SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER:
000-29592
GENESIS MICROCHIP INCORPORATED
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 COMMERCE VALLEY DRIVE WEST
THORNHILL, ONTARIO, CANADA L3T 7V8
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (905) 889-5400
Former name, former address and former fiscal year if changed since last report.
Former address: N/A
Former Fiscal Year: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
There were 20,983,584 shares of the registrant's common shares issued and
outstanding as of September 30, 2001.
GENESIS MICROCHIP INCORPORATED
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 2001
Index
Item Number Page
----------- ----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2001 and March 31, 2001 1
Condensed Consolidated Statements of Operations for the three and six month
periods ended September 30, 2001 and September 30, 2000 2
Condensed Consolidated Statements of Cash Flows for the six month periods ended
September 30, 2001 and September 30, 2000 3
Notes To Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II: Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
* No information has been provided because this item is not applicable.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands of U.S. dollars)
ASSETS
September 30, March 31,
2001 2001
(unaudited)
-------------------------
Current assets:
Cash and cash equivalents $ 57,344 $ 32,827
Accounts receivable trade, net of allowance for doubtful accounts
of $341 at September 30 and $78 at March 31 17,246 14,412
Income taxes recoverable 438 1,029
Inventory 7,638 10,505
Investment held for resale 1,100 1,100
Other 4,373 3,964
-------------------------
Total current assets 88,139 63,837
Capital assets 10,544 10,406
Deferred income taxes 6,145 6,561
Other 687 642
-------------------------
Total assets $105,515 $ 81,446
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,832 $ 6,851
Accrued liabilities 3,930 3,707
Current portion of loans payable 90 89
-------------------------
Total current liabilities 7,852 10,647
Long-term liabilities:
Loans payable 319 410
-------- --------
Total liabilities 8,171 11,057
Shareholders' equity:
Special shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - no shares at September 30 or March 31
Common shares:
Authorized - 1,000,000,000 shares without par value
Issued and outstanding - 20,983,584 shares at September 30 and
19,559,103 shares at March 31 93,285 74,619
Additional paid in capital 1,293 1,293
Cumulative other comprehensive loss (94) (94)
Deferred compensation (127) (187)
Retained earnings (deficit) 2,987 (5,242)
-------------------------
Total shareholders' equity 97,344 70,389
-------------------------
Total liabilities and shareholders' equity $105,515 $ 81,446
=========================
See accompanying notes to condensed consolidated financial statements.
1
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands of U.S. dollars, except per share amounts)
(unaudited)
Three Months Ended Six months ended
September September September September
30, 2001 30, 2000 30, 2001 30, 2000
---------------------------------------------------
Revenues $ 36,137 $ 15,040 $ 57,443 $ 27,852
Cost of revenues 19,465 5,603 30,910 9,957
---------------------------------------------------
Gross profit 16,672 9,437 26,533 17,895
Operating expenses:
Research and development 5,161 4,417 9,385 8,465
Selling, general and administrative 4,538 3,553 8,754 6,742
---------------------------------------------------
Total operating expenses 9,699 7,970 18,139 15,207
---------------------------------------------------
Income from operations 6,973 1,467 8,394 2,688
Interest income 399 739 753 1,253
---------------------------------------------------
Income before income taxes 7,372 2,206 9,147 3,941
Provision for income taxes 740 241 918 411
---------------------------------------------------
Net income $ 6,632 $ 1,965 $ 8,229 $ 3,530
===================================================
Earnings per share:
Basic $ 0.32 $ 0.10 $ 0.41 $ 0.18
Diluted $ 0.29 $ 0.10 $ 0.37 $ 0.18
Weighted average number of common shares outstanding (in thousands):
Basic 20,697 19,298 20,211 19,241
Diluted 22,617 19,963 22,024 19,902
See accompanying notes to condensed consolidated financial statements.
