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, 2001, there were 201,420 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 employees of Paradise
Electronics Inc., a wholly owned subsidiary of Genesis ("Paradise") 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
-31-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 500,000 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, 2001, there were 292,375
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, consultants and directors of non-
statutory stock options for up to 1,500,000 common shares. 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, 2001, there were 104,348 shares available for grant
under the 2000 Employee Plan.
2001 Non-Statutory Stock Option Plan
The 2001 Non-Statutory Stock Option Plan (the "the 2001 Employee Plan)
provides for the granting to employees, consultants and employee directors of
non-statutory stock options for up to 1,000,000 common shares. The exercise
price of stock options granted under the 2001 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, 2001, there were 603,000 shares available
for grant under the 2001 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, 2001, 148,288 common shares were available for issuance under
this plan.
Details of stock option transactions are as follows:
Weighted average
Option price exercise price
Number of shares per share per share
---------------- ------------- ----------------
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
-32-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Issued....................... 3,190,900 9.25 - 20.56 14.33
Exercised.................... (317,446) 0.17 - 18.13 4.82
Cancelled.................... (1,037,768) 0.78 - 29.93 15.96
----------
Balances, March 31, 2001....... 4,352,112 0.17 - 31.50 14.28
There were 1,028,002 options at March 31, 2001, 533,580 options at March
31, 2000, and 481,848 options at March 31, 1999 that had vested and were
exercisable, with a weighted average exercise price per share of $13.39 at March
31, 2001, $7.54 at March 31, 2000, and $5.80 at March 31, 1999. All options
issued during each period were issued at fair value. The weighted average
remaining contractual life of all of the options outstanding at March 31, 2001
was 6.95 years, at March 31, 2000 was 8.45 years, and at March 31, 1999 was 8.12
years.
Genesis recorded no deferred compensation for the years ended March 31,
2001 or March 31, 2000, and $388,000 for the ten months ended March 31, 1999.
The amortization of deferred compensation is charged to operations and is
amortized over the vesting period of the options. Amortization of deferred
compensation was $86,000 for the year ended March 31, 2001, $53,000 for the year
ended March 31, 2000, and $231,000 for the ten months ended March 31, 1999.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share as if Genesis had 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.
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Risk-free interest rates.......... 4.5% 5.0% 5.0%
Volatility........................ 80% 88% 92%
Expected life of option in years.. 5 5 5
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 2001 would have decreased
by approximately $10,538,000 or by $0.54 for basic earnings per share and by
$0.53 for diluted earnings per share. The 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 per share for basic earnings per share and
by $0.16 for diluted
-33-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2001,
2000, and 1999 are $8.79, $15.45, and $10.47, respectively.
7. Income taxes
The provision for income taxes consists of (in thousands):
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Current.......................... $ 1,054 $1,069 $ -
Deferred......................... (3,537) (709) (986)
------- ------ ---------
$(2,483) $ 360 $ (986)
======= ====== =========
The provision for (recovery of) income taxes differs from the amount
computed by applying the statutory income tax rate to income before provision
for income taxes. The sources and tax effects of the differences are as follows
(in thousands):
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Basic rate applied to income
before provision for (recovery of) income taxes............... $ 76 $ 2,802 $ 2,032
Adjustments resulting from:
Permanent difference arising from stock option deduction... (1,200) (188) -
Non-deductible expenses.................................... 280 65 -
Research and development deductions
and investment tax credits............................ (1,071) (1,212) (545)
Foreign tax rate differences............................. (472) - 45
Utilization of loss carry-forwards....................... - - (1,142)
Utilization of research and development expenses
deferred for income tax purposes......................... - - (1,621)
Change in valuation allowance............................ - (1,096) -
Other items.............................................. (96) (11) (135)
------- ------- -------
......................................................... (2,483) 360 (1,366)
Unrecognized benefit of losses
carried forward............................................. - - 380
------- ------- -------
$(2,483) $ 360 $ (986)
======= ======= =======
Pretax income from foreign operations was $4,730,000 for the year ended
March 31, 2001, $427,000 for the year ended March 31, 2000, and $2,790,000 for
the ten months ended March 31, 1999.
