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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
[_] 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 0-27026
Pericom Semiconductor Corporation
(Exact Name of Registrant as Specified in Its Charter)
California 77-0254621
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2380 Bering Drive
San Jose, California 95131
(408) 435-0800
(Address of Principal Executive Offices and
Issuer's Telephone Number, Including Area Code)
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 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 [_]
The number of outstanding shares of the Registrant's Common Stock as of October
20, 1998 was 9,331,699.
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Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended September 26, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Condensed Balance Sheets as of
September 30, 1998 and June 30, 1998 3
Condensed Statements of Income
for the three months ended
September 30, 1998 and September 30, 1997 4
Condensed Statements of Cash Flows
for the three months ended
September 30, 1998 and September 30, 1997 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Pericom Semiconductor Corporation
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998 (1)
---- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 7,877 $ 8,773
Short-term investments 17,036 17,058
Accounts receivable:
Trade (net of allowances of $1,407 and $1,559) 8,117 5,437
Other receivables 330 193
Inventories 8,630 8,917
Prepaid expenses and other current assets 378 153
Deferred income taxes 510 510
---------------------------------------------
Total current assets 42,878 41,041
Property and equipment net 5,328 5,121
Investment in and advances to joint venture 1,329 1,046
Other assets 194 193
---------------------------------------------
$49,729 $ 47,401
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,633 $ 6,117
Accrued liabilities 1,258 1,855
Income taxes payable 977 318
---------------------------------------------
Total current liabilities 8,868 8,290
Deferred income taxes 500 500
Shareholders' equity:
Common stock 24,738 24,570
Retained earnings 15,623 14,041
---------------------------------------------
Total shareholders' equity 40,361 38,611
---------------------------------------------
$49,729 $ 47,401
=============================================
</TABLE>
(1) Derived from the June 30, 1998 audited balance sheet included in the
Company's Annual Report on Form 10-K.
See notes to condensed financial statements.
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Pericom Semiconductor Corporation
Condensed Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net revenues $14,547 $11,398
Cost of revenues 8,968 6,839
-------------------------------
Gross profit 5,579 4,559
-------------------------------
Operating expenses:
Research and development 1,355 1,169
Selling, general and administrative 2,095 1,956
-------------------------------
Total 3,450 3,125
-------------------------------
Income from operations 2,129 1,434
Equity in net loss of joint venture (75) (30)
Interest income 343 123
-------------------------------
Income before income taxes 2,397 1,527
Provision for income taxes 815 504
-------------------------------
Net income $ 1,582 $ 1,023
===============================
Basic earnings per share $0.17 $0.33
===============================
Diluted earnings per share $0.16 $0.12
===============================
Shares used in computing basic earnings per share 9,311 3,122
===============================
Shares used in computing diluted earnings per share 9,967 8,210
===============================
</TABLE>
See notes to condensed financial statements.
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Pericom Semiconductor Corporation
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,582 $1,023
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 347 277
Equity in net loss of joint venture 75 30
Changes in assets and liabilities:
Accounts receivable (2,817) 238
Inventories 287 (263)
Prepaid expenses and other current assets (225) 3
Accounts payable 516 (892)
Accrued liabilities (597) 162
Income taxes payable 659 155
-------------------------------
Net cash provided by (used in) operating activities (173) 733
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (554) (745)
Decrease in short-term investments 22 ---
Increase in other assets (1) (93)
(Increase) decrease in advances to joint (358) 25
venture
-------------------------------
Net cash used for investing activities (891) (813)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 168 58
-------------------------------
Net cash provided by financing activities 168 58
-------------------------------
NET DECREASE IN CASH AND EQUIVALENTS (896) (22)
CASH AND EQUIVALENTS:
Beginning of period 8,773 9,566
-------------------------------
End of period $ 7,877 $9,544
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 156 $ 350
===============================
</TABLE>
See notes to condensed financial statements.
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Pericom Semiconductor Corporation
Notes To Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The financial statements have been prepared by Pericom Semiconductor Corporation
("Pericom" or the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments and accruals, necessary for a fair presentation of
the Company's financial position as of September 30, 1998 and the results of
operations and cash flows for the three-month periods ended September 30, 1998
and 1997. This unaudited quarterly information should be read in conjunction
with the audited financial statements of Pericom and the notes thereto
incorporated by reference in the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission.
