<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- -
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from................to..................
COMMISSION FILE NUMBER: 0-26312
TELCOM SEMICONDUCTOR, INC.
(Exact name of registrant 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
(address of principal executive offices)
(Zip Code)
TELEPHONE NUMBER (415) 968-9241
(Registrant'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 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 registrant's Common Stock as of October
27, 1997 was 16,387,069.
================================================================================
<PAGE>
TELCOM SEMICONDUCTOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PAGE
NO.
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</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,
1997 1996 1997 1996
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $15,564 $ 8,787 $40,420 $27,388
Cost of sales 8,556 7,300 22,942 18,914
------- ------- ------- -------
Gross profit 7,008 1,487 17,478 8,474
------- ------- ------- -------
Operating expenses:
Research and development 1,637 838 4,212 3,248
Selling, general and administrative 2,455 1,832 6,842 5,626
Impairment loss on foundry investment - - 8,000 -
------- ------- ------- -------
Total operating expenses 4,092 2,670 19,054 8,874
------- ------- ------- -------
Income (loss) from operations 2,916 (1,183) (1,576) (400)
Interest income (expense), net (76) 6 (345) 218
------- ------- ------- -------
Income (loss) before income taxes 2,840 (1,177) (1,921) (182)
Provision for income taxes 766 (318) 1,641 (49)
------- ------- ------- -------
Net income (loss) $ 2,074 $ (859) $(3,562) $ (133)
======= ======= ======= =======
Net income (loss) per share $0.12 $(0.05) $(0.22) $(0.01)
======= ======= ======= =======
Number of shares used to compute per
share data 17,753 15,666 16,130 15,587
======= ======= ======= =======
</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,
1997 1996
------------------------ -----------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $22,359 $12,761
Marketable securities - 5,202
Accounts receivable 7,455 5,288
Inventory 7,645 6,490
Deferred income taxes 1,635 1,635
Income tax receivable - 1,430
Other current assets 304 358
------------------------ -----------------------
Total current assets 39,398 33,164
Property and equipment, net 19,630 21,848
Other assets - 3,000
------------------------ -----------------------
$59,028 $58,012
======================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,769 $ 3,518
Accounts payable 5,766 2,042
Accrued liabilities 2,766 2,006
Deferred distributor income 1,369 1,077
Income taxes payable 2,034 761
------------------------ -----------------------
Total current liabilities 15,704 9,404
Notes payable 7,529 10,047
Deferred income taxes 1,635 1,635
------------------------ -----------------------
Total liabilities 24,868 21,086
------------------------ -----------------------
Stockholders' equity:
Common stock 16 16
Additional paid-in capital 33,986 33,199
Notes receivable from stockholders (2) (11)
Retained earnings 160 3,722
------------------------ -----------------------
Total stockholders' equity 34,160 36,926
------------------------ -----------------------
$59,028 $58,012
======================== =======================
</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,
----------------------------------------------------
1997 1996
------------------- -------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(3,562) $ (133)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Impairment loss on foundry investment 8,000 -
Depreciation and amortization 2,874 2,487
Changes in assets and liabilities:
Accounts receivable (2,167) 1,935
Inventory (1,155) (1,234)
Income tax receivable 1,430 -
Other current assets 54 (355)
Accounts payable 3,724 220
Accrued liabilities 760 (107)
Deferred distributor income 292 (437)
Income taxes payable 1,273 (1,766)
------------------- -------------------------
Net cash provided by operating activities 11,523 610
------------------- -------------------------
Cash flows from investing activities:
Purchases of property and equipment (5,656) (9,876)
Investment in IC WORKS, Inc. - (3,000)
Sales of marketable securities, net 5,202 2,806
------------------- -------------------------
Net cash used for investing activities (454) (10,070)
------------------- -------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 787 443
Notes receivable from stockholders 9 35
Borrowings on notes payable 283 8,067
Payments on notes payable (2,550) (1,351)
------------------- -------------------------
Net cash provided by (used for) financing activities (1,471) 7,194
------------------- -------------------------
Net increase (decrease) in cash and cash
equivalents 9,598 (2,266)
Cash and cash equivalents at the beginning of period 12,761 15,849
------------------- -------------------------
Cash and cash equivalents at the end of period $22,359 $ 13,583
=================== =========================
</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
(In thousands)
(Unaudited)
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,
1996 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-Q for the period ended September 30, 1997 should be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 and Form 10-Q for the periods ended March 31, 1997 and
June 30, 1997.
