-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MXfHOxB7jtqicbYsSfzHnfyWq2zbpCKS8TbWKvkwAixjRTBFnAroOhcXB6wzeMnF v+zudlJ+dVfDfFsQXiDjwA== 0001012870-98-002798.txt : 19981109 0001012870-98-002798.hdr.sgml : 19981109 ACCESSION NUMBER: 0001012870-98-002798 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERICOM SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0001001426 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770254621 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27026 FILM NUMBER: 98739327 BUSINESS ADDRESS: STREET 1: 2380 BERING DR CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084350800 MAIL ADDRESS: STREET 1: 2380 BERING DR CITY: SAN JOSE STATE: CA ZIP: 95131 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _______ to _______ Commission File Number 0-27026 Pericom Semiconductor Corporation (Exact Name of Registrant as Specified in Its Charter) California 77-0254621 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2380 Bering Drive San Jose, California 95131 (408) 435-0800 (Address of Principal Executive Offices and Issuer's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of outstanding shares of the Registrant's Common Stock as of October 20, 1998 was 9,331,699. 1 Pericom Semiconductor Corporation Form 10-Q for the Quarter Ended September 26, 1998 INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1: Financial Statements Condensed Balance Sheets as of September 30, 1998 and June 30, 1998 3 Condensed Statements of Income for the three months ended September 30, 1998 and September 30, 1997 4 Condensed Statements of Cash Flows for the three months ended September 30, 1998 and September 30, 1997 5 Notes to Condensed Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 19 Signatures 20 2 PART I. FINANCIAL INFORMATION Item 1: Financial Statements Pericom Semiconductor Corporation Condensed Balance Sheets (In thousands)
September 30, June 30, 1998 1998 (1) ---- -------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 7,877 $ 8,773 Short-term investments 17,036 17,058 Accounts receivable: Trade (net of allowances of $1,407 and $1,559) 8,117 5,437 Other receivables 330 193 Inventories 8,630 8,917 Prepaid expenses and other current assets 378 153 Deferred income taxes 510 510 --------------------------------------------- Total current assets 42,878 41,041 Property and equipment net 5,328 5,121 Investment in and advances to joint venture 1,329 1,046 Other assets 194 193 --------------------------------------------- $49,729 $ 47,401 ============================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,633 $ 6,117 Accrued liabilities 1,258 1,855 Income taxes payable 977 318 --------------------------------------------- Total current liabilities 8,868 8,290 Deferred income taxes 500 500 Shareholders' equity: Common stock 24,738 24,570 Retained earnings 15,623 14,041 --------------------------------------------- Total shareholders' equity 40,361 38,611 --------------------------------------------- $49,729 $ 47,401 =============================================
(1) Derived from the June 30, 1998 audited balance sheet included in the Company's Annual Report on Form 10-K. See notes to condensed financial statements. 3 Pericom Semiconductor Corporation Condensed Statements of Income (Unaudited) (In thousands, except per share amounts)
Three Months Ended September 30, ------------------------------ 1998 1997 -------------- -------------- Net revenues $14,547 $11,398 Cost of revenues 8,968 6,839 ------------------------------- Gross profit 5,579 4,559 ------------------------------- Operating expenses: Research and development 1,355 1,169 Selling, general and administrative 2,095 1,956 ------------------------------- Total 3,450 3,125 ------------------------------- Income from operations 2,129 1,434 Equity in net loss of joint venture (75) (30) Interest income 343 123 ------------------------------- Income before income taxes 2,397 1,527 Provision for income taxes 815 504 ------------------------------- Net income $ 1,582 $ 1,023 =============================== Basic earnings per share $0.17 $0.33 =============================== Diluted earnings per share $0.16 $0.12 =============================== Shares used in computing basic earnings per share 9,311 3,122 =============================== Shares used in computing diluted earnings per share 9,967 8,210 ===============================
See notes to condensed financial statements. 4 Pericom Semiconductor Corporation Condensed Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended September 30, ------------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,582 $1,023 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 347 277 Equity in net loss of joint venture 75 30 Changes in assets and liabilities: Accounts receivable (2,817) 238 Inventories 287 (263) Prepaid expenses and other current assets (225) 3 Accounts payable 516 (892) Accrued liabilities (597) 162 Income taxes payable 659 155 ------------------------------- Net cash provided by (used in) operating activities (173) 733 ------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (554) (745) Decrease in short-term investments 22 --- Increase in other assets (1) (93) (Increase) decrease in advances to joint (358) 25 venture ------------------------------- Net cash used for investing activities (891) (813) ------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 168 58 ------------------------------- Net cash provided by financing activities 168 58 ------------------------------- NET DECREASE IN CASH AND EQUIVALENTS (896) (22) CASH AND EQUIVALENTS: Beginning of period 8,773 9,566 ------------------------------- End of period $ 7,877 $9,544 =============================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 156 $ 350 ===============================
