<PAGE>
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 March 28, 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 May 1,
1998 was 9,183,503.
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Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended March 28, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Condensed Balance Sheets as of
March 31, 1998 and June 30, 1997 3
Condensed Statements of Income
for the three months and nine months ended
March 31, 1998 and March 31, 1997 4
Condensed Statements of Cash Flows
for the nine months ended
March 31, 1998 and March 31, 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
2
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Pericom Semiconductor Corporation
Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997 (1)
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 9,620 $ 9,566
Short-term investments 14,565 ---
Accounts receivable:
Trade (net of allowances of $1,435 and $1,198) 7,557 3,227
Related party 371 99
Other receivables 280 20
Inventories 8,039 6,182
Prepaid expenses and other current assets 159 149
Deferred income taxes 339 339
------- --------
Total current assets 40,930 19,582
Property and equipment - net 4,565 3,422
Investments 395 545
Other assets 44 32
------- --------
$45,934 $ 23,581
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,185 $ 4,984
Accrued liabilities 1,773 1,203
Income taxes payable 195 411
------- --------
Total current liabilities 9,153 6,598
Deferred income taxes 188 188
Shareholder's equity:
Convertible preferred stock --- 7,717
Common stock 24,116 201
Retained earnings 12,477 8,877
------- --------
Total shareholders' equity 36,593 16,795
------- --------
$45,934 $ 23,581
======= ========
</TABLE>
(1) Derived from the June 30, 1997 audited balance sheet included in the
Company's registration statement on Form S-1 (File No. 333-35327).
See notes to condensed financial statements.
3
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Pericom Semiconductor Corporation
Condensed Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues $12,512 $8,008 $35,884 $21,909
Cost of revenues 7,418 5,017 21,397 13,689
---------------------------------------------------------------
Gross profit 5,094 2,991 14,487 8,220
---------------------------------------------------------------
Operating expenses:
Research and development 1,300 1,078 3,738 3,053
Selling, general and administrative 2,005 1,497 5,952 4,352
---------------------------------------------------------------
Total 3,305 2,575 9,690 7,405
---------------------------------------------------------------
Income from operations 1,789 416 4,797 815
Equity in net loss of joint venture (80) (20) (150) (50)
Interest income 340 110 726 320
---------------------------------------------------------------
Income before income taxes 2,049 506 5,373 1,085
Provision for income taxes 676 167 1,773 358
---------------------------------------------------------------
Net income $ 1,373 $ 339 $ 3,600 $ 727
===============================================================
Basic earnings per share $ 0.15 $ 0.12 $ 0.56 $ 0.25
===============================================================
Diluted earnings per share $ 0.14 $ 0.04 $ 0.39 $ 0.09
===============================================================
Shares used in computing basic earnings per share 9,083 2,941 6,377 2,941
===============================================================
Shares used in computing diluted earnings per share 10,007 8,044 9,202 8,127
===============================================================
</TABLE>
See notes to condensed financial statements.
4
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Pericom Semiconductor Corporation
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,600 $ 727
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 846 694
Equity in net loss of joint venture 150 50
Changes in assets and liabilities:
Accounts receivable (4,862) (491)
Inventories (1,857) 176
Prepaid expenses and other current assets (10) (150)
Accounts payable 2,201 1,148
Accrued liabilities 570 (682)
Income taxes payable (216) 374
-------------------------------
Net cash provided by operating activities 422 1,846
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,989) (1,496)
Purchase of short-term investments (14,565) ---
(Increase) decrease in other assets (12) 33
Proceeds from sale of property and equipment --- 7
-------------------------------
Net cash used for investing activities (16,566) (1,456)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 16,198 67
-------------------------------
Net cash provided by financing activities 16,198 67
-------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 54 457
CASH AND EQUIVALENTS:
Beginning of period 9,566 8,556
-------------------------------
End of period $ 9,620 $ 9,013
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 1,989 $ ---
===============================
</TABLE>
See notes to condensed financial statements.
5
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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 March 31, 1998 and the results of
operations for the three and nine-month periods ended March 31, 1998 and 1997
and of cash flows for the nine-month periods ended March 31, 1998 and 1997.
This unaudited quarterly information should be read in conjunction with the
audited financial statements of Pericom and the notes thereto included in the
Company's Registration Statement on Form S-1 as amended, filed with the
Securities and Exchange Commission, SEC File No. 333-35327 (the "S-1").