The preparation of the interim condensed 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 and
disclosure of contingent assets and liabilities as of the date of the interim
condensed financial statements and the reported amounts of revenue and expenses
during the period. Actual amounts could differ from these estimates. The results
of operations for the three-month period ended September 30, 1998 are not
necessarily indicative of the results to be expected for the entire year.
The Company's fiscal periods in the accompanying financial statements have been
shown as ending on June 30 and September 30. Fiscal year 1998 ended on June 27,
1998. The three-month periods in fiscal years 1998 and 1999 ended on September
27, 1997 and September 26, 1998, respectively.
The Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company's future financial position or results of operations: advances and
trends in new technologies; competitive pressures in the form of new products or
price reductions on current products; changes in the overall demand for products
and services offered by the Company; changes in customer relationships;
litigation or claims against the Company based on intellectual property, patent,
product, regulatory or other factors; risks associated with changes in domestic
and international economic and/or political conditions or regulations;
availability of necessary components; and the Company's ability to attract and
retain employees necessary to support its growth.
2. EARNINGS PER SHARE
The Company has computed earnings per share in accordance with SFAS No. 128,
"Earnings Per Share," (SFAS 128). Basic earnings per share is based upon the
weighted average number of common shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
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Basic and diluted earnings per share for the three-month periods ended September
30, 1998 and September 30, 1997 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $1,582 $1,023
=============================
Computation of common shares outstanding - basic earnings per
share:
Weighted average shares of common stock 9,311 3,122
-----------------------------
Shares used in computing basic earnings per share 9,311 3,122
=============================
Basic earnings per share $ 0.17 $ 0.33
=============================
Computation of common shares outstanding - diluted earnings
per share:
Weighted average shares of common stock 9,311 3,122
Preferred shares --- 4,613
Dilutive options using the treasury stock method 656 475
-----------------------------
Shares used in computing diluted earnings per share 9,967 8,210
=============================
Diluted earnings per share $ 0.16 $ 0.12
=============================
3. INVENTORIES
Inventories consist of (in thousands):
September 30, June 30,
1998 1998
---- ----
<S> <C> <C>
Finished goods $2,480 $1,752
Work in process 4,756 5,671
Raw materials 1,394 1,494
-----------------------------
$8,630 $8,917
=============================
4. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
September 30, June 30,
1998 1998
---- ----
<S> <C> <C>
Accrued compensation $ 643 $1,059
External sales representative commissions 482 636
Other accrued expenses 133 160
-----------------------------
$1,258 $1,855
=============================
</TABLE>
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5. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, service,
geographic areas and major customers. Adoption of this statement will not impact
the Company's financial position, results of operations or cash flows. This
statement is effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
6. COMPREHENSIVE INCOME
During the quarter ended September 30, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires an enterprise to report, by major components and as a single
total, the change in net assets during the period from non-owner sources. At
September 30, 1998 and 1997, there are no differences between comprehensive
income and reported net income.
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Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
Pericom Semiconductor Corporation
The following information should be read in conjunction with the unaudited
financial statements and notes thereto included in Part 1 - Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K (the
"Form 10-K").
This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. In some cases, forward-looking statements can be identified by
the use of terminology such as "may," "will," "expects," "plans," "anticipates,"
"estimates," "potential," or "continue," or the negative thereof or other
comparable terminology. Although the Company believes that the expectations
reflected in the forward-looking statements contained herein are reasonable,
there can be no assurance that such expectations or any of the forward-looking
statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the forward-looking statements. The Company's
future financial condition and results of operations, as well as any forward-
looking statements, are subject to risks and uncertainties, including but not
limited to the factors set forth in "Additional Factors That May Affect Results"
and elsewhere in this report, as well as factors set forth in the Company's Form
10-K. All forward-looking statements and reasons why results may differ included
in this Quarterly Report are made as of the date hereof, and the Company assumes
no obligation to update any such forward-looking statement or reason why actual
results may differ.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of revenues 61.6% 60.0%
-------------------------------
Gross profit 38.4% 40.0%
-------------------------------
Operating expenses:
Research and development 9.3% 10.2%
Selling, general and administrative 14.4% 17.2%
-------------------------------
Total 23.7% 27.4%
-------------------------------
Income from operations 14.7% 12.6%
Other income, net 1.8% 0.8%
-------------------------------
Income before income taxes 16.5% 13.4%
Provision for income taxes 5.6% 4.4%
-------------------------------
Net income 10.9% 9.0%
===============================
</TABLE>
9
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NET REVENUES
Net revenues consist primarily of product sales, which are recognized upon
shipment, less an estimate for returns and allowances. Net revenues increased
27% from $11.4 million for the quarter ended September 30, 1997 to $14.5 million
for the quarter ended September 30, 1998. The increase in net revenues resulted
from continued market acceptance of the Company's existing products and sales of
new products in the Company's SiliconInterface, SiliconSwitch and SiliconClock
product lines, offset in part by a decline in the weighted average selling price
of all products. Sales to domestic and international distributors as a percent
of total revenues rose from 43% for the first quarter of fiscal 1998 to 52% for
the first quarter of fiscal 1999. Sales to one customer, an international
distributor, accounted for approximately 16% of net revenues in the first
quarter of fiscal 1999. No customers accounted for more than 10% of net revenues
in the first quarter of fiscal 1998.
