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 December 30, 2000
[_] 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 [_]
As of February 6, 2001 the Registrant had outstanding 24,943,191 shares of
Common Stock.
Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended December 30, 2000
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Condensed Balance Sheets as of
December 31, 2000 and June 30, 2000 3
Condensed Statements of Income
for the three months and six months ended
December 31, 2000 and December 31, 1999 4
Condensed Statements of Cash Flows
for the six months ended
December 31, 2000 and December 31, 1999 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 4: Submission of Matters to Vote of Security Holders 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Pericom Semiconductor Corporation
Condensed Balance Sheets
(In thousands)
December 31, June 30,
2000 2000 (1)
----------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $134,202 $124,115
Short-term investments 18,644 16,549
Accounts receivable:
Trade (net of allowances of $5,487, and $3,343) 16,880 12,012
Other receivables 573 377
Inventories 11,868 13,166
Prepaid expenses and other current assets 284 209
Deferred income taxes 1,099 1,099
---------------------------------------
Total current assets 183,550 167,527
Property and equipment - net 9,786 8,246
Investment in and advances to investee 4,350 4,287
Other assets 257 306
---------------------------------------
Total $197,943 $180,366
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,136 $ 8,983
Accrued liabilities 3,948 3,561
Income taxes payable 2,667 1,710
---------------------------------------
Total current liabilities 17,751 14,254
Deferred income taxes 1,340 1,340
Shareholders' equity:
Common stock 132,170 130,834
Accumulated other comprehensive loss 0 (90)
Retained earnings 46,682 34,028
---------------------------------------
Total shareholders' equity 178,852 164,772
---------------------------------------
Total $197,943 $180,366
=======================================
(1) Derived from the June 30, 2000 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 Six Months Ended
December 31 December 31,
2000 1999 2000 1999
------- ------- ------- -------
Net revenues $35,718 $20,009 $69,078 $37,634
Cost of revenues 20,250 11,581 39,300 21,814
---------------------------------------------------------------
Gross profit 15,468 8,428 29,778 15,820
---------------------------------------------------------------
Operating expenses:
Research and development 2,754 1,874 5,341 3,493
Selling, general and administrative 4,231 2,768 8,216 5,272
---------------------------------------------------------------
Total 6,985 4,642 13,557 8,765
---------------------------------------------------------------
Income from operations 8,483 3,786 16,221 7,055
Equity in net loss of investee (132) (84) (357) (168)
Interest income 2,323 387 4,546 748
---------------------------------------------------------------
Income before income taxes 10,674 4,089 20,410 7,635
Provision for income taxes 4,056 1,472 7,756 2,891
---------------------------------------------------------------
Net income $ 6,618 $ 2,617 $12,654 $ 4,744
===============================================================
Basic earnings per share $0.27 $0.13 $0.51 $0.25
===============================================================
Diluted earnings per share $0.24 $0.12 $0.46 $0.22
===============================================================
Shares used in computing basic earnings per share 24,875 19,430 24,785 19,326
===============================================================
Shares used in computing diluted earnings per share 27,272 22,056 27,374 21,848
===============================================================
See notes to condensed financial statements.
4
Pericom Semiconductor Corporation
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
December 31,
-------------------------------
2000 1999
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,654 $ 4,744
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,591 1,097
Equity in net loss of joint venture 357 168
Changes in assets and liabilities:
Accounts receivable (5,065) (1,791)
Inventories 1,298 (3,505)
Prepaid expenses and other current assets (75) 251
Accounts payable 2,153 1,373
Accrued liabilities 388 174
Income taxes payable 957 1,068
--------------------------------
Net cash provided by operating activities 14,258 3,579
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,131) (2,173)
Purchase of short-term investments (4,253) (5,299)
Maturities of short-term investments 2,250 4,400
Decrease (Increase) in other assets 49 (98)
Advances to investee (421) (776)
--------------------------------
Net cash used in investing activities (5,506) (3,946)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 1,335 849
--------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,087 482
CASH AND CASH EQUIVALENTS:
Beginning of period 124,115 8,328
--------------------------------
End of period $134,202 $ 8,810
================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 4,954 $ 870
================================
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 December 31, 2000 and the results of
operations and cash flows for the three and six-month periods ended December 31,
2000 and 1999. 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 and six- month periods ended December 31,
2000 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 December 31. The Company's fiscal year 2000
ended on July 1, 2000. The three and six-month periods in fiscal years 2000 and
1999 ended on December 30, 2000 and January 1, 2000, 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
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.
