<PAGE>
U.S. SECURITY AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-26312
TELCOM SEMICONDUCTOR, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3186995
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1300 Terra Bella, Mt. View, California 94039
(415) 968-9241
(address, including zip code, and telephone number, including
code, of issuer's principle executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
The number of shares outstanding of the issuer's Common Stock as of October 22,
1996 was 15,708,907.
1
<PAGE>
TELCOM SEMICONDUCTOR, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 8,787 $10,682 $27,388 $28,614
Cost of sales 7,300 6,814 18,914 18,430
------- ------- ------- -------
Gross profit 1,487 3,868 8,474 10,184
------- ------- ------- -------
Operating expenses:
Research and development 838 715 3,248 1,867
Selling, general and administrative 1,832 1,851 5,626 5,179
------- ------- ------- -------
Total operating expenses 2,670 2,566 8,874 7,046
------- ------- ------- -------
Income (loss) from operations (1,183) 1,302 (400) 3,138
Interest income, net 6 136 218 83
------- ------- ------- -------
Income (loss) before income taxes (1,177) 1,438 (182) 3,221
Provision (benefit) for income taxes (318) 347 (49) 805
------- ------- ------- -------
Net income (loss) $ (859) $ 1,091 $ (133) $ 2,416
======= ======= ======= =======
Net income (loss) per share $(0.05) $0.07 $(0.01) $ 0.16
======= ======= ======= =======
Number of shares used to compute per
share data 15,666 16,530 15,587 15,457
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,583 $15,849
Marketable securities 5,184 7,990
Accounts receivable, less allowance
for doubtful accounts of $195 and $156 4,259 6,233
Inventory 8,116 6,882
Deferred income taxes 1,145 1,145
Other current assets 529 174
------- -------
Total current assets 32,816 38,273
Property and equipment, net 18,960 11,532
Other assets 3,000 -
------- -------
$54,776 $49,805
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 2,682 $ 1,265
Accounts payable 2,387 2,167
Accrued liabilities 1,801 1,908
Deferred distributor income 1,215 1,652
Income taxes payable 159 1,925
------- -------
Total current liabilities 8,244 8,917
Notes payable 8,627 3,328
Deferred income taxes 501 501
------- -------
Total liabilities 17,372 12,746
------- -------
Stockholders' equity:
Common stock 15 15
Additional paid-in capital 33,183 32,740
Notes receivable from stockholders (11) (46)
Retained earnings 4,217 4,350
------- -------
Total stockholders' equity 37,404 37,059
------- -------
$54,776 $49,805
======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (133) $ 2,416
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 2,448 1,174
Provision for uncollectible accounts 39 (22)
Changes in assets and liabilities:
Accounts receivable 1,935 (2,721)
Inventory (1,234) (945)
Other current assets (355) 34
Accounts payable 220 1,378
Accrued liabilities (107) 519
Deferred distributor income (437) 821
Income taxes payable (1,766) 579
------- -------
Net cash provided by (used for) operating activities 610 3,233
------- -------
Cash flows from investing activities:
Purchases of property and equipment (9,876) (6,624)
Investment in IC WORKS, Inc. (3,000) -
Net sales of marketable securities 2,806 -
------- -------
Net cash used for investing activities (10,070) (6,624)
------- -------
Cash flow from financing activities:
Proceeds from sale of common stock 458 18,976
Repurchase of common stock (15) (2)
Notes receivable from stockholders 35 231
Borrowings on notes payable 8,067 3,654
Payments on notes payable (1,351) (496)
------- -------
Net cash provided by financing activities 7,194 22,363
------- -------
Net increase (decrease) in cash and cash equivalents (2,266) 18,972
Cash and cash equivalents at the beginning of period 15,849 6,297
------- -------
Cash and equivalents at the end of period $13,583 $25,269
======= =======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
<PAGE>
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(amounts in thousands)
1. The Company and Basis of Presentation:
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs, develops,
manufactures and markets a diversified portfolio of high performance analog
integrated circuits for use in a wide variety of electronic systems. The Company
operates and reports financial results on a 52-53 week fiscal year ending on the
last Friday of December. For convenience, the Company has presented its fiscal
year as ending December 31, and its fiscal quarter as ending September 30.
