<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TELCOM SEMICONDUCTOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
DELAWARE 94-3186995
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
TELCOM SEMICONDUCTOR, INC.
1300 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94039
(408) 968-9252
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT G. GARGUS
PRESIDENT AND CHIEF FINANCIAL OFFICER
TELCOM SEMICONDUCTOR, INC.
1300 TERRA BELLA AVENUE
MOUNTAIN VIEW, CALIFORNIA 94039
(408) 968-9252
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. ROBERT SUFFOLETTA, ESQ. NATHANIEL M. CARTMELL III, ESQ.
CRAIG N. LANG, ESQ. MICHELLE ROWE HALLSTEN, ESQ.
WILSON SONSINI GOODRICH & ROSATI PILLSBURY MADISON & SUTRO LLP
PROFESSIONAL CORPORATION 50 FREMONT STREET
650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94105
PALO ALTO, CALIFORNIA 94304 (415) 983-1000
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value... 3,668,500 $22.875 $83,916,938 $22,155
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</TABLE>
(1) Includes 478,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
TELCOM SEMICONDUCTOR MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS PERMITTED.
SUBJECT TO COMPLETION -- FEBRUARY , 2000
PROSPECTUS
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3,190,000 Shares
TelCom Semiconductor, Inc. Logo
Common Stock
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TelCom Semiconductor, Inc. is offering 3,000,000 shares of common stock and the
selling stockholders are offering 190,000 shares of common stock. TelCom
Semiconductor will not receive any proceeds from the sale of shares by the
selling stockholders.
TelCom Semiconductor is a provider of high performance analog and mixed-signal
circuits for wireless communications, networking, computer and industrial
markets.
The shares of TelCom Semiconductor are quoted in the Nasdaq National Market
under the symbol "TLCM." On February 18, 2000, the last reported sale price in
the Nasdaq National Market was $23.1875 per share.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price..................................... $ $
Underwriting discounts and commissions.................... $ $
Proceeds, before expenses, to TelCom...................... $ $
Proceeds to selling stockholders.......................... $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 7 TO 15 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF TELCOM SEMICONDUCTOR.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The underwriters may, under some circumstances, purchase up to 378,500
additional shares from us and 100,000 additional shares from one of the selling
stockholders at the public offering price, less underwriting discounts and
commissions. Delivery and payment for the shares will be on , 2000.
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
C.E. UNTERBERG, TOWBIN
STEPHENS INC.
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 3
Risk Factors....................... 7
Forward-Looking Statements......... 16
Use of Proceeds.................... 17
Price Range Of Common Stock and
Dividend Policy.................. 17
Capitalization..................... 18
Selected Consolidated Financial
Data............................. 19
Management's Discussion and
Analysis of Financial
Condition........................ 20
Business........................... 26
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management......................... 33
Principal and Selling
Stockholders..................... 35
Underwriting....................... 37
Indemnification of Directors and
Officers......................... 39
Where You Can Find More
Information...................... 39
Legal Matters...................... 40
Experts............................ 40
Index to Consolidated Financial
Statements....................... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any other date other than the date on the front
cover of this prospectus.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of TelCom.
Investors should read the entire prospectus carefully.
TELCOM
We design, develop and market a diversified portfolio of high-performance
analog and mixed-signal integrated circuits for a wide variety of applications
in the wireless communications, computer, networking and industrial markets.
Analog integrated circuits are used to measure or control variables that have an
infinite number of values or states such as light, temperature, pressure, weight
or speed, and are required to interface between digital electronics systems and
a variety of every day applications. Mixed-signal integrated circuits
incorporate both analog and digital functionality on a single integrated
circuit. The analog and mixed-signal market is both large and growing, and the
Semiconductor Industry Association (SIA) estimates that the worldwide market
will increase from $21.2 billion in 1999 to over $34.5 billion in 2002.
We focus our sales, marketing, distribution and research and development
activities to address the following four key markets: wireless communications,
networking, computer and industrial. Our products are used in a broad range of
applications within these markets, ranging from battery operated communications
devices such as cellular telephones, pocket pagers and personal two-way radios
to industrial instruments such as digital multi-meters, panel meters,
temperature meters, digital scales and digital oscilloscopes. Our products
address a variety of demands within these markets, including power distribution
and precision power regulation, temperature detection and control, and the
measurement of voltages, currents, resistance and capacitance.
We offer a diversified portfolio of over 600 analog and mixed-signal
integrated circuit products for a wide range of market applications. Our basic
product strategy is to address an increasing spectrum of customer applications
by introducing proprietary and selected second source products that increase the
range of performance and capabilities of our product portfolio. Our products
comprise four principal product families:
- Power management products such as low drop-out regulators, DC to DC
converters, voltage detectors and MOSFET drivers;
- Thermal management products that provide thermal control solutions, such
as temperature detection and control and fan speed control;
- Data converter products which include system and display type analog to
digital converters; and
- Linear products such as operational amplifiers, voltage references and
comparators that are used in a wide variety of electronic systems.
Our products are sold to over 6,500 end-user customers throughout the world
through a direct sales staff and a worldwide network of independent sales
representatives and distributors. Our customers include the following leading
companies:
- Motorola, Qualcomm and Samsung in the wireless communications market;
- Lucent, Delta, 3Com and Cisco in the networking market;
- Compaq Computer, Seagate and Intel in the computer market; and
- NCR in the industrial market.
3
<PAGE> 5
We have adopted the following strategy to achieve our objective of being a
leading provider of high performance analog and mixed-signal circuits:
- Identify customers that are the leading suppliers of products in our
target markets and understand their future systems needs so that we can
develop unique product solutions and selected second source products that
can enhance our total product offering;
- Leverage our position with the industry leaders by supplying our products
to an increasing spectrum of customers that produce products similar to
the industry leaders;
- Maintain our technological leadership; and
- Selectively pursue strategic relationships that either augment our
product portfolio, expand our customer base, increase our design
capability, or secure foundry capacity.
OUR HISTORY AND OFFICES
We were organized in Delaware in June 1993 and began operations in December
1993 after purchasing the semiconductor operations of Teledyne, Inc., which
principally consisted of the Teledyne Components Division. Our principal
executive offices are located at 1300 Terra Bella Avenue, Mountain View,
California 94039, and our telephone number is (650) 968-9241.
We maintain a website on the Internet at www.telcom-semi.com. Our website,
and the information contained therein, is not a part of this prospectus.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Shares offered by TelCom Semiconductor............... 3,000,000 shares
Shares offered by the selling stockholders........... 190,000 shares
Shares outstanding after this offering............... 17,315,107 shares
Use of proceeds by TelCom Semiconductor.............. For general corporate purposes, principally working
capital and potential acquisitions.
Nasdaq National Market symbol........................ TLCM
</TABLE>
The number of our common shares to be outstanding after this offering is
based on the number of shares outstanding as of December 31, 1999, and does not
include the following:
- - 3,106,115 shares of common stock issuable upon exercise of outstanding stock
options with a weighted average exercise price of approximately $5.00 per
share;
- - 943,388 shares of common stock reserved for future issuance under our stock
option plans;
- - 419,280 shares of common stock reserved for sale under our employee stock
purchase plan; and
- - 378,500 shares that the underwriters may purchase if they exercise their
over-allotment option in full.
In addition, the underwriters may purchase 100,000 currently outstanding
shares from one of the selling stockholders if they exercise their
over-allotment option in full.
RISK FACTORS
You should consider the risk factors and the impact of various events that
could adversely affect our business before investing in our common stock.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $39,004 $37,762 $55,435 $54,263 $57,322
Gross profit.............................. 14,324 10,961 24,260 19,367 25,696
Income (loss) from operations............. 4,560 (1,023) 1,011 (2,975) 8,626
Gain on sale of investment................ -- -- -- -- 5,819
Income (loss) before income taxes......... 4,859 (861) 723 (2,589) 14,830
Provision (benefit) for income taxes...... 1,215 (233) 2,427 958 1,701
------- ------- ------- ------- -------
Net income (loss)......................... $ 3,644 $ (628) $(1,704) $(3,547) $13,129
======= ======= ======= ======= =======
Basic income (loss) per share............. $ 0.43 $ (0.04) $ (0.11) $ (0.22) $ 0.92
======= ======= ======= ======= =======
Diluted income (loss) per share........... $ 0.23 $ (0.04) $ (0.11) $ (0.22) $ 0.84
======= ======= ======= ======= =======
Number of shares used to compute basic
income (loss) per share................. 8,436 15,612 16,184 15,933 14,302
======= ======= ======= ======= =======
Number of shares used to compute diluted
income (loss) per share................. 15,703 15,612 16,184 15,933 15,676
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short term investments........... $20,699 $ 85,171
Working capital............................................. 29,191 93,663
Total assets................................................ 45,941 110,413
Total stockholders' equity.................................. 38,582 103,054
</TABLE>
The as adjusted amounts above give effect to the sale of the 3,000,000
shares of common stock offered by us in this offering at an assumed public
offering price of $22.875 per share after deducting the underwriting discounts
and commissions and the estimated offering expenses.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the risk factors in addition to the other
information in or incorporated by reference in this prospectus. Each of these
risk factors could adversely affect our business, financial condition and
operating results as well as adversely affect the value of an investment in our
common stock. Investors should read the entire prospectus carefully.
WE HAVE HISTORICALLY EXPERIENCED FLUCTUATIONS IN OUR OPERATING RESULTS AND
EXPECT THESE FLUCTUATIONS TO CONTINUE WHICH MAY CAUSE OUR COMMON STOCK
PRICE TO DECLINE.
Our quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect our net sales, gross
margins and operating results. These factors include:
- - the volume and timing of orders received;
- - changes in the mix of proprietary and second source products sold;
- - market acceptance of our products and the products of our customers;
- - competitive pricing pressures;
- - our ability to expand manufacturing output to meet increasing demand;
- - our ability to introduce new products on a timely basis;
- - the timing and extent of our research and development expenses;
- - cyclical semiconductor industry conditions;
- - the failure to anticipate changing customer product requirements;
- - fluctuations in manufacturing yields;
- - disruption in the supply of wafers or assembly services;
- - the ability of customers to make payments to us;
- - increases in material costs;
- - certain production and other risks associated with using independent
manufacturers; and
- - our ability to access 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 we are unable to introduce new proprietary
or second source products with higher margins or reduce manufacturing costs to
offset anticipated decreases in the prices of our existing products, then our
operating results will be adversely affected. Our 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 our
backlog is cancelable without penalty, we typically plan our production and
inventory levels based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. In addition, because of fixed
costs in the semiconductor industry, we are limited in our ability to reduce
costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, we may experience material adverse fluctuations in
our future operating results on a quarterly or annual basis. Although we were
profitable for the year ended December 31, 1999, we cannot assure you that we
will remain profitable on a quarterly or annual basis in future periods.
7
<PAGE> 9
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND DISTRIBUTORS FOR A HIGH
PERCENTAGE OF OUR SALES, AND THE LOSS OF A SIGNIFICANT CUSTOMER OR
DISTRIBUTOR WOULD CAUSE A DECLINE IN OUR PROFITS.
A limited number of customers and distributors have accounted for a
significant portion of our net sales. Motorola accounted for approximately 34%
of our net sales in 1999 and 35% of our net sales in 1998. In addition, Future
Electronics, one of our distributors, accounted for 12% of our net sales in 1999
and 11% of our net sales in 1998. Our top five customers, including
distributors, accounted for 58% of our net sales in 1999 and 64% of our net
sales in 1998, although the customers who typically comprise our top five
customers tend to change somewhat year to year. We anticipate that we will
continue to be dependent on a limited number of key customers and distributors
for a significant portion of our net sales. The reduction, delay or cancellation
of orders from one or more significant customers for any reason could
significantly harm our operating results. We are also dependent on sales
representatives and distributors for the sale of our products to many of our
customers. Such distributors sell competitors' products and are not within our
control. The loss of one or more of our distributors or a disruption in our
sales and distribution channels could significantly harm our business and
operating results.
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY
BASIS.
Our success depends upon our ability to develop new analog and mixed-signal
circuits for new and existing markets, to introduce such products in a timely
manner, and to have such products gain market acceptance. The development of new
analog and mixed-signal circuits is highly complex and from time to time we have
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 our products and the products of our customers.
Moreover, successful product design and development is dependent on our
ability to attract, retain and motivate qualified analog design engineers, of
which there is a limited number. We cannot assure you we 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 and mixed-signal circuits, the limited number of qualified
circuit designers and the limited effectiveness of computer-aided design systems
in the design of such circuits, we cannot assure you that we will be able to
successfully develop and introduce new products on a timely basis. Although we
seek to design products that have the potential to become industry standard
products, we cannot assure you that any products introduced by us will be
adopted by such market leaders, or that any products initially accepted by our
customers that are market leaders will become industry standard products. Our
failure to develop and introduce new products successfully could significantly
harm our business and cause our operating results to suffer.
Our results of operations are dependent on the mix 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 our
margins, sales of proprietary products must in the future represent a greater
percentage of our net sales, requiring us to successfully develop, introduce and
market new proprietary products. We cannot assure you that we will be successful
in developing new proprietary products with the features and functionality that
customers in our key markets will demand.
8
<PAGE> 10
OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE
SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
We develop complex and evolving products. Despite testing by us and our
customers, defects, integration issues or other performance problems may be
found in existing or new products. This could result in delay in recognition or
loss of revenues, loss of market share or failure to achieve market acceptance.
These defects may also cause us to incur significant warranty, support and
repair costs, divert the attention of our engineering personnel from our product
development efforts and harm our relationships with our customers. The
occurrence of these problems could result in the delay or loss of market
acceptance of our products and would likely harm our business. Any defects or
other problems with our products could result in financial or other damages to
our customers who could seek damages from us for their losses. A product
liability claim brought against us, even if unsuccessful, would likely be time
consuming and costly to defend.
WE MUST BE ABLE TO RESPOND TO TECHNOLOGICAL CHANGES IN OUR INDUSTRY OR OUR
BUSINESS WILL BE HARMED.
The markets for our products are characterized by rapid technological
change and frequent new product introductions. To remain competitive, we must
develop or obtain access to new semiconductor process technologies to reduce die
size, increase die performance and functional complexity and improve
manufacturing yields. In order to have access to new semiconductor process
technologies, particularly for products requiring sub-micron processing, we have
entered into relationships with outside foundries to provide the processes and
wafers we need to produce our products. Semiconductor design and process
methodologies are subject to rapid technological change, requiring large
expenditures for research and development. If we are unable to develop or obtain
access to advanced wafer processing technologies as they become needed, or are
unable to define, design, develop and introduce competitive new products on a
timely basis, our future operating results will suffer. We cannot assure you
that the analog process technology utilized by us will not become obsolete.
STRONG COMPETITION IN THE ANALOG SEMICONDUCTOR MARKET MAY REDUCE THE DEMAND
FOR OUR PRODUCTS OR THE PRICES OF OUR PRODUCTS, WHICH COULD REDUCE OUR
REVENUES AND HARM OUR BUSINESS.
The analog semiconductor industry is highly competitive and subject to
rapid technological change. Significant competitive factors in the analog market
include:
- - product features, performance and price;
- - the timing of new product introductions;
- - the emergence of new computer standards and other customer systems;
- - product quality; and
- - customer support.