Shares outstanding and basic and diluted earnings per share have been adjusted
for the three and six-month periods ended December 31, 1999 to account for the
two-for-one stock split in September 2000.
6
Basic and diluted earnings per share for the three and six-month periods ended
December 31, 2000 and December 31, 1999 are computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
------- ------- ------- -------
Net income $ 6,618 $ 2,617 $12,654 $ 4,744
----------------------------------------------------------
Computation of common shares outstanding - basic earnings
per share:
Weighted average shares of common stock 24,875 19,430 24,785 19,326
----------------------------------------------------------
Shares used in computing basic earnings per share 24,875 19,430 24,785 19,326
----------------------------------------------------------
Basic earnings per share $ 0.27 $ 0.13 $ 0.51 $ 0.25
----------------------------------------------------------
Computation of common shares outstanding - diluted earnings
per share:
Weighted average shares of common stock 24,875 19,430 24,785 19,326
Dilutive options using the treasury stock method 2,397 2,626 2,589 2,522
----------------------------------------------------------
Shares used in computing diluted earnings per share 27,272 22,056 27,374 21,848
----------------------------------------------------------
Diluted earnings per share $ 0.24 $ 0.12 $ 0.46 $ 0.22
----------------------------------------------------------
3. Inventories
Inventories consist of (in thousands):
December 31, June 30,
2000 2000
------- -------
Finished goods $ 4,010 $ 4,403
Work in process 5,455 6,285
Raw materials 2,403 2,478
---------------------------------
$11,868 $13,166
=================================
4. Accrued Liabilities
Accrued liabilities consist of (in thousands):
December 31 June 30,
2000 2000
----- -----
Accrued compensation $2,026 $2,066
External sales representative commissions 1,079 975
Other accrued expenses 843 520
---------------------------------
$3,948 $3,561
=================================
7
5. Industry and Segment Information
In fiscal year 1999, the Company adopted 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, services, geographical areas and major
customers. The Company operates in one reportable segment.
6. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", 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 and six month periods
ended December 31, 2000 and 1999, 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 Six Months Ended
December 31, December 31,
-----------------------------------------------------------------
2000 1999 2000 1999
------ ------ ------- ------
Net income $6,618 $2,617 $12,654 $4,744
Unrealized gain/(loss) on investment 17 (52) 90 (55)
-----------------------------------------------------------------
Comprehensive income $6,635 $2,565 $12,744 $4,689
=================================================================
7. Derivative Instruments and Hedging Activities
On July 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. The Company does not have any derivatives as of
December 31, 2000. There was no impact to the Company's financial statements due
to the adoption of SFAS No. 133.
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").
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 Six Months Ended
December 31, December 31,
----------------------------------------------------------
2000 1999 2000 1999
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 56.7% 57.9% 56.9% 58.0%
----------------------------------------------------------
Gross profit 43.3% 42.1% 43.1% 42.0%
----------------------------------------------------------
Operating expenses:
Research and development 7.7% 9.4% 7.7% 9.3%
Selling, general and administrative 11.8% 13.8% 11.9% 14.0%
----------------------------------------------------------
Total 19.6% 23.2% 19.6% 23.3%
----------------------------------------------------------
Income from operations 23.7% 18.9% 23.5% 18.7%
Other income, net 6.1% 1.5% 6.1% 1.5%
----------------------------------------------------------
Income before income taxes 29.9% 20.4% 29.5% 20.3%
Provision for income taxes 11.4% 7.3% 11.2% 7.7%
----------------------------------------------------------
Net income 18.5% 13.1% 18.3% 12.6%
----------------------------------------------------------
Net Revenues
Net revenues consist primarily of product sales, which are recognized upon
shipment, less an estimate for returns and allowances. Net revenues increased
78.5% from $20.0 million for the quarter ended December 31, 1999 to $35.7
million for the quarter ended December 31, 2000. The increase in net revenues
resulted from overall strength in the semiconductor industry, continued market
acceptance of the Company's existing products and sales of new products in the
Company's SiliconInterface, SiliconSwitch and SiliconClock product lines. Sales
to domestic and international distributors as a percent of total revenues
decreased from 64.2% for the quarter ended December 31, 1999 to 58.6% for the
quarter ended December 31, 2000. Sales to one customer, an international
distributor, accounted for approximately 7.1% of net revenues in the quarter
ended December 31, 2000 and approximately 15.6% of net revenues in the quarter
ended December 31, 1999. As a percentage of gross revenues, sales to one-end
user customer, Cisco Systems, increased from 9.0% in the quarter ended December
31, 1999 to 12.0% in the quarter ended December 31, 2000.