2
GENESIS MICROCHIP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands of U.S. dollars)
(unaudited)
Six Months Ended
September September
30, 2001 30, 2000
------------------------
Cash flows from operating activities:
Net income $ 8,229 $ 3,530
Adjustments to reconcile net income to cash
used in operating activities:
Amortization 1,418 2,032
Loss (gain) on sale of capital assets 2 (140)
Stock compensation expense 60 50
Deferred income taxes 356 (207)
Change in operating assets and liabilities:
Accounts receivable trade (2,834) (5,470)
Income taxes recoverable 651 (124)
Inventory 2,867 (2,412)
Other current assets (409) (1,494)
Accounts payable (3,019) (906)
Accrued liabilities 223 (2,385)
------------------------
Net cash provided by (used in) operating activities 7,544 (7,526)
Cash flows from investing activities:
Additions to capital assets (1,678) (2,700)
Proceeds on disposal of capital assets 147 1,320
Other, net (72) (1,941)
------------------------
Cash used in investing activities (1,603) (3,321)
Cash flows from financing activities:
Proceeds from issue of common shares, net of
issue costs 18,666 1,403
Repayment of loans payable (93) (90)
------------------------
Net cash from financing activities 18,573 1,313
Effect of currency translation on cash balances 3 (12)
------------------------
Increase (decrease) in cash and cash equivalents 24,517 (9,546)
Cash and cash equivalents, beginning of period 32,827 42,942
------------------------
Cash and cash equivalents, end of period $ 57,344 $ 33,396
========================
See accompanying notes to condensed consolidated financial statements.
3
GENESIS MICROCHIP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
We have prepared the accompanying unaudited condensed consolidated financial
statements in accordance with United States generally accepted accounting
principles and according to the rules and regulations of the Securities and
Exchange Commission for interim financial reporting. Consequently, they do not
include all of the information and footnotes required by United States generally
accepted accounting principles for a complete set of annual financial
statements. These condensed financial statements should be read in conjunction
with our financial statements and notes thereto for the year ended March 31,
2001 that are included in our most recent Annual Report on Form 10-K filed with
the Securities and Exchange Commission. We believe that the accompanying
financial statements reflect all adjustments, consisting solely of normal,
recurring adjustments, that are necessary for fair presentation of the results
for the interim periods presented. The results of operations for the period
ended September 30, 2001 are not necessarily indicative of the results to be
expected for the full fiscal year.
2. Earnings per share
Basic earnings per share are computed by dividing the net income in a period by
the weighted average number of common shares outstanding during that period.
Diluted earnings per share are calculated in order to give effect to all
potential common shares issuable during the period. The weighted average number
of diluted shares outstanding is calculated by assuming that any proceeds from
potential common shares, such as stock options, are used to repurchase common
shares at the average share price in the period.
Per share information calculated on this basis is as follows (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------------------- -----------------------------
Numerator:
Net income $ 6,632 $ 1,965 $ 8,229 $ 3,530
============================= =============================
Denominator for basic earnings per share-
Weighted average common shares outstanding 20,697 19,298 20,211 19,241
============================= =============================
Basic earnings per share $ 0.32 $ 0.10 $ 0.41 $ 0.18
============================= =============================
Denominator for diluted earnings per share-
Weighted average common shares outstanding 20,697 19,298 20,211 19,241
Stock options and warrants 1,920 665 1,813 661
----------------------------- -----------------------------
Shares used in computing diluted earnings per share 22,617 19,963 22,024 19,902
============================= =============================
Diluted earnings per share $ 0.29 $ 0.10 $ 0.37 $ 0.18
============================= =============================
4
3. Segmented information
We operate and track our results in one operating segment. We design, develop
and market integrated circuits that manipulate and process digital images. The
target market is divided into two major categories; flat panel monitors and
other.