Because the market for analog integrated circuits is diverse and highly
fragmented, we encounter different competitors in our various product markets.
Our principal competitors include Linear Technology Corporation, Maxim
Integrated Products and Harris Semiconductor in one or more of our 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 we do. We expect intensified
competition from existing analog circuit suppliers and the possible entry of new
competition. Increased competition could harm our business. We cannot assure you
that we will be able to compete successfully in the future or that competitive
pressures will not harm our financial condition or our operating results.
Competitive pressures could reduce market acceptance of our products and result
in price reductions and increases in expenses that could harm our business and
our financial condition.
9
<PAGE> 11
OUR CONTRACTS WITH WAFER SUPPLIERS DO NOT OBLIGATE THEM TO A MINIMUM SUPPLY
OR SET PRICES. ANY INABILITY OR UNWILLINGNESS OF OUR WAFER SUPPLIERS TO
MEET OUR MANUFACTURING REQUIREMENTS WOULD DELAY OUR PRODUCTION AND PRODUCT
SHIPMENTS AND HARM OUR BUSINESS.
If we are unable to obtain an adequate supply of wafers from our current or
any alternative sources in a timely manner, our business would be harmed. To
date, our principal manufacturing relationship has been with Central
Semiconductor Manufacturing Company Limited, or CSMC, from which we have
obtained a substantial majority of our wafers. We also receive wafers from
American Microsystems, Inc., or AMI, and Taiwan Semiconductor Manufacturing
Company, or TSMC. Each of our wafer suppliers also fabricates wafers for other
integrated circuit companies, including some of our competitors. Although we
have written commitments specifying wafer capacities from our suppliers, we
would likely not be able to enforce fulfillment of the delivery commitments if
these suppliers experience manufacturing failures or yield shortfalls, choose to
prioritize capacity for other use or otherwise choose to reduce or eliminate
deliveries to us. We may not be able to qualify additional manufacturing sources
for existing or new products in a timely manner. Moreover, it is uncertain
whether additional manufacturing sources would agree to deliver an adequate
supply of wafers to us.
BECAUSE FOUNDRY CAPACITY IS LIMITED WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
We currently purchase all of our wafers from three outside foundries.
Market conditions could result in wafers being in short supply and prevent us
from having adequate supply to meet our customer requirements. Any prolonged
inability to utilize our foundries as a result of fire, natural disaster or
otherwise would harm our financial condition and cause our operating results to
suffer. If we are not able to obtain additional foundry capacity as required,
our relationships with our customers would be harmed and our sales would likely
be reduced. In order to secure additional foundry capacity, we have entered into
and expect to enter into various arrangements with suppliers, which could
include:
- - contracts that commit us to purchase specified quantities of silicon wafers at
specified prices over extended periods;
- - option payments, non-refundable deposits, loans or other prepayments;
- - investments; or
- - joint ventures or other strategic partnerships with foundries.
We may not be able to make any such arrangement in a timely fashion or at
all, and such arrangements, if any, may not be on terms favorable to us.
Moreover, if we are able to secure foundry capacity, we may be obligated to
utilize all of that capacity or incur penalties. Such penalties may be expensive
and could harm our operating results.
WE ARE DEPENDENT ON OUR SUBCONTRACTORS IN ASIA TO PERFORM KEY MANUFACTURING
FUNCTIONS FOR US.
We depend on third party subcontractors in Asia for assembly and packaging
of our products. The packaging of our products is performed by a limited group
of subcontractors and some of the raw materials included in our products are
obtained from a limited group of suppliers. Although we seek to reduce our
dependence on our sole and limited source suppliers, disruption or termination
of any of these sources could occur and such disruptions could harm our business
and operating results. In the event that any of our subcontractors were to
experience financial, operational, production or quality assurance difficulties
resulting in a reduction or interruption in supply to us, our operating results
would suffer until alternate subcontractors, if any, became available.
10
<PAGE> 12
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS OF OUR INTERNATIONAL
OPERATIONS COULD HARM OUR OPERATING RESULTS.
International sales accounted for approximately 70% of our net sales in
1999 and 65% of our net sales in 1998. We expect international sales to continue
to represent a significant portion of product sales. Our Hong Kong subsidiary
employs over 50% of our total workforce. If the lease on our Hong Kong facility,
which expires in July 2000, is not renewed, our international sales and
operations could be harmed. In addition, our test operations and substantially
all of the foundries and subcontractors that manufacture and assemble wafers for
us are located in Asia. This concentration of manufacturing operations in Asia
subjects us to the risks of conducting business internationally, including
political and economic conditions in Asia, particularly in the People's Republic
of China. Our international sales and operations involve a number of other
risks, including:
- - unexpected changes in regulatory requirements;
- - changes in diplomatic and trade relationships;
- - delays resulting from difficulty in obtaining export licenses for technology;
- - tariffs and other barriers and restrictions;
- - currency exchange fluctuations; and
- - the burdens of complying with a variety of foreign laws.
We cannot assure you that regulatory, political and other factors will not
harm our operations in the future or require us to modify our current business
practices.
WE MUST BE ABLE TO EFFECTIVELY MANAGE ANY FUTURE GROWTH IN OUR BUSINESS.
We have experienced significant growth and expansion in recent periods,
which has placed and continues to place a strain on our resources. If we sustain
such growth in the future, we will need to continue to implement and improve our
operational, financial and management information systems and to hire, train,
motivate and manage additional employees. We cannot assure you that continued
growth will not necessitate changes in the systems, procedures and controls to
support our operations. Any failure to improve our operational, financial and
management systems or to hire, train, motivate or manage employees could harm
our business.
THE SEMICONDUCTOR INDUSTRY IS VERY CYCLICAL AND AN INDUSTRY DOWNTURN WOULD
HARM OUR BUSINESS.
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. Although the semiconductor industry in recent periods has
experienced increased demand and production capacity constraints, we cannot
assure you that these conditions will continue. In addition, we cannot assure
you that any future downturn in the industry will not be severe or that any such
downturn will not harm our business and cause our
11
<PAGE> 13
operating results to suffer. We cannot assure you that we will not experience
substantial period-to-period fluctuations in operating costs due to general
semiconductor industry conditions or other factors.
THE DEMAND FOR OUR PRODUCTS DEPENDS ON THE MARKETS FOR OUR CUSTOMERS'
PRODUCTS. ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS.
A majority of our products are incorporated into products such as cellular
telephones, computers and computer peripherals. These markets may from time to
time experience cyclical, depressed business conditions, often in connection
with, or in anticipation of, a decline in general economic conditions. Such
industry downturns have resulted in reduced product demand and declining average
selling prices. Our business would be harmed by any future downturns in the
markets that we serve.
SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE AND
SUCH SHIFTS HAVE RESULTED AND COULD IN THE FUTURE RESULT IN SIGNIFICANT
INVENTORY WRITEDOWNS.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our quarterly
or annual operating results. The semiconductor industry is highly cyclical and
is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. We attempt to
stock products in quantities that are sufficient to meet anticipated customer
demands. However, due to the product manufacturing cycle characteristic of
semiconductor manufacturing and the inherent imprecision by our customers to
accurately forecast their demand, product inventories may not always correspond
to product demand, leading to shortages or surpluses of certain products. As a
result, future inventory write-downs may occur due to lower of cost or market
accounting, excess inventory or inventory obsolescence.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN OUR KEY TECHNICAL AND
MANAGEMENT PERSONNEL.
Our success depends upon the continued service of our executive officers
and other key management and technical personnel, particularly our analog design
engineers, and on our ability to continue to attract, retain and motivate
qualified personnel, particularly experienced circuit designers, systems
applications engineers and sales managers. We are currently in the process of
seeking a new chief financial officer to replace our current chief financial
officer, Robert Gargus, who recently became our president. The competition for
such employees is intense. The loss of the services of one or more of our design
engineers, of which there is a limited number, executive officers or other key
personnel or our inability to recruit replacements for such personnel or to
otherwise attract, retain and motivate qualified personnel could harm our
business.
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY
RIGHTS.
Our success depends on our ability to obtain patents and licenses and to
preserve our other intellectual property rights covering our manufacturing
processes, products and development and testing tools. We seek patent protection
for those inventions and technologies for which we believe such protection is
suitable and is likely to provide a competitive advantage to us. We currently
hold 28 United States patents on semiconductor devices and methods with various
expiration dates, none earlier than May 2003. We have applications for six
United States patents currently pending. We also hold one foreign patent. The
process of seeking patent protection can be long and expensive and we cannot
assure you that our 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 us. We 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.
We regard elements of our manufacturing process, product design and
equipment as proprietary and seek to protect our proprietary rights through a
combination of employee and third party nondisclosure agreements,
12
<PAGE> 14
internal procedures and patent protection. Notwithstanding our attempts to
protect our proprietary rights, we believe that our future success will depend
primarily upon the technical expertise, creative skills and management abilities
of our officers and key employees rather than on patent and copyright ownership.
We also rely substantially on trade secrets and proprietary technology to
protect our technology and manufacturing know-how, and work actively to foster
continuing technological innovation to maintain and protect our competitive
position. We cannot assure you that our competitors will not independently
develop or patent substantially equivalent or superior technologies.
Although we are not currently a party to any material litigation, the
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. We cannot assure you that any patent
owned by us will not be invalidated, circumvented or challenged, that rights
granted thereunder will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the
claims sought by us, 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, we have from time to time
received, and may in the future receive, communications from third parties
asserting patents, maskwork rights, or copyrights on certain of our products and
technologies. Although we are 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, our operating
results could suffer. Litigation, which could result in substantial cost to us
and diversion of our resources, may also be necessary to enforce our patents or
other intellectual property rights or to defend us 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 harm our business and operating results. We cannot assure
you that the steps taken by us to protect our intellectual property will be
adequate to prevent misappropriation or that others will not develop competitive
technologies or products.
OUR DOMESTIC AND INTERNATIONAL OPERATIONS ARE SUBJECT TO VARIOUS
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS THAT MAY RESTRICT OUR
OPERATIONS.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals and gases used in quality
and reliability tests of our products and on the facilities leased by us in the
United States and Hong Kong. We no longer produce wafers in our Mountain View
facility and believe that our past activities conformed to all environmental and
land use regulations applicable to our operations. We cannot assure you that
governmental regulations in the United States or Hong Kong will not in the
future impose the need for additional capital equipment or other requirements
upon us or restrict our ability to continue current or planned activities at our
facilities. The adoption of an ordinance or measure that limits our testing or
any failure by us to comply with applicable environmental and land use
regulations in the United States or Hong Kong could subject us to future
liability or could cause our manufacturing operations to be curtailed or
suspended.
In 1993, we acquired the semiconductor manufacturing operations of Teledyne
previously conducted at our Mountain View, California facility. The
semiconductor manufacturing operations conducted by Teledyne Components at the
facility allegedly contaminated the soil and groundwater of the facility and the
groundwater of properties located down-gradient of the facility. Although we
were indemnified by Teledyne as part of the acquisition transaction against,
among other things, any liabilities arising from any such contamination, we
cannot assure you that claims will not be made against us or that such
indemnification will be available or will provide meaningful protection at the
time any such claim is brought. To the extent we become subject to a claim which
is not covered by the indemnity from Teledyne or as to which Teledyne is unable
to provide indemnification, our financial condition or operating results could
suffer.
13
<PAGE> 15
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE THE OWNERSHIP INTERESTS OF
OUR STOCKHOLDERS, CAUSE US TO INCUR DEBT AND ASSUME CONTINGENT LIABILITIES.
As part of our business strategy, we expect to review acquisition prospects
that would complement our current product offerings, enhance our design
capability, or that may otherwise offer growth opportunities. While we have no
current agreements or negotiations underway with respect to any such
acquisitions, we may acquire businesses, products or technologies in the future.
In the event of such future acquisitions, we could:
- - use a significant portion of our available cash, including the cash proceeds
from this offering;
- - issue equity securities which would dilute current stockholders' percentage
ownership;
- - incur substantial debt; or
- - assume contingent liabilities.
Such actions by us could harm our operating results and/or the price of our
common stock. Acquisitions also entail numerous risks, including:
- - difficulties in the assimilation of acquired operations, technologies or
products;
- - unanticipated costs associated with the acquisition;
- - diversion of management's attention from other business concerns;
- - adverse effects on existing business relationships with customers; and
- - potential loss of key employees of acquired organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could harm our business and operating results.
YOU WILL BE RELYING ON THE JUDGMENT OF OUR MANAGEMENT REGARDING OUR USE OF
PROCEEDS.
We have not designated any specific uses for the net proceeds from our sale
of common stock described in this prospectus. Rather, we expect to use the net
proceeds for general corporate purposes, including working capital and potential
acquisitions. Consequently, our management will have significant flexibility in
applying the net proceeds of this offering and will have the ability to change
the application of the proceeds of this offering without stockholder approval.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
All of our outstanding shares are freely tradeable without restriction or
further registration. Affiliates must sell all shares they own in compliance
with the volume and other requirements of Rule 144, except for the holding
period requirements. Our directors and executive officers have agreed that for a
period of 90 days after the date of this prospectus, they will not directly or
indirectly sell any shares of common stock without the consent of Prudential
Securities Incorporated. Sales of substantial amounts of common stock by our
stockholders may have a depressive effect on the market price of our common
stock and could impair our ability to raise capital through the sale of our
equity securities.
14
<PAGE> 16
OUR STOCK PRICE IS EXPECTED TO BE VOLATILE, WHICH COULD ADVERSELY AFFECT AN
INVESTMENT IN OUR COMMON STOCK.
The trading price of our common stock has been and is expected to be
subject to wide fluctuations in response to:
- - quarter-to-quarter variations in our operating results;
- - announcements of new products, strategic relationships or acquisition by us or
our competitors;
- - increases or decreases in wafer capacity;
- - general conditions or cyclicality in the semiconductor industry or the end
markets that we serve;
- - governmental regulations, trade laws and import duties;
- - litigation;
- - new or revised earnings estimates;
- - comments or recommendations issued by analysts who follow us, our competitors
or the semiconductor industry;
- - announcements of technological innovations by us or our competitors;
- - additions or departures of senior management; and
- - other events or factors many of which are beyond our control.
In addition, stock markets have experienced extreme price and trading
volume volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many high technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may cause the market price of our common stock
to decline.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US DUE TO ANTITAKEOVER
PROVISIONS.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by our stockholders. The
rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any shares of preferred
stock that may be issued in the future. While we have no present intention to
issue shares of preferred stock, any issuance of these shares could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock. In addition, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could cause the market value of the common stock to
decline. We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change of control. In November 1998, we implemented a
plan to protect our stockholders' rights in the event of a proposed takeover of
the company. This plan could have the effect of delaying or preventing a change
in control unless the transaction was approved by our board of directors.
