<PAGE> 1
================================================================================
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, 2000
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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 94-3186995
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
</TABLE>
1300 TERRA BELLA, MT. VIEW, CALIFORNIA 94039
(address of principal executive offices)
(Zip Code)
TELEPHONE NUMBER (650) 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
31 31, 2000 was 18,314,505.
================================================================================
<PAGE> 2
TELCOM SEMICONDUCTOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
No.
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
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 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 11 - 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................... 19
Signatures ....................................................... 20
</TABLE>
2
<PAGE> 3
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,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ................................. $18,171 $14,851 $55,385 $41,526
Cost of sales ............................. 8,651 8,099 27,099 23,225
------- ------- ------- -------
Gross profit .............................. 9,520 6,752 28,286 18,301
------- ------- ------- -------
Operating expenses:
Research and development .............. 2,616 1,478 7,609 5,150
Selling, general and administrative ... 2,998 2,579 8,918 7,415
Restructuring & other ................. -- -- -- 269
------- ------- ------- -------
Total operating expenses ........ 5,614 4,057 16,527 12,834
------- ------- ------- -------
Income from operations .................... 3,906 2,695 11,759 5,467
Interest income (expense), net ............ 1,746 154 3,684 226
Gain on sale of investment ................ -- -- 3,091 5,819
------- ------- ------- -------
Income before income taxes ................ 5,652 2,849 18,534 11,512
Provision for income taxes ................ 1,546 542 5,034 2,438
------- ------- ------- -------
Income before equity in net loss of SAI ... 4,106 2,307 13,500 9,074
Equity in net loss of SAI ................. 205 -- 649 --
------- ------- ------- -------
Net income ................................ $ 3,901 $ 2,307 $12,851 $ 9,074
------- ------- ------- -------
Per share data:
Net income
Basic .............................. $ 0.21 $ 0.16 $ 0.75 $ 0.63
------- ------- ------- -------
Diluted ............................ $ 0.19 $ 0.14 $ 0.67 $ 0.58
------- ------- ------- -------
Number of shares used to compute per
share data
Basic .............................. 18,252 14,279 17,115 14,300
------- ------- ------- -------
Diluted ............................ 20,156 16,216 19,280 15,514
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............... $ 113,639 $ 18,413
Short term investments .................. -- 2,286
Accounts receivable ..................... 13,249 8,314
Inventory ............................... 10,148 5,863
Deferred income taxes ................... 1,199 88
Other current assets .................... 852 1,186
--------- ---------
Total current assets ................ 139,087 36,150
Property and equipment, net ................. 5,992 6,791
Other assets ................................ 4,736 3,000
--------- ---------
$ 149,815 $ 45,941
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 4,374 $ 2,889
Accrued liabilities ..................... 2,354 1,832
Deferred distributor income ............. 2,650 1,635
Income taxes payable .................... 7,649 603
--------- ---------
Total current liabilities ........... 17,027 6,959
Deferred income taxes ....................... 400 400
--------- ---------
Total liabilities ................... 17,427 7,359
--------- ---------
Stockholders' equity:
Common stock ............................ 18 17
Additional paid-in capital .............. 107,919 38,644
Treasury stock .......................... -- (12,697)
Accumulated other comprehensive income .. -- 1,018
Retained earnings ....................... 24,451 11,600
--------- ---------
Total stockholders' equity .......... 132,388 38,582
--------- ---------
$ 149,815 $ 45,941
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 12,851 $ 9,074
Adjustments to reconcile net income to net
cash provided by operating activities:
Pretax gain on sale of investment ............... (3,091) (5,819)
Equity in net loss of SAI ....................... 649 --
Depreciation and amortization ................... 1,948 2,086
Changes in assets and liabilities:
Accounts receivable ........................ (4,935) (1,453)
Inventory .................................. (4,285) (131)
Other current assets ....................... 334 (436)
Accounts payable ........................... 1,485 (736)
Accrued liabilities ........................ 522 (41)
Deferred distributor income ................ 1,015 385
Income taxes payable ....................... 7,046 420
--------- ---------
Net cash provided by operating activities ............. 13,539 3,349
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ............. (1,485) (566)
Net proceeds from sale of equipment ............. 449 1,260
Net proceeds from sale of investment ............ 3,680 6,730
Purchase of common stock of CSMC ................ (1,600) --
Purchase of M.E.A.D. Microelectronics ........... (1,330) --
--------- ---------
Net cash (used for) provided by investing activities .. (286) 7,424
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock .............. 81,973 1,312
Repurchase of common stock ...................... -- (3,039)
Payments on notes payable ....................... -- (3,696)
--------- ---------
Net cash provided by (used for) financing activities .. 81,973 (5,423)
--------- ---------
Net increase in cash and cash equivalents ............. 95,226 5,350
Cash and cash equivalents at the beginning of period .. 18,413 14,059
--------- ---------
Cash and cash equivalents at the end of period ........ $ 113,639 $ 19,409
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 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
Friday closest to the last day 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,
1999 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, 2000 should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 and Forms 10-Q for the periods ended March 31, 2000 and
June 30, 2000.