Net revenues increased 83.6% from $37.6 million for the six-month period ended
December 31, 1999 to $69.1 million for the six-month period ended December 31,
2000. The increase in net revenues resulted from overall strength in the
semiconductor industry, continued market acceptance of the Company's existing
products and sales of new products in the Company's SiliconInterface,
SiliconSwitch and
9
SiliconClock product lines. Sales to domestic and international distributors as
a percentage of total revenues decreased to 55.2% in the first half of fiscal
2001 from 61.4% in the comparable period in fiscal 2000. Sales to one customer,
an international distributor, accounted for approximately 8.8% of net revenues
in the first half of fiscal 2001 versus approximately 14.9% in the comparable
period in fiscal 2000. As a percentage of gross revenues, sales to one-end user
customer, Cisco Systems, decreased from 11.7% in the six months ended December
31, 1999 to 11.4% in the six months ended December 31, 2000.
Gross Profit
Gross profit increased 83.5% from $8.4 million for the quarter ended December
31, 1999 to $15.5 million for the quarter ended December 31, 2000. Gross profit
as a percentage of net revenues, or gross margin, increased from 42.1% in the
quarter ended December 31, 1999 to 43.3% in the quarter ended December 31, 2000.
The increase in gross margin resulted from the introduction and sale of new
products at higher gross margins, a shift in mix towards a higher margin product
line, and cost reductions achieved through reduced assembly and test costs.
Gross profit increased 88.2% from $15.8 million for the six-month period ending
December 31, 1999 to $29.8 million for the six-month period ended December 31,
2000. Gross margin for the same six-month periods increased from 42.0% last year
to 43.1% this year. These increases are for the same reasons cited in the above
analysis of the three-month periods ending December 31, 2000 and 1999.
Research and Development
Research and development expenses increased 47.0% from $1.9 million for the
quarter ended December 31, 1999 to $2.8 million for the quarter ended December
31, 2000, but decreased as a percentage of net revenues from 9.4% to 7.7%.
Research and development expenses increased from $3.5 million for the six-month
period ended December 31, 1999 to $5.3 million for the six-month period ended
December 31, 2000, an increase of 52.9%, but also decreased as a percentage of
net revenue from 9.3% to 7.7% for those periods. The increase in expense is
attributable to development costs for new products in each of the Company's
product lines and expansion of the Company's engineering staff and related
infrastructure 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 also include advertising, sales materials, sales
commissions and other marketing and promotional expenses. Selling, general and
administrative expenses increased 52.9% from $2.8 million for the quarter ended
December 31, 1999 to $4.2 million for the quarter ended December 31, 2000, but
decreased as a percentage of net revenues from 13.8% to 11.8%. Selling, general
and administrative expenses increased from $5.3 million for the six-month period
ended December 31, 1999, to $8.2 million for the six-month period ended December
31, 2000, an increase of 55.8%, but also decreased as a percentage of net
revenue from 14.0% to 11.9% for those periods. The increase in expense in each
period was primarily attributable to increased staffing levels, particularly in
sales and marketing and increases in commissions due to sales growth.
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.
10
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 $303,000 for the quarter ended December 31, 1999 to $2,191,000 for the
quarter ended December 31, 2000. From the quarter ended December 31, 1999 to
the quarter ended December 31, 2000, the Company's share of the net losses of
PTI increased from $84,000 to $132,000 and interest income rose from $387,000 to
$2,323,000 due to interest earned on the increased cash balances that resulted
from the net proceeds from the Company's follow-on public offering in March
2000. For the six-month period ended December 31, 1999 compared with the same
period ended December 31, 2000, other income, net rose from $580,000 to
$4,189,000 as the Company's share in the net losses of PTI increased from
$168,000 to $357,000 and interest income rose from $748,000 to $4,546,000.
Provision for Income Taxes
The provision for income taxes increased from $1,472,000 for the quarter ended
December 31, 1999 to $4,056,000 for the quarter ended December 31, 2000. The
increase in the provision for income taxes for the current fiscal quarter is due
primarily to the increase in taxable income. The effective tax rate of 38.0% in
the quarter ended December 31, 2000 has increased from the 36.0% rate used in
the comparable period last year. The provision for income taxes also differed
from the federal statutory rate due to state income taxes. For the six-month
periods ended December 31, 2000 and December 31, 1999 the provision for income
taxes was $7,756,000 and $2,891,000, respectively, and the effective tax rates
were 38.0% and 37.9% respectively. In the first quarter of the prior fiscal year
the research and development tax credit had expired which caused the effective
tax rate to increase. The research and development tax credit was subsequently
extended and the overall effective tax rate for the prior fiscal year was 37.5%.
