<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 October 2, 1999
[ ] 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
22, 1999 was 9,680,175.
<PAGE>
Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended October 2, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1: Financial Statements
Condensed Balance Sheets as of
September 30, 1999 and June 30, 1999 3
Condensed Statements of Income
for the three months ended
September 30, 1999 and September 30, 1998 4
Condensed Statements of Cash Flows
for the three months ended
September 30, 1999 and September 30, 1998 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 19
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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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,
1999 1999(1)
------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 9,005 $ 8,328
Short-term investments 18,038 17,397
Accounts receivable:
Trade (net of allowances of $3,020, and $2,570) 10,955 9,719
Other receivables 358 346
Inventories 10,794 9,835
Prepaid expenses and other current assets 424 582
Deferred income taxes 356 356
--------------------------------------
Total current assets 49,930 46,563
Property and equipment - net 7,243 6,509
Investment in and advances to investee 2,925 2,611
Other assets 359 242
--------------------------------------
Total $60,457 $ 55,925
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,744 $ 7,295
Accrued liabilities 1,752 1,604
Income taxes payable 1,262 22
--------------------------------------
Total current liabilities 10,758 8,921
Deferred income taxes 624 624
Shareholders' equity:
Common stock 26,172 25,600
Accumulted other comprehensive loss (37) (33)
Retained earnings 22,940 20,813
--------------------------------------
Total shareholders' equity 49,075 46,380
--------------------------------------
Total $60,457 $ 55,925
======================================
</TABLE>
(1) Derived from the June 30, 1999 audited balance sheet included in the
Company's Annual Report on Form 10-K.
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
September 30,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Net revenues $17,625 $14,547
Cost of revenues 10,233 8,968
---------------------------
Gross profit 7,392 5,579
---------------------------
Operating expenses:
Research and development 1,619 1,355
Selling, general and administrative 2,504 2,095
---------------------------
Total 4,123 3,450
---------------------------
Income from operations 3,269 2,129
Equity in net loss of investee (84) (75)
Interest income 361 343
---------------------------
Income before income taxes 3,546 2,397
Provision for income taxes 1,419 815
---------------------------
Net income $ 2,127 $ 1,582
===========================
Basic earnings per share $ 0.22 $ 0.17
===========================
Diluted earnings per share $ 0.20 $ 0.16
===========================
Shares used in computing basic earnings per share 9,611 9,311
===========================
Shares used in computing diluted earnings per share 10,820 9,967
===========================
</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>
Three Months Ended
September 30,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,127 $ 1,582
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 499 347
Equity in net loss of joint venture 84 75
Changes in assets and liabilities:
Accounts receivable (1,248) (2,817)
Inventories (959) 287
Prepaid expenses and other current assets 157 (225)
Accounts payable 449 516
Accrued liabilities 148 (597)
Income taxes payable 1,240 659
----------------------------
Net cash provided by (used in) operating activities 2,497 (173)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,233) (554)
Purchase of short-term investments (3,545) (2,234)
Maturities of short-term investments 2,900 2,256
Increase in other assets (116) (1)
Advances to investee (398) (358)
----------------------------
Net cash used for investing activities (2,392) (891)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 572 168
----------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 677 (896)
CASH AND EQUIVALENTS:
Beginning of period 8,328 8,773
----------------------------
End of period $ 9,005 $ 7,877
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 178 $ 156
============================
</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 September 30, 1999 and the results of
operations and cash flows for the three-month periods ended September 30, 1999
and 1998. 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, 1999 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 1999 ended on July 3,
1999. The three-month periods in fiscal years 1999 and 1998 ended on October 2,
1999 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.
6
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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.
