-----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, GtGmw7NW+gxJgYOnIENkHCVXTbnATWwW8E8U5oE1B1XuYNY56IBUIgeFcIkabymn iDgUI0DmYSaQn2QlYaFixw== 0001012870-99-004181.txt : 19991117 0001012870-99-004181.hdr.sgml : 19991117 ACCESSION NUMBER: 0001012870-99-004181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991115 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: 99751715 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 October 2, 1999 [ ] 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 22, 1999 was 9,680,175. Pericom Semiconductor Corporation Form 10-Q for the Quarter Ended October 2, 1999 INDEX
PART I. FINANCIAL INFORMATION Page ---- Item 1: Financial Statements Condensed Balance Sheets as of September 30, 1999 and June 30, 1999 3 Condensed Statements of Income for the three months ended September 30, 1999 and September 30, 1998 4 Condensed Statements of Cash Flows for the three months ended September 30, 1999 and September 30, 1998 5 Notes to Condensed Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3: Quantitative and Qualitative Disclosures about Market Risk 19 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 20 Signatures 21
2 PART I. FINANCIAL INFORMATION Item 1: Financial Statements Pericom Semiconductor Corporation Condensed Balance Sheets (In thousands)
September 30, June 30, 1999 1999(1) ------- -------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 9,005 $ 8,328 Short-term investments 18,038 17,397 Accounts receivable: Trade (net of allowances of $3,020, and $2,570) 10,955 9,719 Other receivables 358 346 Inventories 10,794 9,835 Prepaid expenses and other current assets 424 582 Deferred income taxes 356 356 -------------------------------------- Total current assets 49,930 46,563 Property and equipment - net 7,243 6,509 Investment in and advances to investee 2,925 2,611 Other assets 359 242 -------------------------------------- Total $60,457 $ 55,925 ====================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,744 $ 7,295 Accrued liabilities 1,752 1,604 Income taxes payable 1,262 22 -------------------------------------- Total current liabilities 10,758 8,921 Deferred income taxes 624 624 Shareholders' equity: Common stock 26,172 25,600 Accumulted other comprehensive loss (37) (33) Retained earnings 22,940 20,813 -------------------------------------- Total shareholders' equity 49,075 46,380 -------------------------------------- Total $60,457 $ 55,925 ======================================
(1) Derived from the June 30, 1999 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, --------------------------- 1999 1998 ------- ------- Net revenues $17,625 $14,547 Cost of revenues 10,233 8,968 --------------------------- Gross profit 7,392 5,579 --------------------------- Operating expenses: Research and development 1,619 1,355 Selling, general and administrative 2,504 2,095 --------------------------- Total 4,123 3,450 --------------------------- Income from operations 3,269 2,129 Equity in net loss of investee (84) (75) Interest income 361 343 --------------------------- Income before income taxes 3,546 2,397 Provision for income taxes 1,419 815 --------------------------- Net income $ 2,127 $ 1,582 =========================== Basic earnings per share $ 0.22 $ 0.17 =========================== Diluted earnings per share $ 0.20 $ 0.16 =========================== Shares used in computing basic earnings per share 9,611 9,311 =========================== Shares used in computing diluted earnings per share 10,820 9,967 ===========================
See notes to condensed financial statements. 4 Pericom Semiconductor Corporation Condensed Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended September 30, ---------------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,127 $ 1,582 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 499 347 Equity in net loss of joint venture 84 75 Changes in assets and liabilities: Accounts receivable (1,248) (2,817) Inventories (959) 287 Prepaid expenses and other current assets 157 (225) Accounts payable 449 516 Accrued liabilities 148 (597) Income taxes payable 1,240 659 ---------------------------- Net cash provided by (used in) operating activities 2,497 (173) ---------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,233) (554) Purchase of short-term investments (3,545) (2,234) Maturities of short-term investments 2,900 2,256 Increase in other assets (116) (1) Advances to investee (398) (358) ---------------------------- Net cash used for investing activities (2,392) (891) ---------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock 572 168 ---------------------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 677 (896) CASH AND EQUIVALENTS: Beginning of period 8,328 8,773 ---------------------------- End of period $ 9,005 $ 7,877 ============================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 178 $ 156 ============================
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, 1999 and the results of operations and cash flows for the three-month periods ended September 30, 1999 and 1998. 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, 1999 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 1999 ended on July 3, 1999. The three-month periods in fiscal years 1999 and 1998 ended on October 2, 1999 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. 6 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. Basic and diluted earnings per share for the three-month periods ended September 30, 1999 and September 30, 1998 are computed as follows:
Three Months Ended September 30, -------------------------- 1999 1998 ------- ------ Net income $ 2,127 $1,582 ========================== Computation of common shares outstanding - basic earnings per share: Weighted average shares of common stock 9,611 9,311 -------------------------- Shares used in computing basic earnings per share 9,611 9,311 ========================== Basic earnings per share $ 0.22 $ 0.17 ========================== Computation of common shares outstanding - diluted earnings per share: Weighted average shares of common stock 9,611 9,311 Dilutive options using the treasury stock method 1,209 656 -------------------------- Shares used in computing diluted earnings per share 10,820 9,967 ========================== Diluted earnings per share $ 0.20 $ 0.16 ==========================
3. Inventories Inventories consist of (in thousands):
September 30, June 30, 1999 1999 --------- -------- Finished goods $ 2,324 $2,620 Work in process 6,775 5,972 Raw materials 1,695 1,243 --------------------------------- $10,794 $9,835 =================================
7 4. Accrued Liabilities Accrued liabilities consist of (in thousands):