Three Months Ended Six Months Ended
September September September September
30, 2001 30, 2000 30, 2001 30, 2000
-------------------------------------------------------
Flat panel monitors $32,488 $ 9,334 $50,013 $19,151
Other 3,649 5,706 7,430 8,701
-------------------------------------------------------
$36,137 $15,040 $57,443 $27,852
=======================================================
Revenues from our unaffiliated customers by geographic region were as follows
(in thousands):
Three Months Ended Six Months Ended
September September September September
30, 2001 30, 2000 30, 2001 30, 2000
-------------------------------------------------------
United States $ 1,630 $ 3,342 $ 3,942 $ 5,190
Japan and Asia 33,733 10,226 52,157 20,575
Canada 515 465 702 712
Rest of World 259 1,007 642 1,375
-------------------------------------------------------
$36,137 $15,040 $57,443 $27,852
=======================================================
Net long-lived assets by country of location were as follows (in thousands):
September March 31,
30, 2001 2001
--------------------------
United States $ 4,700 $ 4,896
Canada 6,431 6,052
--------------------------
$11,131 $10,948
==========================
The following table shows the percentage of our revenues in each period that was
derived from customers who individually accounted for more than 10% of revenues
in that period:
Three Months Ended Six Months Ended
September September September September
30, 2001 30, 2000 30, 2001 30, 2000
-------------------------------------------------------
Customer A 21% - 18% -
Customer B 12% - - -
Customer C 11% - - -
Customer D 10% - 10% -
Customer E - - - 10%
The following table shows customers accounting for more than 10% of accounts
receivable trade at September 30, 2001 and March 31, 2001:
September March 31,
30, 2001 2001
--------------------------
Customer A 27% -
Customer B 15% 10%
Customer C 13% -
Customer D 10% -
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains numerous statements of a
forward-looking nature relating to potential future events or to our future
financial performance. Our actual future results may differ significantly from
those forward-looking statements. You should consider the various factors
identified under the caption "Factors that may affect future operating results"
in evaluating those statements.
Overview
We design, develop and market integrated circuits, or chips, that process
digital video and graphic images. Our chips translate source video, graphics and
digital images in order to be able to show them on various display systems such
as flat panel computer monitors or digital televisions. We do not manufacture
our chips. We procure them from third party manufacturers, such as Taiwan
Semiconductor Manufacturing Corporation, and United Semiconductor Corporation.
Applications for our products include:
. flat panel computer monitors,
. digital CRT computer monitors,
. consumer electronics applications, such as digital television and DVD,
. digital projection systems, and
. advanced image processing applications such as video editing, medical and
security systems.
Results of operations
The following table shows unaudited statement of operations data for the three
month and six month periods ended September 30, 2001 and September 30, 2000,
expressed as a percentage of revenues:
Three months ended Six months ended
------------------------------------------------------------
September September September September
30, 2001 30, 2000 30, 2001 30, 2000
------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 53.9 37.3 53.8 35.8
------------------------------------------------------------
Gross profit 46.1 62.7 46.2 64.2
Operating expenses:
Research and development 14.3 29.4 16.4 30.4
Selling, general and administrative 12.5 23.6 15.2 24.2
------------------------------------------------------------
Total operating expenses 26.8 53.0 31.6 54.6
------------------------------------------------------------
Income from operations 19.3 9.8 14.6 9.6
Interest 1.1 4.9 1.3 4.5
------------------------------------------------------------
Income before income taxes 20.4 14.7 15.9 14.1
Provision for income taxes 2.0 1.6 1.6 1.5
------------------------------------------------------------
Net income 18.4% 13.1% 14.3% 12.7%
============================================================
Three months ended September 30, 2001
Revenues. Revenues for the three months ended September 30, 2001 increased to
$36.1 million from $15.0 million in the three months ended September 30, 2000,
an increase of 140.3%. This resulted from a significant increase in units
shipped offset in part by a decline in average selling prices. We expect that
revenues in the 2002 fiscal year will continue to be dominated by shipments of
products into the flat-panel monitor market and continue to see strength in the
market going forward. However, given the current uncertain economic environment,
we are targeting revenue in the December quarter to be at least the same as the
September quarter.
Gross Profit. Gross profit for the three months ended September 30, 2001
increased to $16.7 million from $9.4 million in the three months ended September
30, 2000. As a percentage of revenues, gross profit represented 46.1% of
revenues in the three
6
months ended September 30, 2001, down from 62.7% of revenues in the three months
ended September 30, 2000. The decrease in gross profit percentage in 2001 over
2000 was primarily attributable to a different mix of products sold, with the
newer products generally having lower average gross margins, and as a result of
our pricing strategy for further increasing our share of the flat panel computer
monitor market. We expect gross margins for the December quarter to decrease to
approximately 45% as a result of price discounts associated with higher volumes.
Research and Development. Research and development expenses include costs
associated with research and development personnel, development tools and
prototyping costs. Research and development expenses for the three months ended
September 30, 2001 increased to $5.2 million from $4.4 million in the three
months ended September 30, 2000. These expenses represented 14.3% of revenues in
the 2001 period and 29.4% of revenues in the 2000 period. The decrease in
research and development expenses as a percentage of revenues is a result of the
increase in revenues from the previous period.