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
stock options and warrants using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share". FAS
128 requires the disclosure of basic and diluted earnings per share data and is
effective for fiscal years ending after December 15, 1997. The adoption of FAS
128 would have had the following effect on earnings per share data for the three
and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Basic net income (loss) per share $0.13 $(0.05) $(0.22) $(0.01)
Diluted net income (loss) per share $0.12 $(0.05) $(0.22) $(0.01)
</TABLE>
6
<PAGE>
3. Balance Sheet Details:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1997 1996
-------------------- -------------------
Inventory:
<S> <C> <C>
Raw material $ 806 $ 1,174
Work in process 3,938 2,233
Finished goods 2,901 3,083
-------------------- -------------------
$ 7,645 $ 6,490
==================== ===================
Property and equipment:
Equipment $18,137 $ 13,222
Leasehold improvements 2,613 2,228
-------------------- -------------------
20,750 15,450
Accumulated depreciation (8,572) (5,698)
-------------------- -------------------
12,178 9,752
Equipment for I.C. WORKS, Inc. 5,363 10,363
Construction in progress 2,089 1,733
-------------------- -------------------
$19,630 $21,848
==================== ===================
Accrued liabilities:
Payroll and related $ 2,164 $ 1,396
Accrued rent 57 109
Professional fees 238 207
Customer deposits and other 307 294
-------------------- -------------------
$ 2,766 $ 2,006
==================== ===================
</TABLE>
4. Impairment Loss on Foundry Investment
In November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held company located in San Jose, California. Pursuant
to these agreements, in 1996, the Company purchased $3.0 million of preferred
stock of IC WORKS and provided $10.4 million in capital equipment. In return for
this investment, TelCom received a guarantee of submicron wafer capacity at
specified prices for a period of five years, projected to start in 1997. The
shortage of wafer capacity projected in late 1995 has diminished and since late
1995, substantial foundry capacity has been available worldwide while overall
demand has not increased proportionately. Consequently, wafer pricing has
decreased dramatically, which has changed the economic viability of the foundry
business in which the Company invested. As a result, the Company recorded an
impairment loss of $8.0 million on its foundry investment during the three
months ended March 31, 1997. The remaining balance of the foundry investment at
September 30, 1997 of $5.4 million represents management's estimate of the fair
market value of the investment based on appraiser estimates and prices for
similar assets.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report on Form 10-Q 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.
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 shipment 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.
In November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held company located in San Jose, California. Pursuant
to these agreements, in 1996, the Company purchased $3.0 million of preferred
stock of IC WORKS and provided $10.4 million in capital equipment. In return for
this investment, TelCom received a guarantee of submicron wafer capacity at
specified prices for a period of five years, projected to start in 1997. The
shortage of wafer capacity projected in late 1995 has diminished and since late
1995, substantial foundry capacity has been available worldwide while overall
demand has not increased proportionately. Consequently, wafer pricing has
decreased dramatically, which has changed the economic viability of the foundry
business in which the Company invested. As a result, the Company recorded an
impairment loss of $8.0 million on its foundry investment during the three
months ended March 31, 1997. The remaining balance of the foundry investment at
September 30, 1997 of $5.4 million represents management's estimate of the fair
market value of the investment based on appraiser
8
<PAGE>
estimates and prices for similar assets. There can be no assurance that
additional losses will not be incurred with respect to this impairment in the
future.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three month and nine month periods ended September 30,
1997 increased $6.8 million or 77.1% and $13.0 million or 47.6%, respectively,
from the corresponding periods in the prior fiscal year. The increase in sales
was primarily due to higher sales volume in the Company's power management
product line. International sales for the three month and nine month periods
ended September 30, 1997 were 64% of total sales for each of the periods
compared to 66% and 62% of total sales for the same periods in the prior year.