See notes to condensed financial statements. 5 Pericom Semiconductor Corporation Notes To Condensed Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The financial statements have been prepared by Pericom Semiconductor Corporation ("Pericom" or the "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's financial position as of September 30, 1998 and the results of operations and cash flows for the three-month periods ended September 30, 1998 and 1997. This unaudited quarterly information should be read in conjunction with the audited financial statements of Pericom and the notes thereto incorporated by reference in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The preparation of the interim condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed financial statements and the reported amounts of revenue and expenses during the period. Actual amounts could differ from these estimates. The results of operations for the three-month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the entire year. The Company's fiscal periods in the accompanying financial statements have been shown as ending on June 30 and September 30. Fiscal year 1998 ended on June 27, 1998. The three-month periods in fiscal years 1998 and 1999 ended on September 27, 1997 and September 26, 1998, respectively. The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position or results of operations: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current products; changes in the overall demand for products and services offered by the Company; changes in customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; and the Company's ability to attract and retain employees necessary to support its growth. 2. EARNINGS PER SHARE The Company has computed earnings per share in accordance with SFAS No. 128, "Earnings Per Share," (SFAS 128). Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 6 Basic and diluted earnings per share for the three-month periods ended September 30, 1998 and September 30, 1997 are computed as follows:
Three Months Ended September 30, ----------------------------- 1998 1997 ---- ---- Net income $1,582 $1,023 ============================= Computation of common shares outstanding - basic earnings per share: Weighted average shares of common stock 9,311 3,122 ----------------------------- Shares used in computing basic earnings per share 9,311 3,122 ============================= Basic earnings per share $ 0.17 $ 0.33 ============================= Computation of common shares outstanding - diluted earnings per share: Weighted average shares of common stock 9,311 3,122 Preferred shares --- 4,613 Dilutive options using the treasury stock method 656 475 ----------------------------- Shares used in computing diluted earnings per share 9,967 8,210 ============================= Diluted earnings per share $ 0.16 $ 0.12 ============================= 3. INVENTORIES Inventories consist of (in thousands): September 30, June 30, 1998 1998 ---- ---- Finished goods $2,480 $1,752 Work in process 4,756 5,671 Raw materials 1,394 1,494 ----------------------------- $8,630 $8,917 ============================= 4. ACCRUED LIABILITIES Accrued liabilities consist of (in thousands): September 30, June 30, 1998 1998 ---- ---- Accrued compensation $ 643 $1,059 External sales representative commissions 482 636 Other accrued expenses 133 160 ----------------------------- $1,258 $1,855 =============================
7 5. RECENTLY ISSUED ACCOUNTING STANDARD In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, service, geographic areas and major customers. Adoption of this statement will not impact the Company's financial position, results of operations or cash flows. This statement is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 6. COMPREHENSIVE INCOME During the quarter ended September 30, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. At September 30, 1998 and 1997, there are no differences between comprehensive income and reported net income. 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Pericom Semiconductor Corporation The following information should be read in conjunction with the unaudited financial statements and notes thereto included in Part 1 - Item 1 of this Quarterly Report and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K (the "Form 10-K"). This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. The Company's future financial condition and results of operations, as well as any forward- looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in "Additional Factors That May Affect Results" and elsewhere in this report, as well as factors set forth in the Company's Form 10-K. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and the Company assumes no obligation to update any such forward-looking statement or reason why actual results may differ. RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of net revenues for the periods indicated.