15
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about TelCom, including, among
other things:
- Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- General economic and business conditions, both nationally and in our
markets;
- Anticipated trends in our business;
- Existing and future regulations affecting our business;
- Our acquisition opportunities; and
- Other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to TelCom, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds from the sale of the 3,000,000 shares of common stock by
us are estimated to be approximately $64.5 million at an assumed public offering
price of $22.875 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses, or approximately $72.7 million if
the over-allotment option from us is exercised in full. We expect to use the net
proceeds from this offering for general corporate purposes, including working
capital. We may use a portion of the net proceeds to make equity investments or
prepayments to secure access to foundry capacity. In addition, we may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses; however, we currently have no commitments or agreements and are not
involved in any negotiations with respect to any such transactions. Pending use
of the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities. We will not receive any proceeds
from the sale of common stock by the selling stockholder.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been quoted in the Nasdaq National Market under the
symbol "TLCM" since our initial public offering in July 1995. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported in the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $ 5 3/4 $ 4 1/8
Second Quarter............................................ 7 1/2 4
Third Quarter............................................. 16 7/8 7 1/2
Fourth Quarter............................................ 13 1/2 6 13/16
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $11 11/16 $ 7 3/4
Second Quarter............................................ 11 11/16 3 5/8
Third Quarter............................................. 5 1/4 2 3/8
Fourth Quarter............................................ 5 7/8 1 1/2
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $ 5 13/16 $ 3 1/2
Second Quarter............................................ 10 1/4 4 1/8
Third Quarter............................................. 13 15/16 9 5/16
Fourth Quarter............................................ 22 1/8 7 7/8
FISCAL YEAR ENDING DECEMBER 31, 2000
First Quarter (through February 18, 2000)................. $27 3/4 $18
</TABLE>
On February 18, 2000, the reported last sale price of our common stock in
the Nasdaq National Market was $23 3/16 per share. As of January 31, 2000, there
were approximately 4,000 beneficial holders of our common stock.
We have never declared or paid cash dividends. We currently intend to
retain any earnings for use in our business and do not anticipate declaring or
paying any cash dividends on our capital stock in the near future.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- - on an actual basis and
- - on an as adjusted basis to give effect to the receipt of our estimated net
proceeds from the sale of 3,000,000 shares of common stock by us at an assumed
public offering price of $22.875 per share less underwriting discounts and
estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Notes payable and other long-term obligations............... $ -- $ --
-------- --------
Stockholders' equity:
Preferred Stock: $0.001 par value; authorized: 5,000,000; no
shares issued and outstanding............................. -- --
Common Stock: $0.001 par value; 30,000,000 shares
authorized; 17,434,407 shares issued and 14,315,107 shares
outstanding, actual; 20,434,407 shares issued and
17,315,107 shares outstanding, as adjusted................ 17 20
Additional paid-in capital.................................. 38,644 103,113
Treasury stock (3,119,300 shares at cost)................... (12,697) (12,697)
Accumulated other comprehensive income...................... 1,018 1,018
Retained earnings........................................... 11,600 11,600
-------- --------
Total stockholders' equity.................................. 38,582 103,054
--------
Total capitalization........................................ $ 38,582 $103,054
======== ========
</TABLE>
- -------------------------
The above table excludes the following shares, at December 31, 1999:
- - 3,106,115 shares of common stock issuable upon exercise of outstanding stock
options with a weighted average exercise price of approximately $5.00 per
share;
- - 943,388 shares for common stock reserved for future issuance under our stock
option plans;
- - 419,280 shares of common stock reserved for sale under our employee stock
purchase plan; and
- - 378,500 shares that the underwriters may purchase if they exercise their
over-allotment option from us.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto included elsewhere in this prospectus or incorporated herein by
reference. The consolidated statement of operations data set forth below for the
years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet
data as of December 31, 1998 and 1999 have been derived from our audited
financial statements included elsewhere in this prospectus. The consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 have
been derived from our audited financial statements not included in this
prospectus. The historical results are not necessarily indicative of results to
be expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $39,004 $37,762 $55,435 $54,263 $57,322
Cost of sales.................................... 24,680 26,801 31,175 34,896 31,626
------- ------- ------- ------- -------
Gross profit................................ 14,324 10,961 24,260 19,367 25,696
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 2,649 4,271 5,455 5,588 6,794
Selling, general and administrative............ 7,115 7,713 9,530 9,496 10,007
Loss on foundry investment..................... -- -- 8,264 -- --
Restructuring and other........................ -- -- -- 7,258 269
------- ------- ------- ------- -------
Total operating expenses.................... 9,764 11,984 23,249 22,342 17,070
------- ------- ------- ------- -------
Income (loss) from operations.................... 4,560 (1,023) 1,011 (2,975) 8,626
Interest income (expense), net................... 299 162 (288) 386 385
Gain on sale of investment....................... -- -- -- -- 5,819
------- ------- ------- ------- -------
Income (loss) before income taxes................ 4,859 (861) 723 (2,589) 14,830
Provision (benefit) for income taxes............. 1,215 (233) 2,427 958 1,701
------- ------- ------- ------- -------
Net income (loss)................................ $ 3,644 $ (628) $(1,704) $(3,547) $13,129
======= ======= ======= ======= =======
Basic per share data:
Net income (loss)................................ $ 0.43 $ (0.04) $ (0.11) $ (0.22) $ 0.92
======= ======= ======= ======= =======
Number of shares used to compute basic income
(loss) per share............................... 8,436 15,612 16,184 15,933 14,302
======= ======= ======= ======= =======
Diluted per share data:
Net income (loss)................................ $ 0.23 $ (0.04) $ (0.11) $ (0.22) $ 0.84
======= ======= ======= ======= =======
Number of shares used to compute diluted income
(loss) per share............................... 15,703 15,612 16,184 15,933 15,676
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments.................. $15,849 $12,761 $17,110 $14,059 $20,699
Working capital.................................. 29,356 23,760 24,681 17,108 29,191
Total assets..................................... 49,805 58,012 53,684 41,166 45,941
Notes payable and other long term obligations.... 3,328 10,047 3,462 2,678 --
Total stockholders' equity....................... 37,059 36,926 36,421 25,918 38,582
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and our financial statements included in
this prospectus and the related notes. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors including the risks discussed in Risk Factors and elsewhere
in this prospectus.
OVERVIEW
We design, develop and sell a variety of analog and mixed-signal integrated
circuits. We were founded in December 1993 as the result of a management buyout
of the Teledyne Components Division of Teledyne Industries Inc. As part of the
buyout, we acquired a five-inch wafer fabrication facility in which we
manufactured a portfolio of second source analog and mixed-signal products for
the industrial, communications, computer, automotive and medical markets. Over
the last several years, we have been transitioning our product portfolio away
from the legacy second source products associated with the Teledyne Division to
higher value proprietary solutions. As a result, our primary emphasis is
developing proprietary products, but we continue to offer second source products
to enhance our total product portfolio. Average selling prices for our
proprietary products have generally tended to decline at a slower rate than have
those for our second source products, which are more susceptible to competitive
pricing pressures. We generally recognize higher gross margins on our
proprietary products than on our second source products.
As we 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, we
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, Exar and PMC-Sierra
who also invested in IC WORKS at the same time. In return for this investment,
we 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, we recorded a loss of $8.3 million. In the fourth
quarter of 1998, we also terminated our operating agreement with IC WORKS.
During the first quarter of 1999, Cypress Semiconductor, Inc. acquired IC WORKS
and we received shares of Cypress Semiconductor in exchange for our shares of IC
WORKS. All shares have been sold by us except for approximately 70,614 shares
which are being held in escrow by Cypress Semiconductor until the second quarter
of 2000. Consequently, we 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 are valued at $2.3
million, which represents the fair market value of $32 per share of Cypress
Semiconductor common stock on December 31, 1999. The shares are presented as
short term investments and are accounted for as an available for sale security
in accordance with FAS 115. We anticipate that we will sell the remaining shares
of Cypress Semiconductor stock in the second quarter of 2000 and, at December
31, 1999, we recorded as a separate component of equity an unrealized gain on
such shares of approximately $1.5 million.
In August 1998, we announced our plans to shut down our wafer fabrication
facility in Mountain View, California and use third party foundries for all of
our 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, we recognized restructuring and
other charges of $7.6 million. Historically, the majority of the activity of our
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 our wafer fabrication facility to outside
foundries.
20
<PAGE> 22
All of these historical costs for supporting the fabrication facility and
the transition activities were charged to cost of sales as overhead associated
with the manufacture of the product. As we continue 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, we purchased 1.3 million shares of common stock of Silicon
Aquarius, Inc. for $3.0 million. We have an option to purchase an additional 1.7
million shares for $4.0 million on or before October 7, 2000. If we exercise
this option, we 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, we announced a strategic relationship
with ON Semiconductor which was then a part of Motorola. The purpose of this
relationship is to enable each company to augment their existing product lines
by selectively releasing and private labeling a number of the other company's
products each quarter. This agreement is expected to generate additional
revenues for us through the sale of our products to ON Semiconductor for resale
as well as the purchase and resale of ON Semiconductor products by our sales
force. We generally expect that ON Semiconductor will sell our products into
markets that we do not currently serve such as the automotive and consumer
appliance markets.
Revenue from product sales to customers other than domestic distributors is
recognized upon shipment. Sales to domestic distributors are generally subject
to agreements allowing certain rights of return and price protection for unsold
merchandise held by each distributor. We defer recognition of revenue and
related gross margin on the sales to domestic distributors until the product is
sold by these distributors.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statement of operations
data as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 56.3 64.3 55.2
----- ----- -----
Gross margin................................................ 43.7 35.7 44.8
----- ----- -----
Operating expenses:
Research and development.................................. 9.8 10.3 11.9
Selling, general and administrative....................... 17.2 17.5 17.5
Loss on foundry investment................................ 14.9 -- --
Restructuring and other................................... -- 13.4 0.4
----- ----- -----
Total operating expenses.................................... 41.9 41.2 29.8
----- ----- -----
Income (loss) from operations............................... 1.8 (5.5) 15.0
Interest income (expense), net.............................. (0.5) 0.7 0.7
Gain on sale of investment.................................. -- -- 10.2
----- ----- -----
Income (loss) before taxes.................................. 1.3 (4.8) 25.9
Provision (benefit) for income taxes........................ 4.4 1.7 3.0
----- ----- -----
Net income (loss)........................................... (3.1)% (6.5)% 22.9%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Sales. Net sales in 1999 were $57.3 million, an increase of $3.0
million, or 5.6%, compared to $54.3 million in 1998. During 1998, the
semiconductor industry was characterized by overcapacity which caused prices to
erode rapidly and competition to increase significantly, especially during the
second half of
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<PAGE> 23
the year. The overall market improved significantly in 1999 and our net sales
increased primarily due to revenue generated from new products introduced after
the third quarter of 1997. Our largest OEM customer, Motorola, accounted for 34%
of our net sales for 1999 compared to 35% of our net sales for 1998. Three other
OEM customers, Compaq Computer, Qualcomm and Lucent Technologies, accounted for
9% of our net sales for 1999, compared to 7% of our net sales for 1998.
Gross Margin. Gross margin improved to 44.8% in 1999 from 35.7% in 1998.
The improvement in gross margin was caused by reduced manufacturing costs and
improved volumes. This was primarily caused by the lower cost associated with
utilizing wafer foundries in 1999 compared to the fabrication of wafers in our
wafer fabrication facility in 1998. Our ability to increase gross margins will
depend on the successful introduction of our new proprietary products and
controlling our manufacturing costs. Future wafer costs will depend on the
volume and availability of wafers from our wafer foundries.
Research and Development Expenses. Research and development expenses were
$6.8 million, or 11.9% of net sales, in 1999, compared to $5.6 million, or 10.3%
of net sales, in 1998. The increase in research and development expenses was
primarily attributable to an increase in mask and wafer costs associated with
development of new products. We expect research and development expenses 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 were $10.0 million, or 17.5% of net sales, in 1999
compared to $9.5 million, or 17.5% of net sales, in 1998. The increase in
selling, general and administration expenses was primarily due to increases in
salary and incentive payments. We expect selling, general and administrative
expenses generally to increase in absolute dollars in the future periods
although such expenses may fluctuate as a percentage of sales.
Restructuring and Other Charges. During 1999, we recognized restructuring
and other charges of $0.3 million compared to $7.3 million in 1998. The
restructuring cost in 1999 was primarily additional employee severance costs
associated with the closure of our wafer fabrication facility. The restructuring
costs in 1998 for our fabrication facility were $6.5 million, while other
one-time charges totaled $0.8 million. We also terminated our lease with
Teledyne Industries and now sublease the same facility from another party. The
new sublease provides for a reduction in the square footage currently occupied
by us by June 1, 2000 which will eliminate the idle facility. As a result, we
reversed idle facility costs of $1.0 million previously accrued in 1998, leaving
a remaining balance of $0.2 million that will be amortized through May 2000.
Also, in 1999 we recorded a charge of $1.0 million for additional write down of
wafer fabrication equipment.
Interest Income (Expense), Net. Net interest income was $.4 million in each
of 1999 and 1998, reflecting lower interest expense associated with equipment
financing and lower interest income due to lower cash balances from repurchasing
our common stock.
Gain on Sale of Investment. During the first quarter of 1999, IC WORKS
merged with Cypress Semiconductor and we received shares of Cypress
Semiconductor in exchange for our shares of IC WORKS. This transaction resulted
in a gain of $5.0 million. Subsequently, we sold a portion of the Cypress
Semiconductor shares and recognized an additional gain of $0.8 million.
Income Taxes. We recorded an income tax provision of $1.7 million in 1999
at an effective rate of 11% compared to $1.0 million in 1998 at an effective
rate of negative 37%. The 1999 tax rate is effected by the release of fully
reserved deferred tax assets due to the utilization of substantially all of our
restructuring reserves. The 1998 effective rate was a result of the non
deductibility of certain foundry investment losses and a tax charge relating to
the repatriation of certain of our foreign subsidiaries undistributed earnings,
offset by an increase in the 1998 valuation allowance relating to our net
deferred tax assets.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales in 1998 were $54.3 million, a decrease of $1.1
million, or 2.0%, compared to $55.4 million in 1997. The decrease in net sales
was primarily due to lower average selling prices caused by a
22
<PAGE> 24
change in product mix and a change by Motorola from a device which had a higher
average sales price to a device with a lower average sales price for the same
application. Net sales in 1998 for the United States, Asia and Europe accounted
for 35%, 34% and 31% of our sales, respectively, compared to 35%, 33%, and 32%
of our sales, respectively, in 1997. Sales to our three largest OEM customers,
Motorola, Intel and Compaq were $18.8 million, or 35%, $4.6 million, or 9%, and
$2.4 million, or 4%, respectively, of net sales in 1998 compared to $16.5
million, or 30%, $1.5 million, or 3% and $4.1 million, or 7%, respectively, of
net sales in 1997.
Gross Margin. Gross margin decreased to 35.7% in 1998 from 43.7% in 1997.
The decrease in gross margin was caused by decreased production volume in our
wafer fabrication facility due to lower demand, a decrease in unit selling
prices for products sold to Motorola, and an additional charge related to
surplus inventory related to the closure of our wafer fabrication facility.
Research and Development Expenses. Research and development expenses were
$5.6 million, or 10.3% of net sales, in 1998, compared to $5.5 million, or 9.8%
of net sales, in 1997. The increase in research and development expenses, in
absolute dollars, was primarily attributable to an increase in design engineers
and product engineers and the costs associated with the purchase and maintenance
of computer-aided design systems for design engineers.
Loss on Foundry Investment. In 1997, we recorded an impairment loss of $8.3
million for our IC WORKS foundry investment. This loss resulted from the loss of
economic viability of the foundry investment and consisted of $3.0 million write
down of our preferred stock investment, $5.2 million impairment write down of
equipment and $0.1 million of other related costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $9.5 million, or 17.5% of net sales, in 1998
compared to $9.5 million, or 17.2% of net sales, in 1997.