Significant components of Genesis' deferred tax assets are as follows (in
thousands):
March 31
2001 2000
------- -------
Net operating loss carryforwards............... $ 6,857 4,282
Investment tax credit carryforwards............ 1,737 1,035
-34-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred interest charges................... 1,492 1,492
Issue costs................................. 554 983
Merger related costs........................ 405 621
Other....................................... 110 (795)
------- -------
Net deferred tax asset...................... 11,155 7,618
Less valuation allowance.................... (4,594) (4,594)
------- -------
$ 6,561 $ 3,024
======= =======
There is no change in the valuation allowance during the year ended March
31, 2001. The valuation allowance increased by $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 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 would need to generate
future taxable income of approximately $29,000,000 prior to the expiration of
the net operating loss carryforwards in the years 2008 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.
8. 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):
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Numerator for basic and diluted
net income per share:
Net income........................ $ 2,662 $ 6,008 $ 5,530
======= ======= =======
Denominator for basic net income
per share:
Weighted average common shares.... 19,406 18,756 18,027
======= ======= =======
Basic net income per share.............. $ 0.14 $ 0.32 $ 0.31
======= ======= =======
Denominator for diluted net income
per share:
Weighted average common shares.... 19,406 18,756 18,027
Stock options and warrants........ 478 1,166 1,338
------- ------- -------
Shares used in computing diluted
net income per share.................. 19,884 19,922 19,365
======= ======= =======
Diluted net income per share............ $ 0.13 $ 0.30 $ 0.29
======= ======= =======
-35-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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):
Amount
------
2001................................................ $ 2,204
2002................................................ 2,141
2003................................................ 2,067
2004................................................ 2,022
2005................................................ 2,043
Thereafter.......................................... 3,338
-------
$13,815
=======
Rental expense was $2,211,000 for the year ended March 31, 2001, $1,187,000
for the year ended March 31, 2000, and $651,000 for the ten months ended March
31, 1999.
Supply agreements
Genesis purchases products from several suppliers but no single product is
purchased from more than one supplier. 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.
10. 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. The target market is divided into two major
categories; flat panel monitors and other.
Revenues by major product category were as follows:
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
Flat panel monitors................ $45,928 $36,788 $26,374
Other.............................. 17,699 16,544 11,364
------- ------- -------
$63,627 $53,332 $37,738
======= ======= =======
Other revenue includes $1,030,000 of sub-lease rental income for the year ended
March 31, 2001. No rental income was earned during the year ended March 31,
2000, nor the ten months ended March 31, 1999.
-36-
GENESIS MICROCHIP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Year Year Ten Months
Ended Ended Ended
March 31 March 31 March 31
2001 2000 1999
---- ---- ----
United States...................................... $ 9,519 $11,288 $ 7,535
Japan and Asia..................................... 49,508 40,139 28,576
Canada............................................. 3,050 624 300
Other.............................................. 1,550 1,281 1,327
------- ------- -------
$63,627 $53,332 $37,738
======= ======= =======
Net long-lived assets by country were as follows:
March 31
2001 2000
---- ----
United States...................................... $ 4,896 $ 3,000
Canada............................................. 6,052 9,000
------- -------
$10,948 $12,000
======= =======
For the year ended March 31, 2001, no customer accounted for more than 10%
of total revenues. 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. At March 31, 2001,
one customer represented 10% of accounts receivable trade. At March 31, 2000,
two customers represented 16% and 10% of accounts receivable trade,
respectively.
11. Subsequent Event
On April 24, 2001, Silicon Image, Inc., announced that it had filed a
patent infringement lawsuit against the Company in the United States District
Court for the Eastern District of Virginia and had filed a complaint before the
International Trade Commission of the United States Government. The complaint
and suit allege that certain Genesis products infringe various claims of one of
Silicon Image's patents. Genesis believes the lawsuit to be baseless and without
merit, and intends to defend it vigorously. The financial impact of these claims
is not yet determinable, and no provision has been made in the consolidated
financial statements for any costs associated with these claims.
-37-
Genesis Microchip Inc.
Selected Quarterly Financial Information
(Unaudited)
Three Months Ended
---------------------------------------------------------------------------------------
Mar. Dec. Sep. Jun. Mar. Dec. Sep. Jun.