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 the Company's operations, acquire capital
equipment and finance inventory and accounts receivable growth. Operating
activities generated $14.3 million of cash during the first half of fiscal 2001
and $3.6 million of cash during the first half of fiscal 2000.
Net cash used for investing activities increased from $3.9 million for the six
months ended December 31, 1999 to $5.5 million for the six months ended December
31, 2000. The Company made capital expenditures of approximately $3.1 million
during the six months ended December 31, 2000 compared with $2.2 million in the
comparable period of the previous year, and also increased net purchases of
short-term investments by $1,105,000 during the six months ended December 31,
2000 compared to the same period last year.
On March 8, 2000 the Company sold 2.2 million shares (on a pre-split basis
before the Company's 2-for-1 stock split in September 2000) of common stock in a
follow-on public offering. Net proceeds to the Company, before expenses, from
this offering were $101,376,000 after underwriting discounts and commissions.
Expenses were approximately $427,000. These funds are invested in short-term
money market funds.
As of December 31, 2000, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of approximately $152.8
million. Management 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, future events may require the Company to seek additional capital
sooner. If the Company determines that it needs to seek additional capital, the
Company may not be able to obtain such additional capital on terms acceptable to
it.
11
Factors That May Affect Operating Results
This Quarterly Report on Form 10-Q 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;
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 (i) below, (ii) in the Company's Form
10-K under the heading "Risk Factors; Factors That May Affect Future Results",
and (iii) in 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.
If we do not develop products that our customers and end-users design into their
products, or if their products do not sell successfully, our business and
operating results would be harmed.
We have relied in the past and continue to rely upon our relationships with our
customers and end-users for insights into product development strategies for
emerging system requirements. We generally incorporate new products into a
customer's or end-user's product or system at the design stage. However, these
design efforts, which can often require significant expenditures by us, may
precede product sales, if any, by a year or more. Moreover, the value to us of
any design win will depend in large part on the ultimate success of the
customer's or end-user's product and on the extent to which the system's design
accommodates components manufactured by our competitors. If we fail to achieve
design wins or if the design wins fail to result in significant future revenues,
our operating results would be harmed. If we have problems developing or
maintaining our relationships with our customers and end-users, our ability to
develop well-accepted new products may be impaired.
The trading price of our common stock and our operating results are likely to
fluctuate substantially in the future.
The trading price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could fluctuate widely in response to factors
some of which are not within our control, including:
. quarter-to-quarter variations in operating results;
. announcements of technological innovations or new products by us or our
competitors;
. general conditions in the semiconductor and electronic systems industries;
. changes in earnings estimates by analysts; and price and volume fluctuations
in the overall stock market, which have particularly affected the market
prices of many high technology companies.
12
In the past, our quarterly operating results have varied significantly and are
likely to fluctuate in the future. A wide variety of factors affect our
operating results. These factors might include the following:
. the timing of new product introductions and announcements by us and by our
competitors;
. customer acceptance of new products introduced by us;
. growth or reduction in the size of the market for interface ICs;
. a decline in the gross margins of our products;
. general conditions in the semiconductor industry;
. changes in our product mix;
. delay or decline in orders received from distributors;
. the availability of manufacturing capacity with our wafer suppliers;
. changes in manufacturing costs;
. fluctuations in manufacturing yields;
. the ability of customers to pay us;
. expenses incurred in obtaining, enforcing, and defending intellectual
property rights; and
. increased research and development expenses associated with new product
introductions or process changes.
All of these factors are difficult to forecast and could seriously harm our
operating results. Our expense levels are based in part on our expectations
regarding future sales and are largely fixed in the short term. Therefore, we
may be unable to reduce our expenses fast enough to compensate for any
unexpected shortfall in sales. Any significant decline in demand relative to our
expectations or any material delay of customer orders could harm our operating
results. In addition, if our operating results in future quarters fall below
public market analysts' and investors' expectations, the market price of our
common stock would likely decrease.
The markets for our products are characterized by rapidly changing technology,
and our financial results could be harmed if we do not successfully develop and
implement new manufacturing technologies or develop, introduce and sell new
products.