Restructuring and Other Charges. During 1998, we recognized restructuring
and other charges of $7.3 million. Restructuring costs for our Mountain View,
California fabrication facility were $6.5 million, while other one-time charges
totaled $.8 million. The restructuring charge includes a write down of
fabrication equipment of $4.5 million, costs associated with idle facility space
of $1.4 million, employee severance costs of $.5 million and clean up and
environmental related charges of $.1 million. The other one time charges
included the write down of $.4 million of certain test equipment in Hong Kong,
the write down of certain equipment in Mountain View totaling $.3 million, and
$.3 million related to licensing and royalty costs, offset by a decrease of $.2
million in amounts previously accrued due to a change in our employee sabbatical
policy.
Interest Income (Expense), Net. Net interest income increased from an
expense of $.2 million in 1997 to an income of $.4 million in 1998, reflecting
lower interest expense associated with equipment financing.
Income Taxes. We recorded an income tax provision of $1.0 million in 1998
at an effective rate of negative 37% compared to $2.4 million in 1997 at an
effective rate of 336%. The decrease in the effective tax rate is due to the non
deductibility of certain foundry investment losses and a tax charge relating to
the repatriation of certain of our foreign subsidiaries undistributed earnings,
offset by an increase in the 1998 valuation allowance relating to our net
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
In 1999, we generated approximately $7.2 million of cash from operating
activities primarily from net income of $13.1 million offset by the non cash
gain on sale of investments of $5.8 million, depreciation of $2.7 million and a
net decrease of $2.8 million in working capital items. The net decrease in
working capital primarily reflects increases in accounts receivable of $1.4
million, decreases in inventory of $.5 million, accounts payable of $.4 million,
accrued liabilities of $1.0 million and deferred income taxes of $.3 million. We
also generated $3.6 million of cash from investing activities primarily
reflecting net proceeds from the sale of investments of $6.7 million, the sale
of equipment of $1.5 million, offset by purchases of equipment of $1.6 million
and an investment in Silicon Aquarius of $3.0 million. We expect capital
expenditures of
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<PAGE> 25
$4.0 million in 2000. As of December 31, 1999, we had no material commitments
related to such expenditures.
In 1999, we used $6.5 million of cash for financing activities primarily
reflecting the repurchase of our common stock of $4.8 million, the payment of
notes payable and other long term obligations of $3.7 million, offset by
proceeds from the issuance of common stock of $2.0 million from the sale of
stock through our employee stock option and stock purchase plans.
In 1998, we generated approximately $9.9 million of cash from operating
activities primarily from income before restructuring and other charges,
depreciation of $5.2 million and a net increase of $.9 million in working
capital items. The net increase in working capital primarily reflects decreases
in accounts receivable of $.5 million, inventory of $1.9 million, accounts
payable of $.2 million, accrued liabilities of $.5 million and deferred income
taxes of $.8 million. We also invested or used $5.8 million to fund capital
equipment and leasehold improvements in 1998. We also used $9.6 million of cash
to repurchase our common stock for $7.9 million and to pay down notes payable by
$2.6 million. These were partially offset by cash generated from the sale of
stock through our employee stock option and stock purchase plans of $1.0
million.
In 1997, we generated approximately $11.9 million from operating
activities, primarily from income before the loss on foundry investment,
depreciation of $4.1 million and a net increase of $1.2 million in working
capital items. The net increase in working capital primarily reflects a decrease
of income tax receivable of $1.4 million, due to collection of tax refunds
recorded in the prior year, an increase in accounts payable of $1.4 million, an
increase in taxes payable of $1.8 million, offset by an increase in accounts
receivable from higher fourth quarter sales of $2.2 million, and an increase in
inventory of $1.8 million. In the fourth quarter of 1997, we sold the $10.4
million of equipment at IC WORKS for $5.2 million and invested an additional
$1.5 million in IC WORKS. We invested $7.6 million in capital equipment and
leasehold improvements in 1997. We financed $3.3 million of this investment
through notes payable and paid $10.8 million in principal payments of which $7.7
million was for equipment sold as part of the IC WORKS agreement and $3.1
million was principal payments on other equipment financing for prior years.
On February 1, 2000, we invested $1.6 million for approximately a 4% equity
interest in the parent of CSMC.
We believe that the net proceeds from this offering, together with our
existing cash and cash equivalents, expected cash flow from operations and other
existing financing sources will be sufficient to support our operating and
capital needs for at least the next 12 months. We expect from time to time, to
evaluate potential acquisitions and equity investments complementary to our
market strategy, including possible investments in wafer fabrication foundries.
To the extent we pursue such transactions, we could require additional equity or
debt financing to fund such activities or our working capital requirements in
the event of an industry downturn or an unexpected adverse change in our
business operations. To the extent we require additional capital, we cannot
assure you that we will be able to obtain such financing on terms favorable to
us, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. We
believe that adoption of this pronouncement will have no material impact on our
final position and results of operations. In December 1999, the SEC issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. We believe that adopting
SAB 101 will not have a material impact on our financial position and results of
operations.
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<PAGE> 26
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 our 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, we incurred costs of $.1 million and $.3 million related
to year 2000 issues. As of January 31, 2000, we have not encountered any
problems associated with year 2000 issues and we continue to review all business
activities for any potential issues. We cannot assure you that we have
identified all future issues that may be associated with year 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio.
We place 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 our investment portfolio, we do not expect any material loss with respect to
our investment portfolio. A 10% move in interest rates at December 31, 1999
would have an immaterial effect on our pre-tax earnings and the carrying value
of our cash and cash equivalents over the next fiscal year.
Certain of our sales, cost of manufacturing and marketing are transacted in
local currencies. As a result, our international results of operations are
subject to foreign exchange rate fluctuations. We do not currently hedge against
foreign currency rate fluctuations. Gains and losses from such fluctuations have
not been material to our consolidated results of operations. A 10% move in local
currencies against the U.S. dollar as of December 31, 1999 would have an
immaterial effect on our pretax earnings over the next fiscal year.
25
<PAGE> 27
BUSINESS
We design, develop and market a diversified portfolio of high-performance
analog and mixed-signal integrated circuits for a wide variety of applications
in the wireless communications, computing, networking and industrial markets.
Analog integrated circuits are used to measure or control variables that have an
infinite number of values or states such as light, temperature, pressure, weight
or speed, and are required to interface between digital electronics systems and
a variety of every day applications. Mixed-signal integrated circuits
incorporate both analog and digital functionality on a single integrated
circuit. We offer a diversified portfolio of over 600 analog and mixed-signal
integrated circuit products for a wide range of market applications.
STRATEGY
Our objective is to be a leading provider of high performance analog and
mixed-signal circuits for a wide variety of applications in high growth markets.
To achieve this objective, we have adopted the following strategies:
Customer Driven Marketing and Product Development. We seek to identify
customers that are leaders in each of our targeted market segments, work with
these customers to understand their analog and mixed-signal device applications
and needs, and develop for these customers unique product solutions that offer a
combination of high performance, increased functionality and cost savings. We
believe that working with market leaders, such as Motorola and Qualcomm in the
cellular telephone market and Compaq Computer and Intel in the computer market,
results in early adoption of our products by such customers and maximizes
product sales. In working with market leaders, we direct our efforts toward
products that have the potential to become industry standard products, since
other industry participants often tend to adopt products used by market leaders.
After penetrating both market leaders and other industry participants, our
strategy is to use our internal sales force in combination with our distribution
network to offer the same products to potential customers with similar needs in
other industries. We believe that over a period of time, the execution of this
strategy will also enable us to broaden our customer base and reduce our
dependence on any single customer.
Build Product Families with a Focus on Proprietary Products. Our product
strategy is to address an increasing spectrum of customer applications by
introducing proprietary and selected second source products within our principal
product families. We focus on providing customer value by offering products that
offer both higher performance as well as higher levels of integration. Our
current products comprise four principal product families: power management,
thermal management, data converter and linear products. We introduced 72 new
products in 1999, including 12 from ON Semiconductor, and 30 new products in
1998. In the fourth quarter of 1999, approximately 35% or our sales were from
new products introduced after the third quarter of 1997. Our new products
increase the range of performance and capabilities of our product portfolio and
address a broad spectrum of customer applications. By providing a range of
unique product solutions to a variety of customer applications, we believe that
we provide additional value to customers in our target markets.
Maintain Technological Leadership. We seek to utilize our design talent and
our process expertise to produce feature rich analog and mixed-signal circuits
at competitive prices. We have built a team of experienced analog design
engineers who combine their industry expertise with the latest computer-aided
design technology to design products to meet exacting customer requirements in a
timely manner. We are continually making use of a wide variety of manufacturing
technologies from our foundry partners to enable production of the more
sophisticated devices being designed by our designers.
Pursue Strategic Relationships and Selective Acquisitions. We plan to
selectively pursue strategic relationships to augment our product portfolio,
expand our customer base, increase our design capability or secure foundry
capacity. As part of this strategy, we entered into a product augmentation
agreement with ON Semiconductor in 1999 to expand our offering of high and low
voltage products in our power management product family. We also invested in
Silicon Aquarius to obtain access to advanced standalone and embedded memory
technology to help us further penetrate the networking market. From time to time
we have also
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<PAGE> 28
evaluated acquisitions of design center expertise or complementary product
lines. In the future we may also pursue investments or other strategic
investments to secure access to additional foundry capacity.
MARKETS
Our products are used in a broad range of applications within the following
markets:
WIRELESS COMMUNICATIONS MARKET. The proliferation of battery operated
communications devices such as cellular telephones, pocket pagers and personal
two-way radios has created a demand for analog and mixed-signal semiconductor
products that monitor, control and reduce power consumption. We offer a range of
analog and mixed-signal circuits to address the demands of these products for
power distribution, precision power regulation and longer battery life. These
circuits perform functions such as battery full/low charge detection, DC to DC
converters for converting from one voltage to another, and providing regulated
power to other circuit products in the system, and drivers for liquid crystal
displays, including backlighting. These devices are offered in miniature
packages resulting in savings in space and weight. Our family of high current
metal oxide semiconductor field effect transistor, or MOSFET, drivers are used
in a wide variety of applications including AC/DC and DC/DC power supplies.
Sales to customers in the wireless communications market accounted for 52.9% of
our sales in 1999 and 45.1% of our sales in 1998.
NETWORKING MARKET. The networking market is a target market for us that we
believe offers significant opportunities for our thermal and power management
solutions. In addition, our strategic investment in Silicon Aquarius is
expected, over time, to increase opportunities for embedded memory solutions as
well as produce proprietary standard product offerings that utilize Silicon
Aquarius' intellectual property. Sales to customers in the networking market
accounted for 3.7% of our sales in 1999 and 2.3% of our sales in 1998.
COMPUTER MARKET. The rapid adoption of networked PCs, workstations and
servers and the deployment of machines using high performance microprocessors
has given rise to the need for reliable, precision temperature monitor and
control products to protect high performance systems packaged in ever smaller
enclosures. We have patented solid-state temperature sensor technology that is
used on a number of different products, in our smart sensor product family, to
provide precision temperature detection and control. These products are used,
for instance, to control shutdown of equipment with no loss of data or
destruction of critical or expensive components. This trend, to protect critical
components by replacing older solutions with high performance analog and
mixed-signal semiconductor products, is extending into notebook computers,
servers and PC peripherals. The reliability and increased functionality of
semiconductor products make them preferable to older solutions. This market
sector also uses circuits from our power management portfolio. We make a variety
of analog and mixed-signal products for use in laptop/notebook computers,
palmtop computers, personal digital assistants, disk drives, pocket organizers,
facsimile modems and CD-ROM products. These products offer low operating current
and are used in a wide variety of systems applications including power
conversion and voltage detection. Sales to customers in the computer market
accounted for 13.3% of our sales in 1999 and 20.1% of our sales in 1998.
INDUSTRIAL MARKET. Increased demand for precision and reliability has
resulted in higher semiconductor content in industrial instruments and
manufacturing equipment. We offer a broad range of analog to digital converters
that address the measurement of DC and AC voltages and currents, resistance and
capacitance. These devices are commonly used in digital multi-meters, panel
meters, temperature meters, digital scales and digital oscilloscopes. In
addition, we offer precision analog to digital converter products that can be
used in a variety of industrial, process control and consumer applications.
Sales to customers in the industrial market accounted for 30.1% of our sales in
1999 and 32.2% of our sales in 1998.
PRODUCTS
We offer a diversified portfolio of over 600 analog and mixed-signal
integrated circuit products for a wide range of market applications. Our
internal development activities focus on technology, high quality and fast time
to market. Our products are currently comprised of four principal product
families:
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<PAGE> 29
POWER MANAGEMENT PRODUCTS. We offer analog and mixed-signal circuits that
provide a wide variety of system functions, including power regulation, power
conversion and voltage detection. These products include low drop-out
regulators, DC to DC converters, voltage detectors (including microprocessor
supervisory circuits) and MOSFET drivers. Our broad line of complementary metal
oxide semiconductor, or CMOS, LDO (low drop-out) regulators are designed to be
used wherever there is a need to provide efficient power consumption to maximize
battery life.
THERMAL MANAGEMENT PRODUCTS. The increasing trend towards lightweight, high
performance PCs and other products has necessitated smaller enclosures and
higher performance systems, resulting in a significant increase in the amount of
heat generated within such products. Our range of solid state thermal management
products are designed to monitor and control fault conditions and solve system
level thermal management problems. We offer a variety of thermal sensing and
control products that provide the customer the ability to protect advanced
microprocessor-based systems by monitoring temperature and controlling system
operation. Our thermal management product family offers a variety of circuit
configurations and features.
DATA CONVERTER PRODUCTS. Our data converter products include both system
and display type analog-to-digital (A/D) converters. We are expanding our
position as a supplier of A/D converters by introducing devices with higher
accuracy (resolution) and increased functionality. We are also developing
products that perform digital-to-analog functions (D/A). We are also developing
relationships with customers in the field of portable test equipment and process
control applications.
LINEAR PRODUCTS. We produce operational amplifiers, voltage references, and
comparators that act as linear building blocks in a wide range of electronic
systems. We have developed a new family of precision low voltage CMOS linear
products that are produced in small packages that make them well suited for
portable, battery-operated equipment.
DESIGN AND PROCESS TECHNOLOGY
DESIGN TECHNOLOGY. The design of analog and mixed-signal circuits involves
the design and interconnection of a variety of circuits and features to achieve
the desired function. The specific placement and interrelationship of these
circuits is both complex and critical to the performance of the analog circuit.
Computer-aided design and engineering tools, which have proliferated and
enhanced the design effort for digital integrated circuits, have proven to be
useful but less effective for analog and mixed-signal devices. Consequently,
analog and mixed-signal circuit design has traditionally been highly dependent
on the skills and expertise of individual design engineers. Our design engineers
principally focus on developing next generation standard products, using
computer simulation models to design products that both meet the high
performance characteristics required by customers and adjust for process and
temperature variations. Our new product development strategy emphasizes a broad
line of standard products that are based on customer input and needs. We are
currently developing products to further expand the number of offerings within
each of the power management, thermal management, data converter and linear
product families.
PROCESS TECHNOLOGY. We design products utilizing CMOS process technology.