GROSS PROFIT
Gross profit increased 22% from $4.6 million for the quarter ended September 30,
1997 to $5.6 million for the corresponding quarter ended September 30, 1998.
Gross profit as a percentage of net revenues, or gross margin, decreased from
40.0% in the first quarter of fiscal 1998 to 38.4% in the first quarter of
fiscal 1999. The decrease in gross margin resulted from decreases in average
selling prices in the Company's various product lines in excess of cost
reductions achieved by the Company. The introduction of new products at higher
gross margins and cost reductions achieved in each of the Company's product
lines through reduced wafer costs, lower per unit assembly and test costs, and
increased die per wafer resulting from reduced design geometries were not enough
to offset the erosion in average selling prices.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 16% from $1.2 million for the
quarter ended September 30, 1997 to $1.4 million for the corresponding quarter
ended September 30, 1998, but decreased as a percentage of net revenues from
10.2% to 9.3%. The increase in expense was attributable to development costs for
new products in each of the Company's product lines and expansion of the
Company's engineering staff as the Company continued its commitment to new
product development.
The Company believes that continued spending on research and development to
develop new products and improve manufacturing processes is critical to the
Company's success and, consequently, expects to increase research and
development expenses in future periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of personnel and
related overhead costs for sales, marketing, finance, human resources and
general management. Such costs include advertising, sales materials, sales
commissions and other marketing and promotional expenses. Selling, general and
administrative expenses increased 7% from $2.0 million for the quarter ended
September 30, 1997 to $2.1 million for the corresponding quarter ended September
30, 1998, but decreased as a percentage of net revenues from 17.2% to 14.4%. The
increase in expense was attributable to increased staffing levels, particularly
in sales and marketing. The Company anticipates that selling, general and
administrative expenses will increase in future periods due to increased
staffing, commission expenses and increased legal and accounting expenses
associated with public reporting obligations.
OTHER INCOME, NET
Other income, net includes interest income and the Company's allocated portion
of net losses of Pericom Technology, Inc. ("PTI"). Other income, net increased
from $93,000 for the quarter ended September 30, 1997 to $268,000 for the
corresponding quarter ended September 30, 1998 due to interest earned on the
increased cash and short-term investment balances that resulted from the net
proceeds from the Company's
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initial public offering in the December 1997 quarter, partially offset by an
increase of $45,000 in the Company's share of the net losses of PTI.
PROVISION FOR INCOME TAXES
The provision for income taxes increased from $504,000 for the quarter ended
September 30, 1997 to $815,000 for the corresponding quarter ended September 30,
1998 due to the increase in taxable income. The provision for income taxes
differed from the federal statutory rate primarily due to state income taxes and
the utilization of research and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public offering in October 1997, the Company used
proceeds from the private sale of equity securities, bank borrowings and
internal cash flow to support its operations, acquire capital equipment and
finance inventory and accounts receivable growth. During the first three months
of fiscal 1998 and 1999, operating activities generated $0.7 million and used
$0.2 million of cash, respectively.
Net cash used for investing activities increased from $0.8 million for the three
months ended September 30, 1997 to $0.9 million for the comparable period in
fiscal 1999. The Company made capital expenditures of approximately $0.7 million
during the first three months of fiscal 1998 compared with $0.6 million in the
comparable period of fiscal 1999.
As of September 30, 1998, the Company's principal source of liquidity included
cash, cash equivalents and short-term investments of approximately $24.9
million. The Company believes that existing cash balances and cash generated
from operations will be sufficient to fund necessary purchases of capital
equipment and to provide working capital at least through the next 12 months.