2001 2000 2000 2000 2000 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Revenues................................. $ 18,471 $ 17,304 $ 15,040 $ 12,812 $ 10,605 $ 10,059 $ 16,362 $ 16,306
Cost of revenues......................... 14,762 7,697 5,603 4,354 3,492 3,263 5,002 5,264
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............................. 3,709 9,607 9,437 8,458 7,113 6,796 11,360 11,042
Operating expenses:
Research and development............... 4,156 4,792 4,417 4,048 4,149 4,351 3,986 3,579
Selling, general and
administrative....................... 5,372 3,833 3,553 3,189 2,988 2,991 3,112 3,273
Merger related costs................... -- -- -- -- -- -- -- 3,455
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses............ 9,528 8,625 7,970 7,237 7,137 7,342 7,098 10,307
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations............ (5,819) 982 1,467 1,221 (24) (546) 4,262 735
Interest and other income................ 433 642 739 514 459 550 515 417
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes........ (5,386) 1,624 2,206 1,735 435 4 4,777 1,152
Provision for (recovery of)
income taxes............................ (2,540) (354) 241 170 (74) (196) 751 (121)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (2,846) $ 1,978 $ 1,965 $ 1,565 $ 509 $ 200 $ 4,026 $ 1,273
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share
Basic.................................. $ (0.15) $ 0.10 $ 0.10 $ 0.08 $ 0.03 $ 0.01 $ 0.22 $ 0.07
Diluted................................ $ (0.15) $ 0.10 $ 0.10 $ 0.08 $ 0.03 $ 0.01 $ 0.20 $ 0.06
Shares used to compute basic
net income (loss) per share............ 19,524 19,378 19,294 19,215 19,081 18,923 18,499 18,375
Shares used to compute diluted
net income (loss) per share............ 19,524 19,860 19,963 19,858 19,991 19,807 19,784 19,817
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
-38-
ITEM 10 Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers,
directors and any person who owns more than ten percent of our common shares to
file reports of ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission and with us. Based on our review of copies of forms and written
representations, we believe that all of our officers, directors and greater than
ten percent shareholders complied with all filing requirements applicable to
them for the year ended March 31, 2001.
Directors and Executive Officers
The following table lists the names and positions held by each of our directors
and executive officers as of June 30, 2001:
Name Age Position
---- --- --------
Amnon Fisher......................... 53 President and Chief Executive Officer
Robert Bicevskis..................... 40 Chief Technology Officer
Tzoyao Chan.......................... 48 Vice-President, Product Development
Eric Erdman.......................... 43 Chief Financial Officer and Secretary
Anders Frisk......................... 45 Vice President, Marketing
Ken Murray........................... 50 Vice President, Human Resources
Matthew Ready........................ 42 Vice President, Sales
Mohammad Tafazzoli................... 41 Vice President, Operations
Alexander S. Lushtak ................ 62 Chairman of the Board
Jeffrey Diamond...................... 48 Director
James E. Donegan..................... 55 Director
George A. Duguay .................... 48 Director
Lawrence G. Finch ................... 67 Director
Amnon Fisher joined Genesis as President and Chief Operating Officer in February
2000. He was appointed Chief Executive Officer in April 2000 and elected to our
Board of Directors in August 2000. Before joining Genesis, Mr. Fisher served as
Senior Vice President and General Manager of the Consumer Products Division of
NeoMagic Corp. from 1998 to 2000. Mr. Fisher was Vice President and General
Manager, Consumer Products Division of LSI Logic from 1991 to 1998. Mr. Fisher
holds a M. Sc. in Electrical Engineering from City College of New York and a B.
Sc. in Electrical Engineering from Israel Institute of Technology.
Robert Bicevskis joined Genesis in July 2000 as Vice President, Engineering and
became Chief Technology Officer in April 2001. Prior to that he held senior
engineering and design management positions with ATI Technologies, most recently
as Director of Hardware Engineering. He has also served with National
Semiconductor and Control Data in various software and hardware roles. Mr.
Bicevskis holds a B.A.Sc. in Engineering Science and a M.A.Sc. in Electrical
Engineering, both from the University of Toronto.
Tzoyao Chan joined Genesis as a result of the merger with Paradise Electronics.