Through our product augmentation agreement with ON Semiconductor, we also offer
products that are based upon Bipolar and BICMOS technologies. The process
technology used for a particular product is driven by the product specifications
and customer requirements. CMOS technology is the technology best suited for low
power, battery operated applications and has the advantages of low power
consumption and high packing density, that enables the combination of analog and
digital circuits on the same chip. The majority of our current products utilize
some version of CMOS.
SALES AND MARKETING
Our products are sold to over 6,500 end-user customers throughout the
world, either directly or through our distributor network. Product sales in
North America, Asia and Europe accounted for 30%, 41% and 29%, respectively, of
our net sales for 1999, and 35%, 34% and 31%, respectively, of our net sales for
1998. Our
28
<PAGE> 30
largest OEM customer, Motorola, accounted for 34% of our net sales for 1999
compared to 35% of our net sales for 1998. We anticipate that we will continue
to be dependent on a limited number of customers and distributors for a
significant portion of our net sales. The reduction, delay or cancellation of
orders from one or more significant customers for any reason could significantly
harm our operating results.
Some of our major customers in each of our target markets include the
following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
WIRELESS
COMMUNICATIONS NETWORKING COMPUTER INDUSTRIAL
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Motorola Lucent Compaq NCR
- ------------------------------------------------------------------------------------------------------
Qualcomm Delta Seagate Atkins Technical
- ------------------------------------------------------------------------------------------------------
Samsung 3Com Intel
- ------------------------------------------------------------------------------------------------------
Pantech Cisco IBM
- ------------------------------------------------------------------------------------------------------
Hanwha Charles Industries Dell
- ------------------------------------------------------------------------------------------------------
LG
- ------------------------------------------------------------------------------------------------------
SK Teletech
- ------------------------------------------------------------------------------------------------------
</TABLE>
We sell our products through a direct sales staff and a worldwide network
of independent sales representatives and distributors. Our direct sales staff
works with customers that are industry leaders to determine future system
requirements and interfaces with the customers design engineers to achieve
solutions that meet their performance needs. They also manage our network of
sales representatives and distributors. We sell our products in Europe and Asia
through our direct sales staff and various, independent stocking
representative/distributor firms. The stocking representative/distributor firms
may buy and stock our products for resale or act as our agent in arranging for
direct sales from us to an OEM customer. Our direct sales organization provides
direction and support to all independent sales representatives and distributors.
We currently utilize independent sales representative firms at various
locations in the United States and Canada. We also sell our products through
national distributors. Sales through distributors accounted for 39% net sales in
1999 and 38% of net sales in 1998. Sales through Future Electronics, our largest
national distributor, accounted for 12% of our net sales in 1999 compared to 11%
of our net sales in 1998. Consistent with standard industry practice, the
distributors are entitled to certain price rebates and are allowed to return to
us a portion of the products purchased by them. Our distributors sell
competitors' products and are not within our control. Loss of one or more of our
current distributors or disruption in our sales and distribution channels could
seriously harm our business and operating results.
We have contracts with all of our distributors, the material terms of which
typically include the following: (a) the distributor is appointed as a
non-exclusive authorized distributor for a designated territory, (b) the
distributor may return up to 5-10% of its net sales in the prior 6-12 month
period as a credit against a new order of equal or greater amount of product,
(c) the distributor is obligated to meet certain information reporting
requirements, (d) the term of the contract is one year and is automatically
renewable for one year periods and (e) the contract may be terminated at any
time by either party upon 30 days' written notice. We warrant that our products
are free from defects in workmanship and materials for one year and that they
meet the published specifications. Warranty expenses to date have been nominal.
MANUFACTURING
Until February 1999, we produced the majority of our wafers at our
manufacturing facility in Mountain View, California. From 1993 to 1998, we
believed that our in-house wafer fabrication facility provided a
29
<PAGE> 31
competitive advantage because it facilitated a close collaboration between our
design and process engineers, provided us control over our wafer supply and
offered us the potential for lower manufacturing costs and accelerated new
product introduction. By early 1998, market conditions had changed significantly
resulting in outside foundries willing to run non-standard processes and market
prices below our internal cost to manufacture. During this time, many of our new
products were being designed using advanced process technology that could not be
accommodated by our wafer fabrication facility. As a result, in August 1998, we
announced plans to close our wafer fabrication facility and use third party
foundries for all of our wafer fabrication. In 1998, we transferred all wafer
fabrication to foundries and our Mountain View wafer fabrication facility was
closed in January 1999.
We utilize CMOS process technology that is tailored to meet our product
specifications and customer requirements. We purchase wafers from three
foundries. To help assure wafer supply, we purchased approximately a 4% equity
position in the parent company of one of our foundries, CSMC. Market conditions
could result in wafers being in short supply and prevent us from having adequate
supply to meet our customer requirements. We cannot assure you that we will have
the ability to acquire all the wafers we need.
The wafers are sent to our wholly-owned subsidiary in Hong Kong which tests
the individual die in wafer form, and distributes them to contract assembly
houses, primarily in Malaysia and Thailand, to be packaged. Upon completion of
the packaging operation, the units are returned to TelCom Hong Kong for final
testing in assembled form and are then shipped to customers worldwide. The Hong
Kong facility, which is leased by us, is approximately 30,000 square feet and is
presently testing approximately ten million units per month.
We design and manufacture our own test equipment that can test both the
individual die in wafer form and the finished assembled unit. We believe the
cost of our in-house tester is substantially less than the cost of purchasing an
equivalent tester from an outside vendor. In addition to the cost advantages, we
can also standardize our operations on one tester type and can therefore upgrade
tester capability more easily than if we had purchased different testers from
more than one vendor. We believe we are better able to meet our internal demand
for test capacity by building our own testers because we are not subject to long
lead times from outside vendors in times of rising demand for such equipment. We
could purchase testers from outside vendors if we experienced problems in
producing our own testers, but such equipment would be more costly.
A large portion of our costs of manufacturing is relatively fixed, and,
consequently, our operating results are volume sensitive. A reduction in
manufacturing yields or delays in product shipments would impact our operating
results unfavorably. We have from time to time experienced lower than expected
production yields, which have delayed product shipments and adversely affected
gross margins. We cannot assure you that we will be able to maintain acceptable
manufacturing yields in the future.
RESEARCH AND DEVELOPMENT
Our ability to compete successfully will depend substantially on our
ability to define, design, develop and introduce on a timely basis new products
offering design or technology innovations. Research and development in the
analog and mixed-signal integrated circuit industry is characterized primarily
by circuit design and product engineering that enables new functionality
(improved performance) or higher integration (bundling of functionality on one
chip). Our research and development efforts are also directed at improving
process technologies, reducing the cost of existing manufacturing processes,
utilizing new process capabilities to manufacture new products and adding new
features to existing products. With respect to more established products, our
research and development efforts also include product redesign, shrinkage of
device size and reduction of mask steps to improve yields per wafer and reduce
per device costs.
In 1997, 1998 and 1999, we spent approximately $5.5 million, $5.6 million
and $6.8 million, respectively, on research and development. We expect that we
will continue to invest substantial funds in research and development
activities. As of December 31, 1999, we had 36 employees engaged in research and
development. Our research and development efforts are dependent upon attracting
and retaining qualified analog and mixed-signal design engineers. We also
utilize independent contractors for certain research and development projects.
30
<PAGE> 32
INTELLECTUAL PROPERTY
Our success can be influenced by our ability to obtain patents and licenses
and to preserve other intellectual property rights covering our manufacturing
processes, products and development and testing tools. We seek patent protection
for those inventions and technologies for which we believe such protection is
suitable and is likely to provide a competitive advantage to us. We currently
hold 28 United States patents on semiconductor devices and methods with various
expiration dates, none earlier than May 2003. We have applications for six
United States patents currently pending. We also hold one foreign patent. The
process of seeking patent protection can be long and expensive and we cannot
assure you that our 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 us. We 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. We cannot assure you
that our competitors will not independently develop or patent substantially
equivalent or superior technologies.
Although we are not currently a party to any material litigation, the
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. We cannot assure you that any patent
owned by us will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the
claims sought by us, 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, we have from time to time
received, and may in the future receive, communications from third parties
asserting patents, maskwork rights, or copyrights on certain of our products and
technologies. Although we are 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 relating to such intellectual property was not available on
commercially reasonable terms, our operating results could suffer. Litigation,
which could result in substantial cost to us and diversion of our resources, may
also be necessary to enforce our patents or other intellectual property rights
or to defend us 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 seriously harm
our business and operating results. We cannot assure you that the steps taken by
us to protect our intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products.
COMPETITION
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the analog and
mixed-signal semiconductor markets include:
- - product features, performance and price;
- - timing of new product introductions;
- - availability of advanced process technology;
- - availability of adequate manufacturing capacity;
- - level of integration;
- - emergence of new computer standards and other customer systems;
- - product quality; and
- - customer support.
We believe that we compete favorably in each of these areas.
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<PAGE> 33
Because the market for analog and mixed-signal integrated circuits is
diverse and highly fragmented, we encounter different competitors in various
product markets. Our principal competitors include Linear Technology
Corporation, Maxim Integrated Products and Harris Semiconductor in one or more
of our product areas. Other competitors include Motorola, National Semiconductor
Corporation, Texas Instruments, and certain Japanese manufacturers. Each of
these companies has substantially greater technical, manufacturing, financial
and marketing resources and greater name recognition than we do. Due to the
increasing demands for analog and mixed-signal circuits, we expect continued
competition from existing analog circuit suppliers and the entry of new
competition.
Competitive pressures could reduce market acceptance of our products and
result in price reductions and increases in expenses that could harm our
business, financial condition or operating results. We cannot assure you that we
will be able to compete successfully in the future or that competitive pressures
will not harm our business.
EMPLOYEES
As of December 31, 1999, we had 258 full-time employees, 155 of whom were
engaged in manufacturing (including testing, quality and materials functions),
36 in research and development, 32 in marketing and sales and 35 in finance and
administration. Of such employees, 141 were located in Hong Kong, six were
located in Europe and the remainder in the United States. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe that our employee relations are good.
PROPERTIES
Our main executive, administrative, and technical offices are located in a
40,000 square foot facility in Mountain View, California. The lease on this
facility expires in May 2003. We also lease 30,000 square feet of additional
space in Hong Kong in which we conduct testing and from which we ship products
to customers worldwide. The lease on the Hong Kong facility expires in July
2000. We expect this lease to be renewed in the second quarter of 2000. In the
event this lease is not renewed for any reason, we believe we will be able to
locate alternative space on reasonable terms. We believe that our existing
facilities are adequate to meet our needs for at least the next 12 months.
32
<PAGE> 34
MANAGEMENT
Our executive officers and directors, and their ages as of December 31,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Phillip M. Drayer......................... 54 Chief Executive Officer and Director
Robert G. Gargus.......................... 48 President, Chief Financial Officer and
Director
Edward D. Mitchell........................ 46 Executive Vice President, Strategic
Marketing and Product Development
Edward H. Browder......................... 59 Vice President, Manufacturing Operations
and Chief Operating Officer
Thomas J. Grune........................... 37 Vice President of Sales
Donald Herman............................. 42 Vice President, Human Resources and
Information Technology
Kenneth J. Rose........................... 50 Chief Accounting Officer and Corporate
Controller
Donald E. Fowler.......................... 62 Director
Frank Gill................................ 56 Director
T. Peter Thomas........................... 53 Director
</TABLE>
Set forth below is certain information relating to our executive officers
and directors.
Phillip M. Drayer has been our Chief Executive Officer, President and a
director since we commenced operations in December 1993. From 1990 through 1993,
Mr. Drayer was President and Chief Executive Officer of Teledyne Components, a
division of Teledyne Industries Inc. From 1980 to 1990, he was President and
Chief Executive Officer for EPI Technologies, a semiconductor testing company,
and from 1976 to 1979, he was Manufacturing Manager at Mostek, a semiconductor
manufacturer. From 1968 to 1976, Mr. Drayer held various engineering positions
at Texas Instruments. Mr. Drayer earned his B.S.E.E. degree from Lamar
University and his J.D. degree from South Texas College of Law. Mr. Drayer is a
member of the Texas State Bar Association.
Robert G. Gargus has been our President and Chief Financial Officer since
December 1999, and has been a director since January 2000. He had been our Vice
President, Finance and Administration and Chief Financial Officer since May
1998. From 1984 to May of 1998, he held a number of financial and non-financial
positions at Tandem Computers (now a part of Compaq Computer). His last two
positions at Tandem were as President and General Manager of their Atalla
Security Products Division and as the Corporate Controller. He also has 14 years
of experience in a number of financial positions at Unisys Corporation. Mr.
Gargus earned his B.S. degree in accounting and an M.B.A. in finance from the
University of Detroit.
Edward D. Mitchell has been our Executive Vice President, Strategic
Marketing and Product Development since December 1999. He had been our Vice
President, Engineering and Chief Technical Officer since November 1996, our Vice
President, Quality, Product and Test Engineering from November 1994 to November
1996, and our Vice President, Quality Management from December 1993 to November
1994. From 1991 through 1993, he was Vice President, Quality Management for
Teledyne Components. From 1982 to 1990, he was with Seeq Technology, a
semiconductor manufacturer, most recently serving as Director of Quality and
Reliability Assurance, and from 1980 to 1982, he was Product Engineering
Supervisor for NEC Electronics, a semiconductor manufacturer. Prior thereto, he
was employed at National Semiconductor Corporation and Advanced Micro Devices in
various engineering positions. Mr. Mitchell earned his B.S.E.E. degree from the
University of California at Berkeley.
Edward H. Browder has been our Vice President, Manufacturing Operations and
Chief Operating Officer since April 1998. From January 1996 to December 1997,
Mr. Browder was President and Chief Operating Officer of Unitrode Corporation, a
mixed-signal/analog semiconductor company that was subsequently acquired by
Texas Instruments. From 1994 through 1995, he was President of Seacliff
Technologies, a privately held company that was a distributor of specialty
programmable semiconductor devices. From 1990 to
33
<PAGE> 35
1993, he was President and Chief Executive Officer of Concurrent Logic, Inc., a
supplier of high density semiconductor field programmable gate arrays. Mr.
Browder also held positions with Saratoga Semiconductor, Falco Data Products and
Fairchild Semiconductor. Mr. Browder earned his B.S. degree in physics from
Stetson University.
Thomas J. Grune has been our Vice President of Sales since December of
1998. Prior to this, Mr. Grune was our North American Sales Manager from May
1997 to December 1998. From July of 1996 to May of 1997 Mr. Grune was United
States and European Sales Manager for Turbo IC, a semiconductor company. From
1985 to 1996 he held various engineering and sales management positions for
Sipex Corporation, where he was responsible for sale management in South East
Asia and Western United States regions. Mr. Grune earned his B.S. degree in
electrical engineering from Northwestern University and an M.B.A. in Technology
Management from the University of Phoenix.
Donald R. Herman has been our Vice President, Human Resources and
Information Technology since July 1998. He had been our Vice President, Human
Resources since February 1997. From 1996 to 1997, he was with VLSI Technology, a
semiconductor manufacturing company, as Worldwide Staffing Manager. From 1981 to
1996, he was employed at Schlumberger, LTD, a diversified technology company,
most recently serving as Director, Human Resources. Mr. Herman earned his B.S.
degree in mechanical engineering from Purdue University.