However, there can be no assurance that future events will not require the
Company to seek additional capital sooner or, if so required, that adequate
capital will be available on terms acceptable to the Company.
MARKET RISK DISCLOSURE
At September 30, 1998, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $17
million. These securities are subject to interest rate risk and will decline in
value if market interest rates increase. For example, if market interest rates
were to increase immediately and uniformly by 10% from levels as of September
30, 1998, the decline in the fair value of the portfolio would not have a
material effect on the Company's results of operations over the next fiscal
year.
YEAR 2000 DISCLOSURE
The approach of the year 2000 may present potentially serious information
systems problems for many companies because many of today's existing computer
programs were written using two digits rather than four to define the applicable
year. As a result, those computer programs have time-sensitive software that
recognize a date using "00" as the year and therefore, may be unable to
distinguish 1900 from the year 2000. This could cause a system failure or
miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company relies upon products and
information from critical suppliers, large customers and other outside parties,
in the normal course of business, whose software programs are also subject to
this problem. In response to this, the Company is in the process of inquiring of
strategic vendors and large customers to determine the extent to which the
Company may be vulnerable to these third parties' failure to adequately remedy
any Year 2000 issues. The Company has spent and will continue to spend an
appropriate level of resources to address this issue on a timely basis and to
date has spent less than $100,000 and expects total costs incurred to not exceed
this amount. There can be no assurance that the critical Year 2000-deficient
software applications of the parties on which the Company depends will be
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converted on a timely basis or not converted to systems which are incompatible
with the Company's systems.
The Company began the installation of an enterprise wide EDP system that was
required to meet Pericom's business needs in late fiscal 1997. The enterprise
wide system purchased by the Company includes many important functional
improvements necessary for Pericom to be a competitive semiconductor
manufacturing company and is year 2000 compliant. The Company has not allocated
a portion of the total project cost to the Year 2000 issue. The Company believes
that the incremental cost associated with Year 2000 compliance is not material,
as this feature is included in the enterprise wide system purchased by the
Company to satisfy business needs. The Company believes that substantially all
of its systems, including the new enterprise wide system, are Year 2000
compliant and therefore has no contingency plans. Under the worst case scenario,
if the Company is wrong in its beliefs about the Year 2000 readiness of its
systems, the Company would have a difficult time managing its business.
The Company currently believes that is has no significant exposure to
contingencies directly related to the Year 2000 issue for products it has sold
or will sell in the future.
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS
LIMITED OPERATING HISTORY; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
There can be no assurance that any past levels of revenue growth or
profitability can be sustained on a quarterly or annual basis. The Company's
expense levels are based in part on anticipated future revenue levels, which can
be difficult to predict. The Company's business is characterized by short-term
orders and shipment schedules. The Company does not have long-term purchase
agreements with any of its customers, and customers can typically cancel or
reschedule their orders without significant penalty. The Company typically plans
its production and inventory levels based on forecasts, generated with input
from customers and sales representatives, of customer demand, which is highly
unpredictable and can fluctuate substantially. If customer demand falls
significantly below anticipated levels, the Company's business, financial
condition and results of operations would be materially and adversely affected.
As a result of these and other factors, there can be no assurance that the
Company will not experience material fluctuations in its future operating
results on a quarterly or annual basis.
The Company's operating results are affected by a wide variety of factors that
could materially and adversely affect net revenues and results of operations,
including a decline in the gross margins of its products, the growth or
reduction in the size of the market for interface ICs, delay or decline in
orders received from distributors, the availability of manufacturing capacity
with the Company's wafer suppliers, changes in product mix, customer acceptance
of the Company's new products, the ability of customers to make payments to the
Company, the timing of new product introductions and announcements by the
Company and its competitors, increased research and development expenses
associated with new product introductions or process changes, expenses incurred
in obtaining and enforcing, and in defending claims with respect to,
intellectual property rights, changes in manufacturing costs and fluctuations in
manufacturing yields, and other factors such as general conditions in the
semiconductor industry. All of the above factors are difficult for the Company
to forecast, and these or other factors can materially and adversely affect the
Company's business, financial condition and results of operations for one
quarter or a series of quarters. The Company's expense levels are based in part
on its expectations regarding future sales and are fixed in the short term to a
large extent. Therefore, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in sales. Any
significant decline in demand relative to the Company's expectations or any
material delay of customer orders could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis. In addition, it is possible that the Company's
operating results in future quarters may fall below the expectations of public
market analysts and investors, which would likely result in a material drop in
the market price of the Company's Common Stock.