We expect to continue to make substantial investments in our research and
development activities and anticipate that the dollar amount of research and
development expenses will continue to increase in the longer term.
Selling, General and Administrative. Selling, general and administrative
expenses consist of personnel and related overhead costs for selling, marketing,
customer support, finance, human resources and general management functions and
of commissions paid to regional sales representatives. Selling, general and
administrative expenses were $4.5 million in the three months ended September
30, 2001 and $3.6 million in the three months ended September 30, 2000. These
expenses represented 12.5% of revenues in the 2001 period and 23.6% of revenues
in the 2000 period.
The dollar increase in 2001 from 2000 in selling, general and administrative
expenses reflects increased personnel costs related to increased administrative,
marketing, selling and customer support personnel, continued expansion of our
international operations, and an increase in the number of demonstration boards
built as part of our marketing strategy for new product introduction. The
decrease in selling, general and administrative expenses as a percentage of
revenues results from the increase in revenues from the previous period.
Total Operating Expenses. Total operating expenses for the three months ended
September 30, 2001 increased to $9.7 million from $8.0 million in the three
months ended September 30, 2000, for the reasons described above. We expect
total operating expenses to remain similar to current levels for the remainder
of the fiscal year.
Interest Income. Interest income in the three months ended September 30, 2001
was $399,000, compared with $739,000 in the three months ended September 30,
2000. The decline in interest income resulted primarily from a decline in
prevailing interest rates. Future interest income will depend on the amount of
funds available to invest and on future interest rates.
Provision for Income Taxes. The provision for income taxes for the three months
ended September 30, 2001, is calculated based on our expected effective tax rate
for the entire fiscal year. We have investment tax credits and non-capital
losses available to reduce taxes payable or taxable income. Future income taxes
will depend on our effective tax rates and the distribution of taxable income
between taxation jurisdictions.
Six months ended September 30, 2001
Revenues. Revenues for the six months ended September 30, 2001 increased to
$57.4 million from $27.9 million in the six months ended September 30, 2000, an
increase of 106.2%. This resulted from a significant increase in units shipped
offset in part by a decline in average selling prices.
Gross Profit. Gross profit for the six months ended September 30, 2001 increased
to $26.5 million from $17.9 million in the six months ended September 30, 2000.
As a percentage of revenues, gross profit represented 46.2% of revenues in the
six months
7
ended September 30, 2001, down from 64.2% of revenues in the three months ended
September 30, 2000. The decrease in gross profit percentage in 2001 over 2000
was primarily attributable to a different mix of products sold, with the newer
products generally having lower average gross margins, and as a result of our
pricing strategy for further increasing our share of the flat panel computer
monitor market.
Research and Development. Research and development expenses for the six months
ended September 30, 2001 increased to $9.4 million from $8.5 million in the six
months ended September 30, 2000. These expenses represented 16.4% of revenues in
the 2001 period and 30.4% of revenues in the 2000 period. The decrease in
research and development expenses as a percentage of revenues is a result of the
increase in revenues from the previous period.
Selling, General and Administrative. Selling, general and administrative
expenses were $8.8 million in the six months ended September 30, 2001 and $6.7
million in the six months ended September 30, 2000. These expenses represented
15.2% of revenues in the 2001 period and 24.2% of revenues in the 2000 period.
The dollar increase in 2001 from 2000 in selling, general and administrative
expenses reflects increased personnel costs related to increased administrative,
marketing, selling and customer support personnel, continued expansion of our
international operations, and an increase in the number of demonstration boards
built as part of our marketing strategy for new product introduction. The
decrease in selling, general and administrative expenses as a percentage of
revenues results from the increase in revenues from the previous period.
Interest Income. Interest income in the six months ended September 30, 2001 was
$753,000, compared with $1.2 million in the six months ended September 30, 2000.
The decline in interest income resulted primarily from a decline in prevailing
interest rates.
Provision for Income Taxes. The provision for income taxes for the six months
ended September 30, 2001, is calculated based on our expected effective tax rate
for the entire fiscal year.
Liquidity and capital resources
Cash and cash equivalents were $57.3 million at September 30, 2001. Net cash
provided by operations for the six months ended September 30, 2001, was $7.5
million. Prior to changes in operating assets and liabilities, cash of $10.1
million was generated for the six months ended September 30, 2001.