September 30, June 30, 1999 1999 ------ ------ Accrued compensation $1,071 $ 908 External sales representative commissions 570 572 Other accrued expenses 111 124 ---------------------------------- $1,752 $1,604 ==================================
5. Industry and Segment Information In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information about operating segments in annual and financial statements and requires that certain selected information about operating segments be reported in interim financial reports. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, or decision making group in deciding how to allocate resources and in assessing performance. SFAS no. 131 differs from accounting standard SFAS No. 14, which required companies to disclose certain financial information about an industry segment in which they operate. Under both SFAS No. 14 and SFAS No. 131, the Company operates in one reportable segment: The Company designs, manufactures and markets high performance digital, analog and mixed-signal integrated circuits used for the transfer, routing, and timing of digital and analog signals within and between computer, networking, datacom and telecom systems. 6. Comprehensive Income SFAS No. 130 requires an enterprise to report, by major components and as a single total, the change in net assets during the period from nonowner sources. For the three months ended September 30, 1999 and 1998, comprehensive income, which was comprised of the Company's net income for the periods and changes in cumulative unrealized gain/(loss) on short-term investments was as follows:
Three Months Ended September 30, -------------------------------- 1999 1998 ---------------- ------------- Net income $2,127 $1,582 Unrealized loss on investment (4) --- -------------------------------- Comprehensive income $2,123 $1,582 =================================
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 to Shareholders 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 statements regarding: projections of revenues, expenses or other financial items; the plans and objectives of management for future operations; the Company's tax rate; the adequacy of allowances for returns, price protection and other concessions; proposed new products or services; the sufficiency of cash generated from operations and cash balances; the Company's exposure to interest rate risk; the Company's costs, liabilities, exposure, and plans related to the Year 2000 problem; the Company's ability to mitigate risks associated with the Year 2000 problem; future economic conditions or performance; and 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 the Company's Form 10-K under the heading "Factors That May Affect Future Results", in (i) this Management's Discussion and Analysis of Financial Condition and Results of Operations, particularly under the subheading "Additional Factors that May Affect Results", and (ii) Note 1 to the Notes to Condensed Financial Statements. 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. 9 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, --------------------------------- 1999 1998 ----- ----- Net revenues 100.0% 100.0% Cost of revenues 58.1% 61.6% --------------------------------- Gross profit 41.9% 38.4% --------------------------------- Operating expenses: Research and development 9.2% 9.3% Selling, general and administrative 14.2% 14.4% --------------------------------- Total 23.4% 23.7% --------------------------------- Income from operations 18.5% 14.7% Other income, net 1.6% 1.8% --------------------------------- Income before income taxes 20.1% 16.5% Provision for income taxes 8.0% 5.6% --------------------------------- Net income 12.1% 10.9% =================================
Net Revenues Net revenues consist primarily of product sales, which are recognized upon shipment, less an estimate for returns and allowances. Net revenues increased 21% from $14.5 million for the quarter ended September 30, 1998 to $17.6 million for the quarter ended September 30, 1999. 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 52% for the first quarter of fiscal 1999 to 58% for the first quarter of fiscal 2000. Sales to one customer, an international distributor, accounted for approximately 14% of net revenues in the first quarter of fiscal 2000 and 16% of net revenues for the comparable quarter in fiscal 1999. Gross Profit Gross profit increased 32% from $5.6 million for the quarter ended September 30, 1998 to $7.4 million for the corresponding quarter ended September 30, 1999. Gross profit as a percentage of net revenues, or gross margin, increased from 38.4% in the first quarter of fiscal 1999 to 41.9% in the first quarter of fiscal 2000. The increase in gross margin resulted from the introduction and sale of new products at higher gross margins and cost reductions achieved through reduced wafer, assembly and test costs. These margin increases were partially offset by decreases in average selling prices in the Company's various product lines. Research and Development Research and development expenses increased 19.5% from $1.4 million for the quarter ended September 30, 1998 to $1.6 million for the corresponding quarter ended September 30, 1999, but decreased slightly as a percentage of net revenues from 9.3% to 9.2%. 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. 10 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 19.5% from $2.1 million for the quarter ended September 30, 1998 to $2.5 million for the corresponding quarter ended September 30, 1999, but decreased as a percentage of net revenues from 14.4% to 14.2%. The increase in expense was attributable to increased staffing levels, particularly in sales and marketing and the addition of a sales office in Japan. The Company anticipates that selling, general and administrative expenses will increase in future periods due to increased staffing levels, particularly in sales and marketing, as well as increased commission expense to the extent the Company achieves higher sales levels. 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 remained relatively flat, increasing from $268,000 for the quarter ended September 30, 1998 to $277,000 for the corresponding quarter ended September 30, 1999. The Company's share of the net losses of PTI increased from $75,000 to $84,000 and interest income rose from $343,000 to $361,000 for the quarters ending September 30, 1998 and September 30, 1999, respectively. Provision for Income Taxes The provision for income taxes increased from $815,000 for the quarter ended September 30, 1998 to $1,419,000 for the corresponding quarter ended September 30, 1999. The effective tax rate of 40% in the current years first quarter is up from 34% used in the comparable period last year. This is due to the increase in taxable income, and the expiration of the research and development tax credit which caused the effective rate to rise. The research and development tax credit has since been extended and the Company will be adjusting the tax rate downward in future periods to an expected overall 36% rate for the current year. The provision for income taxes differed from the federal statutory rate also due to state income taxes. 