In the opinion of management, the unaudited condensed consolidated interim
financial statements have been prepared on the same basis as the December 31,
1995 financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary to fairly state the information set forth
herein.
This report on Form 10-QSB for the period ended September 30, 1996 should
be read in conjunction with the Company's 1995 Annual Report on Form 10-KSB and
the 10-QSB for the periods ended March 31, 1996 and June 30, 1996.
2. Net Income (Loss) per Share
Net income (loss) per share is computed using the weighted average number
of shares of common stock and, when dilutive, common equivalent shares from
mandatorily redeemable convertible preferred stock (using the if-converted
method) and from stock options and warrants (using the treasury stock method).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares, warrants and options issued by the Company
during the twelve-month period prior to the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods presented prior to the offering.
6
<PAGE>
3. Balance Sheet Details:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
----------- ---------
<S> <C> <C> <C>
Marketable securities:
U.S. Government agency obligations $ 0 $ 1,509
Municipal Government obligations 5,184 6,481
----------- ---------
$ 5,184 $ 7,990
=========== =========
Inventory:
Raw material $ 1,245 $ 1,014
Work in process 3,916 3,172
Finished goods 2,955 2,696
----------- ---------
$ 8,116 $ 6,882
=========== =========
Property and equipment:
Equipment $13,213 $10,888
Leasehold improvements 1,977 812
----------- ---------
15,190 11,700
Accumulated depreciation (4,811) (2,363)
----------- ---------
10,379 9,337
Equipment for I.C. WORKS, Inc. 7,420 0
Construction in progress 1,161 2,195
----------- ---------
$18,960 $11,532
=========== =========
Accrued liabilities:
Payroll and related $ 1,398 $ 1,251
Accrued rent 126 186
Professional fees 179 176
Other 98 295
----------- ---------
$ 1,801 $ 1,908
=========== =========
</TABLE>
7
<PAGE>
4. Income Taxes
The provision for income taxes reflects the estimated annualized effective
rate applied to earnings for the interim period. The effective rate differs from
the U. S. statutory rate primarily due to earnings of foreign subsidiaries being
taxed at lower rates.
5. Additional Foundry Agreement
In November 1995, the Company entered into a foundry agreement with IC
WORKS, Inc. whereby the Company will obtain guaranteed production capacity for
certain of the Company's integrated circuits. The agreement requires TelCom to
provide approximately $10 million in capital equipment to IC WORKS and to
purchase up to a maximum of $3 million of preferred stock of IC WORKS, Inc.
During the nine months ended September 30, 1996, the Company purchased $3
million of such preferred stock and $7.4 million of capital equipment.