Net cash used in investing activities was $1.6 million in the six months ended
September 30, 2001, primarily due to capital spending.
Net cash provided by financing activities in the six months ended September 30,
2001 was $18.6 million. This was a result of funds received for the purchase of
shares under the terms of our stock option plans, offset by our repayment of
indebtedness of $0.1 million.
We have signed an agreement for the acquisition of Sage, Inc. ("Sage"). Subject
to the satisfaction of the conditions set forth in that agreement, (i) the
Company will form a new parent corporation under Delaware law, (ii) each
outstanding share of common stock of the Company will be exchanged for 1 share
of common stock of the new Delaware parent, and (iii) each outstanding share of
common stock of Sage will be exchanged for 0.571 share of common stock of the
new Delaware parent. We expect those transactions to be effected in the fiscal
quarter ending March 31, 2002. The shares issued to the former shareholders of
Sage are expected to represent approximately 27% of the post-issuance shares
outstanding of the new parent. In addition, the Company expects that it will
incur costs of approximately $5.7 million to effect the foregoing transactions,
as well as additional costs of approximately $0.4 million associated with
integrating the businesses and operations of the Company and Sage.
Continued expansion of our business may require higher levels of capital
equipment purchases. Other than as set forth above, we have no significant
capital spending or
8
purchase commitments other than purchase commitments made in the ordinary course
of business.
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, including our requirements in connection with the acquisition
of Sage and the related formation of a new parent company.
Longer term, we may need to raise additional capital to fund investments in
operating assets to assist in the growth of our business, such as investments in
accounts receivable or inventory, or to purchase capital assets, such as land,
buildings or equipment. Because we do not have our own semiconductor
manufacturing facility, we may be required to make deposits to secure supply in
the future. Although we currently have no plans to raise additional funds, we
could be required or could decide to try and raise additional capital in the
future.
We periodically evaluate acquisitions of businesses, products or technologies
that complement our business. If we were to enter into a transaction of this
nature, we may either have to use a portion of our cash, issue debt or issue
additional equity securities. If we were to issue additional equity securities,
there could be further dilution to our shareholders.
Factors that may affect future operating results
The following factors may have a harmful impact on our business:
Our success will depend on demand for flat panel display applications and other
display applications.
Our ability to generate increased revenues will depend on the growth of the
demand for flat panel display applications. This industry is at an early stage
of development. Our continued growth will also depend upon demand for other
display applications, including digital CRT monitors, and for other consumer
electronics, such as home theater, DVD, flat screen and digital television, and
HDTV. Moreover, our ability to generate increased revenues is dependent on
consumer willingness to adopt flat panel displays instead of traditional CRT
monitors. Presently, flat panel display technology competes directly with the
dominant, industry standard CRT technology. The potential number of display
applications and the timing of their development is uncertain and will depend in
particular upon:
. a significant reduction in the costs of products;
. the availability of components such as LCDs required by such products; and
. the emergence of competing technologies.
A substantial portion of our revenues is currently derived from sales to
customers for flat panel display applications. These and other potential
applications may not develop as expected, which would harm our business.
Our products may not be accepted for flat panel display applications and other
emerging applications.
Our success in the industry for flat panel display applications, as well as
digital CRTs, home theater, DVD, flat panel and digital television, HDTV and
other applications will depend upon the extent to which manufacturers of those
products incorporate our integrated circuits into their products. Our ability to
sell products for these applications will depend upon demand for the
functionality provided by our products. The failure of our products to be
accepted in flat panel display applications in particular would harm our
business.
We must develop new products and enhance our existing products to meet OEM
design requirements and design cycles.
We must develop new products and enhance our existing products with improved
technologies to meet rapidly evolving customer requirements and industry
standards. We need to design products for customers that continually require
higher functionality at lower costs. This requires us to continue to add
features to our
9
products. The development process for these advances is lengthy and will require
us to accurately anticipate technological innovations and market trends. Any new
products or product enhancements may not be accepted in new or existing markets.
If we fail to effectively develop and introduce new products or product
enhancements, that failure will harm our business.
In addition, as customer requirements and industry standards evolve, we may
incur charges related to excess and obsolete inventory. In this regard, in our
March 2001 quarter we incurred costs of $5.5 million attributable a write-down
of prior-generation products and initial low manufacturing yield associated with
one of our new products.