Dr.Chan joined Paradise Electronics in May 1997 as Vice President of Engineering
and became Vice President of Product Development of Genesis Microchip in April
2001. Before Paradise, he was with Cirrus Logic as Director of Engineering,
Advanced Products. Dr. Chan holds a Ph.D. degree from the University of Arizona
(Electrical Engineering).
Eric Erdman has served as Chief Financial Officer since December 1997 and as
Secretary since October 1995. He joined Genesis in July 1995 as Director,
Finance and Administration, served as Vice President, Finance and Administration
from July 1996 to May 1999, and as a Director from October 1995 to September
1996. Mr. Erdman holds a Bachelor of Mathematics degree from the University of
Waterloo,
-39-
and he is a member of the Canadian Institute of Chartered Accountants and of the
American Institute of Certified Public Accountants.
Anders Frisk joined Genesis in March 2000. Prior to then, he served as Director
of Technology Planning with Nokia from February 1998 to March 2000, and as PC
Architecture Manager Fujitsu ICL Computers from April 1991 to January 1998. Mr.
Frisk has served on the board of the Video Electronics Standards Association, or
VESA, and chaired VESA's Monitor Committee for four years. Mr. Frisk holds a
Master's degree in Electrical Engineering from Stockholm's Royal Institute of
Technology.
Ken Murray joined Genesis in August 2000. Prior to then, he served as Vice
President, Human Resources for Choridant Software (1999-2000), NeoMagic Corp.
(1997-99), Akashic Memories Corp. (1990-97) and Domain Technology (1984-89). He
has also worked in human resources and personnel management for Memorex (1975-
84) and ISS/Sperry-Univac (1973-75). Mr. Murray holds a B.S. degree in Business
Administration from San Jose State University.
Matthew Ready joined Genesis in April 2000. Prior to then, he served as General
Manager of the Global PC Business Unit for Brooks Technical Group from July
1997. Mr. Ready was Vice President of Worldwide Sales for Array Microsystems
from September 1996 to June 1997 and Vice President Sales with OPTi Computer
from March 1991 to August 1996. Mr. Ready holds a B.S. degree in Business
Administration from San Jose State University.
Mohammad Tafazzoli has served as Vice President, Operations since June 2000. He
was previously the Director of Operations at Genesis and joined the company as a
result of the merger with Paradise Electronics. Prior to joining Paradise, Mr.
Tafazzoli was a Senior Manager, Product Engineering for Cirrus Logic's Graphics
Business Unit from October 1993 to March 1998. Mr. Tafazzoli holds a B.S.E.E.
degree from San Jose State University.
Alexander S. Lushtak has served as Chairman since April 2001 and as a Director
since May 1999. He is a founder of Paradise Electronics, Inc. and served as the
Chairman of the Board of Directors of Paradise from 1996 until May 1999 when it
merged with Genesis. From 1993 to 1996 he was the founder and Chairman of the
Board of Directors of Accent Inc., a voice recognition company. Mr. Lushtak also
serves on the Board of Directors of two private companies.
Jeffrey Diamond has served as a Director since April 2001. Prior to then, he
served as an executive and consultant since the Genesis-Paradise merger of 1999.
Prior to the merger, he served as a Director of Paradise Electronics from its
inception in 1996 and served as CEO of Paradise Electronics from September 1998.
James E. Donegan has served as a Director since September 1997. Mr. Donegan has
served as the Chairman of the Board, President and Chief Executive Officer of
Sipex Corporation, a semiconductor company, since 1985. Mr. Donegan holds a B.A.
degree from Villanova University.
George A. Duguay has served as a Director since May 1993. Mr. Duguay has served
as the President and partner of Duguay and Ringler Corporate Services, which
provides bookkeeping and corporate secretarial services, since May 1985.
Lawrence G. Finch has served as a Director since May 1999. He is a former
Director of Paradise Electronics, and has been a venture capitalist and general
partner of the general partner of various Sigma Partners funds since 1987. Mr.
Finch is a director of Splash Technology Holdings and International Network
Services.