Kenneth J. Rose has been our Chief Accounting Officer since December 1995
and has also been our Corporate Controller since December 1993. From 1990 to
1993, he was Vice President, Finance and Administration of Teledyne Components.
From 1985 to 1990, he was Vice President, Finance and Administration of Teledyne
CME, a division of Teledyne. From 1982 to 1985, he was Controller of Teledyne
Micronetics, a division of Teledyne. Prior thereto, he held various positions in
accounting at Teledyne Ryan Aeronautical, a division of Teledyne. Mr. Rose
earned his B.S. degree from the University of San Diego.
Donald E. Fowler has served as a director since January 1998. Since August
1998, he has been a consultant. From 1996 to 1998, Mr. Fowler was President and
Chief Executive Officer of eT Communications, an early stage company which
supplies home-based transaction processing systems to enable delivery of
multiple information services to homes and small businesses. From 1986 to 1996,
he was a Senior Vice President and Executive Committee Member of Tandem Computer
Corporation, a computer company. Prior to 1986, Mr. Fowler held executive
positions at Bechtel Corporation and IBM. He earned his B.S. degree and M.B.A.
degree from the University of Washington. He is also a director of ECCS
Corporation. Mr. Fowler also serves as Chairman of the President's Cabinet at
Cal Poly University in San Luis Obispo, California.
Frank Gill has served as a director since January 1998. From 1989 to 1998,
Mr. Gill was an Executive Vice President of Intel Corp., a semiconductor
company. From 1997 to 1998, he was in charge of the Small Business and
Networking Group. From 1995 to 1997, he was in charge of the Internet and
Communications Group. From 1990 to 1995, Mr. Gill was in charge of the Intel
Products Group. From 1987 to 1990, he headed Intel's North American Sales Force.
From 1986 to 1975, Mr. Gill held various managerial positions in the sales
department of Intel. He is also a director of Sequent Computer Systems and
Inktomi Inc. He earned his B.S.E.E. degree from the University of California at
Davis.
T. Peter Thomas has served as a director since June 1994. Mr. Thomas is a
general partner of Institutional Venture Management III, IV, V, VI and VII, the
General Partners of Institutional Venture Partners III, IV, V, VI and VII,
respectively, all of which are venture capital funds. Mr. Thomas has been a
general partner with Institutional Venture Partners since 1985. Mr. Thomas is
also a director of Atmel Corporation. He received his B.S.E.E. degree from Utah
State University and his M.S. in Computer Science from the University of Santa
Clara.
34
<PAGE> 36
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 31, 2000 with respect to:
- - each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
- - each of our directors;
- - each of our executive officers; and
- - all directors and executive officers as a group.
Except as otherwise indicated in the footnotes to the table, each
stockholder has sole voting and investment power with respect to the shares
beneficially owned by such stockholder, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING SHARES OFFERING
-------------------- BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Phillip M. Drayer(1)..................... 983,217 6.8% 152,580 830,637 4.8%
Robert G. Gargus(2)...................... 72,849 * 10,000 62,849 *
Edward D. Mitchell(3).................... 151,037 1.1 -- 151,037 *
Edward H. Browder(4)..................... 54,531 * -- 54,531 *
Thomas J. Grune(5)....................... 5,599 * -- 5,599 *
Donald Herman(6)......................... 62,724 * -- 62,724 *
Kenneth J. Rose(7)....................... 51,064 * -- 51,064 *
Donald E. Fowler(8)...................... 61,000 * -- 61,000 *
Frank Gill(9)............................ 19,000 * -- 19,000 *
T. Peter Thomas(10)...................... 116,453 * -- 116,453 *
IVP Founders Fund I(11).................. 27,420 * 27,420 -- --
--------- ---- ------- --------- ---
All directors and executive officers as a
group (10 persons)(12)................. 1,604,894 11.0% 190,000 1,414,894 8.1%
========= ==== ======= ========= ===
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 70,306 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(2) Includes 66,661 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(3) Includes 131,037 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(4) Includes 48,849 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(5) Includes 4,157 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(6) Includes 53,027 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(7) Includes 37,644 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
35
<PAGE> 37
(8) Includes 9,000 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(9) Includes 9,000 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(10) Includes 12,000 shares issuable upon exercise of options which are
exercisable within 60 days of January 31, 2000.
(11) Mr. Thomas is a general partner of the entity that is a general partner of
IVP Founders Fund I. Mr. Thomas disclaims beneficial ownership of the
shares held by such fund except to the extent of his pecuniary interest
therein.
(12) Includes 441,681 shares issuable upon the exercise of options which are
exercisable within 60 days of January 31, 2000. See notes 1 through 10
above.
This table is based upon information supplied by officers, directors and
principal stockholders and schedules 13D and 13G filed with the Securities and
Exchange Commission. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe that each of
the stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Applicable percentages
are based on 14,366,736 shares outstanding on January 31, 2000, adjusted as
required by rules promulgated by the Securities and Exchange Commission.
If the underwriters' over-allotment option is exercised in full, Mr. Drayer
will sell an additional 100,000 shares of common stock and will beneficially own
730,637 shares, or 4.1% of our outstanding common stock after the offering.
36
<PAGE> 38
UNDERWRITING
We and the selling stockholders have entered into an underwriting agreement
with the underwriters named below, for whom Prudential Securities Incorporated,
C.E. Unterberg, Towbin and Stephens Inc., are acting as representatives. We and
the selling stockholders are obligated to sell, and the underwriters are
obligated to purchase, all of the shares offered on the cover page of this
prospectus, if any are purchased. Subject to conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the shares
indicated opposite its name.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Prudential Securities Incorporated..........................
C.E. Unterberg, Towbin......................................
Stephens Inc. ..............................................
---------
Total.................................................. 3,190,000
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to 378,500 additional shares from TelCom and 100,000 additional shares from the
selling stockholders. If any additional shares are purchased, the underwriters
will severally purchase the shares in the same proportion as per the table
above.
The representatives of the underwriters have advised us and the selling
stockholders that the shares will be offered to the public at the offering price
indicated on the cover page of this prospectus. The underwriters may allow to
selected dealers a concession not in excess of $ per share and such dealers
may reallow a concession not in excess of $ per share to some other dealers.
After the shares are released for sale to the public, the representatives may
change the offering price and the concessions.
We and the selling stockholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us.............................. $ $ $
Fees paid by the selling stockholders........ $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $550,000 in
expenses in this offering, including those of the selling stockholders. We and
the selling stockholders have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.
We and our executive officers and directors and the selling stockholders
will have entered into lock-up agreements pursuant to which we and they agree
not to offer or sell any shares of common stock or securities convertible into
or exchangeable or exercisable for shares of common stock for a period of 90
days from the date of filing of this prospectus without the prior written
consent of Prudential Securities Incorporated, on behalf of the underwriters.
Prudential Securities Incorporated may, at any time and without notice, waive
the terms of these lock-up agreements.
Prudential Securities Incorporated, on behalf of the underwriters, may
engage in the following activities in accordance with applicable securities
rules:
- - Over-allotments involving sales in excess of the offering size, creating a
short position. Prudential Securities Incorporated may elect to reduce this
short position by exercising some or all of the over-allotment option.
37
<PAGE> 39
- - Stabilizing and short covering; stabilizing bids to purchase the shares are
permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in the
open market may also reduce the short position. These activities may cause the
price of the shares to be higher than would otherwise exist in the open
market.
- - Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short covering
transactions.
These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Also and prior to the pricing of the shares, and until such time when
a stabilizing bid may have been made, some of the underwriters who are market
makers in the shares may make bids for or purchases of shares subject to certain
restrictions, known as passive market making activities.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- - the Public Offers of Securities Regulations 1995,
- - the Financial Services Act 1986, and
- - the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
Prudential Securities Incorporated facilitates the marketing of new issues
online through its Prudential Securities.com division. Clients of Prudential
Advisor(TM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
38
<PAGE> 40
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Restated Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. Our Bylaws provide
that we shall indemnify our officers and directors and may indemnify our
employees and other agents to the fullest extent permitted by Delaware law. We
have entered into indemnification agreements with our officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements require us, among other things to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms. We believe that these agreements are necessary to attract and
retain qualified persons as directors and officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and with respect to any criminal action, had no reasonable cause
to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the Registration Statement on Form S-3 of which this prospectus is a part,
as well as reports, proxy statements and other information filed by us, at the
public reference facilities maintained by the Securities and Exchange Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Securities and Exchange Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can obtain copies of
such material from the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You can call the Securities and Exchange Commission at 1-800-732-0330 for
information regarding the operations of its Public Reference Room. The
Securities and Exchange Commission also maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding registrants (like us) that file electronically.
The Securities and Exchange Commission allows this Prospectus to
"incorporate by reference" certain other information that we file with them
(File No. 000-26312), which means that we can disclose important information to
you by referring to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later with
the Securities and Exchange Commission will automatically update and replace
this information. We incorporate by reference the documents listed below and any
future filings made by us with the Securities and Exchange Commission under
Sections 13(a), 13(c),
39
<PAGE> 41
14 or 15(d) of the Securities Exchange Act of 1934 until we have sold all of the
securities that we have registered.
1. Our Annual Report on Form 10-K for the year ended December 31, 1998;
2. Our Quarterly Reports on Form 10-Q for the quarters ended March 30,
1999, June 30, 1999 and September 30, 1999; and
3. The description of our capital stock contained in a Registration
Statement on Form 8-A filed on June 23, 1995, including any amendments
or reports filed for the purpose of updating such descriptions.
If you make a request for such information in writing or by telephone, we
will provide you without charge, a copy of any or all of the information
incorporated by reference in the registration statement of which this prospectus
is a part. Requests for such information should be submitted in writing to us at
the following address: Investor Relations, TelCom Semiconductor, Inc., 1300
Terra Bella Avenue, Mountain View, California 94039, or by telephone at (408)
968-9252.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Pillsbury Madison & Sutro LLP, San Francisco, California.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
40
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998
and 1999.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
TelCom Semiconductor, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of TelCom
Semiconductor, Inc. and its subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 20, 2000, except as to Note 13
which is as of February 1, 2000
F-2
<PAGE> 44
TELCOM SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $14,059 $ 18,413
Short term investments.................................... -- 2,286
Accounts receivable, less allowance for doubtful accounts
of $195 and $195....................................... 6,944 8,314
Inventories............................................... 6,377 5,863
Deferred income taxes..................................... 1,099 88
Other current assets...................................... 799 1,186
------- --------
Total current assets................................... 29,278 36,150
Property and equipment, net................................. 10,388 6,791
Other assets................................................ 1,500 3,000
------- --------
$41,166 $ 45,941
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.......................... $ 1,886 $ --
Accounts payable.......................................... 3,247 2,889
Accrued liabilities....................................... 2,982 1,832
Deferred distributor income............................... 1,484 1,635
Income taxes payable...................................... 2,571 603
------- --------
Total current liabilities.............................. 12,170 6,959
Notes payable and other long term obligations, net of
current portion........................................... 2,678 --
Deferred income taxes....................................... 400 400
------- --------
Total liabilities...................................... 15,248 7,359
------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued or outstanding................. -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 16,859,214 and 17,434,407 shares issued and
14,557,214 and 14,315,107 shares outstanding........... 17 17
Additional paid-in capital................................ 35,355 38,644
Treasury stock (2,302,000 and 3,119,300 shares at cost)... (7,925) (12,697)
Accumulated other comprehensive income.................... -- 1,018
Retained earnings......................................... (1,529) 11,600
------- --------
Total stockholders' equity............................. 25,918 38,582
------- --------
$41,166 $ 45,941
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 45
TELCOM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $55,435 $54,263 $57,322
Cost of sales............................................... 31,175 34,896 31,626
------- ------- -------
Gross profit................................................ 24,260 19,367 25,696
------- ------- -------
Operating expenses:
Research and development.................................. 5,455 5,588 6,794
Selling, general and administrative....................... 9,530 9,496 10,007
Loss on foundry investment................................ 8,264 -- --
Restructuring and other................................... -- 7,258 269
------- ------- -------
Total operating expenses............................... 23,249 22,342 17,070
------- ------- -------
Income (loss) from operations............................... 1,011 (2,975) 8,626
Interest income............................................. 959 845 584
Interest expense............................................ (1,247) (459) (199)
Gain on sale of investment.................................. -- -- 5,819
------- ------- -------
Income (loss) before income taxes........................... 723 (2,589) 14,830
Provision for income taxes.................................. 2,427 958 1,701
------- ------- -------
Net income (loss)........................................... $(1,704) $(3,547) $13,129
======= ======= =======
Per share data:
Net income (loss)
Basic.................................................. $ (0.11) $ (0.22) $ 0.92
======= ======= =======
Diluted................................................ $ (0.11) $ (0.22) $ 0.84
======= ======= =======
Number of shares used to compute per share data:
Basic.................................................. 16,184 15,933 14,302
======= ======= =======
Diluted................................................ 16,184 15,933 15,676
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 46
TELCOM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK INCOME EARNINGS EQUITY
------ ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... 15,706 $16 $33,188 $ -- $ -- $ 3,722 $36,926
Sale of common stock....................... 712 -- 1,190 -- -- -- 1,190
Repurchase of common stock................. -- -- -- -- -- -- --
Payment on notes receivable from
stockholders............................. -- -- 9 -- -- 9
Net loss................................... -- -- -- -- -- (1,704) --
Comprehensive loss......................... -- -- -- -- -- -- (1,704)
------ --- ------- -------- ------ ------- -------
Balance at December 31, 1997............... 16,418 16 34,387 -- -- 2,018 36,421
Sale of common stock....................... 441 1 968 -- -- -- 969
Repurchase of common stock................. -- -- -- (7,925) -- -- (7,925)
Net loss................................... -- -- -- -- -- (3,547) --
Comprehensive loss......................... -- -- -- -- -- -- (3,547)
------ --- ------- -------- ------ ------- -------
Balance at December 31, 1998............... 16,859 17 35,355 (7,925) -- (1,529) $25,918
Sale of common stock....................... 575 -- 1,953 -- -- -- 1,953
Repurchase of common stock................. -- -- -- (4,772) -- -- (4,772)
Tax benefit from stock options............. -- -- 1,336 -- -- -- 1,336
Unrealized gain on short term investment
(net of deferred taxes of $679).......... -- -- -- -- 1,018 -- --
Net income................................. -- -- -- -- -- 13,129 --
Comprehensive income....................... -- -- -- -- -- -- 14,147
------ --- ------- -------- ------ ------- -------
Balance at December 31, 1999............... 17,434 $17 $38,644 $(12,697) $1,018 $11,600 $38,582
====== === ======= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 47
TELCOM SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (1,704) $(3,547) $13,129
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Loss on foundry investment............................. 8,264 -- --
Gain on sale of investment............................. -- -- (5,819)
Restructuring and other................................ -- 7,258 --
Depreciation and amortization.......................... 4,113 5,247 2,701
Deferred income taxes.................................. 77 (776) 332
Changes in assets and liabilities:
Accounts receivable.................................. (2,164) 508 (1,370)
Inventories.......................................... (1,799) 1,912 514
Income taxes receivable.............................. 1,430 -- --
Other current assets................................. (393) (48) (387)
Accounts payable..................................... 1,419 (214) (358)
Accrued liabilities.................................. 454 (543) (1,021)
Deferred distributor income.......................... 352 55 151
Income taxes payable................................. 1,805 5 (632)
-------- ------- -------
Net cash provided by operating activities................... 11,854 9,857 7,240
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (7,574) (5,816) (1,612)
Net proceeds from sale of equipment....................... -- -- 1,511
Investment in SAI, Inc.................................... -- -- (3,000)
Investment in IC WORKS, Inc............................... (1,500) -- --
Net proceeds from sale of equipment at IC WORKS, Inc...... 5,099 -- --
Sales of short term investments........................... 2,733 2,469 6,730
-------- ------- -------
Net cash provided (used for) investing activities........... (1,242) (3,347) 3,629
-------- ------- -------
Cash flow from financing activities:
Proceeds from sale of common stock........................ 1,190 969 1,953
Payment on notes receivable from stockholders............. 9 -- --
Repurchase of common stock................................ -- (7,925) (4,772)
Proceeds from issuance of notes payable................... 3,333 -- --
Principal payments on notes payable....................... (10,795) (2,605) (3,696)
-------- ------- -------
Net cash used for financing activities...................... (6,263) (9,561) (6,515)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 4,349 (3,051) 4,354
Cash and cash equivalents at the beginning of period........ 12,761 17,110 14,059
-------- ------- -------
Cash and cash equivalents at the end of period.............. $ 17,110 $14,059 $18,413
======== ======= =======
Cash paid during the year for:
Interest.................................................. $ 1,247 $ 459 $ 199
Income taxes paid (received), net......................... (885) 1,807 2,102
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 48
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION:
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs, develops
and markets a diversified portfolio of high performance analog integrated
circuits for use in a wide variety of electronic systems. The Company was
organized in Delaware in June 1993 and began operations in December 1993 after
the management-led buyout of the semiconductor operations of Teledyne, Inc. The
Company has operations in the United States, Hong Kong and Germany. The Company
operates and reports financial results on a 52-53 week fiscal year. During 1997,
the Company changed its fiscal year end from the last Friday of December to the
Friday closest to the last day of December. Fiscal year 1997 is a 53 week year
ended on January 2, 1998. Fiscal 1998 and 1999 are 52 week years ended on
January 1, 1999 and December 31, 1999, respectively. For convenience, the
Company presents its fiscal years as ending on December 31.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
Revenue from product sales to customers other than domestic distributors is
recognized upon shipment. Sales to domestic distributors are generally subject
to agreements allowing certain rights of return and price protection with
respect to unsold merchandise held by each distributor. The Company defers
recognition of revenue and related gross margin on the sales to domestic
distributors until the product is sold by these distributors.