NOTE 2. NET INCOME PER SHARE:
Basic EPS is computed by dividing net income available to common
stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method. In computing diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available to
common stockholders ........... $ 3,901 $ 2,307 $12,851 $ 9,074
------- ------- ------- -------
Weighted average common stock
outstanding (basic) .......... 18,252 14,279 17,115 14,300
Effect of options ............... 1,904 1,937 2,165 1,214
------- ------- ------- -------
Weighted average common stock
outstanding (diluted) ......... 20,156 16,216 19,280 15,514
------- ------- ------- -------
Income per share:
Basic ........................... $ 0.21 $ 0.16 $ 0.75 $ 0.63
------- ------- ------- -------
Diluted ......................... $ 0.19 $ 0.14 $ 0.67 $ 0.58
------- ------- ------- -------
</TABLE>
6
<PAGE> 7
Options to purchase 988,500 shares of common stock at a weighted average
price of $23.62 per share were outstanding at September 30, 2000 but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of common stock during the period.
NOTE 3. SALE OF COMMON STOCK:
On March 27, 2000, the Company completed the sale of 3,378,500 shares of
its common stock in an underwritten public offering. Aggregate net proceeds to
the Company were $79.5 million, after deducting underwriting discounts and
offering expenses.
NOTE 4. BALANCE SHEET DETAILS (IN THOUSANDS):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
-------- --------
<S> <C> <C>
Inventory:
Raw material ................................. $ -- $ 17
Work in process .............................. 5,172 4,490
Finished goods ............................... 4,976 1,356
-------- --------
$ 10,148 $ 5,863
======== ========
Property and equipment:
Equipment .................................... $ 13,227 $ 12,844
Leasehold improvements ....................... 934 123
Carrying value of assets to be disposed of ... -- 266
-------- --------
14,161 13,233
Accumulated depreciation ..................... (8,269) (7,562)
-------- --------
5,892 5,671
Construction in progress ..................... 100 1,120
-------- --------
$ 5,992 $ 6,791
======== ========
Accrued liabilities:
Payroll and related .......................... $ 1,943 $ 1,434
Other ........................................ 411 398
-------- --------
$ 2,354 $ 1,832
======== ========
</TABLE>
7
<PAGE> 8
NOTE 5. RESTRUCTURING AND OTHER CHARGES
During 1998, the Company recorded restructuring and other charges totaling
$7.3 million, consisting of $6.5 million of items relating to the closure of the
Company's wafer fabrication facility, and $743,000 relating to other one-time
charges.
In August 1998, the Company announced its plans to shut down its five-inch
wafer fabrication facility in Mountain View, California and use third party
foundries for all of its wafer fabrication. In conjunction with the shut-down of
its wafer fabrication foundry, the Company recorded fab closure charges totaling
$6.5 million to write down and write off manufacturing equipment and facilities
improvements; accrue for future idle facility space; accrue severance of
manufacturing and other personnel and other costs.