The markets for our products are characterized by rapidly changing technology,
frequent new product introductions and declining selling prices over product
life cycles. We currently offer over 500 products. Our future success depends
upon the timely completion and introduction of new products, across all our
product lines, at competitive price and performance levels. The success of new
products depends on a variety of factors, including the following:
. 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 our wafer suppliers.
We may also experience delays, difficulty in procuring adequate fabrication
capacity for the development and manufacture of new products or other
difficulties in achieving volume production of these products. Even relatively
minor errors may significantly affect the development and manufacture of new
products. If we fail to complete and introduce new products in a timely manner
at competitive price and performance levels, our business would be significantly
harmed.
13
Intense competition in the semiconductor industry may reduce the demand for our
products or the prices of our products, which could reduce our revenues.
The semiconductor industry is intensely competitive. Our competitors include
Cypress Semiconductor Corporation, Integrated Circuit Systems, Inc., Integrated
Device Technology, Inc., Maxim Integrated Products, Inc., and Texas Instruments,
Inc. Most of those competitors have substantially greater financial, technical,
marketing, distribution and other resources, broader product lines and longer-
standing customer relationships than we do. We also compete with other major or
emerging companies that sell products to certain segments of our markets.
Competitors with greater financial resources or broader product lines may have a
greater ability to sustain price reductions in our primary markets in order to
gain or maintain market share.
We believe that our future success will depend on our ability to continue to
improve and develop our products and processes. Unlike us, many of our
competitors maintain internal manufacturing capacity for the fabrication and
assembly of semiconductor products. This ability may provide them 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 ours may be able to manufacture and sell competitive
products at lower prices. Any introduction of products by our competitors that
are manufactured with improved process technology could seriously harm our
business. As is typical in the semiconductor industry, our competitors have
developed and marketed products that function similarly or identically to ours.
If our products do not achieve performance, price, size or other advantages over
products offered by our competitors, our products may lose market share.
Competitive pressures could also reduce market acceptance of our products,
reduce our prices and increase our expenses.
We also face competition from the makers of ASICs and other system devices.
These devices may include interface logic functions, which may eliminate the
need or sharply reduce the demand for our products in particular applications.
Product price declines and fluctuations may cause our future financial results
to vary.
Historically, selling prices in the semiconductor industry generally, as well as
for our products, have decreased significantly over the life of each product. We
expect that selling prices for our existing products will continue to decline
over time and that average selling prices for our new products will decline
significantly over the lives of these products. Declines in selling prices for
our 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 our
overall gross margins and could seriously harm our business.
The demand for our products depends on the growth of our end users' markets.
Our continued success depends in large part on the continued growth of markets
for the products into which our semiconductor products are incorporated. These
markets include the following:
. computers and computer related peripherals;
. data communications and telecommunications equipment;
. electronic commerce and the Internet; and
. consumer electronics equipment.
Any decline in the demand for products in these markets could seriously harm our
business, financial condition and operating results. These markets have also
historically experienced significant fluctuations in demand. We may also be
seriously harmed by slower growth in the other markets in which we sell our
products.
14
Downturns in the semiconductor industry, rapidly changing technology and
evolving industry standards can harm our operating results.
The semiconductor industry has historically been cyclical and periodically
subject to significant economic downturns--characterized by diminished product
demand, accelerated erosion of selling prices and overcapacity--as well as
rapidly changing technology and evolving industry standards. In the past, our
operating results have been harmed by excess supply in the semiconductor
industry. For example, we believe our net revenues fell from $41.2 million in
fiscal 1996 to $33.2 million in fiscal 1997 primarily due to a cyclical downturn
in the semiconductor industry. Accordingly, we may in the future experience
substantial period-to-period fluctuations in our business and operating results
due to general semiconductor industry conditions, overall economic conditions or
other factors. Our business is also subject to the risks associated with the
effects of legislation and regulations relating to the import or export of
semiconductor products.
Our contracts with our wafer suppliers do not obligate them to a minimum supply
or set prices. Any inability or unwillingness of our wafer suppliers generally,
and Chartered Semiconductor Manufacturing Ltd. in particular, to meet our
manufacturing requirements would delay our production and product shipments and
harm our business.
In fiscal 2000, 1999 and 1998 we purchased approximately 75%, 85% and 90%,
respectively, of our wafers from Chartered Semiconductor Manufacturing Ltd., and
in the first half of fiscal 2001 we purchased 62% of our wafers from Chartered.