SALES TO SIGNIFICANT CUSTOMERS
Sales to one customer represented 30%, 35% and 34% of the Company's net
sales for the years ended December 31, 1997, 1998 and 1999, respectively. Sales
to another customer represented 10%, 11% and 12% of the Company's net sales for
the years ended December 31, 1997, 1998 and 1999, respectively.
CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist primarily of money market funds.
Short term investments consist of a common stock investment in Cypress
Semiconductor, Inc. The Company categorizes its short-term investments as
"available for sale" and the investments are reported at fair market value. The
fair value of the Company's investments was determined based on quoted market
prices at the reporting date for those instruments.
F-7
<PAGE> 49
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign entities is the U.S.
dollar; however, certain of the Company's costs and expenses are paid in
currencies other than the U.S. dollar. The Company does not currently hedge
against foreign currency exchange rate fluctuations and gains and losses arising
from the translation of foreign currency balances and transactions are included
in consolidated results of operations. Gains and losses from such fluctuations
have not been material to the Company's consolidated results of operations.
INVENTORIES
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements are stated at cost, or fair market
value at the time of impairment for impaired assets. Depreciation is computed
using the straight-line method with estimated useful lives of three to five
years for equipment. Leasehold improvements consist of improvements to the
Company's facilities and are amortized over the remaining term of the lease or
useful life of the asset, whichever is less.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company assesses the impairment of long-lived assets based
upon the estimated future undiscounted cash flows from these assets.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its integrated circuits to customers throughout the world. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for uncollectable accounts receivable. The Company's
write-offs of accounts receivable were not significant in 1997, 1998 and 1999.
The Company's accounts receivable were concentrated with three customers at
December 31, 1998 (representing 10%, 11% and 25% of aggregate receivables) and
one customer at December 31, 1999 (representing 27% of aggregate receivables).
NET INCOME (LOSS) 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, and convertible preferred stock, using
the if-converted 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.
F-8
<PAGE> 50
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations, (in thousands, except for per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss) attributable to common shareholders....... $(1,704) $(3,547) $13,129
======= ======= =======
Weighted average common shares outstanding (basic).......... 16,184 15,933 14,302
Effect of dilutive options.................................. -- -- 1,374
------- ------- -------
Weighted average common shares outstanding (diluted)........ 16,184 15,933 15,676
======= ======= =======
Net income (loss) per share:
Basic....................................................... $ (0.11) $ (0.22) $ 0.92
======= ======= =======
Diluted..................................................... $ (0.11) $ (0.22) $ 0.84
======= ======= =======
</TABLE>
Due to the Company's net loss from continuing operations in 1997 and 1998,
a calculation of EPS assuming dilution is not required. At December 31, 1997,
there were 2,386,000 options and warrants outstanding to purchase common stock
at a weighted average price of $4.40 per share. At December 31, 1998, there were
2,975,000 options outstanding to purchase common stock at a weighted average
price of $3.65 per share. The securities have been excluded from the computation
of dilutive EPS because the inclusion of such warrants and options would have
been anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's statements of operations. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for disclosure and financial
statement display for reporting total comprehensive income and its individual
components. Comprehensive income, as defined, includes all changes in equity
during a period from non-owner sources. The Company's comprehensive income
includes net income and unrealized gains and losses on investments and is
displayed in the statement of stockholders' equity.
SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "Industry Segment" approach with the
"Management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The Company operates in one industry segment comprising the
design,
F-9
<PAGE> 51
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
development, manufacture and sale of integrated circuits. The adoption of SFAS
131 did not affect results of the Company's operations or financial position or
the segments reported in 1998.
ACCOUNTING FOR DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
accounting and reporting on derivative instruments for periods beginning after
June 15, 2000 and early adoption is permitted. SFAS No. 133 requires that all
derivative instruments be recognized in the balance sheet as either assets or
liabilities and measured at fair value. Furthermore, SFAS No. 133 requires
current recognition in earnings of changes in the fair value of derivative
instruments depending on the intended use of the derivative and the resulting
designation. The Company is currently evaluating the effects of the new standard
and has not determined its method or timing of adopting SFAS No. 133 or the
impact on its financial statements.
NOTE 3 -- BALANCE SHEET DETAILS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Inventories:
Raw materials............................................. $ 108 $ 17
Work-in-process........................................... 4,331 4,490
Finished goods............................................ 1,938 1,356
------- -------
$ 6,377 $ 5,863
======= =======
Property and equipment:
Equipment................................................. $15,077 $12,844
Carrying value of assets to be disposed of................ 2,594 266
Leasehold improvements.................................... 81 123
------- -------
17,752 13,233
Accumulated depreciation.................................. (8,313) (7,562)
------- -------
9,439 5,671
Construction in progress.................................. 949 1,120
------- -------
$10,388 $ 6,791
======= =======
Accrued liabilities:
Payroll and related....................................... $ 2,074 $ 1,434
Other..................................................... 908 398
------- -------
$ 2,982 $ 1,832
======= =======
</TABLE>
NOTE 4 -- 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
F-10
<PAGE> 52
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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. By the
end of the first quarter of 1999, all fabrication of wafers was 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 use submicron technology which allows for more
die per wafer than the five inch wafer fabrication used 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. Separately, during 1998 the Company recorded a
one time charge relating to, amongst other items, the write-off of certain
equipment in Mountain View, California. The fair value of the equipment was
estimated to be $355 and is recorded as "assets to be disposed of ". During the
first nine months of 1999, net proceeds for the sale of the equipment was $978.
Due to the weakness in the market for used semiconductor equipment, the Company
booked an additional charge in the period ending September 30, 1999 of $997.
This additional charge and the net proceeds from the equipment sales in the
fourth quarter of 1999 adjusts the carrying value of the remaining equipment to
$266 at December 31, 1999. Given the continued oversupply in the used
semiconductor equipment market, the Company is unable to predict the time needed
to dispose of the assets classified as "assets to be disposed of ".
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 were included in the first quarter of 1999 for
employee severance costs of $243 and environmental and related clean up costs of
$26. During the period ending September 30, 1999, the Company renegotiated its
lease for the Mt. View facility by terminating its lease with Teledyne
Industries in exchange for a sublease of the facility from Clontech
Laboratories, Inc. The new sublease provides for a reduction in the square
footage currently occupied by the company by June 1, 2000 which will eliminate
the idle facility. As a result, the Company reversed idle facility costs of
$1,047, previously accrued in 1998, leaving a remaining balance of $161 that
will be amortized through May 2000. Additionally, the Company recorded
additional restructuring charges in the third quarter 1999 of $50 for additional
costs associated with the facility clean up and removal of the fabrication
equipment.
The following table sets forth the Company's activity for the restructuring
accrual and charges taken against the accrual and the remaining restructuring
accrual balance at December 31, 1999:
<TABLE>
<CAPTION>
RESTRUCTURING ACCRUAL
---------------------------------------------------
TWELVE MONTHS ENDED
BALANCE DECEMBER 31, 1999 BALANCE
DECEMBER 31, ------------------- DECEMBER 31,
1998 EXPENSE UTILIZED 1999
------------ ------- -------- ------------
<S> <C> <C> <C> <C>
Idle facility charge.......................... $1,406 $(1,047) $ (257) $102
Employee severance and other.................. 651 319 (927) 43
------ ------- ------- ----
$2,057 $ (728) $(1,184) $145
====== ======= ======= ====
</TABLE>
F-11
<PAGE> 53
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5 -- 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 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. The value of the shares held in
escrow at December 31, 1999 is $2,286 and is presented as short term
investments. These shares are accounted for as an available for sale security in
accordance with FAS 115.
NOTE 6 -- INVESTMENT IN SAI:
On October 7, 1999, the Company entered into a Common Stock Agreement and a
Stockholder Purchase Agreement with Silicon Aquarius, Inc. (SAI). In accordance
with the Common Stock Agreement the Company purchased 1.3 million shares of
common stock of SAI, representing an 18.67% ownership interest in SAI, for $3.0
million. In addition, the Common Stock Agreement provides the Company with an
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 the 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 results for the entity.
NOTE 7 -- INCOME TAXES:
The Company accounts for income taxes under an asset and liability approach
that requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or income tax returns. Provisions are made for
estimated United States and foreign income taxes, less available tax credits and
deductions, which may be incurred on the remittance of certain of the Company's
foreign subsidiaries' undistributed earnings. Deferred taxes have not been
provided for the cumulative undistributed earnings of foreign subsidiaries which
are considered by management to be permanently reinvested.
The components of income (loss) before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
U.S................................................... $(1,414) $(3,424) $11,879
Foreign............................................... 2,137 835 2,951
------- ------- -------
Income before taxes................................... $ 723 $(2,589) $14,830
======= ======= =======
</TABLE>
F-12
<PAGE> 54
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
U.S.................................................... $1,253 $ 993 $ 486
Foreign................................................ 590 543 667
State.................................................. 507 198 216
------ ------ ------
2,350 1,734 1,369
------ ------ ------
Deferred:
U.S.................................................... 77 (776) 332
------ ------ ------
Provision for income taxes............................. $2,427 $ 958 $1,701
====== ====== ======
</TABLE>
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Reserves and other non-deductible expenses.................. $ 3,561 $ 102
Research and development credit carryforwards............... 871 877
Deferred distributor income................................. 594 654
Property and equipment...................................... 114 34
------- -------
Gross deferral tax assets................................. 5,140 1,667
------- -------
Unremitted earnings of foreign subsidiaries................. (400) (400)
Unrealized gain on short term investment.................... -- (679)
------- -------
Gross deferred tax liabilities............................ (400) (1,079)
------- -------
Deferred tax asset valuation allowance...................... (4,041) (900)
------- -------
$ 699 $ (312)
======= =======
</TABLE>
Due to the uncertainty of the realization of a portion of deferred tax
assets, the Company has provided a valuation allowance on these assets to the
extent there is no current realization at December 31, 1998 and 1999. Upon
recognition of the Company's deferred tax assets, approximately $900 will be
credited directly to equity as a result of previous exercises of non qualified
stock options and disqualifying dispositions of incentive stock options.
The provision for income taxes differs from the amount computed by applying
the U.S. statutory federal rate to income before taxes as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ----- -------
<S> <C> <C> <C>
Tax at statutory rate.................................... $ 253 $(906) $ 5,191
Differential in rates on earnings of foreign
operations............................................. (158) (196) (336)
State taxes.............................................. 507 129 130
Loss on foundry investment............................... 1,050 -- --
Change in valuation allowance............................ 688 1,969 (3,141)
Research and development credits......................... -- (56) (154)
Other.................................................... 87 18 11
------ ----- -------
$2,427 $ 958 $ 1,701
====== ===== =======
</TABLE>
F-13
<PAGE> 55
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 -- PREFERRED STOCK:
The Company has authorized 5,000,000 shares of undesignated Preferred
Stock. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series in the designations of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. In
November 1998, the Company designated 30,000 shares of Preferred Stock as Series
A of Participating Preferred Stock in connection with the adoption of a
shareholders rights program. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company.
NOTE 9 -- COMMON STOCK:
TREASURY STOCK
In July 1998, the Company's Board of Directors approved a plan to
repurchase an aggregate of up to 2 million shares of common stock. In October
1998, the Company's Board of Directors approved a plan to repurchase an
additional 2 million shares of common stock, for a total repurchase of up to 4
million shares. At December 31, 1999, a total of 3.1 million shares have been
repurchased by the Company at an aggregate cost of $12,697 at an average price
of $4.07 per share.
STOCK PURCHASE RIGHTS PLAN
In November 1998, the Company implemented a plan to protect shareholders'
rights in the event of a proposed takeover of the Company. Under the plan, each
share of the Company's outstanding common stock carries one right to purchase
one-thousandth of a share of the Company's Series A Participating Preferred
Stock (the "Right") at an exercise price of $30.00 per share. The Right enables
the holder to purchase common stock of the Company or of the acquiring company
ten days after a person or group publicly announces it has acquired or has
tendered an offer for 15% or more of the Company's outstanding common stock. The
Rights are redeemable by the Company at $0.001 per Right at any time on or
before the tenth day following acquisition by a person or group of 15% or more
of the Company's common stock. If prior to redemption of the Rights, a person or
group acquires 15% or more of the Company's common stock, each Right not owned
by a holder of 15% or more of the common stock (or an affiliate of such holder)
will entitle the holder to purchase, at the Right's then current exercise price,
that number of shares of common stock of the Company having a market value at
the time of twice the Right's exercise price. The Rights expire in November
2008.