A majority of the Company's new products that had been developed in the
prior two years utilized sub-micron wafer technology and are currently
fabricated by outside foundries. All other remaining wafers were fabricated in
the Mountain View facility. In January 1999, the wafer fabrication facility was
shut-down and the fabrication equipment was no longer in use and was being held
for sale. During the first quarter of 1999, all fabrication of wafers had been
transferred to third party foundries. The facility shutdown was a result of
developments in the semiconductor industry, primarily the availability of low
cost wafer fabrication capacity and the willingness of outside foundries to
offer non-standard processes. Competitive designs used sub-micron technology
which allows for more die per wafer than possible with the five inch wafer
fabrication in the Mountain View facility. The restructuring charge relating to
the write down of the carrying value of the Company's fabrication equipment to
its estimated fair value was $4.5 million. The cost and accumulated depreciation
of the fabrication equipment prior to the write down was $13.0 million and $6.3
million, respectively. The fair value of the fabrication equipment was estimated
to be $2.2 million and was recorded as "assets to be disposed of". The fair
value of the fabrication equipment was based on third party estimates of fair
value. During the quarter ended June 30, 2000, the carrying value of assets to
be disposed of had been fully liquidated from the sale of those assets.
The restructuring charge for 1998 also included charges for idle facilities
of $1.4 million, severance payments totaling $519,000 for employees terminated
upon closing of the facility and environmental and related clean up costs of
$132,000. Additional restructuring charges are included in the first quarter of
1999 for employee severance costs of $243,000 and environmental and related
clean up costs of $26,000.
The following table sets forth the Company's activity for the restructuring
cost and charges taken against the accrual and the resulting restructuring
accrual balance at September 30, 2000:
<TABLE>
<CAPTION>
Restructuring Cost
(in thousands)
----------------------------------------------------------------
Nine months ended
Sept. 30, 2000
Balance ---------------------- Balance
Dec. 31, 1999 Expense Utilized Sept. 30, 2000
------------- ------- -------- --------------
<S> <C> <C> <C> <C>
Idle facility charge ............ $ 102 $ -- $ 102 $ --
Employee severance and other .... 43 (16) 27 --
----- ----- ----- ----
$ 145 $ (16) $ 129 $ --
===== ===== ===== ====
</TABLE>
8
<PAGE> 9
NOTE 6. GAIN ON SALE OF INVESTMENT
At the end of the quarter ended March 31, 1999, the Company recognized a
gain of $5.0 million on the sale of its investment in IC WORKS. IC WORKS was
purchased by Cypress Semiconductor, Inc., a publicly held company, and as part
of the purchase agreement between IC WORKS and Cypress Semiconductor, the
Company's preferred shares, with a book value of $1.5 million, were exchanged
for common shares of Cypress Semiconductor with a fair market value of $6.5
million. As part of the agreement, ten percent of the common shares received by
the Company were held in escrow pending final closure of the purchase of IC
Works by Cypress Semiconductor or one year from the date of purchase. During the
quarter ended June 30, 1999, the Company sold all of the shares it held, except
the shares held in escrow, for $6.7 million and recognized an additional gain on
the sale of $813,000 representing the increase in the fair value between the
date the shares were received and the date the shares were sold. During the
quarter ended March 31, 2000, the shares held in escrow were released to the
Company. The Company sold a portion of the shares and recognized a gain of $1.7
million representing the increase in the fair value between the date the shares
were received and the date they were sold. During the quarter ended June 30,
2000, the company sold the remaining shares and recognized a gain of $1.4
million representing the increase in the fair value between the date the shares
were received and the date they were sold.
NOTE 7. EQUITY IN NET LOSS OF SAI:
In the quarter ended December 31, 1999, the Company entered into a Common
Stock Agreement and a Stockholder Purchase Agreement with Silicon Aquarius
Incorporated (SAI). In accordance with the agreement the Company purchased 1.3
million shares of common stock of SAI, representing an 18.67% ownership in SAI,
for $3.0 million. The Company accounts for this investment under the equity
method. During the three month and nine month periods ending September 30, 2000,
the Company recorded an equity in net loss of SAI of $205,000 and $649,000,
respectively.