Three Months Ended September 30, ------------------------------- 1998 1997 ---- ---- Net revenues 100.0% 100.0% Cost of revenues 61.6% 60.0% ------------------------------- Gross profit 38.4% 40.0% ------------------------------- Operating expenses: Research and development 9.3% 10.2% Selling, general and administrative 14.4% 17.2% ------------------------------- Total 23.7% 27.4% ------------------------------- Income from operations 14.7% 12.6% Other income, net 1.8% 0.8% ------------------------------- Income before income taxes 16.5% 13.4% Provision for income taxes 5.6% 4.4% ------------------------------- Net income 10.9% 9.0% ===============================
9 NET REVENUES Net revenues consist primarily of product sales, which are recognized upon shipment, less an estimate for returns and allowances. Net revenues increased 27% from $11.4 million for the quarter ended September 30, 1997 to $14.5 million for the quarter ended September 30, 1998. The increase in net revenues resulted from continued market acceptance of the Company's existing products and sales of new products in the Company's SiliconInterface, SiliconSwitch and SiliconClock product lines, offset in part by a decline in the weighted average selling price of all products. Sales to domestic and international distributors as a percent of total revenues rose from 43% for the first quarter of fiscal 1998 to 52% for the first quarter of fiscal 1999. Sales to one customer, an international distributor, accounted for approximately 16% of net revenues in the first quarter of fiscal 1999. No customers accounted for more than 10% of net revenues in the first quarter of fiscal 1998. GROSS PROFIT Gross profit increased 22% from $4.6 million for the quarter ended September 30, 1997 to $5.6 million for the corresponding quarter ended September 30, 1998. Gross profit as a percentage of net revenues, or gross margin, decreased from 40.0% in the first quarter of fiscal 1998 to 38.4% in the first quarter of fiscal 1999. The decrease in gross margin resulted from decreases in average selling prices in the Company's various product lines in excess of cost reductions achieved by the Company. The introduction of new products at higher gross margins and cost reductions achieved in each of the Company's product lines through reduced wafer costs, lower per unit assembly and test costs, and increased die per wafer resulting from reduced design geometries were not enough to offset the erosion in average selling prices. RESEARCH AND DEVELOPMENT Research and development expenses increased 16% from $1.2 million for the quarter ended September 30, 1997 to $1.4 million for the corresponding quarter ended September 30, 1998, but decreased as a percentage of net revenues from 10.2% to 9.3%. The increase in expense was attributable to development costs for new products in each of the Company's product lines and expansion of the Company's engineering staff as the Company continued its commitment to new product development. The Company believes that continued spending on research and development to develop new products and improve manufacturing processes is critical to the Company's success and, consequently, expects to increase research and development expenses in future periods. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management. Such costs include advertising, sales materials, sales commissions and other marketing and promotional expenses. Selling, general and administrative expenses increased 7% from $2.0 million for the quarter ended September 30, 1997 to $2.1 million for the corresponding quarter ended September 30, 1998, but decreased as a percentage of net revenues from 17.2% to 14.4%. The increase in expense was attributable to increased staffing levels, particularly in sales and marketing. The Company anticipates that selling, general and administrative expenses will increase in future periods due to increased staffing, commission expenses and increased legal and accounting expenses associated with public reporting obligations. OTHER INCOME, NET Other income, net includes interest income and the Company's allocated portion of net losses of Pericom Technology, Inc. ("PTI"). Other income, net increased from $93,000 for the quarter ended September 30, 1997 to $268,000 for the corresponding quarter ended September 30, 1998 due to interest earned on the increased cash and short-term investment balances that resulted from the net proceeds from the Company's 10 initial public offering in the December 1997 quarter, partially offset by an increase of $45,000 in the Company's share of the net losses of PTI. PROVISION FOR INCOME TAXES The provision for income taxes increased from $504,000 for the quarter ended September 30, 1997 to $815,000 for the corresponding quarter ended September 30, 1998 due to the increase in taxable income. The provision for income taxes differed from the federal statutory rate primarily due to state income taxes and the utilization of research and development tax credits. LIQUIDITY AND CAPITAL RESOURCES Prior to the Company's initial public offering in October 1997, the Company used proceeds from the private sale of equity securities, bank borrowings and internal cash flow to support its operations, acquire capital equipment and finance inventory and accounts receivable growth. During the first three months of fiscal 1998 and 1999, operating activities generated $0.7 million and used $0.2 million of cash, respectively. Net cash used for investing activities increased from $0.8 million for the three months ended September 30, 1997 to $0.9 million for the comparable period in fiscal 1999. The Company made capital expenditures of approximately $0.7 million during the first three months of fiscal 1998 compared with $0.6 million in the comparable period of fiscal 1999. As of September 30, 1998, the Company's principal source of liquidity included cash, cash equivalents and short-term investments of approximately $24.9 million. The Company believes that existing cash balances and cash generated from operations will be sufficient to fund necessary purchases