In each fiscal period, only four other suppliers manufactured the remainder of
our wafers. Our reliance on independent wafer suppliers to fabricate our wafers
at their production facilities subjects us to possible risks such as:
. lack of adequate capacity;
. lack of available manufactured products;
. lack of control over delivery schedules; and
. unanticipated changes in wafer prices.
Any inability or unwillingness of our wafer suppliers generally, and Chartered
in particular, to provide adequate quantities of finished wafers to meet our
needs in a timely manner would delay our production and product shipments and
seriously harm our business.
At present, we purchase wafers from our suppliers through the issuance of
purchase orders based on our rolling six-month forecasts. The purchase orders
are subject to acceptance by each wafer supplier. We do not have long-term
supply contracts which obligate our suppliers to a minimum supply or set prices.
We also depend upon our wafer suppliers to participate in process improvement
efforts, such as the transition to finer geometries. If our suppliers are unable
or unwilling to do so, our development and introduction of new products could be
delayed. Furthermore, sudden shortages of raw materials or production capacity
constraints can lead wafer suppliers to allocate available capacity to customers
other than us or for the suppliers' internal uses, interrupting our ability to
meet our product delivery obligations. Any significant interruption in our wafer
supply would seriously harm our operating results and our customer relations.
Our reliance on independent wafer suppliers may also lengthen the development
cycle for our products, providing time-to-market advantages to our competitors
that have in-house fabrication capacity.
In the event that our suppliers are unable or unwilling to manufacture our key
products in required volumes, we will have to identify and qualify additional
wafer foundries. The qualification process can take up to six months or longer.
Furthermore, we are unable to predict whether additional wafer foundries will
become available to us or will be in a position to satisfy any of our
requirements on a timely basis.
15
We depend on single or limited source assembly subcontractors with whom we do
not have written contracts. Any inability or unwillingness of our assembly
subcontractors to meet our assembly requirements would delay our product
shipments and harm our business.
We primarily rely on foreign subcontractors for the assembly and packaging of
our products and, to a lesser extent, for the testing of finished products.
Some of these subcontractors are our single source supplier for some of our new
packages. In addition, changes in our or a subcontractor's business could cause
us to become materially dependent on a single subcontractor. We have from time
to time experienced difficulties in the timeliness and quality of product
deliveries from our subcontractors and may experience similar or more severe
difficulties in the future. We generally purchase these single or limited source
components or services pursuant to purchase orders and have no guaranteed
arrangements with these subcontractors. These subcontractors could cease to meet
our requirements for components or services, or there could be a significant
disruption in supplies from them, or degradation in the quality of components or
services supplied by them. Any circumstance that would require us to qualify
alternative supply sources could delay shipments, result in the loss of
customers and limit or reduce our revenues.
We may have difficulty accurately predicting revenues for future periods.
Our expense levels are based in part on anticipated future revenue levels, which
can be difficult to predict. Our business is characterized by short-term orders
and shipment schedules. We do not have long-term purchase agreements with any of
our customers, and customers can typically cancel or reschedule their orders
without significant penalty. We typically plan production and inventory levels
based on forecasts of customer demand generated with input from customers and
sales representatives. Customer demand is highly unpredictable and can fluctuate
substantially. If customer demand falls significantly below anticipated levels,
our gross profit would be reduced.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, key personnel would harm us.
To a greater degree than non-technology companies, our future success will
depend on the continued contributions of our executive officers and other key
management and technical personnel. None of these individuals has an employment
agreement with us and each one would be difficult to replace. We do not maintain
any key person life insurance policies on any of these individuals. The loss of
the services of one or more of our executive officers or key personnel or the
inability to continue to attract qualified personnel could delay product
development cycles or otherwise harm our business, financial condition and
results of operations.
Our future success also will depend on our 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, we expect to experience continued
difficulty in filling our needs for qualified engineers and other personnel.
Our limited ability to protect our intellectual property and proprietary rights
could harm our competitive position.
Our success depends in part on our ability to obtain patents and licenses and
preserve other intellectual property rights covering our products and
development and testing tools. In the United States, we hold 26 patents covering
certain aspects of our product designs and have at least 14 additional patent
applications pending. Copyrights, mask work protection, trade secrets and
confidential technological know-how are also key to our business. Additional
patents may not be issued to us or our patents or other intellectual property
may not provide meaningful protection. We may be subject to, or initiate,
interference proceedings in the U.S. Patent and Trademark Office. These
proceedings can consume significant financial and management resources. We may
become involved in litigation relating to alleged infringement by us of others'
patents or other intellectual property rights. This type of litigation is
frequently expensive to both the winning party
16
and the losing party and takes up significant amounts of management's time and
attention. In addition, if we lose such a lawsuit, a court could require us to
pay substantial damages and/or royalties or prohibit us from using essential
technologies. For these and other reasons, this type of litigation could
seriously harm our business. Also, although we may seek to obtain a license
under a third party's intellectual property rights in order to bring an end to
certain claims or actions asserted against us, we may not be able to obtain such
a license on reasonable terms or at all.