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 and nine-month periods ended March 31, 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 March 31. Fiscal year 1997 ended on June 28,
1997. The three and nine-month periods in fiscal years 1997 and 1998 ended on
March 29, 1997 and March 28, 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
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. Pursuant to rules of the Securities
and Exchange Commission, all common shares issued and options, warrants and
other rights to acquire shares of Common Stock at a price less than the initial
public offering price granted by the Company during the period subsequent to
November 6, 1996 (using the treasury stock method until shares are issued) have
been included in the computation of basic earnings per share and diluted
earnings per share for all periods presented prior to October 31, 1997, the date
the Company completed its initial public offering of common shares.
6
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Basic and diluted earnings per share for the three and nine month periods ended
March 31, 1998 and March 31, 1997 are computed as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 1,373 $ 339 $3,600 $ 727
============================================================
Computation of common shares outstanding, basic
earnings per share:
Common stock 9,083 2,165 6,024 2,165
Cheap Stock:
Options granted --- 543 247 543
Common shares issued --- 233 106 233
------------------------------------------------------------
Shares used in computing basic earnings per share 9,083 2,941 6,377 2,941
============================================================
Basic earnings per share $ 0.15 $0.12 $0.56 $0.25
============================================================
Computation of common shares outstanding, diluted
earnings per share:
Common stock 9,083 2,165 6,024 2,165
Cheap Stock:
Options granted --- 543 247 543
Common shares issued --- 233 106 233
Preferred shares --- 4,613 2,095 4,613
Dilutive options using the treasury stock 924 490 730 573
method
------------------------------------------------------------
Shares used in computing diluted earnings per share 10,007 8,044 9,202 8,127
============================================================
Diluted earnings per share $ 0.14 $0.04 $0.39 $0.09
============================================================
</TABLE>
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
<S> <C> <C>
Finished goods $2,347 $1,327
Work in process 4,422 3,659
Raw materials 1,270 1,196
------ ------
$8,039 $6,182
====== ======
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
<S> <C> <C>
Accrued compensation $ 629 $ 591
External sales representative commissions 527 310
Other accrued expenses 617 302
------ ------
$1,773 $1,203
====== ======
</TABLE>
7
<PAGE>
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued 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; and 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 these statements will not impact the Company's financial position,
results of operations or cash flows. Both of these statements are effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
8
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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 Registration Statement on Form S-1
declared effective October 31, 1997, SEC File No. 333-35327 (the "Form S-1").
Except for the historical information contained herein, the matters discussed in
this Quarterly Report are forward looking statements that involve risks and
uncertainties, including statements regarding the expected future levels of the
Company's research and development and selling, general and administrative
expenses, and the sufficiency of the Company's current cash balances and cash
expected to be generated from operations. The actual results that the Company
achieves may differ materially from those projected in any forward looking
statements due 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 S-1. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release updates or revisions to these
statements.
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 Nine months ended
March 31, March 31,
---------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 59.3% 62.6% 59.6% 62.5%
---------------------------------------------------------------
Gross profit 40.7% 37.4% 40.4% 37.5%
---------------------------------------------------------------
Operating expenses:
Research and development 10.4% 13.5% 10.4% 13.9%
Selling, general and administrative 16.0% 18.7% 16.6% 19.9%
---------------------------------------------------------------
Total 26.4% 32.2% 27.0% 33.8%
---------------------------------------------------------------
Income from operations 14.3% 5.2% 13.4% 3.7%
Other income, net 2.1% 1.1% 1.6% 1.2%
---------------------------------------------------------------
Income before income taxes 16.4% 6.3% 15.0% 4.9%
Provision for income taxes 5.4% 2.1% 5.0% 1.6%
---------------------------------------------------------------
Net income 11.0% 4.2% 10.0% 3.3%
===============================================================
</TABLE>
NET REVENUES
Net revenues consist primarily of product sales, which are recognized upon
shipment, less an estimate for returns and allowances. Net revenues increased
56% from $8.0 million for the quarter ended March 31, 1997 to $12.5 million for
the quarter ended March 31, 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
9
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of total revenues rose from 36% for the third quarter of fiscal 1997 to 54% for
the third quarter of fiscal 1998. Sales to two customers accounted for
approximately 16% and 11%, respectively, of net revenues in the third quarter of
fiscal 1997 and sales to two customers, each of which is a distributor,
accounted for approximately 14% and 10%, respectively, of net revenues in the
third quarter of fiscal 1998.