ITEM 11 Compensation and Other Information Concerning Officers
Executive compensation
-40-
The following table contains information for the last three fiscal periods about
compensation paid to our Chief Executive Officer and to our four other most
highly compensated executive officers in our 2001 fiscal year. The data for
fiscal years 2000 and 2001 include compensation for the entire fiscal years
ended March 31. Data for fiscal period 1999 includes compensation for the ten
months ended March 31, 1999.
Summary Compensation Table
Securities
Fiscal Annual Compensation Underlying All Other
-------------------
Name and Principal Position Year Salary Bonus Options (#) Compensation
---------------------------
--------------------------------------------------------------
Amnon Fisher/(1)/.............................. 2001 $ 258,333 $ - 175,000 $ -
President and Chief Executive Officer 2000 41,667 75,000 400,000 -
Matthew Ready/(2)/............................. 2001 167,670 97,000 195,000 -
Vice President, Sales
Anders Frisk/(3)/.............................. 2001 200,000 - 110,000 -
Vice President, Marketing 2000 25,450 100,000 130,000 -
Mohammad Tafazzoli/(4)/........................ 2001 161,461 24,000 107,000 -
Vice President, Operations
Eric Erdman.................................... 2001 132,267 - 130,000 -
Chief Financial Officer and Secretary 2000 101,775 16,100 40,000 -
1999 73,667 79,334 22,500 -
__________________
(1) Mr. Fisher was appointed Chief Executive Officer in April 2000. He joined
the company as Chief Operating Officer in February 2000.
(2) Matthew Ready joined the company in April 2000.
(3) Anders Frisk joined the company in March 2000.
(4) Mohammad Tafazzoli became an executive officer in June 2000. No
information has been provided for previous fiscal years because he was not
an executive officer at any time in those years.
Options granted in the year ended March 31, 2001
The following table contains information about stock option grants made during
the year ended March 31, 2001 to our Chief Executive Officer and to our four
other most highly compensated executive officers in fiscal 2001. No stock
appreciation rights were granted to these individuals. The stock options were
granted under our 1997 Employee Stock Option Plan, our 2000 Non-Statutory Stock
Option Plan and our 2001 Non-Statutory Stock Option Plan. Those options have a
maximum term of ten years, subject to earlier termination upon cessation of
service.
Individual grants
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation for
Underlying Employees Exercise Option Term/(1)/
----------------------
Options in Fiscal Price Expiration
Name Granted (#) Year ($/Share) Date 5%($) 10%($)
---- --------------------------------------------------------------------------
-41-
Amnon Fisher............... 25,000 0.8 % $ 9.44 12/06/10 $ 148,419 $ 376,123
150,000 4.7 9.25 01/02/11 872,591 2,211,318
Matthew Ready.............. 130,000 4.1 16.38 04/17/10 1,339,168 3,393,715
15,000 0.5 9.44 12/06/10 89,051 225,674
50,000 1.6 9.25 01/02/11 290,864 737,106
Anders Frisk............... 40,000 1.3 17.00 08/02/10 427,648 1,083,745
20,000 0.6 9.44 12/06/10 118,735 300,899
50,000 1.6 9.25 01/02/11 290,864 737,106
Mohammad Tafazzoli......... 12,000 3.8 17.50 04/25/10 132,068 334,686
55,000 1.7 16.50 05/30/10 570,722 1,446,321
15,000 0.5 9.44 12/06/10 89,051 225,674
25,000 0.8 9.25 01/02/11 145,432 368,553
Eric Erdman................ 80,000 2.5 17.50 04/25/10 880,452 2,231,239
15,000 0.5 9.44 12/06/10 89,051 225,674
35,000 1.1 9.25 01/02/11 203,605 515,974
-----------------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There is
no assurance that the actual stock price appreciation over the option terms
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common shares appreciates over the term of
the option, no value will be realized from the option grants made to the
executive officers.
Aggregate option exercises in the last fiscal year and fiscal year end option
values
The following table contains information about option exercises for our Chief
Executive Officer and our four other most highly compensated executive officers
in the year ended March 31, 2001 and their option holdings as of March 31, 2001.