Because it is important to our success that we are able to prevent competitors
from copying our innovations, we intend to continue to seek patent, trade secret
and mask work protection for our technologies. The process of seeking patent
protection can be long and expensive, and we cannot be certain that any
currently pending or future applications will actually result in issued patents,
or that, even if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to us.
Furthermore, others may develop technologies that are similar or superior to our
technology or design around the patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements. In addition, the laws of
some territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as do the laws of
the United States.
The process technology used by our independent foundries, including process
technology that we developed with our foundries, can generally be used by them
to produce their own products or to manufacture products for other companies
including our competitors. In addition, we may not have the right to implement
key process technologies used to manufacture some of our products with foundries
other than our present foundries.
We may not provide adequate allowances for exchanges, returns and concessions.
We recognize revenue from the sale of products when shipped, less an allowance
based on future authorized and historical patterns of returns, price protection,
exchanges and other concessions. We believe our methodology and approach are
appropriate. However, if the actual amounts we incur exceed the allowances, it
could decrease our revenue and corresponding gross profit.
The complexity of our products makes us highly susceptible to manufacturing
problems, which could increase our costs and delay our product shipments.
The manufacture and assembly of our over 500 products are 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 a
foundry are cut into individual die. These die are assembled into individual
packages and tested for performance. Our wafer fabrication suppliers have from
time to time experienced lower than anticipated yields of suitable die. In the
event of such decreased yields, we would incur additional costs to sort wafers,
an increase in average cost per usable die and an increase in the time to market
for our products. These conditions could reduce our net revenues and gross
margin and harm our customer relations.
We do not manufacture any of our products. Therefore, we are referred to in the
semiconductor industry as a "fabless" producer. Consequently, we depend upon
third party manufacturers to produce semiconductors that meet our
specifications. We currently have third party manufacturers that can produce
semiconductors that meet our needs. However, as the industry continues to
progress to smaller manufacturing and design
17
geometries, the complexities of producing semiconductors will increase.
Decreasing geometries may introduce new problems and delays that may affect
product development and deliveries. Due to the nature of the industry and our
status as a "fabless" semiconductor company, we could encounter fabrication-
related problems that may affect the availability of our products, delay our
shipments or increase our costs.
A large portion of our revenues is derived from sales to a few customers, who
may cease purchasing from us at any time.
A relatively small number of customers have accounted for a significant portion
of our net revenues in each of the past several fiscal years. We expect this
trend to continue for the foreseeable future. Techmosa, an international
distributor that in turn ships to many end users, accounted for approximately
14.9% of net revenues during the first six months of fiscal 2000 and
approximately 8.8% of net revenues during the first six months of fiscal 2001.
Sales to our top five customers accounted for approximately 39.5% of net
revenues in the first six months of fiscal 2000 and approximately 37.2% of net
revenues in the first six months of fiscal 2001. Of our end-user customers,
Cisco Systems accounted for approximately 11.7% of our gross revenues in the
first half of fiscal 2000 and sales to our top five end-user customers accounted
for approximately 33.0% of gross revenues in the same period. For the six
months ended December 31, 2000 sales to Cisco Systems were 11.4% of gross
revenues and sales to our top five end-user customers were approximately 37.6%
of gross revenues.
We do not have long-term sales agreements with any of our customers. Our
customers are not subject to minimum purchase requirements, may reduce or delay
orders periodically due to excess inventory and may discontinue selling our
products at any time. Our distributors typically offer competing products in
addition to ours. For the six months ended December 31, 1999, sales to domestic
and international distributors represented approximately 61.4% of net revenues,
and for the six months ended December 31, 2000 sales to our distributors were
55.2% of net revenues. The loss of one or more significant customers, or the
decision by a significant distributor to carry the product lines of our
competitors, could decrease our revenues.
Almost all of our wafer suppliers and assembly subcontractors are located in
southeast Asia, which exposes us to the problems associated with international
operations.