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 used $0.2 million and generated $2.5 million of cash, respectively. Net cash used for investing activities increased from $0.9 million for the three months ended September 30, 1998 to $2.4 million for the comparable period in fiscal 1999. The Company made capital expenditures of approximately $0.6 million during the first three months of fiscal 1998 compared with $1.2 million in the comparable period of fiscal 1999, and also increased net purchases of short-term investments by $0.6 million during the current year compared to the same period last year. As of September 30, 1999, the Company's principal source of liquidity included cash, cash equivalents and short-term investments of approximately $27.0 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 11 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. Year 2000 Disclosure The Company is aware of the issues associated with the programming code in existing computer systems as Year 2000 approaches. The Year 2000 problem is pervasive and complex, as virtually every computer operation will be affected by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has been working to identify and assess the risks associated with its information systems, products, operations and infrastructure, suppliers and customers that are not Year 2000 compliant, and to develop, implement and test remediation and contingency plans to mitigate these risks. The Company is replacing or upgrading systems, equipment and facilities that are known to be Year 2000 non-compliant. For the Year 2000 non-compliance issues identified to date, management believes the cost of upgrade or remediation has been less than $100,000 and expects total costs incurred to not exceed this amount. If implementation of replacement systems is delayed, or if significant new non-compliance issues are identified, these costs could increase and the Company's financial condition, results of operations, or cash flows could be materially adversely affected. INFORMATION SYSTEMS. The Company began the installation of an enterprise wide ERP 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. PRODUCTS. The Company currently believes that it has no significant exposure to contingencies directly related to the Year 2000 issue for products it has sold or is currently selling. OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in the operations and facilities of the Company have been inventoried and are currently being assessed for Year 2000 compliance. The assessment to date has not uncovered any material issues. SUPPLIERS. The Company has contacted its critical suppliers to determine whether their operations, products and services are Year 2000 compliant. Where practicable, the Company will attempt to mitigate its risks with respect to the failure of suppliers to be Year 2000 compliant. In the event that suppliers are not Year 2000 compliant, the Company will seek alternative sources of suppliers. However, such failures remain a possibility and could have a material impact on the Company's financial condition, results of operations, or cash flows. CUSTOMERS. The Company is actively responding to all customer requests for compliance, surveys and other general information related to its Year 2000 programs. 12 GENERAL. The Company does not currently expect its costs associated with the Year 2000 problem to be material, and expects to be able to fund these costs through operating cash flows. However, the risks associated with the Year 2000 problem can be difficult to identify and to address, and could result in material adverse consequences to the Company. Even if the Company, in a timely manner, completes all of its assessments, identifies and tests remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. These consequences could include increased remediation expenses, delays in product shipments, a decline in revenue and exposure to litigation related to any Year 2000 related failures. As the Year 2000 project continues, the Company may discover additional Year 2000 problems, may not be able to develop, implement, and test remediation or contingency plans in a timely manner, or may find that the costs of these activities exceed current expectations and become material. In many cases, the Company is relying on assurances from suppliers and customers that new and upgraded information systems and other products will be Year 2000 compliant. The Company has and plans to test certain third-party products, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed by the supplier in a timely and satisfactory way. Because the Company uses a variety of information systems and has additional systems embedded in its operations and infrastructure, the Company cannot be sure that all of its systems will work together in a Year 2000-compliant fashion. Furthermore, the Company cannot be sure that it will not suffer interruptions, either because of its own Year 2000 problems or those of its customers or suppliers whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the Company. 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, it could have an adverse effect on the Company's financial condition, results of operations, or cash flows. Further, the Company could be materially and adversely impacted by widespread economic or financial market disruption, or by Year 2000 computer system failures at third parties with which it has relationships. Additional Factors That May Affect Results Limited Operating History; Potential Fluctuations in Operating Results The Company was founded in 1990 and has a limited history of operations, having shipped its first products in volume in fiscal 1993. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company has experienced significant fluctuations in its quarterly operating results in the past three fiscal years and could continue to experience such fluctuations in the future. 