<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 MARCH 31, 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)
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 (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 May 5,
2000 was 18,061,529.
================================================================================
<PAGE> 2
TELCOM SEMICONDUCTOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</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
------------------------
Mar. 31, Mar. 31,
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 17,202 $ 12,808
Cost of sales 8,719 7,775
--------- ---------
Gross profit 8,483 5,033
--------- ---------
Operating expenses:
Research and development 2,377 1,787
Selling, general and administrative 2,616 2,252
Restructuring & other -- 269
--------- ---------
Total operating expenses 4,993 4,308
--------- ---------
Income from operations 3,490 725
Interest income, net 297 68
Gain on sale of investment 1,664 5,006
--------- ---------
Income before income taxes 5,451 5,799
Provision for income taxes 1,537 1,017
--------- ---------
Income before equity in net loss of SAI 3,914 4,782
Equity in net loss of SAI 236 --
--------- ---------
Net income $ 3,678 $ 4,782
========= =========
Per share data:
Net income
Basic $ 0.24 $ 0.33
========= =========
Diluted $ 0.21 $ 0.32
========= =========
Number of shares used to compute per share data:
Basic 15,015 14,514
========= =========
Diluted 17,276 15,147
========= =========
</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>
Mar. 31, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 104,795 $ 18,413
Short term investments 1,500 2,286
Accounts receivable 9,750 8,314
Inventory 6,964 5,863
Deferred income taxes 269 88
Other current assets 1,045 1,186
--------- ---------
Total current assets 124,323 36,150
Property and equipment, net 6,477 6,791
Other assets 4,207 3,000
--------- ---------
$ 135,007 $ 45,941
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,513 $ 2,889
Accrued liabilities 1,926 1,832
Deferred distributor income 1,410 1,635
Income taxes payable 4,100 603
--------- ---------
Total current liabilities 11,949 6,959
Deferred income taxes 243 400
--------- ---------
Total liabilities 12,192 7,359
--------- ---------
Stockholders' equity:
Common stock 21 17
Additional paid-in capital 119,466 38,644
Treasury stock (12,697) (12,697)
Accumulated other comprehensive income 747 1,018
Retained earnings 15,278 11,600
--------- ---------
Total stockholders' equity 122,815 38,582
--------- ---------
$ 135,007 $ 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>
Three Months Ended
-------------------------
Mar. 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,678 $ 4,782
Adjustments to reconcile net income to net
cash provided by operating activities:
Pretax gain on sale of investment (1,664) (5,006)
Equity in net loss of SAI 236 --
Depreciation and amortization 598 757
Changes in assets and liabilities:
Accounts receivable (1,436) (720)
Inventory (1,101) 707
Other current assets 141 (434)
Accounts payable 1,624 (45)
Accrued liabilities 94 (488)
Deferred distributor income (225) 10
Income taxes payable 3,497 754
--------- ---------
Net cash provided by operating activities 5,442 317
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (585) (91)
Net proceeds from sale of equipment 301 434
Net proceeds from sale of investment 1,998 --
Purchase of common stock of CSMC (1,600) --
--------- ---------
Net cash provided by (used for) investing 114 343
activities
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 80,826 192
Repurchase of common stock -- (2,473)
Payments on notes payable -- (1,036)
--------- ---------
Net cash provided by (used for) financing 80,826 (3,317)
activities
--------- ---------
Net increase (decrease) in cash and cash 86,382 (2,657)
equivalents
Cash and cash equivalents at the beginning of 18,413 14,059
period
--------- ---------
Cash and cash equivalents at the end of period $ 104,795 $ 11,402
========= =========
</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
(In thousands)
(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 March 31.
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 March 31, 2000 should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
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.