Basic and diluted earnings per share for the three-month periods ended September
30, 1999 and September 30, 1998 are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
------- ------
<S> <C> <C>
Net income $ 2,127 $1,582
==========================
Computation of common shares outstanding - basic earnings
per share:
Weighted average shares of common stock 9,611 9,311
--------------------------
Shares used in computing basic earnings per share 9,611 9,311
==========================
Basic earnings per share $ 0.22 $ 0.17
==========================
Computation of common shares outstanding - diluted earnings
per share:
Weighted average shares of common stock 9,611 9,311
Dilutive options using the treasury stock method 1,209 656
--------------------------
Shares used in computing diluted earnings per share 10,820 9,967
==========================
Diluted earnings per share $ 0.20 $ 0.16
==========================
</TABLE>
3. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
--------- --------
<S> <C> <C>
Finished goods $ 2,324 $2,620
Work in process 6,775 5,972
Raw materials 1,695 1,243
---------------------------------
$10,794 $9,835
=================================
</TABLE>
7
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4. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------ ------
<S> <C> <C>
Accrued compensation $1,071 $ 908
External sales representative commissions 570 572
Other accrued expenses 111 124
----------------------------------
$1,752 $1,604
==================================
</TABLE>
5. Industry and Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and financial
statements and requires that certain selected information about operating
segments be reported in interim financial reports. It also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about
which separate financial information is evaluated regularly by the chief
operating decision maker, or decision making group in deciding how to allocate
resources and in assessing performance. SFAS no. 131 differs from accounting
standard SFAS No. 14, which required companies to disclose certain financial
information about an industry segment in which they operate. Under both SFAS
No. 14 and SFAS No. 131, the Company operates in one reportable segment: The
Company designs, manufactures and markets high performance digital, analog and
mixed-signal integrated circuits used for the transfer, routing, and timing of
digital and analog signals within and between computer, networking, datacom and
telecom systems.
6. Comprehensive Income
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner sources.
For the three months ended September 30, 1999 and 1998, comprehensive income,
which was comprised of the Company's net income for the periods and changes in
cumulative unrealized gain/(loss) on short-term investments was as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1999 1998
---------------- -------------
<S> <C> <C>
Net income $2,127 $1,582
Unrealized loss on investment (4) ---
--------------------------------
Comprehensive income $2,123 $1,582
=================================
</TABLE>
8
<PAGE>
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 to Shareholders 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
statements regarding: projections of revenues, expenses or other financial
items; the plans and objectives of management for future operations; the
Company's tax rate; the adequacy of allowances for returns, price protection and
other concessions; proposed new products or services; the sufficiency of cash
generated from operations and cash balances; the Company's exposure to interest
rate risk; the Company's costs, liabilities, exposure, and plans related to the
Year 2000 problem; the Company's ability to mitigate risks associated with the
Year 2000 problem; future economic conditions or performance; and 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 the
Company's Form 10-K under the heading "Factors That May Affect Future Results",
in (i) this Management's Discussion and Analysis of Financial Condition and
Results of Operations, particularly under the subheading "Additional Factors
that May Affect Results", and (ii) Note 1 to the Notes to Condensed Financial
Statements. 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.
9
<PAGE>
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,
---------------------------------
1999 1998
----- -----
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of revenues 58.1% 61.6%
---------------------------------
Gross profit 41.9% 38.4%
---------------------------------
Operating expenses:
Research and development 9.2% 9.3%
Selling, general and administrative 14.2% 14.4%
---------------------------------
Total 23.4% 23.7%
---------------------------------
Income from operations 18.5% 14.7%
Other income, net 1.6% 1.8%
---------------------------------
Income before income taxes 20.1% 16.5%
Provision for income taxes 8.0% 5.6%
---------------------------------
Net income 12.1% 10.9%
=================================
</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
21% from $14.5 million for the quarter ended September 30, 1998 to $17.6 million
for the quarter ended September 30, 1999. 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 52% for the first quarter of fiscal 1999 to 58% for
the first quarter of fiscal 2000. Sales to one customer, an international
distributor, accounted for approximately 14% of net revenues in the first
quarter of fiscal 2000 and 16% of net revenues for the comparable quarter in
fiscal 1999.
Gross Profit
Gross profit increased 32% from $5.6 million for the quarter ended September 30,
1998 to $7.4 million for the corresponding quarter ended September 30, 1999.
Gross profit as a percentage of net revenues, or gross margin, increased from
38.4% in the first quarter of fiscal 1999 to 41.9% in the first quarter of
fiscal 2000. The increase in gross margin resulted from the introduction and
sale of new products at higher gross margins and cost reductions achieved
through reduced wafer, assembly and test costs. These margin increases were
partially offset by decreases in average selling prices in the Company's
various product lines.
Research and Development
Research and development expenses increased 19.5% from $1.4 million for the
quarter ended September 30, 1998 to $1.6 million for the corresponding quarter
ended September 30, 1999, but decreased slightly as a percentage of net revenues
from 9.3% to 9.2%. 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.
10
<PAGE>
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 19.5% from $2.1 million for the quarter ended
September 30, 1998 to $2.5 million for the corresponding quarter ended September
30, 1999, but decreased as a percentage of net revenues from 14.4% to 14.2%.
The increase in expense was attributable to increased staffing levels,
particularly in sales and marketing and the addition of a sales office in Japan.