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 13 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 continue to decline over time and that average 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 margins 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. See "Technological Change; Dependence on New Products," "Competition," " Semiconductor Industry Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Independent Wafer Foundries In fiscal 1996, 1997 and 1998 approximately 90% of the wafers for the Company's semiconductor products were manufactured by Chartered Semiconductor Manufacturing Ltd ("Chartered"). The remainder of the Company's wafers were manufactured by Austria Mikro Systems International AG ("AMS"), LG Semicon America, Inc. ("LG"), NJR Corporation ("NJRC"), and Taiwan Semiconductor Manufacturing Company, Ltd ("TSMC"). In fiscal 1999, approximately 85% of the Company's wafers were purchased from Chartered. 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 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 future growth 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 14 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. The Company's reliance on independent wafer suppliers may also impact the length of the development cycle for the Company's products, which may provide time-to-market advantages to competitors that have in-house fabrication capacity. Each of Chartered, TSMC, AMS, LG and NJRC 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 foundries are located, each of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of 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 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 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 to successfully 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. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Products" and "Business - Research and Development." 15 Customer Concentration A relatively small number of customers and distributors has 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 1999, sales to one distributor accounted for approximately 14% of the Company's net revenues, and sales to the Company's top five customers and distributors accounted for approximately 36% of net revenues. One customer, an international distributor that in turn ships to multiple customers, accounted for 14% of net revenues during the first three months of fiscal 2000 and sales to the Company's top five customers and distributors accounted for approximately 41% of net revenues for the first three months of fiscal 2000. 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 large 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. See "-- Limited Operating History; Potential Fluctuations in Operating Results," and "Management's Discussion and Analysis of 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., 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 or emerging companies that sell products to certain segments of the markets addressed by the Company. Competitors with greater financial resources or broader product lines may also have greater ability than the Company to engage in sustained price reductions in the Company's primary markets in order to gain or maintain market share. 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 competitors 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 functionality similar or identical to the Company's products, and the Company expects this trend to 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 16 and results of operations. See "-- Dependence on Independent Wafer Foundries," and "-- 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 its 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 selling prices, overcapacity and rapidly changing technology and evolving industry standards. Accordingly, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on Distributors; Product Returns Sales through domestic and international distributors represented 36%, 49% and 57% of the Company's net revenues in fiscal 1997, 1998 and 1999, respectively. During the first three months of fiscal 2000 sales through domestic and international distributors represented 58% 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 permitted 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 incurred 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. See "Business - -- Sales and Marketing." 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 17 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 has been and is now in the later stages of implementing a new management information system. There can be no assurance that the Company will not encounter difficulties as it continues 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 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. See "Business -- Employees" and "Management." 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 seventeen patents covering certain aspects of its product designs and has ten 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 interference proceedings in the U.S. Patent and Trademark Office, which can consume 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 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. See "Business - - -Intellectual Property." Risks of International Sales Sales outside of the United States accounted for approximately 37%, 45%, 48% and 46% of the Company's net revenues in fiscal 1997, 1998, 1999 and the first three months of fiscal 2000, 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 18 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. 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. See "Business -- Customers" and "Business -- Sales and Marketing." 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. In particular, there is a potential risk of conflict and further instability in the relationship between Taiwan and the People's Replublic of China, which could cause a disruption in the operations of several of the Company's assembly subcontractors located in Taiwan. See "Business -- Manufacturing." Item 3. Quantitative and Qualitative Disclosures about Market Risk At September 30, 1999, the Company's investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, of $18.0 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, 1999, 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. Due to the short duration and conservative nature of these instruments, the Company does not believe that it has a material exposure to interest rate risk. 19 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, 1999. 20 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 12, 1999 By: /s/ Alex Hui ------------ Alex Hui Chief Executive Officer Date: November 12, 1999 By: /s/ Patrick B. Brennan ---------------------- Patrick B. Brennan Chief Financial Officer (Chief Accounting Officer) 21 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 9,005 18,038 14,333 3,020 10,794 49,930 12,695 5,452 60,457 10,758 0 0 0 26,172 22,902 60,457 17,625 17,625 10,233 14,356 84 0 0 3,546 1,419 2,127 0 0 0 2,127 0.22 0.20
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