of capital equipment and to provide working capital at least through the next 12 months. However, there can be no assurance that future events will not require the Company to seek additional capital sooner or, if so required, that adequate capital will be available on terms acceptable to the Company. MARKET RISK DISCLOSURE At September 30, 1998, the Company's investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, of $17 million. These securities are subject to interest rate risk and will decline in value if market interest rates increase. For example, if market interest rates were to increase immediately and uniformly by 10% from levels as of September 30, 1998, the decline in the fair value of the portfolio would not have a material effect on the Company's results of operations over the next fiscal year. YEAR 2000 DISCLOSURE The approach of the year 2000 may present potentially serious information systems problems for many companies because many of today's existing computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year and therefore, may be unable to distinguish 1900 from the year 2000. This could cause a system failure or miscalculations causing disruptions to operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company relies upon products and information from critical suppliers, large customers and other outside parties, in the normal course of business, whose software programs are also subject to this problem. In response to this, the Company is in the process of inquiring of strategic vendors and large customers to determine the extent to which the Company may be vulnerable to these third parties' failure to adequately remedy any Year 2000 issues. The Company has spent and will continue to spend an appropriate level of resources to address this issue on a timely basis and to date has spent less than $100,000 and expects total costs incurred to not exceed this amount. There can be no assurance that the critical Year 2000-deficient software applications of the parties on which the Company depends will be 11 converted on a timely basis or not converted to systems which are incompatible with the Company's systems. The Company began the installation of an enterprise wide EDP system that was required to meet Pericom's business needs in late fiscal 1997. The enterprise wide system purchased by the Company includes many important functional improvements necessary for Pericom to be a competitive semiconductor manufacturing company and is year 2000 compliant. The Company has not allocated a portion of the total project cost to the Year 2000 issue. The Company believes that the incremental cost associated with Year 2000 compliance is not material, as this feature is included in the enterprise wide system purchased by the Company to satisfy business needs. The Company believes that substantially all of its systems, including the new enterprise wide system, are Year 2000 compliant and therefore has no contingency plans. Under the worst case scenario, if the Company is wrong in its beliefs about the Year 2000 readiness of its systems, the Company would have a difficult time managing its business. The Company currently believes that is has no significant exposure to contingencies directly related to the Year 2000 issue for products it has sold or will sell in the future. ADDITIONAL FACTORS THAT MAY AFFECT RESULTS LIMITED OPERATING HISTORY; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS There can be no assurance that any past levels of revenue growth or profitability can be sustained on a quarterly or annual basis. The Company's expense levels are based in part on anticipated future revenue levels, which can be difficult to predict. The Company's business is characterized by short-term orders and shipment schedules. The Company does not have long-term purchase agreements with any of its customers, and customers can typically cancel or reschedule their orders without significant penalty. The Company typically plans its production and inventory levels based on forecasts, generated with input from customers and sales representatives, of customer demand, which is highly unpredictable and can fluctuate substantially. If customer demand falls significantly below anticipated levels, the Company's business, financial condition and results of operations would be materially and adversely affected. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in its future operating results on a quarterly or annual basis. The Company's operating results are affected by a wide variety of factors that could materially and adversely affect net revenues and results of operations, including a decline in the gross margins of its products, the growth or reduction in the size of the market for interface ICs, delay or decline in orders received from distributors, the availability of manufacturing capacity with the Company's wafer suppliers, changes in product mix, customer acceptance of the Company's new products, the ability of customers to make payments to the Company, the timing of new product introductions and announcements by the Company and its competitors, increased research and development expenses associated with new product introductions or process changes, expenses incurred in obtaining and enforcing, and in defending claims with respect to, intellectual property rights, changes in manufacturing costs and fluctuations in manufacturing yields, and other factors such as general conditions in the semiconductor industry. All of the above factors are difficult for the Company to forecast, and these or other factors can materially and adversely affect the Company's business, financial condition and results of operations for one quarter or a series of quarters. The Company's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company's expectations or any material delay of customer orders could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to sustain profitability on a quarterly or annual basis. In addition, it is possible that the Company's operating results in future quarters may fall below the expectations of public market analysts and investors, which would likely result in a material drop in the market price of the Company's Common Stock. 