NOTE 8. INVESTMENT IN CSMC:
During the quarter ended March 31, 2000, the Company invested $1.6 million
for approximately a 4% equity interest in Central Semiconductor Holdings Company
Limited, which owns 100% of Central Semiconductor Manufacturing Company Limited
(CSMC). CSMC is one of the foundries used by the Company to manufacture the
Company's products. The Company accounts for this investment on the cost method.
During the three month and six month periods ended September 30, 2000, the
Company purchased fabricated wafers from CSMC for a total amount of $1.7 million
and $3.7 million, respectively. At September 30, 2000, the Company had $632,000
in accounts payable to CSMC.
NOTE 9. TREASURY STOCK:
During the quarter ended June 30, 2000, the Company retired all 3.1 million
shares of its treasury stock valued at $12.7 million.
9
<PAGE> 10
NOTE 10. COMPREHENSIVE INCOME:
The following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ................................ $ 3,901 $ 2,307 $ 12,851 $ 9,074
Unrealized gain (loss) on short term
investment, net of deferred taxes of
$152, $(679), and $425 ................ -- 228 (1,018) 637
-------- -------- -------- --------
Comprehensive income ...................... $ 3,901 $ 2,535 $ 11,833 $ 9,711
-------- -------- -------- --------
The components of accumulated other comprehensive income are as follows (in thousands):
Sept. 30, Dec. 31,
2000 1999
-------- --------
Unrealized gain on short term investment,
net of deferred taxes of $679 .......... $ -- $1,018
-------- --------
</TABLE>
NOTE 11. PURCHASE OF M.E.A.D. MICROELECTRONICS, S.A.
On August 25, 2000, the Company acquired the assets, including cash, and
assumed the liabilities of M.E.A.D. Microelectronics, S.A. (MEAD) an engineering
design company located in Switzerland, for $1.5 million in cash in a transaction
accounted for as a purchase. As part of the purchase agreement, the Company will
pay an additional $1.1 million to the former sole shareholder of MEAD in
quarterly installments of $91,667 contingent upon the shareholder's continued
employment with the Company. In addition, the Company granted an aggregate of
150,000 options to purchase the Company's common stock to the sole shareholder
and key employees of MEAD. The allocation of purchase price, based on the fair
value of the acquired assets and assumed liabilities, resulted in goodwill of
$1.3 million which is being amortized over three years. During the three months
ended September 30, 2000, the Company recognized one month of related
amortization expense of $35,000, which is included as a component of research
and development expense.
In conjunction with the acquisition, the Company entered into a revenue
sharing agreement with certain individuals, including the shareholder and key
employees of MEAD, which obligates the Company to pay royalties related to the
sale of certain specified products and pay a percentage of non-recurring
engineering revenues earned on certain contracts.
NOTE 12. SUBSEQUENT EVENT
On October 27, 2000, the Company announced a planned merger with Microchip
Technology, Inc. (Microchip) which will be accounted for as a stock-for-stock
transaction. Under the terms of the definitive merger agreement, if the average
closing price of Microchip's common stock for the ten trading days preceding the
closing of the transaction is between $28.30 and $32.61, Microchip will issue a
number of shares of its common stock for each outstanding share of the Company's
common stock equal to $15.00 by such ten day average price. If Microchip's ten
day average closing price prior to the merger is less than $28.30, each share of
the Company's common stock will receive 0.53 shares of Microchip's common stock.
10
<PAGE> 11
If the ten day average price exceeds $32.61, each share the Company's common
stock will be exchanged for 0.46 shares of Microchip's common stock. Pending
stockholders approval, the transaction is expected to be consummated during the
first quarter of calendar year 2001.