6
<PAGE> 7
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
Mar. 31, Mar. 31,
2000 1999
--------- ---------
<S> <C> <C>
Net income available to common shareholders $ 3,678 $ 4,782
========= =========
Weighted average common stock outstanding (basic) 15,015 14,514
Effect of dilutive options 2,261 633
--------- ---------
Weighted average common stock outstanding (diluted) 17,276 15,147
========= =========
Earnings per share:
Basic $ 0.24 $ 0.33
========= =========
Diluted $ 0.21 $ 0.32
========= =========
</TABLE>
Options to purchase 554,407 shares of common stock at a weighted average
price of $5.46 per share were outstanding at March 31, 1999 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.
7
<PAGE> 8
NOTE 4. BALANCE SHEET DETAILS:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
2000 1999
-------- --------
<S> <C> <C>
Inventory:
Raw material $ 17 $ 17
Work in process 4,874 4,490
Finished goods 2,073 1,356
-------- --------
$ 6,964 $ 5,863
======== ========
Property and equipment:
Equipment $ 12,792 $ 12,844
Carrying value of assets to be
disposed of 54 266
Leasehold improvements 988 123
-------- --------
13,834 13,233
Accumulated depreciation (7,571) (7,562)
-------- --------
6,263 5,671
Construction in progress 214 1,120
-------- --------
$ 6,477 $ 6,791
======== ========
Accrued liabilities:
Payroll and related $ 1,431 $ 1,434
Other 495 398
-------- --------
$ 1,926 $ 1,832
======== ========
</TABLE>
8
<PAGE> 9
NOTE 5. RESTRUCTURING AND OTHER CHARGES
During 1998, the Company recorded restructuring and other charges
totaling $7,258, consisting of $6,515 of items relating to the closure of the
Company's wafer fabrication facility, and $743 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 $6,515 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 have been developed in the
past two years utilize 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 is no longer in use and is being held for sale. During
the first quarter of 1999, all fabrication of wafers has been transferred to
third party foundries. The facility shutdown is 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 use submicron technology which allows for more
die per wafer than the five inch wafer fabrication in the old 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
$4,458. The cost and accumulated depreciation of the fabrication equipment prior
to the write down was $13,027 and $6,330, respectively. The fair value of the
fabrication equipment was estimated to be $2,239 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. As of March 31, 2000, the carrying value of
assets to be disposed of is $54.
The restructuring charge for 1998 also included charges for idle
facilities of $1,406, severance payments totaling $519 for employees terminated
upon closing of the facility and environmental and related clean up costs of
$132. Additional restructuring charges are included in the first quarter of 1999
for employee severance costs of $243 and environmental and related clean up
costs of $26.
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 March 31, 2000:
<TABLE>
<CAPTION>
Restructuring Cost
(in thousands)
----------------------------------------------------------------------
Three months ended
Mar. 31, 2000
Balance -------------------------------- Balance
Dec. 31, 1999 Expense Utilized Mar. 31, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Idle facility charge $ 102 $ -- $ 56 $ 46
Employee severance and other 43 -- 20 23
------------- ------------- ------------- -------------
$ 145 $ -- $ 76 $ 69
============= ============= ============= =============
</TABLE>
NOTE 6. GAIN ON SALE OF INVESTMENT
At the end of the quarter ended March 31, 1999, the Company recognized a
gain of $5,006 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
9
<PAGE> 10
Company's preferred shares, with a book value of $1,500, were exchanged for
common shares of Cypress Semiconductor with a fair market value of $6,506. As
part of the agreement, ten percent of the common shares received by the Company
are 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 $6,730 and recognized an additional gain on the sale of $813
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 $1,664 representing the increase
in the fair value between the date the shares were received and the date they
were sold. The value of the remaining shares to be sold at March 31, 2000 is
$1,500 and is presented as short term investments with a related unrealized gain
of $1,245, net of tax of $498, being recorded as a separate component of
shareholders' equity at March 31, 2000. These shares are accounted for as an
available for sale security in accordance with FAS 115.