The Company anticipates that selling, general and administrative expenses will
increase in future periods due to increased staffing levels, particularly in
sales and marketing, as well as increased commission expense to the extent the
Company achieves higher sales levels.
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 remained
relatively flat, increasing from $268,000 for the quarter ended September 30,
1998 to $277,000 for the corresponding quarter ended September 30, 1999. The
Company's share of the net losses of PTI increased from $75,000 to $84,000 and
interest income rose from $343,000 to $361,000 for the quarters ending September
30, 1998 and September 30, 1999, respectively.
Provision for Income Taxes
The provision for income taxes increased from $815,000 for the quarter ended
September 30, 1998 to $1,419,000 for the corresponding quarter ended September
30, 1999. The effective tax rate of 40% in the current years first quarter is
up from 34% used in the comparable period last year. This is due to the
increase in taxable income, and the expiration of the research and development
tax credit which caused the effective rate to rise. The research and
development tax credit has since been extended and the Company will be adjusting
the tax rate downward in future periods to an expected overall 36% rate for the
current year. The provision for income taxes differed from the federal statutory
rate also due to state income taxes.
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 used $0.2 million and generated
$2.5 million of cash, respectively.
Net cash used for investing activities increased from $0.9 million for the three
months ended September 30, 1998 to $2.4 million for the comparable period in
fiscal 1999. The Company made capital expenditures of approximately $0.6
million during the first three months of fiscal 1998 compared with $1.2 million
in the comparable period of fiscal 1999, and also increased net purchases of
short-term investments by $0.6 million during the current year compared to the
same period last year.
As of September 30, 1999, the Company's principal source of liquidity included
cash, cash equivalents and short-term investments of approximately $27.0
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
11
<PAGE>
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 Company is aware of the issues associated with the programming code in
existing computer systems as Year 2000 approaches. The Year 2000 problem is
pervasive and complex, as virtually every computer operation will be affected by
the rollover of the two digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company has been working to
identify and assess the risks associated with its information systems, products,
operations and infrastructure, suppliers and customers that are not Year 2000
compliant, and to develop, implement and test remediation and contingency plans
to mitigate these risks. The Company is replacing or upgrading systems,
equipment and facilities that are known to be Year 2000 non-compliant. For the
Year 2000 non-compliance issues identified to date, management believes the cost
of upgrade or remediation has been less than $100,000 and expects total costs
incurred to not exceed this amount. If implementation of replacement systems is
delayed, or if significant new non-compliance issues are identified, these costs
could increase and the Company's financial condition, results of operations, or
cash flows could be materially adversely affected.
INFORMATION SYSTEMS. The Company began the installation of an enterprise wide
ERP 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.
PRODUCTS. The Company currently believes that it has no significant exposure to
contingencies directly related to the Year 2000 issue for products it has sold
or is currently selling.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in
the operations and facilities of the Company have been inventoried and are
currently being assessed for Year 2000 compliance. The assessment to date has
not uncovered any material issues.
SUPPLIERS. The Company has contacted its critical suppliers to determine whether
their operations, products and services are Year 2000 compliant. Where
practicable, the Company will attempt to mitigate its risks with respect to the
failure of suppliers to be Year 2000 compliant. In the event that suppliers are
not Year 2000 compliant, the Company will seek alternative sources of suppliers.
However, such failures remain a possibility and could have a material impact on
the Company's financial condition, results of operations, or cash flows.
CUSTOMERS. The Company is actively responding to all customer requests for
compliance, surveys and other general information related to its Year 2000
programs.
12
<PAGE>
GENERAL. The Company does not currently expect its costs associated with the
Year 2000 problem to be material, and expects to be able to fund these costs
through operating cash flows. However, the risks associated with the Year 2000
problem can be difficult to identify and to address, and could result in
material adverse consequences to the Company. Even if the Company, in a timely
manner, completes all of its assessments, identifies and tests remediation plans
believed to be adequate, and develops contingency plans believed to be adequate,
some problems may not be identified or corrected in time to prevent material
adverse consequences to the Company. These consequences could include increased
remediation expenses, delays in product shipments, a decline in revenue and
exposure to litigation related to any Year 2000 related failures.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, and test remediation or
contingency plans in a timely manner, or may find that the costs of these
activities exceed current expectations and become material. In many cases, the
Company is relying on assurances from suppliers and customers that new and
upgraded information systems and other products will be Year 2000 compliant. The
Company has and plans to test certain third-party products, but cannot be sure
that its tests will be adequate or that, if problems are identified, they will
be addressed by the supplier in a timely and satisfactory way.