12
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Historically, selling prices in the semiconductor industry generally, as well as
for the Company's products, have decreased significantly over the life of each
product. The Company expects that selling prices for its existing products will
decline over time and that selling prices for new products will decline
significantly over the lives of these products. Declines in selling prices for
the Company's products, if not offset by reductions in the costs of producing
these products or by sales of new products with higher gross margins, would
reduce the Company's overall gross margin and could materially and adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to reduce production
costs or to develop and market new products with higher gross margins.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company's reliance on independent wafer suppliers to fabricate its wafers at
their production facilities subjects the Company to such possible risks as
potential lack of adequate capacity and available manufactured products, lack of
control over delivery schedules and the risk of events limiting production and
reducing yields, such as fires or other damage to production facilities or
technical difficulties. Although, to date, the Company has not experienced any
material delays in obtaining an adequate supply of wafers, there can be no
assurance that the Company will not experience delays in the future. Any
inability or unwillingness of the Company's wafer suppliers generally, and
Chartered Semiconductor Manufacturing Pte, Ltd. ("Chartered") in particular, to
provide adequate quantities of finished wafers to meet the Company's needs in a
timely manner or in needed quantities would delay production and product
shipments and have a material adverse effect on the Company's business,
financial condition and results of operations.
At present, the Company purchases wafers from its wafer suppliers through the
issuance of purchase orders based on rolling six month forecasts provided by the
Company, and such purchase orders are subject to acceptance by each wafer
foundry. The Company does not have long-term purchase agreements with any of its
wafer suppliers, each of which has the right to reduce or terminate allocations
of wafers to the Company. In the event that these suppliers were unable or
unwilling to continue to manufacture the Company's key products in required
volumes, the Company would have to identify and qualify additional foundries. In
any event, the Company's ability to grow in the future will also be dependent
upon its ability to identify and qualify new wafer foundries. The qualification
process can take up to six months or longer, and there can be no assurance that
any additional wafer foundries will become available to the Company or will be
in a position to satisfy any of the Company's requirements on a timely basis.
The Company also depends upon its wafer suppliers to participate in process
improvement efforts, such as the transition to finer geometries, and any
inability or unwillingness of such suppliers to do so could delay or otherwise
materially adversely affect the Company's development and introduction of new
products. Furthermore, sudden shortages of raw materials or production capacity
constraints can lead wafer suppliers to allocate available capacity to customers
other than the Company or for internal uses, which could interrupt the Company's
ability to meet its product delivery obligations. Any significant interruption
in the supply of wafers to the Company would adversely affect the Company's
operating results and relations with affected customers.
Each of Chartered, Austria Mikro Systeme GmbH, Taiwan Semiconductor
Manufacturing Corporation, New Japan Radio Corporation and LG Semicon Co., Ltd.,
the wafer foundries utilized by the Company, is located outside the United
States, which exposes the Company to those risks associated with international
business operations, including foreign governmental regulations, currency
fluctuations, reduced protection for intellectual property, changes in political
conditions, disruptions or delays in shipments and changes in economic
conditions in the countries where these foundries are located, each of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The markets for the Company's products are characterized by rapidly changing
technology, frequent new product introductions and declining average selling
prices over product life cycles. The Company's future success is highly
dependent upon the timely completion and introduction of new products at
competitive price/performance levels. The success of new products depends on a
variety of factors, including product selection, product performance and
functionality, customer acceptance, competitive pricing, successful and
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timely completion of product development, sufficient wafer fabrication capacity
and achievement of acceptable manufacturing yields by the Company's wafer
suppliers. There can be no assurance that the Company will be able successfully
to identify new product opportunities and develop and bring to market such new
products or that the Company will be able to respond effectively to new
technological changes or new product announcements by others. In addition, the
Company may experience delays, difficulty in procuring adequate fabrication
capacity for the development and manufacture of such products or other
difficulties in achieving volume production of these products. The failure of
the Company to complete and introduce new products in a timely manner at
competitive price/performance levels would materially and adversely affect the
Company's business, financial condition and results of operations.