6. Sale of Common Stock
On August 2, 1995, the Company completed its initial public offering of
4,140,000 shares of its Common Stock, of which 2,496,666 shares were issued and
sold by the Company. Net proceeds to the Company aggregated approximately $19.0
million. As of the closing date of the offering, all of the mandatorily
redeemable convertible preferred stock outstanding prior to the offering was
automatically converted into an aggregate of 9,561,668 shares of common stock.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-QSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
OVERVIEW
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs, develops,
manufactures and markets a diversified portfolio of high-performance standard
analog integrated circuits for a wide variety of applications in the industrial,
communications, computer, automotive and medical markets. The Company's products
comprise three principal product families: mixed signal products, which are
analog devices with some digital control functionality, such as display
analog/digital converters: power management products, such as switch node power
supply controllers, whose function is to conserve power, and smart sensors, such
as solid state thermal management devices. Within each family, the Company
markets proprietary and selected second source products offering a range of
performance, functionality and price. Average selling prices for the Company's
proprietary products have tended to decline at a slower rate than have those for
the Company's second source products, which are more susceptible to competitive
pricing pressures. The Company generally recognizes higher gross margins on its
proprietary products than on its second source products. Most of the Company's
revenues during 1995 were from products introduced prior to 1994. Since December
1993, the Company has focused its product development efforts on new proprietary
products and second source products and the Company has introduced twenty (20)
of these products since September 1995. During the three month and nine month
periods ended September 30, 1996, sales of products that were introduced after
September 1, 1995 accounted for 15% and 12%, respectively, of net sales.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales, gross
margins and operating income. These factors include the volume and timing of
orders received, changes in the mix of proprietary and second source products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to introduce new products
on a timely basis, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, the Company's access to advanced process technologies and the timing
and extent of process development costs. Historically in the semiconductor
industry, average selling prices of products have decreased over time. If the
Company is unable to introduce new products with higher margins, maintain its
product mix between proprietary and second source products or reduce
manufacturing costs to offset decreases in the prices of its existing products,
the Company's operating results will be adversely affected. The Company's
business is characterized by short term orders and shipments schedules, and
customer orders typically can be canceled or rescheduled without penalty to the
customer. Since most of the Company's backlog is cancelable without penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, because of the high fixed costs in the semiconductor
industry, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls. As a result of the forgoing or other
factors, the Company may experience material adverse fluctuations in future
operating results on a quarterly or annual basis, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
On August 2, 1995, the Company completed its initial public offering of
4,140,000 shares of its common stock, of which 2,496,666 shares were issued and
sold by the Company. Net proceeds to the Company aggregated approximately $19
million. Earnings per share computations for periods after August 2, 1995 will
reflect the additional dilution for the full effect of the 2,496,666 shares sold
by the Company.
9
<PAGE>
In November 1995, the Company entered into a foundry agreement with IC
WORKS, Inc., a privately-held company located in San Jose, California. The terms
of the agreement require TelCom to provide approximately $10 million in capital
equipment to IC WORKS and to purchase up to a maximum of $3 million of preferred
stock of IC WORKS. During the first nine months ended September 30, 1996, the
Company purchased $3 million of such preferred stock and $7.4 million of capital
equipment. In return for this investment, TelCom will receive guaranteed
submicron wafer capacity for a period of five years, projected to start in 1997.
RESULTS OF OPERATIONS
Net Sales
- ---------
Net sales for the three month and nine month periods ended September 30,
1996 decreased $1.9 million or 17.7% and $1.2 million or 4.3%, respectively,
from the corresponding periods in the prior fiscal year. The decrease in sales
was primarily due lower sales volume in commodity products in its mixed signal
product line. International sales for the three month and nine month periods
were 66% and 62%, respectively, compared to 63% and 59% for the same periods in
the prior year. Sales in the Asian market decreased in the three month period
ended September 30, 1996 by 5%, primarily due to lower sales in mixed signal and
sensor products. Asian sales increased in the nine month period ended September
30, 1996 by 13%, primarily due to higher unit volumes in power management offset
by the lower sales volume in mixed signal products. Sales in Europe decreased in
the three month and nine month periods ended September 30, 1996 by 15% and 11%,
respectively, with lower sales volume in the mixed signal products. For the
three month period ended September 30, 1996, two OEM customers, Motorola and
Compaq Computer, accounted for approximately 10% and 9%, respectively, of net
sales compared to 9% and 10%, respectively, for the same period in the prior
year. For the nine month period ended September 30, 1996, Motorola and Compaq
Computer accounted for 9% and 8%, respectively, compared to 11% and 9%,
respectively, for the same period in the prior year. Future Electronics, one of
the Company's distributors, accounted for 11% of the Company's net sales during
the three month period ended September 30, 1996 compared to 13% for the same
period in the prior year. For the nine month period ended September 30, 1996
Future Electronics accounted for 13% of the Company's net sales compared to 13%
for the same period in the prior year. During the three month and nine month
periods ended September 30, 1996, sales of products that were introduced after
September 1, 1995 accounted for 15% and 12%, respectively, of net sales.