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000-compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
interruptions, either because of its own Year 2000 problems or those of its
customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company.
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, it could have an adverse effect on
the Company's financial condition, results of operations, or cash flows.
Further, the Company could be materially and adversely impacted by widespread
economic or financial market disruption, or by Year 2000 computer system
failures at third parties with which it has relationships.
Additional Factors That May Affect Results
Limited Operating History; Potential Fluctuations in Operating Results The
Company was founded in 1990 and has a limited history of operations, having
shipped its first products in volume in fiscal 1993. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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. 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
13
<PAGE>
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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
continue to decline over time and that average 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 margins 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. See "Technological Change; Dependence on New Products," "Competition,"
" Semiconductor Industry Risks" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Independent Wafer Foundries
In fiscal 1996, 1997 and 1998 approximately 90% of the wafers for the Company's
semiconductor products were manufactured by Chartered Semiconductor
Manufacturing Ltd ("Chartered"). The remainder of the Company's wafers were
manufactured by Austria Mikro Systems International AG ("AMS"), LG Semicon
America, Inc. ("LG"), NJR Corporation ("NJRC"), and Taiwan Semiconductor
Manufacturing Company, Ltd ("TSMC"). In fiscal 1999, approximately 85% of the
Company's wafers were purchased from Chartered. 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 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 future growth 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
14
<PAGE>
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. The Company's reliance
on independent wafer suppliers may also impact the length of the development
cycle for the Company's products, which may provide time-to-market advantages to
competitors that have in-house fabrication capacity.
Each of Chartered, TSMC, AMS, LG and NJRC 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 foundries are located, each of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of 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 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 to successfully 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. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business --
Products" and "Business - Research and Development."
15
<PAGE>
Customer Concentration
A relatively small number of customers and distributors has 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 1999, sales to one distributor accounted for approximately 14%
of the Company's net revenues, and sales to the Company's top five customers and
distributors accounted for approximately 36% of net revenues. One customer, an
international distributor that in turn ships to multiple customers, accounted
for 14% of net revenues during the first three months of fiscal 2000 and sales
to the Company's top five customers and distributors accounted for approximately
41% of net revenues for the first three months of fiscal 2000. 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 large 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. See "-- Limited Operating History; Potential Fluctuations in
Operating Results," and "Management's Discussion and Analysis of 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., 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 or emerging companies
that sell products to certain segments of the markets addressed by the Company.
Competitors with greater financial resources or broader product lines may also
have greater ability than the Company 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
competitors 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 functionality similar or
identical to the Company's products, and the Company expects this trend to
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
16
<PAGE>
and results of operations. See "-- Dependence on Independent Wafer Foundries,"
and "-- 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 its 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 selling prices, overcapacity and rapidly changing
technology and evolving industry standards. Accordingly, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Reliance on Distributors; Product Returns
Sales through domestic and international distributors represented 36%, 49% and
57% of the Company's net revenues in fiscal 1997, 1998 and 1999, respectively.
During the first three months of fiscal 2000 sales through domestic and
international distributors represented 58% 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 permitted 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 incurred 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. See "Business
- -- Sales and Marketing."
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
17
<PAGE>
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 has
been and is now in the later stages of implementing a new management information
system. There can be no assurance that the Company will not encounter
difficulties as it continues 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 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. See "Business -- Employees" and
"Management."
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
seventeen patents covering certain aspects of its product designs and has ten
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 consume 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 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. See "Business -
- -Intellectual Property."
Risks of International Sales
Sales outside of the United States accounted for approximately 37%, 45%, 48% and
46% of the Company's net revenues in fiscal 1997, 1998, 1999 and the first three
months of fiscal 2000, 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
18
<PAGE>
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.
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. See "Business -- Customers" and "Business -- Sales
and Marketing."
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. In
particular, there is a potential risk of conflict and further instability in the
relationship between Taiwan and the People's Replublic of China, which could
cause a disruption in the operations of several of the Company's assembly
subcontractors located in Taiwan. See "Business -- Manufacturing."
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At September 30, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $18.0
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, 1999, 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. Due to the short duration and conservative nature of these instruments,
the Company does not believe that it has a material exposure to interest rate
risk.
19
<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, 1999.
20
<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 12, 1999 By: /s/ Alex Hui
------------
Alex Hui
Chief Executive Officer
Date: November 12, 1999 By: /s/ Patrick B. Brennan
----------------------
Patrick B. Brennan
Chief Financial Officer
(Chief Accounting Officer)
21
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