The Company has relied in the past and continues to rely upon its relationships
with manufacturers of high-performance systems for insights into product
development strategies for emerging system requirements. The Company believes it
will rely on these relationships more in the future as the Company focuses on
the development and production of application specific standard products
("ASSPs"). The Company generally incorporates its new products into a
customer's product or system at the design stage. However, these design efforts,
which can often require significant expenditures by the Company, may precede the
generation of volume sales, if any, by a year or more. Moreover, the value of
any design win will depend in large part on the ultimate success of the
customer's product and on the extent to which the system's design accommodates
components manufactured by the Company's competitors. No assurance can be given
that the Company will achieve design wins or that any design win will result in
significant future revenues. To the extent the Company cannot develop or
maintain such relationships, its ability to develop well-accepted new products
may be impaired, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant portion
of the Company's net revenues in each of the past several fiscal years and the
Company expects this trend to continue for the foreseeable future. In fiscal
1998, sales to one customer accounted for approximately 11% of the Company's net
revenues, and sales to the Company's top five customers accounted for
approximately 36% of net revenues. One customer, an international distributor
that in turn ships to multiple customers, accounted for 16% of net revenues
during the first three months of fiscal 1999. The Company does not have long-
term purchase agreements with any of its customers. There can be no assurance
that the Company's current customers will continue to place orders with the
Company, that orders by existing customers will continue at the levels of
previous periods or that the Company will be able to obtain orders from new
customers. Loss of one or more of the Company's customers, or a reduction in
the volume of orders placed by any of such customers, could materially and
adversely affect the Company's business, financial condition and results of
operations.
COMPETITION
The semiconductor industry is intensely competitive. Significant competitive
factors in the market for high-performance ICs include product features and
performance, product quality, price, success in developing new products,
adequate wafer fabrication capacity and sources of raw materials, efficiency of
production, timing of new product introductions, ability to protect intellectual
property rights and proprietary information, and general market and economic
conditions. The Company's competitors include Cypress Semiconductor Corporation,
Integrated Circuit Systems, Inc., Integrated Device Technology, Inc., Maxim
Integrated Products, Inc., Quality Semiconductor, Inc. and Texas Instruments,
Inc. most of which have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer standing
customer relationships than the Company. The Company also competes with other
major emerging companies that sell products to certain segments of the markets
addressed by the Company. Competitors with greater financial resources and
broader product lines may also have greater ability to engage in sustained price
reductions in the Company's primary markets in order to gain or maintain market
share.
14
<PAGE>
The Company believes that its future success will depend on its ability to
continue to improve and develop its products and processes. Unlike the Company,
many of the Company's competitors maintain internal manufacturing capacity for
the fabrication and assembly of semiconductor products, which may provide such
companies with more reliable manufacturing capability, shorter development and
manufacturing cycles and time-to-market advantages. In addition, competitors
with their own wafer fabrication facilities that are capable of producing
products with the same design geometries as those of the Company may be able to
manufacture and sell competitive products at lower prices. Introduction of
products by competitors that are manufactured with improved process technology
could materially and adversely affect the Company's business and results of
operations. As is typical in the semiconductor industry, competitors of the
Company have developed and marketed products having similar or identical
functionality as the Company's products, and the Company expects that this trend
will continue in the future. To the extent the Company's products do not achieve
performance, price, size or other advantages over products offered by
competitors, the Company is likely to experience greater price competition with
respect to such products. The Company also faces competition from the makers of
microprocessors and other system devices, including application specific
integrated circuits ("ASICs"), that have been and may be developed for
particular systems. These devices may include interface logic functions which
may eliminate the need or sharply reduce the demand for the Company's products
in particular applications. There can be no assurance that the Company will be
able to compete successfully in the future or that competitive pressures will
not materially and adversely affect the Company's financial condition and
results of operations. Competitive pressures could also reduce market acceptance
of the Company's products and result in price reductions and increases in
expenses that could materially and adversely affect the Company's business,
financial condition and results of operations. See "--Dependence on Independent
Wafer Foundries," "--Dependence on Single or Limited Source Assembly
Subcontractors."
VARIATION IN PRODUCTION YIELDS
The manufacture and assembly of semiconductor products is highly complex and
sensitive to a wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the materials used and the
performance of manufacturing personnel and production equipment. In a typical
semiconductor manufacturing process, silicon wafers produced by the foundry are
sorted and cut into individual die that are then assembled into individual
packages and tested for performance. The Company's wafer fabrication suppliers
have from time to time experienced lower than anticipated yields of good die, as
is typical in the semiconductor industry. In the event of such decreased
yields, the Company would incur additional costs to sort wafers, an increase in
average cost per usable die and an increase in the time to market for the
Company's products. These conditions could reduce the Company's net revenues and
gross margin, and have an adverse effect on the Company's business and results
of operations, and relations with affected customers. No assurance can be given
that the Company or its suppliers will not experience yield problems in the
future which could result in a material adverse effect on the Company's business
and results of operations.