12 Historically, selling prices in the semiconductor industry generally, as well as for the Company's products, have decreased significantly over the life of each product. The Company expects that selling prices for its existing products will decline over time and that selling prices for new products will decline significantly over the lives of these products. Declines in selling prices for the Company's products, if not offset by reductions in the costs of producing these products or by sales of new products with higher gross margins, would reduce the Company's overall gross margin and could materially and adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to reduce production costs or to develop and market new products with higher gross margins. DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES The Company's reliance on independent wafer suppliers to fabricate its wafers at their production facilities subjects the Company to such possible risks as potential lack of adequate capacity and available manufactured products, lack of control over delivery schedules and the risk of events limiting production and reducing yields, such as fires or other damage to production facilities or technical difficulties. Although, to date, the Company has not experienced any material delays in obtaining an adequate supply of wafers, there can be no assurance that the Company will not experience delays in the future. Any inability or unwillingness of the Company's wafer suppliers generally, and Chartered Semiconductor Manufacturing Pte, Ltd. ("Chartered") in particular, to provide adequate quantities of finished wafers to meet the Company's needs in a timely manner or in needed quantities would delay production and product shipments and have a material adverse effect on the Company's business, financial condition and results of operations. At present, the Company purchases wafers from its wafer suppliers through the issuance of purchase orders based on rolling six month forecasts provided by the Company, and such purchase orders are subject to acceptance by each wafer foundry. The Company does not have long-term purchase agreements with any of its wafer suppliers, each of which has the right to reduce or terminate allocations of wafers to the Company. In the event that these suppliers were unable or unwilling to continue to manufacture the Company's key products in required volumes, the Company would have to identify and qualify additional foundries. In any event, the Company's ability to grow in the future will also be dependent upon its ability to identify and qualify new wafer foundries. The qualification process can take up to six months or longer, and there can be no assurance that any additional wafer foundries will become available to the Company or will be in a position to satisfy any of the Company's requirements on a timely basis. The Company also depends upon its wafer suppliers to participate in process improvement efforts, such as the transition to finer geometries, and any inability or unwillingness of such suppliers to do so could delay or otherwise materially adversely affect the Company's development and introduction of new products. Furthermore, sudden shortages of raw materials or production capacity constraints can lead wafer suppliers to allocate available capacity to customers other than the Company or for internal uses, which could interrupt the Company's ability to meet its product delivery obligations. Any significant interruption in the supply of wafers to the Company would adversely affect the Company's operating results and relations with affected customers. Each of Chartered, Austria Mikro Systeme GmbH, Taiwan Semiconductor Manufacturing Corporation, New Japan Radio Corporation and LG Semicon Co., Ltd., the wafer foundries utilized by the Company, is located outside the United States, which exposes the Company to those risks associated with international business operations, including foreign governmental regulations, currency fluctuations, reduced protection for intellectual property, changes in political conditions, disruptions or delays in shipments and changes in economic conditions in the countries where these foundries are located, each of which could have a material adverse effect on the Company's business, financial condition and results of operations. TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS The markets for the Company's products are characterized by rapidly changing technology, frequent new product introductions and declining average selling prices over product life cycles. The Company's future success is highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. The success of new products depends on a variety of factors, including product selection, product performance and functionality, customer acceptance, competitive pricing, successful and 13 timely completion of product development, sufficient wafer fabrication capacity and achievement of acceptable manufacturing yields by the Company's wafer suppliers. There can be no assurance that the Company will be able successfully to identify new product opportunities and develop and bring to market such new products or that the Company will be able to respond effectively to new technological changes or new product announcements by others. In addition, the Company may experience delays, difficulty in procuring adequate fabrication capacity for the development and manufacture of such products or other difficulties in achieving volume production of these products. The failure of the Company to complete and introduce new products in a timely manner at competitive price/performance levels would materially and adversely affect the Company's business, financial condition and results of operations. The Company has relied in the past and continues to rely upon its relationships with manufacturers of high-performance systems for insights into product development strategies for emerging system requirements. The