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-the-
Acquired Options At Fiscal Year End money Options/SARs at the
Upon Value (#) Fiscal Year End ($)(1)
-----------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------------------------------------------------------------------------------------
Amnon Fisher............ - $ - 166,666 408,334 $ - $ 115,563
Matthew Ready........... - - - 195,000 - 41,838
Anders Frisk............ - - 52,812 187,188 - 44,325
Mohammad Tafazzoli...... 1,201 21,582 5,683 114,101 21,996 51,042
Eric Erdman............. - - 93,436 125,554 101,482 42,439
----------------
(1) The value of an in-the-money stock option represents the difference between
the aggregate estimated fair market value of the underlying stock and the
aggregate exercise price of the stock option. We have used the reported
closing price of $9 15/16 per share on The Nasdaq National Market on March
30, 2001 as the estimated fair market value of our common shares.
Compensation committee interlocks and insider participation
At no time since our formation have any of the members of our compensation
committee served as officers or employees of us or any of our subsidiaries. An
interlocking relationship does not exist between our board of directors or its
compensation committee and the board of directors or compensation committee of
any other company, nor did any interlocking relationships exist during the past
fiscal year.
Compensation of directors
-42-
Directors who are not our employees receive $2,000 per quarter as a retainer,
$1,000 for each meeting of the Board of Directors attended in person, $500 for
each teleconference meeting of the Board of Directors attended and $500 for each
committee meeting attended. Directors who are employees receive no separate
compensation for services rendered as a director. All directors are reimbursed
for reasonable expenses to attend meetings. Compensation paid to non-employee
directors as retainers and as attendance fees for the year ended March 31, 2001
was $59,500.
Non-employee directors automatically receive stock options under the terms of
the 1997 Non-Employee Stock Option Plan, and along with employee directors may
receive stock options under the terms of our 2000 Non-Statutory Stock Option
Plan and 2001 Non-Statutory Stock Option Plan.
ITEM 12 Ownership by our Directors, Officers and Principal Shareholders
The following table contains information about the beneficial ownership of our
common shares as of June 30, 2001, for:
. each of our directors,
. our Chief Executive Officer and each of our four other most highly
compensated executive officers during the fiscal year ended March 31, 2001,
. all of our directors and executive officers as a group, and
. all persons known by us to be beneficial owners of more than five percent of
our outstanding shares.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities and Exchange Act of 1934 and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under Rule 13d-3 beneficial ownership includes any shares over which
the individual or entity has voting power or investment power and any shares
that the individual has the right to acquire within 60 days of June 30, 2001
through the exercise of any stock options. Unless indicated, each person or
entity has sole voting and investment power over the shares shown as
beneficially owned, or shares those powers with his or her spouse.
The number of options exercisable within 60 days of June 30, 2001 is shown in
the first column of the table, and is included in the number of common shares
beneficially owned shown in the second column.
The number and percentage of shares beneficially owned is computed on the basis
of 20,288,444 common shares outstanding on June 30, 2001.
Number of Total
Common Number of Percentage
Shares Common of
Issuable Shares Outstanding
Pursuant to Beneficially Common
Beneficial Owner Options Owned Shares
---------------- ------------------------------------------
State of Wisconsin Investment Board - 1,779,600 8.4%
121 East Wilson Street
Madison, WI 53707
Firsthand Capital Management Inc. - 1,337,700 6.3%
125 S Market Street, Suite 1200
San Jose, CA 95113
Putnam Investment Management Inc. - 1,146,699 5.4%
One Post Office Square
Boston, MA 02110
Directors and Executive Officers:
Alexander S. Lushtak(1)................ 45,416 145,416 *
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Jeffrey Diamond/(2)/......................... 1,666 161,220 *
James E. Donegan............................. 16,250 16,250 *
George A. Duguay............................. 33,166 33,166 *
Lawrence G. Finch/(3)/....................... 28,750 435,409 2.1%
Amnon Fisher................................. 281,249 281,249 1.3%
Matthew Ready................................ 84,582 84,582 *
Anders Frisk................................. 109,374 109,374 *
Mohammad Tafazzoli........................... 38,260 43,045 *
Eric Erdman.................................. 133,509 135,509 *
All directors and executive officers as a
group (13 persons)..................... 917,270 1,636,792 7.7%
--------------
* Less than one percent
(1) Includes 100,000 common shares held by a trust established for the benefit
of Mr. Lushtak and his family.
(2) Includes 159,554 common shares held by a trust established for the benefit
of Mr. Diamond and his family.