SEMICONDUCTOR INDUSTRY RISKS
The semiconductor industry has historically been cyclical and periodically
subject to significant economic downturns, characterized by diminished product
demand, accelerated erosion of average selling prices, overcapacity and rapidly
changing technology and evolving industry standards. The Company may in the
future experience substantial period-to-period fluctuations in business and
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors. The Company's business is also subject to
the risks associated with the effects of legislation and regulations relating to
the import or export of semiconductor products.
15
<PAGE>
RELIANCE ON DISTRIBUTORS; PRODUCT RETURNS
Sales through domestic and international distributors represented 36% and 49% of
the Company's net revenues in fiscal years 1997 and 1998, respectively. During
the first three months of fiscal 1999 sales through domestic and international
distributors represented 52% of net revenues. The Company's distributors are
not subject to minimum purchase requirements, may reduce or delay orders
periodically due to excess inventory and can discontinue selling the Company's
products at any time. The Company recognizes revenue and related gross profit
from sales of products through distributors when shipped. Domestic distributors
are generally allowed a return allowance of 10% of their net purchases every six
months. Although the Company believes that, to date, it has provided adequate
allowances for exchanges, returns, price protection and other concessions and,
to date, amounts returned have not been material, there can be no assurance that
actual amounts incurred will not exceed the Company's allowances, particularly
in connection with the introduction of new products, enhancements to existing
products or price reductions. The Company's distributors typically offer
competing products. The loss of one or more distributors, or the decision by one
of the distributors to reduce the number of the Company's products offered by
such distributor or to carry the product lines of the Company's competitors,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
MANAGEMENT OF GROWTH
The Company has recently experienced and may continue to experience growth in
the number of its employees and the scope of its operations, resulting in
increased responsibilities for management personnel. To manage recent and
potential future growth effectively, the Company will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage a growing number of employees.
The future success of the Company also will depend on its ability to attract and
retain qualified technical, marketing and management personnel, particularly
highly skilled design, process and test engineers, for whom competition is
intense. In particular, the current availability of qualified engineers is
limited, and competition among companies for skilled and experienced engineering
personnel is very strong. During strong business cycles, the Company expects to
experience continued difficulty in filling its needs for qualified engineers and
other personnel. The Company is in the process of implementing a new management
information system. There can be no assurance that the Company will not
encounter difficulties as it seeks to integrate this new system into its
operations. There can be no assurance that the Company will be able to achieve
or manage effectively any such growth, and failure to do so could delay product
development cycles or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend to a large extent on the continued
contributions of its executive officers and other key management and technical
personnel, none of whom has an employment agreement with the Company and each of
whom would be difficult to replace. The Company does not maintain any key person
life insurance policy on any of such persons. The loss of the services of one or
more of the Company's executive officers or key personnel or the inability to
continue to attract qualified personnel could delay product development cycles
or otherwise have a material adverse effect on the Company's business, financial
condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain patents and
licenses and preserve other intellectual property rights covering its products
and development and testing tools. In the United States, the Company holds
eleven patents covering certain aspects of its product designs and has seven
additional patent applications pending. Copyrights, mask work protection, trade
secrets and confidential technological know-how are also key elements of the
Company's business. There can be no assurance that any additional patents will
be issued to the Company or that the Company's patents or other intellectual
property will provide meaningful protection from competition. The Company may
be subject to or may initiate
16
<PAGE>
interference proceedings in the U.S. Patent and Trademark Office, which can
require significant financial and management resources. In addition to the
foregoing, the laws of certain territories in which the Company's products are
or may be developed, manufactured or sold may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. The inability of the Company to protect its intellectual property
adequately could have a material adverse effect on its business, financial
condition and results of operations.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights, and there can be no assurance
that the Company will not be subject to infringement claims by other parties.
In May 1995, Quality Semiconductor, Inc. ("QSI"), a competitor of the Company,
brought a lawsuit against the Company in the United States District Court for
the Northern District of California, San Francisco Division, claiming
infringement of one of its patents by certain features in certain of the
Company's bus switch products and seeking injunctive relief and monetary
damages. The court has issued a claim construction order, at this time there is
no discovery or motions pending. The Company believes that is has meritorious
defenses, that the products involved are not material to the Company's business
and that the resolution of this matter will not have a material adverse effect
on the Company's business, financial condition or results of operations.