Company believes it will rely on these relationships more in the future as the Company focuses on the development and production of application specific standard products ("ASSPs"). The Company generally incorporates its new products into a customer's product or system at the design stage. However, these design efforts, which can often require significant expenditures by the Company, may precede the generation of volume sales, if any, by a year or more. Moreover, the value of any design win will depend in large part on the ultimate success of the customer's product and on the extent to which the system's design accommodates components manufactured by the Company's competitors. No assurance can be given that the Company will achieve design wins or that any design win will result in significant future revenues. To the extent the Company cannot develop or maintain such relationships, its ability to develop well-accepted new products may be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER CONCENTRATION A relatively small number of customers have accounted for a significant portion of the Company's net revenues in each of the past several fiscal years and the Company expects this trend to continue for the foreseeable future. In fiscal 1998, sales to one customer accounted for approximately 11% of the Company's net revenues, and sales to the Company's top five customers accounted for approximately 36% of net revenues. One customer, an international distributor that in turn ships to multiple customers, accounted for 16% of net revenues during the first three months of fiscal 1999. The Company does not have long- term purchase agreements with any of its customers. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods or that the Company will be able to obtain orders from new customers. Loss of one or more of the Company's customers, or a reduction in the volume of orders placed by any of such customers, could materially and adversely affect the Company's business, financial condition and results of operations. COMPETITION The semiconductor industry is intensely competitive. Significant competitive factors in the market for high-performance ICs include product features and performance, product quality, price, success in developing new products, adequate wafer fabrication capacity and sources of raw materials, efficiency of production, timing of new product introductions, ability to protect intellectual property rights and proprietary information, and general market and economic conditions. The Company's competitors include Cypress Semiconductor Corporation, Integrated Circuit Systems, Inc., Integrated Device Technology, Inc., Maxim Integrated Products, Inc., Quality Semiconductor, Inc. and Texas Instruments, Inc. most of which have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer standing customer relationships than the Company. The Company also competes with other major emerging companies that sell products to certain segments of the markets addressed by the Company. Competitors with greater financial resources and broader product lines may also have greater ability to engage in sustained price reductions in the Company's primary markets in order to gain or maintain market share. 14 The Company believes that its future success will depend on its ability to continue to improve and develop its products and processes. Unlike the Company, many of the Company's competitors maintain internal manufacturing capacity for the fabrication and assembly of semiconductor products, which may provide such companies with more reliable manufacturing capability, shorter development and manufacturing cycles and time-to-market advantages. In addition, competitors with their own wafer fabrication facilities that are capable of producing products with the same design geometries as those of the Company may be able to manufacture and sell competitive products at lower prices. Introduction of products by competitors that are manufactured with improved process technology could materially and adversely affect the Company's business and results of operations. As is typical in the semiconductor industry, competitors of the Company have developed and marketed products having similar or identical functionality as the Company's products, and the Company expects that this trend will continue in the future. To the extent the Company's products do not achieve performance, price, size or other advantages over products offered by competitors, the Company is likely to experience greater price competition with respect to such products. The Company also faces competition from the makers of microprocessors and other system devices, including application specific integrated circuits ("ASICs"), that have been and may be developed for particular systems. These devices may include interface logic functions which may eliminate the need or sharply reduce the demand for the Company's products in particular applications. There can be no assurance that the Company will be able to compete successfully in the future or that competitive pressures will not materially and adversely affect the Company's financial condition and results of operations. Competitive pressures could also reduce market acceptance of the Company's products and result in price reductions and increases in expenses that could materially and adversely affect the Company's business, financial condition and results of operations. See "--Dependence on Independent Wafer Foundries," "--Dependence on Single or Limited Source Assembly Subcontractors." VARIATION IN PRODUCTION YIELDS The manufacture and assembly of semiconductor products is highly complex and sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of manufacturing personnel and production equipment. In a typical semiconductor manufacturing process, silicon wafers produced by the foundry are sorted and cut into individual die that are then assembled into individual packages and tested for performance. The Company's wafer fabrication suppliers have from time to time experienced lower than anticipated yields of good die, as is typical in