(3) Includes 348,946 common shares held by Sigma Partners III, L.P. of which
Mr. Finch is a general partner of the general partner. Mr. Finch disclaims
beneficial ownership of these shares except to the extent of his
proportional interest therein.
ITEM 13 Transactions with our Directors, Officers and Principal Shareholders
Silicon Video, Inc.
Paul M. Russo, our former Chairman, is the Chairman and Chief Executive Officer
of Silicon Video, Inc., or SVI, a private company formed in July 2000.
We invested $2 million in SVI in July 2000. This investment was made by way of
convertible debt. The debt was converted into shares at the same price at which
SVI issued shares to third party investors. We also received warrants to
purchase additional shares of SVI as part of this investment. In December 2000,
SVI redeemed our initial shares for an amount equal to our initial investment.
As a result, we now hold only warrants to purchase their shares.
We assigned a third-party contract to SVI and guaranteed their performance under
that contract. SVI subcontracted portions of the remaining work under that
contract back to us for which we billed them $800,000. In exchange for license
fees we licensed SVI the technology used in that contract. SVI may commercialize
that licensed technology outside of agreed markets. If they do this, they will
pay us royalties on sales of their products that incorporate the licensed
technology.
A copy of the agreement assigning the contract and licensing the technology was
filed on November 14, 2000 with the Securities and Exchange Commission as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
We also sold products to SVI. The products were sold at normal trade prices and
SVI's debt to us was secured by a bank guarantee. Total product sales to SVI in
the fiscal year ended March 31, 2001 were $1.2 million.
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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, 2001 and 2000.
. Consolidated Statements of Operations for the years ended March 31, 2001 and
March 31, 2000, and for the ten months ended March 31, 1999.
. Consolidated Statements of Shareholders' Equity for the years ended March
31, 2001 and March 31, 2000, and for the ten months ended March 31, 1999.
. Consolidated Statements of Cash Flows for the years ended March 31, 2001 and
March 31, 2000, and for the ten months ended March 31, 1999.
. Notes to Consolidated Financial Statements
. Selected Quarterly Financial Information
2. Consolidated Financial Statement Schedules.
The schedule listed in the Consolidated Financial Statement Schedule Index
is filed as part of this report on Form 10-K.
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All other financial statement schedules are omitted because they are not
applicable or not required, or because the required information is included in
the Consolidated Financial Statements and Notes thereto which are included
herein.
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, 2001.
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
Date: November 30, 2001 By: /s/ Eric Erdman
------------------------
Eric Erdman
Chief Financial Officer and Secretary
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.
Name Title Date
---- ----- ---------------------
/s/ Alexander S. Lushtak
-------------------------------------
Alexander S. Lushtak Chairman November 30, 2001
/s/ Amnon Fisher
-------------------------------------
Amnon Fisher President and Chief Executive Officer November 30, 2001
/s/ Eric Erdman
-------------------------------------
Eric Erdman Chief Financial Officer and Secretary November 30, 2001
/s/ James E. Donegan
-------------------------------------
James E. Donegan Director November 30, 2001
/s/ George A. Duguay
-------------------------------------
George A. Duguay Director November 30, 2001
/s/ Lawrence G. Finch
-------------------------------------
Lawrence G. Finch Director November 30, 2001
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/s/ Jeffrey Diamond
-------------------------------
Jeffrey Diamond Director November 30, 2001
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CONSOLIDATED FINANCIAL STATEMENT SCHEDULE INDEX
Schedule
Number Description
-------- -----------
II Valuation and Qualifying Accounts
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
------------------------------------------------------------------------------------------------
Balance, Charged to Deductions Balance,
beginning of Cost of end of
period Sales period
$000 $ 000 $000 $ 000
------------------------------------------------------------------------------------------------
Inventory Obsolescence Reserve
------------------------------------------------------------------------------------------------
March 31, 1999 390 - - 390
------------------------------------------------------------------------------------------------
March 31, 2000 390 550 - 940
------------------------------------------------------------------------------------------------
March 31, 2001 940 1,254 484 1,710
------------------------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
21* Subsidiaries
23 Consent of KPMG, LLP dated November 30, 2001
-----------------
* Previously filed.