However, any litigation, whether or not determined in favor of the Company, can
result in significant expense to the Company and can divert the efforts of the
Company's technical and management personnel from productive tasks. In the event
of an adverse ruling in any litigation involving intellectual property, the
Company might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology or obtain licenses to the infringed
technology, and may suffer significant monetary damages, which could include
treble damages. In the event of a successful claim against the Company and the
Company's failure to develop or license a substitute technology on commercially
reasonable terms, the Company's business and results of operations would be
materially and adversely affected. There can be no assurances that the claims
brought by QSI or any potential infringement claims by other parties (or claims
for indemnity from customers resulting from any infringement claims) will not
materially and adversely affect the Company's business, financial condition and
results of operations.
The process technology used by the Company's independent foundries, including
process technology that the Company has developed with its foundries, can
generally be used by such foundries to produce their own products or to
manufacture products for other companies, including the Company's competitors.
In addition, the Company does not generally have the right to implement the
process technology used to manufacture its products with foundries other than
the foundry with which it has developed such process technology.
RISKS OF INTERNATIONAL SALES
Sales outside of the United States accounted for approximately 30%, 37%, 45% and
58% of the Company's net revenues in fiscal years 1996, 1997 and 1998, and the
first three months of fiscal 1999, respectively. The Company expects that export
sales will continue to represent a significant portion of net revenues. The
Company intends to expand its operations outside of the United States, which
will require significant management attention and financial resources and
further subject the Company to international operating risks. These risks
include unexpected changes in regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs and
other barriers and restrictions, and the burdens of complying with a variety of
foreign laws. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political and economic
instability and changes in diplomatic and trade relationships. In addition,
because the Company's international sales are denominated in U.S. dollars,
increases in the value of the U.S. dollar could increase the price in local
currencies of the Company's products in foreign markets and make the Company's
products relatively more expensive than competitors' products that are
denominated in local currencies, and there can be no assurance that the Company
will not be materially and adversely affected by fluctuating exchange rates.
Furthermore, there can be no assurance that regulatory, geopolitical and other
factors will not materially and adversely affect the Company's business,
financial condition and results of operations in the future or require the
Company to modify its current business practices.
17
<PAGE>
DEPENDENCE ON SINGLE OR LIMITED SOURCE ASSEMBLY SUBCONTRACTORS
The Company primarily relies on foreign subcontractors for the assembly and
packaging of its products and, to a lesser extent, for the testing of its
finished products. Some of these subcontractors are the Company's single source
supplier for certain new packages. Although the Company believes that it is not
materially dependent upon any such subcontractor, changes in the Company's or a
subcontractor's business could cause the Company to become materially dependent
on a subcontractor. The Company has from time to time experienced difficulties
in the timeliness and quality of product deliveries from the Company's
subcontractors. Although delays experienced to date have not been material,
there can be no assurance that the Company will not experience similar or more
severe difficulties in the future. The Company generally purchases these single
or limited source components or services pursuant to purchase orders and has no
guaranteed arrangements with such subcontractors. There can be no assurance that
these subcontractors will continue to be able and willing to meet the Company's
requirements for any such components or services. Any significant disruption in
supplies from, or degradation in the quality of components or services supplied
by, these subcontractors, or any other circumstance that would require the
Company to qualify alternative sources of supply could delay shipments and
result in the loss of customers, or limitations or reductions in the Company's
revenues, or otherwise materially and adversely affect the Company's business,
financial condition and results of operations.
Each of the Company's assembly subcontractors is located outside the United
States, which exposes the Company to risks associated with international
business operations, including foreign governmental regulations, currency
fluctuations, reduced protection for intellectual property, changes in political
conditions, disruptions or delays in shipments and changes in economic
conditions in the countries where these subcontractors are located, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit 27.1 Financial Data Schedule
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended September 30, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pericom Semiconductor Corporation
(Registrant)
Date: November 4, 1998 By: /s/ Alex Hui
------------
Alex Hui
Chief Executive Officer
Date: November 4, 1998 By: /s/ Patrick B. Brennan
----------------------
Patrick B. Brennan
Chief Financial Officer
(Chief Accounting Officer)
20
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