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") was founded in
December 1993 as the result of a management buyout of the Teledyne Components
Division of Teledyne Industries Inc. The Company designs, manufactures and sells
a variety of analog and mixed-signal integrated circuits. The Company's product
offerings are divided into four primary categories: (1) Power Management (2)
Thermal Management (3) Data Converters and (4) Linear Building Blocks. Over the
last several years, the Company has been transitioning its product portfolio
away from the legacy products associated with the Teledyne Division to higher
value proprietary solutions. As a result, the Company's current product offering
consists of both proprietary and second source products. While the primary
emphasis is developing proprietary products, the Company does offer second
source products to enhance its total product portfolio. Average selling prices
for the Company's proprietary products have generally 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.
As the Company transitioned from legacy products to newer proprietary
products, it became necessary to develop a source of supply for more advanced
wafer processing technology. This transition began at a time when advanced
semiconductor capacity was in short supply. Therefore, in November 1995, the
Company invested $3.0 million in IC WORKS, Inc., a privately-held wafer foundry
company, and provided $10.4 million in capital equipment to IC WORKS. In return
for this investment, the Company received a guarantee of sub-micron wafer
capacity at specified prices for a period of five years, projected to start in
late 1997. During 1996 and 1997, substantial foundry capacity became available
worldwide while overall demand did not increase proportionately. Consequently,
wafer pricing decreased dramatically, which changed the economic viability of
the foundry business of IC WORKS. The IC WORKS wafer foundry was subsequently
sold to a captive supplier and as a result, in 1997, the Company recorded a loss
of $8.3 million. In the fourth quarter of 1998, the Company also terminated its
operating agreement with IC WORKS. During the first quarter of 1999, Cypress
Semiconductor, Inc. acquired IC WORKS and the Company received shares of Cypress
Semiconductor in exchange for the Company's shares of IC WORKS. As of December
31, 1999, all shares had been sold by the Company except for approximately
70,614 shares which were held in escrow by Cypress Semiconductor. Consequently,
the Company recognized a $5.0 million pretax profit during the first quarter of
1999 and another $813,000 of gain during the second quarter when the shares were
sold. The remaining 70,614 shares were valued at $2.3 million, which represented
the fair market value of $32 per share of Cypress Semiconductor common stock on
December 31, 1999. During the three months ended March 31, 2000, all of the
shares held in escrow were received by the Company and 40,000 shares were sold
by the Company. Consequently the Company recognized $1.7 million pretax profit.
During the three months ended June 30, 2000, the company sold the remaining
30,614 shares and recognized a gain of $1.4 million representing the increase in
the fair value between the date the shares were received and the date they were
sold.
In August 1998, the Company announced its plans to shut down its wafer
fabrication facility in Mountain View, California and use third party foundries
for all of the Company's wafer fabrication. This change was in
11
<PAGE> 12
response to continuing market conditions that made it more economical to
purchase wafers than to produce them internally. In January 1999, the wafer
fabrication facility was closed. In connection with the closure of this
facility, the Company recognized restructuring and other charges of $7.3
million. Historically, the majority of the activity of the Company's
manufacturing personnel in product, test and process engineering was to
continually evaluate and correct process and test problems in wafer fabrication.
During 1999, a majority of these efforts were spent on transitioning the
products formerly produced in the Company's wafer fabrication facility to
outside foundries.
All of these historical costs for supporting the fabrication facility and
the transition activities, including costs of engineering personnel, were
charged to cost of sales as overhead associated with the manufacture of the
product. As the Company continues to focus on new product designs, these
engineers have allocated more of their time to supporting the design process.
This additional allocation of resources, both in effort and costs, have caused
research and development expenditures to increase in 2000 compared to 1999.
In October 1999, the Company purchased 1.3 million shares of common stock
of Silicon Aquarius, Inc. for $3.0 million.
During the second quarter of 1999, the Company announced a strategic
relationship with ON Semiconductor, which was then part of Motorola. The purpose
of this relationship is to enable each company to augment their existing product
lines by selectively releasing under private label a number of the other
company's products each quarter. As a result of this relationship, additional
revenues have been generated for the Company through the sale of its products to
ON Semiconductor for resale into markets that the Company does not currently
serve, such as the automotive and consumer appliance markets.