Sales in the European market increased in the three month and nine month periods
ended September 30, 1997 by $2.6 million, or 124% and $5.8 million, or 87%,
respectively, compared to the three month and nine month periods ended September
30, 1996, primarily due to higher sales of power management products. For the
three month period ended September 30, 1997, two OEM customers, Motorola and
Compaq Computer, accounted for approximately 33% and 8%, respectively, of net
sales compared to 10% and 9%, respectively, of net sales for the same period in
the prior year. In the nine month period ended September 30, 1997, Motorola and
Compaq Computer accounted for approximately 30% and 7%, respectively, of net
sales compared to 9% and 8%, respectively, of net sales for the same period in
the prior year. Future Electronics, one of the Company's distributors, accounted
for 10% of the Company's net sales for each of the three month and nine month
periods ended September 30,1997 compared to 11% and 13%, respectively, of net
sales for same periods in the prior year.
GROSS MARGIN
Gross margin as a percentage of sales for the three month and nine month
periods ended September 30, 1997 increased to 45.0% and 43.2%, respectively,
from 16.9% and 30.9%, respectively, in the corresponding periods in the prior
year. The increase in gross margin was caused by increased production volume in
the Company's wafer fabrication facility due to higher demand, increased
efficiency in wafer fabrication and higher gross margins on sales of power
management products. The Company's ability to increase gross margins will depend
on the successful introduction of its new proprietary products and increasing
manufacturing output at the Company's wafer fabrication facility to spread the
fixed costs over an increasing number of units, thereby reducing the fixed costs
per unit.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three month and nine month
periods ended September 30, 1997 increased to $1.6 million or 10.5% of sales and
$4.2 million or 10.4% of sales, respectively, compared to $0.8 million, or 9.5%
of sales and $3.2 million or 11.9% of sales, for the corresponding periods in
the prior year. This increase was primarily due to wafer costs and outside
services associated with new product development. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month and nine
month periods ended September 30, 1997 increased to $2.5 million and $6.8
million, respectively, compared to $1.8 million and $5.6 million for the
corresponding periods in the prior year. This increase was primarily due to
higher outside sales commissions as a result of higher sales, increased
advertising for new product support, and increases in salaries and staffing in
sales and administration. Such expenses as a percent of sales decreased in the
three month and nine month periods ended September 30, 1997 to 15.8% and 16.9%
of sales, respectively, compared to 20.8% and 20.5% of sales for the
corresponding periods in the prior year. The Company expects
9
<PAGE>
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.
IMPAIRMENT LOSS ON FOUNDRY INVESTMENT
In November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held company located in San Jose, California. Pursuant
to these agreements, in 1996, the Company purchased $3.0 million of preferred
stock of IC WORKS and provided $10.4 million in capital equipment. In return for
this investment, TelCom received a guarantee of submicron wafer capacity at
specified prices for a period of five years, projected to start in 1997. The
shortage of wafer capacity projected in late 1995 has diminished and since late
1995, substantial foundry capacity has been available worldwide while overall
demand has not increased proportionately. Consequently, wafer pricing has
decreased dramatically, which has changed the economic viability of the foundry
business in which the Company invested. As a result, the Company recorded an
impairment loss of $8.0 million on its foundry investment during the three
months ended March 31, 1997. The remaining balance of the foundry investment at
September 30, 1997 of $5.4 million represents management's estimate of the fair
market value of the investment based on appraiser estimates and prices for
similar assets.
INTEREST INCOME (EXPENSE), NET
For the three month and nine month periods ended September 30, 1997, net
interest expense was $76,000 and $345,000, respectively, compared to net
interest income of $6,000 and $218,000 for the corresponding periods in the
prior year. The increase in net interest expense is due to higher interest
expenses associated with equipment financing.
INCOME TAXES.