Gross Margin
- ------------
Gross margin for the three month and the nine month periods ended September
30, 1996 decreased as a percentage of sales to 16.9% and 30.9%, respectively,
from 36.2% and 35.6%, respectively, in the corresponding periods in the prior
fiscal year. The decrease in gross margins was primarily due to higher overhead
period costs due to lower factory utilization, poor yields and scrap in wafer
fabrication. Contributing to the lower gross margin in the three months ended
September 30, 1996 was a provision for an increase in inventory reserves related
to canceled or delayed customer orders.
Research and Development Expenses
- ---------------------------------
Research and development expenses for the three month and nine month
periods ended September 30, 1996 increased to $838,000 or 9.5% of sales and $3.2
million or 11.9% of sales, respectively, compared to $715,000 or 6.7% of sales
and $1.9 million or 6.5% of sales, respectively, for the corresponding periods
in the prior year, representing increases of $123,000 and $1.3 million,
respectively. These increases were primarily due to wafer costs associated with
new product development and increased staffing in design engineers and layout
technicians. The Company expects research and development expenses generally to
increase in absolute dollars in future periods although such expenses may
fluctuate as a percentage of net sales.
10
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the three month period
ended September 30, 1996 decreased to $1.8 million compared to $1.9 million for
the corresponding periods in the prior year. Selling, general and administrative
expenses decreased primarily due to lower outside sales commissions from lower
sales. The percent of sales increased in the three month period ended September
30, 1996 to 20.8% of sales compared to 17.3% for the corresponding period in the
prior year. Selling, general and administrative expenses for the nine month
period ended September 30, 1996 increased to $5.6 million or 20.5% compared to
$5.2 million or 18.1% of sales for the corresponding periods in the prior year.
Selling, general and administrative expenses increased primarily due to the
hiring of additional personnel in the selling organization in the United States
and increased staffing to operate the Company's management information systems.
The Company expects selling, general and administrative expenses generally to
increase in absolute dollars in future periods although such expenses may
continue to fluctuate as a percentage of net sales.
Interest Income, Net
- --------------------
Interest income, net for the three month and nine month periods ended
September 30, 1996 was $6,000 and $218,000, respectively, compared to $136,000
and $83,000 for the corresponding periods in the prior year. The decrease in net
interest expense for the three month period ended September 30, 1996 is the
result of higher interest expense associated with equipment financing. The
increase in the nine month period ended September 30, 1996 is the result of
interest earned from the increased level of investments from the proceeds of the
Company's initial public offering less interest expense associated with
equipment financing.
Income Taxes
- ------------
The effective tax rate for the three month and nine month periods ended
September 30, 1996 is approximately 27% which reflects a blended rate of United
States, Hong Kong, and German tax rates. This effective rate compares to 25%
from the corresponding period in the prior year. The increase to the effective
rate is due to the anticipated change in taxes due for each of the operating
entities.
LIQUIDITY AND CAPITAL RESOURCES.
As of September 30, 1996 the Company had $18.8 million of cash, cash
equivalents and marketable securities. The Company generated $610,000 of cash
from operating activities during the nine months ended September 30, 1996
primarily reflecting depreciation of $2.4 million, offset by a net increase of
$1.7 million in working capital. The increase in working capital primarily
reflects increases in net inventories of $1.2 million, primarily due to lower
than anticipated sales and an increase in inventory related to new products and
a decrease of taxes payable of $1.8 million, reflecting payment of 1995 income
tax liabilities. During the period ended September 30, 1996, the Company reduced
its production to maintain the inventory levels to current forecasted orders.
At September 30,1996, the Company had notes payable of $11.3 million, the
proceeds of which were utilized to purchase certain equipment securing such
notes. These notes bear interest ranging from 9% to 13% per annum and are
payable in monthly installments of principal and interest.
At September 30, 1996, the Company had $3 million of preferred stock
purchased from IC WORKS, Inc. and purchased $7.4 million of capital equipment
for IC WORKS, Inc., as part of an agreement entered into with IC WORKS in
November 1995 that requires TelCom to provide approximately $10 million in
capital equipment to IC WORKS and to purchase up to a maximum of $3 million of
preferred stock of IC WORKS, Inc.