EMPLOYEE STOCK OPTION PLAN
In February 1994, the Company adopted its 1994 Stock Option Plan (the
"Option Plan") which provides for the granting of incentive stock options and
nonstatutory stock options to officers, employees and consultants of the
Company. Incentive stock options are granted at an amount not less than 100% of
the fair market value of the stock on the grant date. During 1997, the Board of
Directors and shareholders approved an increase to the number of shares that may
be issued under the plan from 2,800,000 shares to 3,300,000 shares. During 1998,
the Board of Directors and shareholders approved an increase to the number of
shares that may be issued under the plan from 3,300,000 shares to 4,300,000
shares. During 1999, the Board of Directors and shareholders approved an
increase to the number of shares that may be issued under the plan from
F-14
<PAGE> 56
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4,300,000 shares to 5,300,000 shares. In January 1996, the Board of Directors
approved an option exchange program whereby certain employees were able to
exchange their existing options to purchase an aggregate of 418,500 shares of
Common Stock at exercise prices ranging from $6.00 to $8.75 for new options to
purchase an aggregate of 418,500 shares at $4.87 per share. In June 1998, the
Board of Directors approved an option exchange program whereby certain employees
were able to exchange their existing options to purchase an aggregate of 934,243
shares of Common Stock at exercise prices ranging from $7.88 to $15.94 for new
options to purchase an aggregate of 934,243 shares at $4.31 per share. Generally
all employees exchanged their existing options for new options. Options
generally vest over a four year period. Option terms may not exceed ten years
from the date of grant and unexercised options expire upon termination of
employment. The weighted average fair value of options granted during 1997,
1998, 1999 was $3.78, $2.50 and $5.26, respectively.
DIRECTOR STOCK OPTION PLAN
During 1996, the Company adopted and approved the Company's 1996 Director
Stock Option Plan (the "Director Plan") with 100,000 shares of Common Stock
reserved for issuance thereunder. Under the Director Plan, each non-employee
director who joins the Board will automatically be granted a non-statutory
option to purchase 12,000 shares of Common Stock on the date upon which such
person first becomes a director. In addition, each non-employee director will
automatically receive a non-statutory option to purchase 3,000 shares of Common
Stock upon such director's annual re-election to the Board, provided the
director has been a member of the Board for at least six months upon the date of
reelection. The exercise price of each option granted under the Director Plan
must be equal to the fair market value of the Common Stock on the date of the
grant. The 12,000 share grant vests at the rate of twenty-five percent (25%) of
the option shares upon the first anniversary of the date of grant and as to
twenty-five (25%) of the shares each year thereafter and the 3,000 share grant
vests monthly over a twelve (12) month period. Options granted under the
Director Plan have a term of ten years unless terminated sooner, whether upon
termination of the optionee's status as a director or otherwise pursuant to the
Director Plan. The weighted average fair values of the options granted during
1997, 1998 and 1999 was $3.22, $7.14 and $3.10 per share, respectively. The
Board believes that the Director Plan is necessary to attract and retain highly
qualified individuals to serve as non-employee members of the Board of
Directors.
F-15
<PAGE> 57
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Option Plan and the Directors Plan activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996................ 469,233 2,145,050 $0.10 - $ 6.38
Increase in authorized shares............... 500,000 --
Options granted............................. (1,008,743) 1,008,743 $4.25 - $15.94
Options exercised........................... -- (327,140) $0.10 - $ 4.94
Options canceled............................ 474,315 (474,315) $0.10 - $13.25
---------- ----------
Balance at December 31, 1997................ 434,805 2,352,338
Increase in authorized shares............... 1,000,000 --
Options granted............................. (2,428,243) 2,428,243 $2.94 - $10.38
Options exercised........................... -- (290,762) $0.10 - $ 6.38
Options canceled............................ 1,481,748 (1,481,748) $0.10 - $15.94
---------- ----------
Balance at December 31, 1998................ 488,310 3,008,071
Increase in authorized shares............... 1,000,000 --
Options granted............................. (1,039,600) 1,039,600 $4.56 - $16.69
Options exercised........................... -- (446,878) $0.10 - $ 8.56
Options canceled............................ 494,678 (494,678) $0.10 - $ 9.63
---------- ----------
Balance at December 31, 1999................ 943,388 3,106,115
========== ==========
</TABLE>
Information relating to stock options outstanding under the Option Plan and
Director Plan at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ------------------- --------------
<S> <C> <C> <C>
Range of exercise prices:
$ 0.10 - $ 0.30................................ 147,863 4.5 years $ 0.15
$ 1.50......................................... 143,680 5.3 years $ 1.50
$ 2.94 - $ 4.38................................ 1,445,955 8.3 years $ 3.89
$ 4.56 - $ 6.38................................ 943,660 8.3 years $ 5.01
$ 7.88 - $10.75................................ 169,457 9.4 years $10.16
$12.44 - $16.69................................ 255,500 9.6 years $13.12
---------
3,106,115 8.1 years $ 5.00
=========
</TABLE>
F-16
<PAGE> 58
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
-----------------------------
WEIGHTED
NUMBER AVERAGE
EXERCISABLE EXERCISE PRICE
----------- --------------
<S> <C> <C>
Range of exercise prices:
$0.10 - $ 0.30............................................ 147,863 $0.15
$1.50..................................................... 143,680 $1.50
$2.94 - $ 4.38............................................ 572,659 $3.97
$4.56 - $ 6.38............................................ 291,107 $4.93
$7.88 - $10.75............................................ 23,459 $8.26
---------
1,178,768 $3.46
=========
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions used for grants during 1997,
1998 and 1999: annual dividend yield of 0.0% for all periods; risk-free annual
interest rates of 5.87% to 6.67% for options granted during the year ended
December 31, 1997, 4.25% to 5.62% for options granted during the year ended
December 31, 1998 and 4.72% to 6.02% for options granted in the year ended
December 31, 1999; a weighted average expected option term of five years for all
periods; and an expected volatility factor of 60% for 1997, 72% for 1998 and 81%
for 1999.
EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company adopted its 1995 Employee Stock Purchase Plan
("Purchase Plan"). Under the Purchase Plan, an eligible employee may purchase
shares of Common Stock from the Company through payroll deductions of up to 10%
of their base compensation plus commissions, at a price per share equal to 85%
of the fair market value as of the first day or the last day, whichever is
lower, of each six-month offering period under the Purchase Plan. An employee
can purchase at the lowest offering period's purchase price going back for up to
two years of participation. The offering periods commence on July 1 and January
1 of each year. The Company has reserved 200,000 shares of Common Stock for
issuance under the Purchase Plan. During 1996, the Purchase Plan was amended to
increase the shares reserved for issuance by 200,000 shares, bringing the total
number of shares issuable under the Purchase Plan to 400,000. During 1998, the
Purchase Plan was amended to increase the shares reserved for issuance by
500,000 shares, bringing the total number of shares issuable under the Purchase
Plan to 900,000. At December 31, 1999, 480,720 shares of Common Stock had been
issued under the Purchase Plan, and 419,280 shares remained available for future
issuance under the Purchase Plan.
The fair value of each stock award is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
1997, 1998 and 1999: annual dividend yield of 0.0% for all periods; risk-free
annual interest rates of 5.49% to 5.66% for stock awards granted during the year
ended December 31, 1997, 5.27% to 5.79% for stock awards granted during the year
ended December 31, 1998 and 4.51% and 4.88% for stock swards granted during the
year ended December 31, 1999; a weighted average expected stock award term of
six months for all periods; and an expected volatility factor of 60% for 1997,
72% for 1998 and 81% for 1999.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value of the options at the grant dates
using the Black-Scholes model as provided by FAS 123, the
F-17
<PAGE> 59
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company's net income (loss) and net income (loss) per share for the years ended
December 31, 1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $(1,704) $(3,547) $13,129
Pro forma................................................. $(3,022) $(5,219) $10,289
Net income (loss) per share:
As reported
Basic.................................................. $ (0.11) $ (0.22) $ 0.92
Diluted................................................ $ (0.11) $ (0.22) $ 0.84
Pro forma
Basic.................................................. $ (0.19) $ (0.33) $ 0.72
Diluted................................................ $ (0.19) $ (0.33) $ 0.66
</TABLE>
The pro forma amounts reflect compensation expenses related to 1996, 1997,
1998 and 1999 employee and director option grants and employee stock purchase
plan awards only. In future years, the annual compensation expense will increase
due to the expense associated with future grants.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
The Company occupies its present principal facilities under non-cancelable
operating leases expiring May 2003 and July 2000. The Company is required to pay
taxes, insurance and maintenance expenses.
Future minimum lease payments under non-cancelable leases at December 31,
1999 are as follows (amounts include payments accrued for idle facility charges;
see Note 4):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $1,157
2001........................................................ 708
2002........................................................ 708
2003........................................................ 295
------
Minimum lease payments...................................... $2,868
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was $767,
$867 and $1,460, respectively.
F-18
<PAGE> 60
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 -- SEGMENT INFORMATION:
The Company operates in one industry segment comprising the design,
development, manufacture and sale of integrated circuits. The following is a
summary of the Company's operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Sales to third-party customers located in:
United States....................................... $19,420 $19,035 $17,302
Asia................................................ 18,367 18,373 23,436
Germany............................................. 6,288 6,102 4,824
United Kingdom...................................... 7,872 7,431 9,148
Other Europe........................................ 3,488 3,322 2,612
------- ------- -------
$55,435 $54,263 $57,322
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Identifiable assets:
United States............................................. $26,300 $26,052
Hong Kong................................................. 14,074 18,991
Europe.................................................... 792 898
------- -------
$41,166 $45,941
======= =======
</TABLE>
NOTE 12 -- LOSS ON FOUNDRY INVESTMENT:
In November 1995, the Company entered into certain agreements with IC
WORKS, Inc. a privately-held company located in San Jose, California. Pursuant
to these agreements, in 1996 the Company purchased $3.0 million of preferred
stock of IC WORKS and provided $10.4 million in capital equipment. In return for
this investment, TelCom received a guarantee of submicron wafer capacity at
specified prices for a period of five years, projected to start in late 1997.
The shortage of wafer capacity projected in late 1995 has diminished and since
late 1995, substantial foundry capacity has been available worldwide while
overall demand has not increased proportionately. Consequently, wafer pricing
has decreased dramatically, which has changed the economic viability of the
foundry business in which the Company invested. As a result, in the first
quarter of 1997, the Company recorded an impairment loss on its foundry
investment of $8.0 million, consisting of a $3.0 million write down of the
preferred stock and a $5.0 million impairment write down of the equipment. In
the fourth quarter of 1997, pursuant to an agreement with IC WORKS, the Company
sold the $10.4 million dollars of equipment at IC WORKS for $5.2 million and
invested an additional $1.5 million in preferred stock of IC WORKS. This
agreement terminates the Company's operating agreement with IC WORKS. As a
result of these events and transactions, the Company recorded a loss of $8.3
million on its foundry investment in 1997 (of which $8.0 million was recorded in
the first quarter of 1997), which consists of a $3.0 million write down of the
preferred stock, a loss on the sale of the equipment of $5.2 million, and $.1
million of costs associated with prepayment penalties on financing of the
equipment and legal fees. Two of the Company's directors who served during 1997
also served as directors of IC WORKS.
NOTE 13 -- SUBSEQUENT EVENT:
On February 1, 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.
F-19
<PAGE> 61
- --------------------------------------------------------------------------------
TelCom Semiconductor, Inc. Logo
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
C.E. UNTERBERG, TOWBIN
STEPHENS INC.
- --------------------------------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The fees and expenses incurred by the Registrant in connection with the
offering are payable by the Registrant and, other than filing fees, are
estimated as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC Registration Fee........................................ $ 22,500
NASD Filing................................................. 8,823
Nasdaq National Market Fee.................................. 17,500
Printing.................................................... 125,000
Legal Fees and Expenses..................................... 225,000
Accounting Fees and Expenses................................ 100,000
Miscellaneous............................................... 51,177
--------
Total............................................. $550,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceedings, whether civil, criminal, administrative or investigative (other
than action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interest, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
In accordance with the DGCL, the Registrant's Restated Certificate of
Incorporation ("Certificate"), contains a provision to limit the personal
liability of the directors of the Registrant for violations of their fiduciary
duty. This provision eliminates each director's liability to the Registrant or
its stockholders for monetary damages except (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transaction from which a director
derived an improper personal benefit. The effect of this provision is to
eliminate the personal liability of directors for monetary damages for actions
involving a breach of their fiduciary duty of care, including any such actions
involving gross negligence.
The Registrant's Certificate and the Registrant's Bylaws provide for
indemnification of the officers and directors of the Registrant to the fullest
extent permitted by applicable law.
The Registrant has entered into indemnification agreements with each
director and executive officer which provide indemnification to such directors
and executive officers under certain circumstances for acts or omissions which
may not be covered by directors' and officers' liability insurance.
II-1
<PAGE> 63
ITEM 16. EXHIBITS.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Independent Accountants.
24.1 Power of Attorney (see page II-4 of this Registration
Statement).
27.1 Financial data schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; provided, however, that (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by (i)
and (ii) is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 64
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment of the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California on this 22nd day
of February, 2000.
TELCOM SEMICONDUCTOR, INC.
By: /s/ PHILLIP M. DRAYER
------------------------------------
Phillip M. Drayer
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Phillip M. Drayer and Robert G. Gargus,
and each of them his attorney-in-fact, with the power of substitution, for him
in any and all capacities, to sign any amendment or post-effective amendment to
this Registration on Form S-3 or abbreviated registration statement (including,
without limitation, any additional registration filed pursuant to Rule 462 under
the Securities Act of 1933) with respect thereto and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on February 22, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ PHILLIP M. DRAYER Chief Executive Officer and Director
- --------------------------------------------------- (Principal Executive Officer)
Phillip M. Drayer
/s/ ROBERT G. GARGUS President, Chief Financial Officer and Director
- --------------------------------------------------- (Principal Financial Officer)
Robert G. Gargus
/s/ KENNETH J. ROSE Chief Accounting Officer and Corporate Controller
- --------------------------------------------------- (Principal Accounting Officer)
Kenneth J. Rose
/s/ DONALD E. FOWLER Director
- ---------------------------------------------------
Donald E. Fowler
/s/ FRANK GILL Director
- ---------------------------------------------------
Frank Gill
/s/ T. PETER THOMAS Director
- ---------------------------------------------------
T. Peter Thomas
</TABLE>
II-4
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Independent Accountants.
24.1 Power of Attorney (see page II-4 of this Registration
Statement).
27.1 Financial data schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of
our report dated January 20, 2000, except as to Note 13 which is as of February
1, 2000, relating to the financial statements of TelCom Semiconductor, Inc.,
which appears in such Registration Statement. We also consent to the
incorporation by reference in this Registration Statement on Form S-3 of our
report dated January 20, 1999 relating to the financial statements, which
appears in TelCom Semiconductor, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
February 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,413
<SECURITIES> 0
<RECEIVABLES> 8,509
<ALLOWANCES> 195
<INVENTORY> 5,863
<CURRENT-ASSETS> 36,150
<PP&E> 14,353
<DEPRECIATION> 7,562
<TOTAL-ASSETS> 45,941
<CURRENT-LIABILITIES> 6,959
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 26,965
<TOTAL-LIABILITY-AND-EQUITY> 45,941
<SALES> 57,322
<TOTAL-REVENUES> 57,322
<CGS> 31,626
<TOTAL-COSTS> 31,626
<OTHER-EXPENSES> 17,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> 14,830
<INCOME-TAX> 1,701
<INCOME-CONTINUING> 13,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,129
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.84
</TABLE>