During the quarter ended September 30, 2000, the Company acquired the
assets, including cash, and assumed the liabilities of M.E.A.D.
Microelectronics, S.A. (MEAD) an engineering design company located in
Switzerland, for $1.5 million in cash in a transaction accounted for as a
purchase. As part of the purchase agreement, the Company will pay an additional
$1.1 million to the former sole shareholder of MEAD contingent upon the
shareholder's continued employment with the Company. In addition, the Company
granted an aggregate of 150,000 options to purchase the Company's common stock
to the sole shareholder and key employees of MEAD.
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 foregoing 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.
12
<PAGE> 13
RESULTS OF OPERATIONS
NET SALES
Net sales for the three month and nine periods ended September 30, 2000
increased $3.3 million or 22.4% and $13.9 million or 33.4%, respectively, from
the corresponding periods in the prior fiscal year. The increase in sales was
primarily due to higher sales volume of power management devices. For the three
and nine month periods ended September 30, 2000, Motorola accounted for
approximately 16% and 27%, respectively, of net sales compared to 41% and 33%,
respectively, of net sales for the same periods in the prior year. Future
Electronics, one of the Company's distributors, accounted for 16% and 15%,
respectively, of the Company's net sales for the three month and nine month
periods ended September 30, 2000 compared to 8% and 13%, respectively, of net
sales for same period in the prior year.
GROSS MARGIN
Gross margin as a percentage of sales for the three month and nine month
periods ended September 30, 2000 increased to 52.4% and 51.1%, respectively,
from 45.5% and 44.1% in the corresponding periods in the prior year. The
increase in gross margin was caused by fixed cost efficiencies associated with
increased production. Company's ability to increase gross margins will depend on
the successful introduction of its new proprietary products and controlling its
manufacturing costs. Future wafer costs will depend on the volume and
availability of wafers from the Company's wafer foundries.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three month and nine month
periods ended September 30, 2000 increased to $2.6 million and $7.6 million,
respectively, compared to $1.5 million and $5.2 million for the corresponding
periods in the prior year. This increase was primarily due to an increase in
salaries and wages for additional design, application and product engineers.
Such expenses as a percent of sales increased in the three month and nine month
periods ended September 30, 2000 to 14.4% and 13.7%, respectively, of sales
compared to 10.0% and 12.4%, respectively, of sales for the corresponding period
in the prior year. 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, 2000 increased to $3.0 million and $9.0
million, respectively, compared to $2.6 million and $7.4 million, respectively,
for the corresponding periods in the prior year. This increase was primarily due
to increases in salaries and staffing. Such expenses as a percent of sales
decreased in the three month and nine month periods ended September 30, 2000 to
16.5% and 16.1%, respectively, of sales compared to 17.4% and 17.9%,
respectively, of sales for the corresponding period in the prior year. 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 (EXPENSE), NET
For the three month and nine month periods ended September 30, 2000, net
interest income was $1.7 million and $3.7 million, respectively, compared to
$154,000 and $226,000, respectively, for the corresponding period in the prior
year. The increase in net interest income is due to higher cash balances for the
period.
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GAIN ON SALE OF INVESTMENT
During the nine months ended September 30, 2000, the company sold its
remaining shares of Cypress Semiconductor Corporation for a gain of $3.1 million
compared to a gain of $813,000 for the three months ended September 30, 1999 and
$5.8 million for the nine months ended September 30, 1999 on the sale of its
investment in IC WORKS.