11
<PAGE>
The Company believes that its current cash, cash equivalent and marketable
securities balances, together with anticipated cash flow from operations, will
be sufficient to meet the Company's needs for the next twelve months.
CERTAIN FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS
The Company's future results of operations are dependent upon a number of
factors, including those described below:
Dependence on New Products. The Company's success depends upon its ability
--------------------------
to develop new analog circuits for existing and new markets, to introduce such
products in a timely manner and to have such products gain market acceptance.
Most of the Company's revenues during 1994 and 1995 have been from products
introduced prior to 1994. Since December 1993, the Company has focused its
product development efforts on new proprietary products. The development of new
analog circuits is highly complex and from time to time the Company has
experienced delays in developing and introducing new products. Successful
product development and introduction depends on a number of factors including
proper new product definition, timely completion of design and testing of new
products, achievement of acceptable manufacturing yields and market acceptance
of the Company's and its customers' products. Moreover, successful product
design and development is dependent on the Company's ability to attract, retain
and motivate qualified analog design engineers, of which there is a limited
number. There can be no assurance that the Company will be able to meet these
challenges or adjust to changing market conditions as quickly and cost-
effectively as necessary to compete successfully. Due to the complexity and
variety of analog circuits, the limited number of analog circuit designers and
the limited effectiveness of computer-aided design systems in the design of
analog circuits, there can be no assurance that the Company will be able to
continue to successfully develop and introduce new products on a timely basis.
Although the Company seeks to design products that have the potential to become
industry standard products, there can be no assurance that any products
introduced by the Company will be adopted by such market leaders, or that any
product initially accepted by the Company's customers that are market leaders
will become industry standard products. The Company's failure to continue to
develop and introduce new products successfully could materially and adversely
affect its business and operating results. During the three month and nine month
periods ended September 30, 1996 sales of products introduced after September 1,
1995 accounted for 15% and 12%, respectively, of net sales.
The Company's results of operations are dependent on the balance between
sales of relatively higher margin but lower volume proprietary products and
relatively higher volume but lower margin second source products. In order to
improve its margins, sales of proprietary products must in the future represent
a greater percentage of the Company's net revenues, requiring the Company to
successfully develop, introduce and market new proprietary products. There can
be no assurance that the Company will be successful in developing new
proprietary products with the features and functionality that customers in its
key markets will demand.
Manufacturing Risks. The fabrication of integrated circuits is a highly
-------------------
complex and precise process. Minute impurities, contaminants in the
manufacturing environment, difficulties in the fabrication process, defects in
the masks used to print circuits on a wafer, manufacturing equipment failures,
wafer breakage or other factors can cause a substantial percentage of wafers to
be rejected or numerous die on each wafer to be nonfunctional. The majority of
the Company's costs of manufacturing are relatively fixed, and, consequently,
the number of shippable die per wafer for a given product is critical to the
Company's results of operations. To the extent the Company does not achieve
acceptable manufacturing yields or experiences product shipment delays, its
financial condition or results of operations would be materially and adversely
affected. The Company has from time to time in the past experienced lower than
expected production yields, which have delayed product shipments and adversely
affected gross margins. For example, in the quarter ended December 31, 1994,
the Company experienced lower than expected production yields due to
difficulties encountered in increasing manufacturing volume. As the Company
continues to increase its manufacturing output, there can be no assurance that
the Company will not experience a decrease in
12
<PAGE>
manufacturing yields. Moreover, there can be no assurance that the Company will
be able to maintain acceptable manufacturing yields in the future. In order to
meet anticipated future demand, the Company believes that it will need to
increase its manufacturing capacity. Failure to do so could result in a loss of
customers, which could materially and adversely affect the Company's financial
condition or results of operations.
The Company currently manufactures substantially all of its products at its
wafer fabrication facility in Mountain View, California. Given the complex
nature of the Company's products, it would be difficult for the Company to
arrange for independent manufacturing facilities to supply such products. Any
prolonged inability to utilize the Company's manufacturing facility as a result
of fire, natural disaster or otherwise would have material adverse effect on the
Company's financial condition and results of operations. During periods of
decreased demand, high fixed wafer fabrication costs could have a material
adverse effect on the Company's financial condition or results of operations.