Likewise, we are developing consumer video products that are designed to conform
to certain current video processing industry standards. However, there can be no
assurance that manufacturers will continue to follow these standards or that
more desirable standards will not emerge. The acceptance of our products also
depends in part upon content providers developing and marketing content for
end-user systems, such as video and audio playback systems, in a format
compatible with our products. There can be no assurance that these or other
factors beyond our control will not adversely affect the development of markets
for our products.
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., Trumpion Microelectronics, Topro Technology Inc.,
SmartASIC, Philips Semiconductors, a division of Philips Electronics N.V.,
Pixelworks, Inc., Sage, Inc. (which we have recently entered into an agreement
to acquire, as discussed above under "Liquidity and capital resources") and ST
Microelectronics, Inc. Our business could be harmed by these existing
competitors announcing or introducing new products. Also, we anticipate that as
sales in the industry increase, our current customers may increase or initiate
internal supply of their own products and competition from diversified
electronic and semiconductor companies will intensify. The flat panel display
product space in which we compete with many of these competitors is experiencing
rapid growth. The rapid growth in display applications is likely to attract
larger competitors, such as National Semiconductor Corp., Texas Instruments
Inc., Analog Devices Inc. and other companies with significant patent portfolios
and financial and operational resources to draw upon. We may not have adequate
financial and operational resources available to compete effectively against
these larger competitors. This increased competition could harm our business,
by, for example, increasing pressure on our profit margins or causing us to lose
customers or sales opportunities.
A large percentage of our revenues come from sales to a small number of large
customers.
Our customers are large consumer electronics companies with tremendous
purchasing power. Our sales are derived from a limited number of customers.
Sales to our five largest customers accounted for 59.3% of our revenues for the
three months ended September 30, 2001. Sales to each of Samsung Electronics Co.,
Ltd., Acer Communications and Multimedia, LG Electronics Inc. and AOC
International/Top Victory Electronics accounted for greater than ten percent of
our revenues for the three months ended September 30, 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 would harm our business.
Our semiconductor products are complex and are difficult to manufacture
cost-effectively.
The manufacture of semiconductors is a complex process. It is often difficult
for semiconductor foundries to achieve acceptable product yields. Product yields
depend on both our product design and the manufacturing process technology
unique to the semiconductor foundry. Since low yields may result from either
design or process difficulties, identifying yield problems can only occur well
into the production cycle, when actual product exists which can be analyzed and
tested.
10
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.
No single product is purchased from more than one supplier. There are many risks
associated with our dependence upon outside manufacturing, including:
. reduced control over manufacturing and delivery schedules of products;
. potential political or environmental risks in the countries where the
manufacturing facilities are located;
. reduced control over quality assurance;
. difficulty of management of manufacturing costs and quantities;
. lack of control over contracts for the manufacture of our products;
. potential lack of adequate capacity during periods of excess demand; and
. potential unauthorized use of intellectual property.
We depend upon outside manufacturers to fabricate silicon wafers on which our
integrated circuits are imprinted. These wafers must be of acceptable quality
and in sufficient quantity and the manufacturers must deliver them to assembly
and testing subcontractors on time for packaging into final products. We have at
times experienced delivery delays and long manufacturing lead times. These
manufacturers fabricate, test and assemble products for other companies. We
cannot be sure that our manufacturers will devote adequate resources to the
production of our products or deliver sufficient quantities of finished products
to us on time or at an acceptable cost. It might take some time to establish a
strategic relationship with a new manufacturing partner. We might be unable to
readily obtain an alternative source of supply for any of our products if this
proves necessary. Any occurrence of these manufacturing difficulties could harm
our business.
Our third-party wafer foundries, third-party assembly and test subcontractors
and significant customers are located in an area susceptible to earthquakes.