Net revenues increased 64% from $21.9 million for the nine-month period ended
March 31, 1997 to $35.9 million for the same period of fiscal 1998. The
increase in net revenues was attributable to increased sales volume in all of
the Company's product families, and in particular the Company's SiliconSwitch
product line. Sales to domestic and international distributors as a percent of
total revenues increased to 51% in the first nine months of fiscal 1998 from 42%
in the comparable period in fiscal 1997. Two customers accounted for 17% and
11% of net revenues, respectively, in the first nine months of fiscal 1997 and
one customer accounted for 11% (the 14% customer for the third quarter of fiscal
1998) of net revenues in the comparable period in fiscal 1998.
GROSS PROFIT
Gross profit increased 70% from $3.0 million for the quarter ended March 31,
1997 to $5.1 million for the corresponding quarter ended March 31, 1998. Gross
profit as a percentage of net revenues, or gross margin, increased from 37.4% in
the third quarter of fiscal 1997 to 40.7% in the third quarter of fiscal 1998.
The increase in gross margin resulted from cost reductions in excess of
decreases in average selling prices in the Company's various product lines and
the introduction of new products at higher gross margins. Cost reductions were
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.
Gross profit increased 76% from $8.2 million for the nine months ended March 31,
1997 to $14.5 million for the corresponding period ended March 31, 1998. Gross
margin also increased from 37.5% in the first nine months of fiscal year 1997 to
40.4% in the first nine months of fiscal 1998. The increase in gross margin was
attributable to cost reduction factors in the same product lines as discussed in
the quarterly analysis above.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 21% from $1.1 million for the
quarter ended March 31, 1997 to $1.3 million for the corresponding quarter ended
1998, but decreased as a percentage of net revenues from 13.5% to 10.4%.
Research and development expenses increased 22% from $3.1 million for the nine
months ended March 31, 1997 to $3.7 million for the corresponding period ended
March 31, 1998, but decreased as a percentage of net revenues from 13.9% to
10.4%. The increase in expense in each period was attributable to development
costs for new products in each of the Company's product lines, expansion of the
Company's engineering staff and increased mask expense, 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 34% from $1.5 million for the quarter ended
March 31, 1997 to $2.0 million for the corresponding quarter ended March 31,
1998, but decreased as a percentage of net revenues from 18.7% to 16.0%.
Selling, general and administrative expenses increased 37% from $4.4 million for
the nine months ended March 31, 1997 to $6.0 million for the corresponding
period ended March 31,1998, but decreased as a percentage of net revenues from
19.9% to 16.6%. The increase in expense was
10
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attributable to increased staffing levels, particularly in sales and marketing,
as well as increased commission expense due to higher sales levels. 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 $90,000 for the quarter ended March 31, 1997 to $260,000 for the
corresponding quarter ended March 31, 1998 due to interest earned on the
increased cash and short-term investment balances that resulted from the net
proceeds from the Company's initial public offering in the December 1997
quarter, partially offset by an increase of $60,000 in the Company's share of
the net losses of PTI.
Other income, net increased from $270,000 for the nine months ended March 31,
1997 to $576,000 for the corresponding period ended March 31, 1998 due to
interest earned on the increased cash and short-term investment balances that
resulted from the net proceeds from the Company's initial public offering in the
December 1997 quarter, partially offset by an increase of $100,000 in the
Company's share of the net losses of PTI.
PROVISION FOR INCOME TAXES
The provision for income taxes increased from $167,000 for the quarter ended
March 31, 1997 to $676,000 for the corresponding quarter ended March 31, 1998
due to the increase in taxable income. The provision for income taxes increased
from $358,000 for the nine months ended March 31, 1997 to $1.8 million for the
corresponding period ended March 31, 1998 due to the increase in taxable income.
In each of these periods, 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 nine months
of fiscal 1997 and 1998, operating activities generated $1.8 million and $0.4
million of cash, respectively.
Net cash used for investing activities increased from $1.5 million for the nine
months ended March 31, 1997 to $16.6 million for the comparable period in fiscal
1998. The Company made capital expenditures of approximately $1.5 million
during the first nine months of fiscal 1997 compared with $2.0 million in the
comparable period of fiscal 1998. The Company used proceeds from its initial
public offering to purchase short-term investments of $14.6 million in the nine
months ended March 31, 1998.