Furthermore, the Company is dependent on a number of local subcontractors for
certain of its manufacturing processes. The failure of any of these
subcontractors to perform these processes on a timely basis could result in
manufacturing delays, which could materially and adversely affect the Company's
results of operations.
Dependence on New Technologies; Technological Change. The markets for the
-----------------------------------------------------
Company's products are characterized by rapid technological change and frequent
new product introductions. To remain competitive, the Company must develop or
obtain access to new semiconductor process technologies in order to reduce die
size, increase die performance and functional complexity and improve
manufacturing yields. Semiconductor designs and process methodologies are
subject to rapid technological change, requiring large expenditures for research
and development. If the Company is unable to define, design, develop and
introduce competitive new products on a timely basis, its future operating
results will be materially and adversely affected. In addition, the Company's
ability to compete successfully depends on being able to use advanced analog
process technologies to manufacture its products. There can be no assurance
that the analog process technology utilized by the Company will not become
obsolete.
Intense Competition. The analog semiconductor industry is highly
-------------------
competitive and subject to rapid technological change. Significant competitive
factors in the analog market include product features, performance, price, the
timing of product introductions, the emergence of new computer standards and
other customer systems, product quality and customer support. Because the
standard products market for analog integrated circuits is diverse and highly
fragmented, the Company encounters different competitors in its various product
markets. The Company's principal competitors include Linear Technology
Corporation, Maxim Integrated Products and Harris Semiconductor in one or more
of its product areas. Other competitors include Motorola, National
Semiconductor Corporation, Unitrode Corporation and certain Japanese
manufacturers. Each of these competitors has substantially greater technical,
financial and marketing resources and greater name recognition than the Company.
The Company expects intensified competition from existing analog circuit
suppliers and the possible entry of new competition. Increased competition
could adversely affect the Company's financial condition or results of
operations. There can be no assurance that the Company will be able to compete
successfully in the future or that competitive pressures will not adversely
affect the Company's financial condition and results of operations. Competitive
pressures could reduce market acceptance of the Company's products and result in
price reductions and increases in expenses that could adversely affect the
Company's financial condition or results of operations.
Dependence on International Sales and Operations. International sales for
------------------------------------------------
the three month and nine month periods ended September 30, 1996 was 66% and 62%,
respectively, compared to 63% and 59% for the same periods in the prior year.
The Company expects international sales to continue to represent a significant
portion of product sales. International sales and operations involve various
risks, including 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 political risks in
connection with its international operations, such as political and economic
instability and changes in diplomatic and trade relationships. In addition,
because a substantial majority of the Company's international sales are
denominated in United States dollars,
13
<PAGE>
increases in the value of the dollar would 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, the sales of
which are denominated in local currencies. There can be no assurance that
regulatory, political and other factors will not adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
Customer and Distributor Concentration. A limited number of customers and
--------------------------------------
distributors has accounted for a significant portion of the Company's net sales.
For the three month period ended September 30, 1996, two OEM customers, Motorola
and Compaq Computer, accounted for approximately 10% and 9%, respectively, of
net sales compared to 9% and 10%, respectively, for the same period in the prior
year. For the nine month period ended September 30, 1996, Motorola and Compaq
Computer accounted for 9% and 8%, respectively, compared to 11% and 9%,
respectively, for the same period in the prior year. Future Electronics, one of
the Company's distributors, accounted for 11% of the Company's net sales during
the three month period ended September 30, 1996 compared to 13% for the same
period in the prior year. For the nine month period ended September 30, 1996
Future Electronics accounted for 13% of the Company's net sales compared to 13%
for the same period in the prior year. During the three month and nine month
periods ended September 30, 1996, sales of products that were introduced after
September 1, 1995 accounted for 15% and 12%, respectively, of net sales. The
Company anticipates that it will continue to be dependent or may increase its
dependence on a number of key customers and distributors for a significant
portion of its net sales. The reduction, delay or cancellation of orders from
one or more significant customers for any reason could materially and adversely
affect the Company's operating results. The Company is also dependent on sales
representatives and distributors for the sale of its products to many of its
customers. Such distributors sell competitors' products and are not within the
control of the Company. Loss of one or more of the Company's current
distributors or disruption of the Company's sales and distribution channels
could materially and adversely affect the Company's business and operating
results.