the semiconductor industry. In the event of such decreased yields, the Company would incur additional costs to sort wafers, an increase in average cost per usable die and an increase in the time to market for the Company's products. These conditions could reduce the Company's net revenues and gross margin, and have an adverse effect on the Company's business and results of operations, and relations with affected customers. No assurance can be given that the Company or its suppliers will not experience yield problems in the future which could result in a material adverse effect on the Company's business and results of operations. SEMICONDUCTOR INDUSTRY RISKS The semiconductor industry has historically been cyclical and periodically subject to significant economic downturns, characterized by diminished product demand, accelerated erosion of average selling prices, overcapacity and rapidly changing technology and evolving industry standards. The Company may in the future experience substantial period-to-period fluctuations in business and results of operations due to general semiconductor industry conditions, overall economic conditions or other factors. The Company's business is also subject to the risks associated with the effects of legislation and regulations relating to the import or export of semiconductor products. 15 RELIANCE ON DISTRIBUTORS; PRODUCT RETURNS Sales through domestic and international distributors represented 36% and 49% of the Company's net revenues in fiscal years 1997 and 1998, respectively. During the first three months of fiscal 1999 sales through domestic and international distributors represented 52% of net revenues. The Company's distributors are not subject to minimum purchase requirements, may reduce or delay orders periodically due to excess inventory and can discontinue selling the Company's products at any time. The Company recognizes revenue and related gross profit from sales of products through distributors when shipped. Domestic distributors are generally allowed a return allowance of 10% of their net purchases every six months. Although the Company believes that, to date, it has provided adequate allowances for exchanges, returns, price protection and other concessions and, to date, amounts returned have not been material, there can be no assurance that actual amounts incurred will not exceed the Company's allowances, particularly in connection with the introduction of new products, enhancements to existing products or price reductions. The Company's distributors typically offer competing products. The loss of one or more distributors, or the decision by one of the distributors to reduce the number of the Company's products offered by such distributor or to carry the product lines of the Company's competitors, could have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH The Company has recently experienced and may continue to experience growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management personnel. To manage recent and potential future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate and manage a growing number of employees. The future success of the Company also will depend on its ability to attract and retain qualified technical, marketing and management personnel, particularly highly skilled design, process and test engineers, for whom competition is intense. In particular, the current availability of qualified engineers is limited, and competition among companies for skilled and experienced engineering personnel is very strong. During strong business cycles, the Company expects to experience continued difficulty in filling its needs for qualified engineers and other personnel. The Company is in the process of implementing a new management information system. There can be no assurance that the Company will not encounter difficulties as it seeks to integrate this new system into its operations. There can be no assurance that the Company will be able to achieve or manage effectively any such growth, and failure to do so could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's future success will depend to a large extent on the continued contributions of its executive officers and other key management and technical personnel, none of whom has an employment agreement with the Company and each of whom would be difficult to replace. The Company does not maintain any key person life insurance policy on any of such persons. The loss of the services of one or more of the Company's executive officers or key personnel or the inability to continue to attract qualified personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. PATENTS AND PROPRIETARY RIGHTS The Company's success depends in part on its ability to obtain patents and licenses and preserve other intellectual property rights covering its products and development and testing tools. In the United States, the Company holds eleven patents covering certain aspects of its product designs and has seven additional patent applications pending. Copyrights, mask work protection, trade secrets and confidential technological know-how are also key elements of the Company's business. There can be no assurance that any additional patents will be issued to the Company or that the Company's patents or other intellectual property will provide meaningful protection from competition. The Company may be subject to or may initiate 16 interference proceedings in the U.S. Patent and Trademark Office, which can require significant financial and management resources. In addition to the foregoing, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The inability of the Company to protect its intellectual property adequately could have a material adverse effect on its business, financial condition and results of operations. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights, and there can be no assurance that the Company will not be subject to infringement claims by other parties. In May 1995, Quality Semiconductor, Inc. ("QSI"), a competitor of the Company, brought a lawsuit against the Company in the United States District Court for the Northern District of California, San Francisco Division, claiming infringement of one of its patents by certain features in certain of the Company's bus switch products and seeking injunctive relief and monetary damages. The court has issued a claim construction order, at this time there is no discovery or motions pending. The Company believes that is has meritorious defenses, that the products involved are not material to the Company's business and that the resolution of this matter will not have a material adverse effect on the Company's business, financial condition or results of operations. However, any litigation, whether or not determined in favor of the Company, can result in significant expense to the Company and can divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in any litigation involving intellectual property, the Company might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to the infringed technology, and may suffer significant monetary damages, which could include treble damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology on commercially reasonable terms, the Company's business and results of operations would be materially and adversely affected. There can be no assurances that the claims brought by QSI or any potential infringement claims by other parties (or claims for indemnity from customers resulting from any infringement claims) will not materially and adversely affect the Company's business, financial condition and results of operations. The process technology used by the Company's independent foundries, including process technology that the Company has developed with its foundries, can generally be used by such foundries to produce their own products or to manufacture products for other companies, including the Company's competitors. In addition, the Company does not generally have the right to implement the process technology used to manufacture its products with foundries other than the foundry with which it has developed such process technology. RISKS OF INTERNATIONAL SALES Sales outside of the United States accounted for approximately 30%, 37%, 45% and 58% of the Company's net revenues in fiscal years 1996, 1997 and 1998, and the first three months of fiscal 1999, respectively. The Company expects that export sales will continue to represent a significant portion of net revenues. The Company intends to expand its operations outside of the United States, which will require significant management attention and financial resources and further subject the Company to international operating risks. These risks include unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because the Company's international sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive than competitors' products that are denominated in local currencies, and there can be no assurance that the Company will not be materially and adversely affected by fluctuating exchange rates. Furthermore, there can be no assurance that regulatory, geopolitical and other factors will not materially and adversely affect the Company's business, financial condition and results of operations in the future or require the Company to modify its current business practices. 17 DEPENDENCE ON SINGLE OR LIMITED SOURCE ASSEMBLY SUBCONTRACTORS The Company primarily relies on foreign subcontractors for the assembly and packaging of its products and, to a lesser extent, for the testing of its finished products. Some of these subcontractors are the Company's single source supplier for certain new packages. Although the Company believes that it is not materially dependent upon any such subcontractor, changes in the Company's or a subcontractor's business could cause the Company to become materially dependent on a subcontractor. The Company has from time to time experienced difficulties in the timeliness and quality of product deliveries from the Company's subcontractors. Although delays experienced to date have not been material, there can be no assurance that the Company will not experience similar or more severe difficulties in the future. The Company generally purchases these single or limited source components or services pursuant to purchase orders and has no guaranteed arrangements with such subcontractors. There can be no assurance that these subcontractors will continue to be able and willing to meet the Company's requirements for any such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, these subcontractors, or any other circumstance that would require the Company to qualify alternative sources of supply could delay shipments and result in the loss of customers, or limitations or reductions in the Company's revenues, or otherwise materially and adversely affect the Company's business, financial condition and results of operations. Each of the Company's assembly subcontractors is located outside the United States, which exposes the Company to risks associated with international business operations, including foreign governmental regulations, currency fluctuations, reduced protection for intellectual property, changes in political conditions, disruptions or delays in shipments and changes in economic conditions in the countries where these subcontractors are located, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a. Exhibits Exhibit 27.1 Financial Data Schedule b. Reports on Form 8-K. No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 1998. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pericom Semiconductor Corporation (Registrant) Date: November 4, 1998 By: /s/ Alex Hui ------------ Alex Hui Chief Executive Officer Date: November 4, 1998 By: /s/ Patrick B. Brennan ---------------------- Patrick B. Brennan Chief Financial Officer (Chief Accounting Officer) 20 EX-27.1 2 FINANCIAL DATA SCHEDULE ENDED SEP. 30, 1998
5 1,000 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 7,877 17,036 9,854 1,407 8,630 42,878 9,342 4,014 49,729 8,868 0 0 0 24,738 15,623 49,729 14,547 14,547 8,968 12,418 75 0 0 2,397 815 1,582 0 0 0 1,582 0.17 0.16
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