The effective tax rate for the three month and nine month periods ended
September 30, 1997 was 27% and (85.4)%, respectively, resulting from a tax rate
of 27%, which reflects a blended rate of United States, Hong Kong, and German
tax rates, offset by the recording of a valuation allowance on the income tax
benefit of the impairment loss on foundry investment. This effective rate
compares to 27% for the corresponding periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES.
As of September 30, 1997, the Company had $22.4 million of cash and cash
equivalents. The Company generated $11.5 million of cash from operating
activities during the nine months ended September 30, 1997 primarily reflecting
net income before impairment loss of $4.4 million, depreciation of $2.9 million
and a net decrease of $4.2 million in working capital items. The net decrease in
working capital items primarily reflects a decrease of income tax receivable of
$1.4 million, due to collections of income tax refunds recorded in the prior
year, an increase in current liabilities of $4.8 million, an increase in income
taxes payable of $1.3 million, offset by an increase in accounts receivable of
$2.2 million and an increase in inventories of $1.2 million.
At September 30, 1997, 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.
The Company believes that its current cash and cash equivalent balances,
together with anticipated cash flow from operations, will be sufficient to meet
the Company's needs for the next twelve months.
10
<PAGE>
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.
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.
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, 1996,
the Company experienced lower production volumes in an effort to reduce
inventories, which adversely effected gross margins. As the Company continues
to increase its manufacturing output, there can be no assurance that the Company
will not experience a decrease in 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.
11
<PAGE>
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, 1997 were 64% of
total sales for each of the periods compared to 66% and 62% of total sales 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,
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.
12
<PAGE>
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, 1997, two OEM customers, Motorola
and Compaq Computer, accounted for approximately 33% and 8%, respectively, of
net sales compared to 10% and 9%, respectively, of net sales for the same period
in the prior year. In the nine month period ended September 30, 1997, Motorola
and Compaq Computer accounted for approximately 30% and 7%, respectively, of net
sales compared to 9% and 8%, respectively, of net sales for the same period in
the prior year. Future Electronics, one of the Company's distributors, accounted
for 10% of the Company's net sales for each of the three month and nine month
periods ended September 30, 1997 compared to 11% and 13%, respectively, of net
sales for the same periods in the prior year. 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.
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
13
<PAGE>
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,
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 operations have not been
adversely 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 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.
14
<PAGE>
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.
15
<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 fiscal quarter for
which this report is filed.
16
<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)
<TABLE>
<CAPTION>
<S> <C>
Date: October 28, 1997 By: /s/ Phillip M. Drayer
----------------------------------
Phillip M. Drayer
President
Chief Executive Officer
Date: October 28, 1997 By: /s/ R. Michael O'Malley
----------------------------------
R. Michael O' Malley
Chief Financial Officer
</TABLE>
17
<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,
1997 1996 1997 1996
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 16,255 15,666 16,130 15,587
Dilutive effect of stock options (1) 1,470 - - -
Dilutive effect of warrants (1) 28 - - -
------- -------- ------- -------
Number of shares used to compute per share data 17,753 15,666 16,130 15,587
======= ======== ======= =======
Net income (loss) $ 2,074 $ (859) $(3,562) $ (133)
======= ======== ======= =======
Net income (loss) per share $ 0.12 $ (0.05) $ (0.22) $ (0.01)
======= ======== ======= =======
</TABLE>
(1) Computed using the treasury stock method. There the nine months ended
September 30, 1997 because is no dilutive effect of options and warrants
for the Company incurred a net loss.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,359
<SECURITIES> 0
<RECEIVABLES> 7,650
<ALLOWANCES> 195
<INVENTORY> 7,645
<CURRENT-ASSETS> 39,398
<PP&E> 28,202
<DEPRECIATION> 8,572
<TOTAL-ASSETS> 59,028
<CURRENT-LIABILITIES> 15,704
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 34,144
<TOTAL-LIABILITY-AND-EQUITY> 59,028
<SALES> 40,420
<TOTAL-REVENUES> 40,420
<CGS> 22,942
<TOTAL-COSTS> 41,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (345)
<INCOME-PRETAX> (1,921)
<INCOME-TAX> 1,641
<INCOME-CONTINUING> (3,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,562)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