NOTE 7. COMPREHENSIVE INCOME:
The following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Mar. 31, Mar. 31,
2000 1999
------- -------
<S> <C> <C>
Net income $ 3,678 $ 4,782
Unrealized gain on short term investment
(net of deferred taxes of $(181)) (271) --
------- -------
Comprehensive income $ 3,407 $ 4,782
======= =======
</TABLE>
The components of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
2000 1999
-------- --------
<S> <C> <C>
Unrealized gain on short term investment
(net of deferred taxes of $498 and $679) $ 747 $ 1,018
======== ========
</TABLE>
NOTE 8. 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. In addition, the Common Stock Agreement
provides the Company with the option to purchase an additional 1.7 million
shares for $4.0 million on or before October 7, 2000. The Stockholder Purchase
Agreement gives the Company an option to purchase the remaining outstanding
shares from major stockholders of SAI on or before November 30, 2001 at the then
fair market value of SAI's stock. Notwithstanding this determination, the fair
market value shall not be less than $3.34 or greater than $9.00 per share. The
Company accounts for this investment on the equity method with a 90-day lag in
recording the Company's share of the results for the entity. During the period
ending March 31, 2000, the Company recorded an equity in net loss of SAI of
$236,000.
10
<PAGE> 11
NOTE 9. INVESTMENT IN CSMC:
During the period 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.
11
<PAGE> 12
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 have 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 $.8 million of gain during the second quarter when the shares
were sold. The remaining 70,614 shares were valued at $2.3 million, which
represents the fair market value of $32 per share of Cypress Semiconductor
common stock on December 31, 1999. During the period 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. The remaining shares are presented as short term investments and are
accounted for as an available for sale security in accordance with FAS 115.
Subsequent to the period ended March 31, 2000, the Company sold the remaining
shares and realized a pre-tax gain of $1.4 million.
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 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 $7.6 million. Historically, the
12
<PAGE> 13
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 will be able
to allocate more of their time to supporting the design process. This additional
allocation of resources, both in effort and costs, will cause 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. The Company has an option to purchase
an additional 1.7 million shares for $4.0 million on or before October 7, 2000.
If the Company exercises this option, the Company will also have an option to
purchase the remaining outstanding shares from the major stockholders of Silicon
Aquarius on or before November 30, 2001 at the then fair market value, but not
less than $3.34 per share or greater than $9.00 per share.
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. This agreement is expected to generate
additional revenues for the Company through the sale of its products to ON
Semiconductor for resale as well as the purchase and resale of ON Semiconductor
products by the Company. The Company generally expects that ON Semiconductor
will sell our products into markets that the Company does not currently serve
such as the automotive and consumer appliance markets.
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.
13
<PAGE> 14
RESULTS OF OPERATIONS
NET SALES
Net sales for the three month period ended March 31, 2000 increased $4.4
million or 34.3% from the corresponding period in the prior fiscal year. The
increase in sales was primarily due to higher sales volume in the Company's
power management products. For the three month period ended March 31, 2000,
Motorola accounted for approximately 34% of net sales compared to 28% of net
sales for the same period in the prior year. Future Electronics, one of the
Company's distributors, accounted for 13% of the Company's net sales for the
three month period ended March 31, 2000 compared to 11% of net sales for same
period in the prior year.
GROSS MARGIN
Gross margin as a percentage of sales for the three month period ended
March 31, 2000 increased to 49.3% from 39.3% in the corresponding period in the
prior year. The increase in gross margin was caused by reduced manufacturing
costs from the utilization of wafer foundries. The 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 period ended March
31, 2000 increased to $2.4 million compared to $1.8 million for the
corresponding period 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 decreased in the three month
period ended March 31, 2000 to 13.8% of sales compared to 14.0% 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 period
ended March 31, 2000 increased to $2.6 million compared to $2.3 million for the
corresponding period in the prior year. This increase was primarily due to
increases in salaries and staffing in sales. Such expenses as a percent of sales
decreased in the three month period ended March 31, 2000 to 15.2% of sales
compared to 17.6% 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 period ended March 31, 2000, net interest income was
$297,000 compared to $68,000 for the corresponding period in the prior year. The
increase in net interest income is due to higher cash balances for the period.