Dependence on Key Suppliers; Outsourcing of Assembly Operations. The
---------------------------------------------------------------
packaging of the Company's products is performed by a limited group of
subcontractors and certain of the raw materials included in such products are
obtained from a limited group of suppliers. For example, 5 inch silicon
substrates, which are a key component of the Company's products, are currently
available from only two suppliers and are subject to long ordering lead times.
Although the Company seeks to reduce its dependence on its sole and limited
source suppliers, disruption or termination of any of these sources could occur
and such disruptions could have a material adverse effect on the Company's
financial condition or results of operations. Moreover, a prolonged inability
to obtain raw materials could have a material adverse effect on the Company's
financial condition or results of operations and could result in damage to
customer relationships.
The Company depends on and may in the future depend on third party
subcontractors. For example, all of the Company's products are currently
assembled by independent third parties in Asia. In the event that any of the
Company's subcontractors were to experience financial, operational, production
or quality assurance difficulties resulting in a reduction or interruption in
supply to the Company, the Company's operating results would be adversely
affected until alternative subcontractors, if any, became available.
Patents and Intellectual Property. The Company's success depends in part
---------------------------------
in its ability to obtain patents and licenses and to preserve other intellectual
property rights covering its manufacturing processes, products and development
and testing tools. The Company seeks patent protection for those inventions and
technologies for which it believes such protection is suitable and is likely to
provide a competitive advantage to the Company. The process of seeking patent
protection can be long and expensive and there can be no assurance that its
current patents or any new patents that may be issued will be of sufficient
scope or strength to provide any meaningful protection or any commercial
advantage to the Company. The Company may in the future be subject to or
initiate interference proceedings in the United States Patent and Trademark
office, which can demand significant financial and management resources.
14
<PAGE>
The Company regards elements of its manufacturing process, product design
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and patent protection. Notwithstanding the Company's attempts to
protect its proprietary rights, the Company believes that its future success
will depend primarily upon the technical expertise, creative skills and
management abilities of its officers and key employees rather than on patent and
copyright ownership. The Company also relies substantially on trade secrets and
proprietary technology to protect technology and manufacturing know-how, and
works actively to foster continuing technological innovation to maintain and
protect its competitive position. There can be no assurance that the Company's
competitors will not independently develop or patent substantially equivalent or
superior technologies.
Although the Company is not currently a party to any material litigation,
the semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance that
any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries.
As is typical in the semiconductor industry, the Company has from time to
time received, and may in the future receive, communications from third parties
asserting patents, mask work rights, or copyrights on certain of the Company's
products and technologies. Although the Company is not currently a party to any
material litigation, in the event a third party were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation, which could result in substantial cost to the
Company and diversion of its resources, may also be necessary to enforce patents
or other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the Company's business and operating results. There can be no
assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation or that others will not
develop competitive technologies or products.
Environmental and Other Governmental Regulations. Federal, state and local
------------------------------------------------
regulations impose various controls on the storage, handling, discharge and
disposal of chemicals and gases used in the Company's manufacturing process and
on the facility leased by the Company in Mountain View, California. The Company
believes that its activities conform to present governmental regulations
applicable to its operations and its current facilities including those related
to environmental, land use, public utility utilization and fire code matters.