INCOME TAXES
The effective tax rate for the three month and nine month periods ended
September 30, 2000 was 27.4% and 27.2%, respectively, which reflects a 23%
blended rate of United States, Hong Kong, and German tax rates, offset by the
tax rate applicable to the gain on sale of investment and additional interest
income from cash investments. This effective rate compares to the effective rate
of 19.0% and 21.2%, respectively, for the corresponding periods in the prior
year which was a result of a 23% blended rate of United States, Hong Kong, and
German tax rates, offset by the tax rate applicable to the gain on sale of
investment.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had $113.6 million of cash and cash
equivalents. The Company generated $13.5 million of cash from operating
activities during the nine months ended September 30, 2000 primarily reflecting
net income of $12.9 million and changes in working capital. The net increase in
working capital items primarily reflects an increase in income taxes payable of
$7.0 million, an increase in current liabilities of $2.0 million, an increase in
deferred distributor income of $1.0 million, and a decrease in other assets of
$.3 million offset by an increase in accounts receivable of $4.9 million and an
increase in inventories of $4.3 million.
The Company used $286,000 of cash for investing activities during the nine
months ended September 30, 2000 primarily reflecting net proceeds from the sale
of Cypress Semiconductor common stock for $3.7 million, net proceeds from the
sale of equipment of $449,000, offset by the investment in Central Semiconductor
Holdings Company Limited of $1.6 million, the acquisition of M.E.A.D.
Microelectronics for $1.5 million and the purchase of property and equipment of
$1.5 million. During the nine months ended September 30, 1999, the Company
generated $7.4 million of cash from investing activities primarily reflecting
net proceeds from the sale of Cypress Semiconductor common stock for $6.7
million, net proceeds from the sale of equipment of $1.3 million, offset by
purchases of equipment of $566,000.
The Company generated $82.0 million of cash from financing activities
during the nine months ended September 30, 2000 primarily reflecting the sale of
common stock of $79.5 million in a secondary offering and the sale of common
stock from the employee stock option plan of $2.5 million. During the nine
months ended September 30, 1999, the Company used $5.4 million of cash for
financing activities primarily reflecting the repurchase of common stock of $3.0
million, the payment of notes payable of $3.7 million, offset by proceeds from
the sale of common stock of $1.3 million.
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.
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
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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 Company utilizes CMOS, and Silicon Gate process
technologies, which are tailored to meet product specifications and customer
requirements. Outside wafers are purchased from one of five foundries and market
conditions could result in wafers being in short supply and prevent the Company
from having adequate supply to meet its customer requirements. There can be no
assurances going forward that the Company will have the ability to acquire all
the wafers it desires.
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, Texas Instruments 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
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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, 2000 were 52% and
61%, respectively, of total sales for the period compared to 71% and 69%,
respectively, of total sales for the same period 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.
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 and nine month periods ended September 30, 2000 Motorola
accounted for approximately 16% and 27%, respectively of net sales compared to
41% and 33%, respectively, of net sales for the same period in the prior year.
Future Electronics, one of the Company's distributors, accounted for 16% and
15%, respectively, of the Company's net sales for the three month and nine month
periods ended September 30, 2000 compared to 8% and 13% of net sales for the
same period 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. 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
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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 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.
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.
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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.
YEAR 2000 DISCLOSURE
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. During 1998 and 1999, the company incurred cost of $.1 million and
$.3 million related to year 2000 issues. As of September 30, 2000 the company
has not encountered any problems associated with year 2000 issues. The Company
continues to review all business activities for any potential issues. There can
be no assurance that the company has identified all future issues that may be
associated with year 2000 issues.
Market Risk Disclosure.
Interest Rate Risk - The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio is
generally comprised of municipal government securities that mature within one
year. The Company places investments in instruments that meet high credit
quality standards. These securities are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of the Company's investment portfolio, the Company does not
expect any material loss with respect to its investment portfolio.
Foreign Currency Exchange Rate Risk- Certain of the Company's sales, cost
of manufacturing and marketing are transacted in local currencies. As a result,
the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations. Gains and losses from such fluctuations have not
been material to the Company's consolidated results of operations.
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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.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the fiscal quarter for which
this report is filed.
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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: November 7, 2000 By: /s/ Robert G. Gargus
--------------------------------
Robert G. Gargus
President & Chief Executive
Officer
Date: November 7, 2000 By: /s/ Mark Brown
--------------------------------
Mark Brown
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