All of our outside foundries and most of our third party assembly and test
subcontractors are located in Taiwan, which is an area susceptible to
earthquakes. In addition, some of our significant customers are located in
Taiwan. Damage caused by earthquakes in Taiwan may result in shortages in water
or electricity or transportation which could limit the production capacity of
our outside foundries and the ability of subcontractors to provide assembly and
test services. Any reduction in production capacity or the ability to provide
assembly and test services could cause delays or shortages in our product
supply, which would harm our business. Customers located in Taiwan were
responsible for 40.9% of our product revenue for the three months ended
September 30, 2001. If the facilities or equipment of our customers are damaged
by future earthquakes, they could reduce their purchases of our products, which
would harm our business. In addition, the operations of suppliers to our outside
foundries and our Taiwanese customers could be disrupted by future earthquakes,
which could in turn harm our business by resulting in shortages in our product
supply or reduced purchases of our products.
We do not have long-term commitments from our customers, and we allocate
resources based on estimates of customer demand.
Our sales are made on the basis of purchase orders rather than long-term
purchase commitments. In addition, our customers may cancel or defer purchase
orders for reasons outside our control, such as supply constraints for other
components
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incorporated into their products or errors in their forecast of demand for their
products. We manufacture our products according to both our estimates of
customer demand and our customers' forecasts of their 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 or if our
customers overestimate the demand for their products, we may allocate resources
to manufacturing products which we may not be able to sell. As a result, we
would have excess inventory, which would increase our losses. Conversely, if we
underestimate customer demand or if sufficient manufacturing capacity is
unavailable, we would forego revenue opportunities, lose market share and damage
our customer relationships.
Our sales cycle can result in uncertainty and delays in generating revenues.
Because our products are based on new technology and standards, a sales process,
typically requiring several months, is often required before potential customers
begin the technical evaluation of our products. It can take an additional
several 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 sales cycle, we experience a delay between
the time we increase expenditures for research and development, sales and
marketing efforts and inventory and the time we generate revenues, if any, from
these expenditures. As a result, our business could be harmed if a significant
customer reduces or delays orders or chooses not to release products
incorporating our products.
Our business depends on relationships with industry leaders that are
non-binding.
We work closely with leaders in the industry 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 to such design
activities 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 come from sales outside of North America,
which creates additional business risks.
A large portion of our revenues will come from sales to customers outside of
North America, particularly to equipment manufacturers located in Japan and
other parts of Asia. For the three months ended September 30, 2001 sales to
regions outside of North America amounted to 94.1% of our revenues. We engage
extensively in the international shipment of our products to our customers, who
in turn use international shipments to varying degrees to make deliveries to
their customers. These sales and shipments are subject to numerous risks,
including:
. fluctuations in currency exchange rates, tariffs, import restrictions and
other trade barriers;
. difficulties in maintaining sales representatives outside of the U.S. that
are knowledgeable of the display applications industry, the video
processing industry and our range of products;
. unexpected changes in regulatory requirements;
. longer payment periods;
. potentially adverse tax consequences;
. difficulties related to design piracy of display and video processing
technologies that may exist outside the U.S.;
. export license requirements;
. differing technology standards;
. political and economic instability; and
. unexpected changes in diplomatic and trade relationships.
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To date, sales of our products have been denominated exclusively in U.S.
dollars. An increase in the value of the U.S. dollar could increase the price of
our products so that they become relatively more expensive to customers in the
local currency of a particular country, potentially leading to a reduction in
our revenues and profitability.
We may be unable to adequately protect our intellectual property. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect our proprietary
technologies.
We have been issued patents and have a number of pending United States and
foreign patent applications. However, we cannot assure you that any patent will
be issued as a result of any applications or, if issued, that any claims allowed
will be sufficiently broad to protect our technology. In addition, it is
possible that existing or future patents may be challenged, invalidated or
circumvented. It may be possible for a third party to copy or otherwise obtain
and use our products, or technology without authorization, develop similar
technology independently or design around our patents.
Our competitors may also be able to design around the licensed patents. The laws
of certain foreign countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect our
products or intellectual property rights to the same extent as the laws of the
United States. There can be no assurance that the steps taken by us to protect
our intellectual property rights will be adequate to prevent misappropriation of
our technology or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
Others may bring infringement claims against us which could be time-consuming
and expensive to defend.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. This litigation is
widespread in the high-technology industry and is particularly prevalent in the
semiconductor industry, where a number of companies aggressively use their
patent portfolios by bringing numerous infringement claims. In addition, in
recent years, there has been an increase in the filing of so-called "nuisance
suits" alleging infringement of intellectual property rights, which pressure
defendants into entering settlement arrangements to quickly dispose of such
suits, regardless of their merits. We may become a party to litigation in the
future to protect our intellectual property or as a result of an alleged
infringement of others' intellectual property. For example, we are currently
defending claims brought against it by Silicon Image, Inc. as described in Part
II of this Form 10-Q.