Increasing public attention has, however, been focused on the environmental
impact of semiconductor operations and the risk to neighbors of chemical
releases from such operations. There can be no assurance that such governmental
regulations will not in the future impose the need for additional capital
equipment or other process requirements upon the Company or restrict the
Company's ability to expand its operations. In this regard, the City of
Mountain View, where the Company's wafer fabrication facility is located,
recently adopted an ordinance which restricts the storage and use of hazardous
materials within the proximity of certain sensitive uses, including hospitals,
day care facilities and schools. Although the Company's existing operations are
not affected by the ordinance, there can be no assurance that this ordinance
will not materially adversely affect the Company's future operations. The
adoption of this ordinance or similar measures or any failure by the Company to
comply with applicable environmental and land use regulations or to restrict the
discharge of hazardous substance could subject the Company to future liability
or could cause its manufacturing operations to be curtailed or suspended.
The Company acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at the Company's facility. The
semiconductor manufacturing operations conducted by Teledyne at the facility
allegedly contaminated the soil and groundwater of the facility and the
groundwater of properties located down-gradient of the facility. Although the
Company was indemnified by Teledyne as
15
<PAGE>
part of the acquisition transaction against, among other things, any liabilities
arising from any such contamination, there can be no assurance that claims will
not be made against the Company or that such indemnification will be available
or will provide meaningful protection at the time any such claim is brought. To
the extent the Company is subject to a claim which is not covered by the
indemnity from Teledyne or as to which Teledyne is unable to provide
indemnification, the Company's financial condition or results of operations
could be materially and adversely affected.
Semiconductor Industry. The semiconductor industry is characterized by
----------------------
rapid technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in manufacturing
costs and yields and significant expenditures for capital equipment and product
development. The industry has from time to time experienced depressed business
conditions. There can be no assurance that any future downturn in the industry
will not be severe or that any such downturn will not have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company will not experience substantial period-to-period fluctuations in
operating costs due to general semiconductor industry conditions or other
factors.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report.
11.1 Statement re: Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the second quarter for which
this report is filed.
17
<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.
TELCOM SEMICONDUCTOR, INC.
(Registrant)
Date: October 22, 1996 By: /s/ Phillip M. Drayer
---------------------------
Phillip M. Drayer
President
Chief Executive Officer
Date: October 22, 1996 By: /s/ R. Michael O' Malley
---------------------------
R. Michael O' Malley
Chief Financial Officer
18
<PAGE>
Exhibit 11.1
TELCOM SEMICONDUCTOR, INC.
STATEMENT RE COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding(1) 15,666 11,459 15,587 6,087
Mandatory redeemable convertible preferred stock(1)(2) 0 3,187 0 7,437
Dilutive effect of stock options(1)(3) 0 1,576 0 1,674
Dilutive effect of warrants (3) 0 308 0 259
----------- ----------- ----------- ----------
Number of shares used to compute per share data 15,666 16,530 15,587 15,457
=========== =========== =========== ==========
Net income (loss) $ (859) $ 1,091 $ (133) $ 2,416
=========== =========== =========== ==========
Net income (loss) per share $(0.05) $0.07 $(0.01) $0.16
=========== =========== =========== ==========
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent share and options issued by the Company during
the twelve month period prior to the initial public offering of the
Company's common stock (the "Offering") have been included as if they were
outstanding for all periods presented.
(2) For shares issued more than one year prior to the Offering, computed using
the if-converted method assuming conversion at the beginning of the earliest
period presented, or at the time of issuance, if later.
(3) For options and warrants issued more than one year prior to the Offering,
computed using the treasury stock method.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 13,583
<SECURITIES> 5,184
<RECEIVABLES> 4,454
<ALLOWANCES> 195
<INVENTORY> 8,116
<CURRENT-ASSETS> 32,816
<PP&E> 23,771
<DEPRECIATION> 4,811
<TOTAL-ASSETS> 54,776
<CURRENT-LIABILITIES> 8,244
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 37,389
<TOTAL-LIABILITY-AND-EQUITY> 54,776
<SALES> 27,388
<TOTAL-REVENUES> 27,388
<CGS> 18,914
<TOTAL-COSTS> 27,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 485
<INCOME-PRETAX> (182)
<INCOME-TAX> (49)
<INCOME-CONTINUING> (133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