As of March 31, 1998, the Company's principal source of liquidity included cash,
cash equivalents and short-term investments of approximately $24.2 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.
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
11
<PAGE>
2000. This could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that substantially all of its systems are Year 2000
compliant. 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. The Company currently believes that the
cost of this effort will not be material, although no assurance can be given
that unexpected issues will not cause such costs to increase to a material
amount. The Company currently believes that it has no significant exposure to
contingencies directly related to the Year 2000 issue for the 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.
The Company has experienced significant fluctuations in its quarterly operating
results in the past three fiscal years and could continue to experience such
fluctuations in the future. For instance, in the quarter ended June 30, 1997,
sales to Harris Corporation ("Harris") under a private label resale program were
$3.1 million, compared to an average of $0.8 million in each of the three
previous quarters. Sales to Harris are not expected to continue at the level
achieved in the quarter ended June 30, 1997 and may fluctuate significantly from
quarter to quarter. 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
<PAGE>
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. Beginning late in calendar 1995 and continuing into calendar 1997, the
Company experienced a significant decrease in the selling prices of many of its
products, which had a material adverse effect on the Company's net revenue and
overall gross margin. The Company expects that selling prices for its existing
products will continue to 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.
In the recent past, some wafer foundries, including some of those utilized by
the Company, required certain customers to make substantial financial
commitments to them as a condition to future allocations of finished wafer
output. These financial commitments have taken the form of equity investments in
the foundry by the customers, full or partial pre-payments on orders, or
furnishing capital equipment to the foundry. The Company has not been required
to make such financial commitments to date. Although wafer foundries generally
are no longer requiring such financial commitments, there can be no assurance
that wafer foundries will not renew such requirements at some time in the
future. The Company has limited financial resources and would be substantially
less able than many of its competitors and other semiconductor manufacturers to
provide equity investment or other substantial financial accommodations to its
foundries to obtain capacity allocation guarantees. To the extent that such
financial commitments are required to maintain existing wafer output or to
obtain new capacity, the Company's ability to obtain wafers will be adversely
affected if the Company is unable to meet such requirements.
13
<PAGE>
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 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
1997, sales to Harris and International Business Machines Corporation ("IBM")
accounted for approximately 17% and 14%, respectively, of the Company's net
revenues, and sales to the Company's top five customers accounted for
approximately 47% of net revenues. In the fourth quarter of fiscal 1997, sales
to Harris under a private label resale program were $3.1 million and accounted
for 27.3% of the Company's net revenues during that quarter. One customer
accounted for 11% of net revenues during the first nine months of fiscal 1998.
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. In particular, sales to Harris are not
expected to continue at the level achieved in the fourth quarter of fiscal 1997.
Loss of one or more of the Company's customers, or a reduction in the volume of
orders placed by any of such
14
<PAGE>
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.
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
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
15
<PAGE>
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. Beginning late in 1995 and
continuing into calendar 1997, the Company experienced a significant decrease in
the selling prices of many of its products, attributable primarily to a
significant downward trend in pricing experienced in the semiconductor industry.
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.
RELIANCE ON DISTRIBUTORS; PRODUCT RETURNS
Sales through domestic and international distributors represented 40% and 36% of
the Company's net revenues in fiscal years 1996 and 1997, respectively. During
the first nine months of fiscal 1998 sales through domestic and international
distributors represented 51% 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. The Company is currently attempting to hire a number
of engineering personnel and has experienced delays in filling such positions.
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.
16
<PAGE>
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 nine
patents covering certain aspects of its product designs and has eight 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 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 it 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.
17
<PAGE>
RISKS OF INTERNATIONAL SALES
Sales outside of the United States accounted for approximately 35%, 30%, 37% and
44% of the Company's net revenues in fiscal years 1995, 1995 and 1997, and the
first nine months of fiscal 1998 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.
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 March 31, 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: May 6, 1998 By: /s/ Alex Hui
-------------------------------
Alex Hui
Chief Executive Officer
Date: May 6, 1998 By: /s/ Patrick B. Brennan
-------------------------------
Patrick B. Brennan
Chief Financial Officer
(Chief Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
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