These lawsuits could subject us to significant liability for damages and
invalidate our proprietary rights. These lawsuits, regardless of their success,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
also could force us to do one or more of the following:
. stop selling products or using technology that contain the allegedly
infringing intellectual property;
. attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
. attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of these actions, we may be unable to manufacture
and sell some of our products, which could harm our business.
We may not be able to 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 retain employees. If we cannot retain
key employees, our business will be harmed.
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General economic conditions may reduce our revenues and harm our business.
As our business has grown, we have become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. Because
of the recent economic slowdown in the United States and in Europe, many
industries are delaying or reducing technology purchases. As a result, if
economic conditions in the U.S. and Europe worsen or if a wider or global
economic slowdown occurs, we may fall short of our revenue expectations for any
given period. These conditions would negatively affect our business and results
of operations. In addition, weakness in the technology market could negatively
affect the cash flow of our customers who could, in turn, delay paying their
obligations to us. This would increase our credit risk exposure which could harm
our financial condition.
In addition, political conditions, terrorist acts or acts of war (wherever
located around the world) may cause damage or disruption to our business,
employees, supplies, distributors and resellers, and customers which could have
a material adverse effect on our operations and financial results.
We may make future acquisitions where advisable and acquisitions involve
numerous risks.
Our growth is dependent upon market growth and our ability to enhance our
existing products and introduce new products on a timely basis. One of the ways
we may address this need to develop new products is through acquisitions of
other companies.
Acquisitions 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.
The market price and trading volume 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 and trading volume of our common stock in the future.
The market price and trading volume 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.
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ITEM 3. 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 our revenues and costs of revenues are denominated in U.S.
dollars, a substantial portion of our operating expenses are denominated in
Canadian dollars. Accordingly, our operating results are affected by changes in
the exchange rate between the Canadian and U.S. dollars. Any future
strengthening of the Canadian dollar against the US dollar could negatively
impact our operating results by increasing our operating expenses in U.S.
dollars. We do not presently engage in any hedging or other transactions
intended to manage the risks relating to foreign currency exchange rate
fluctuations, other than natural hedges that occur as a result of holding both
Canadian dollar denominated assets and Canadian dollar denominated liabilities.
We may in the future undertake hedging or other such transactions if management
determines that it is necessary to offset exchange rate risks. Based on our
overall currency rate exposure at September 30, 2001 a near-term 10%
appreciation or depreciation would not have a material effect on our operating
results or financial condition.
PART II: OTHER INFORMATION
ITEM 1. 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 future financial
impact of these claims is not yet determinable and no provision has been made in
our consolidated financial statements for any future 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
At our Annual General Meeting of Shareholders held on September 20, 2001, the
following proposals were considered by shareholders:
1. A resolution electing Jeffrey Diamond, George A. Duguay and Alexander S.
Lushtak as directors of the Company, as described in the information circular
accompanying the proxy.
2. A resolution appointing KPMG LLP as auditors for the year ending March 31,
2002.
The following table shows the results of the votes for each proposal.
Proposal Withheld or
Number For Against Abstained
----------------------------------------------------------------------
1 16,434,089 - 334,342
2 16,506,607 261,824 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1* Agreement and Plan of Merger and Reorganization, dated as of
September 27, 2001, by and between Genesis Microchip
Incorporated, a Nova Scotia corporation, and Sage, Inc., a
Delaware corporation.
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*Incorporated by reference to the Report on 8-K filed by the
Company on September 28, 2001.
(b) Reports on Form 8-K
A Report on Form 8-K was filed on September 28, 2001, with respect to
a proposed acquisition by the Company of Sage, Inc., and the Company's
related change of its legal domicile from Nova Scotia to Delaware.
SIGNATURE
Our authorized representative has signed this report on our behalf as required
by the Securities Exchange Act of 1934.
GENESIS MICROCHIP INCORPORATED
By: /s/ I. ERIC ERDMAN
------------------------------------
I. Eric Erdman
Chief Financial Officer & Secretary
(Authorized Officer &
Principal Financial Officer)
Date: October 22, 2001
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