GAIN ON SALE OF INVESTMENT
For the three months ended March 31, 2000, the company sold additional
shares of Cypress Semiconductor Corporation for a gain of $1.7 million compared
to a gain of $5.0 million on the sale of its investment in IC WORKS recorded in
the corresponding period last year. IC WORKS was purchased by Cypress
Semiconductor Corporation, a publicly held company and, as part of the purchase
agreement
14
<PAGE> 15
between IC WORKS and Cypress Semiconductor Corporation, the Company's preferred
shares, with a book value of $1.5 million, were exchanged for common shares of
Cypress Semiconductor Corporation with a fair market value of $6.5 million.
INCOME TAXES
The effective tax rate for the three month period ended March 31, 2000
was 28.2% 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. This effective rate compares to the effective rate of 17.5% for the
corresponding period in the prior year which was a result of a 27% 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 March 31, 2000, the Company had $104.8 million of cash and cash
equivalents. The Company generated $5.4 million of cash from operating
activities during the three months ended March 31, 2000 primarily reflecting net
income of $3.7 million and changes in working capital. The net increase in
working capital items primarily reflects an increase in income taxes payable of
$3.5 million, an increase in current liabilities of $1.7 million, and a decrease
in other assets of $.1 million offset by an increase in accounts receivable of
$1.4 million and an increase in inventories of $1.1 million.
The Company generated $.1 million of cash from investing activities
during the three months ended March 31, 2000 primarily reflecting net proceeds
from the sale of Cypress Semiconductor common stock for $2.0 million, net
proceeds from the sale of equipment of $.3 million, offset by the investment in
Central Semiconductor Holdings Company Limited of $1.6 million and the purchase
of property and equipment of $.5 million. During the three months ended March
31, 1999, the Company generated $.3 million of cash for investing activities
primarily reflecting net proceeds from the sale of equipment of $.4 million,
offset by purchases of equipment of $.1 million.
The Company generated $80.8 million of cash for financing activities
during the three months ended March 31, 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 $1.3 million. During the three
months ended March 31, 1999, the Company used $3.3 million of cash for financing
activities primarily reflecting the repurchase of common stock of $2.5 million,
the payment of notes payable of $1.0 million, offset by proceeds from the sale
of common stock of $.2 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 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
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<PAGE> 16
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, Silicon Gate, Bipolar
and BiCMOS 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 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 period ended March 31, 2000 were 67% of total sales for the
period compared to 67% of total sales for the same
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<PAGE> 17
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 period ended March 31, 2000 Motorola accounted for
approximately 34% of net sales compared to 28% of net sales for the same period
in the prior year. Future Electronics, one of the Company's distributors,
accounted for 13% of the Company's net sales for the three month period ended
March 31, 2000 compared to 11% 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 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
17
<PAGE> 18
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.
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.
18
<PAGE> 19
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 March 31, 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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<PAGE> 20
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.
20
<PAGE> 21
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: May 9, 2000 By: /s/ Phillip M. Drayer
--------------------------
Phillip M. Drayer
President
Chief Executive Officer
Date: May 9, 2000 By: /s/ Robert G. Gargus
--------------------------
Robert G. Gargus
President
Date: May 9, 2000 By: /s/ Mark Brown
--------------------------
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,202
<SECURITIES> 1,500
<RECEIVABLES> 9,945
<ALLOWANCES> 195
<INVENTORY> 6,964
<CURRENT-ASSETS> 135,007
<PP&E> 14,048
<DEPRECIATION> 7,571
<TOTAL-ASSETS> 135,007
<CURRENT-LIABILITIES> 11,792
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 122,794
<TOTAL-LIABILITY-AND-EQUITY> 135,007
<SALES> 17,202
<TOTAL-REVENUES> 17,202
<CGS> 8,719
<TOTAL-COSTS> 13,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297
<INCOME-PRETAX> 5,451
<INCOME-TAX> 1,537
<INCOME-CONTINUING> 3,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,678
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.21
</TABLE>