Almost all of our wafer suppliers and assembly subcontractors are located in
southeast Asia, which exposes us to risks associated with international business
operations, including the following:
. disruptions or delays in shipments;
. changes in economic conditions in the countries where these subcontractors
are located;
. currency fluctuations;
. changes in political conditions;
. potentially reduced protection for intellectual property;
. foreign governmental regulations;
. import and export controls; and
. changes in tax laws, tariffs and freight rates.
In particular, there is a potential risk of conflict and further instability in
the relationship between Taiwan and the People's Republic of China. Conflict or
instability could disrupt the operations of one of our principal wafer suppliers
and several of our assembly subcontractors located in Taiwan.
Because we sell our products to customers outside of the United States, we face
foreign business, political and economic risks that could seriously harm us.
In the six months ended December 31, 1999, approximately 33% of our net revenues
derived from sales in Asia excluding Japan, approximately 7% from sales in
Europe and approximately 10% from sales in Japan. In the six months ended
December 31, 2000, approximately 29% of our net revenues derived from sales in
Asia excluding Japan, approximately 11% from sales in Europe and approximately
7% from sales in Japan.
18
We expect that export sales will continue to represent a significant portion of
net revenues. We intend to expand our sales efforts outside the United States.
This expansion will require significant management attention and financial
resources and further subject us to international operating risks. These risks
include:
. tariffs and other barriers and restrictions;
. unexpected changes in regulatory requirements;
. the burdens of complying with a variety of foreign laws; and
. delays resulting from difficulty in obtaining export licenses for technology.
We are also subject to general geopolitical risks in connection with our
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. In addition, because our 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 our products in foreign markets
and make our products relatively more expensive than competitors' products that
are denominated in local currencies. Regulatory, geopolitical and other factors
could seriously harm our business or require us to modify our current business
practices.
Our potential future acquisitions may not be successful because we have not made
acquisitions in the past.
We have depended on internal growth in the past and have not made any
acquisitions. As part of our business strategy, we expect to seek acquisition
prospects that would complement our existing product offerings, improve market
coverage or enhance our technological capabilities. We have no current
agreements or negotiations underway with respect to any acquisitions, and we may
not be able to locate suitable acquisition opportunities. Future acquisitions
could result in the following:
. potentially dilutive issuances of equity securities;
. large one-time write-offs;
. the incurrence of debt and contingent liabilities or amortization expenses
related to goodwill and other intangible assets;
. difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns; and
. risks of entering geographic and business markets in which we have no or
limited prior experience and potential loss of key employees of acquired
organizations.
We are not certain that we will be able to successfully integrate any
businesses, products, technologies or personnel that may be acquired in the
future. Our failure to do so could seriously harm our business.
Our operations and financial results could be severely harmed by natural
disasters.
Our headquarters and some of our major suppliers' manufacturing facilities are
located near major earthquake faults. One of the foundries we use is located in
Taiwan, which suffered a severe earthquake during fiscal 2000. We did not
experience significant disruption to our operations as a result of that
earthquake. However, if a major earthquake or other natural disaster were to
affect our suppliers, our sources of supply could be interrupted, which would
seriously harm our business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2000, our investment portfolio consisted of investment-grade
fixed income securities, excluding those classified as cash equivalents, of
$18.6 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% per annum from
levels as of December 31, 2000, the fair
19
market value of the portfolio would decrease. However, we do not believe that
such a decrease would have a material effect on our results of operations over
the next fiscal year. Due to the short duration and conservative nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk.
20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The Annual Meeting of Shareholders was held on December 14, 2000 in San
Jose, California. The results of proposals approved by the Company's
shareholders are as follows:
1. Election of six directors of the Company to
serve for the ensuing year and until their
successors are elected and qualified.
Votes Votes
Name of Director For Withheld
---------------- ----- ----------
Alex Chi-Ming Hui 21,515,309 1,013,706
Chi-Hung (John) Hui, Ph.D. 17,604,020 4,924,995
Hau L. Lee, Ph.D. 22,251,689 277,326
Millard (Mel) Phelps 22,250,245 278,770
Tay Thiam Song 22,252,023 276,992
Jeffrey Young 22,248,431 280,584
Votes
Abstained/
---------------
Votes Votes Broker
For Against Non-vote
----- ------- ---------------
2. Approval of the Company's 2001 Stock 9,498,865 8,700,169 28,189/
Incentive Plan. 4,301,792
Votes Votes Votes
For Against Abstained/
----- ------- ---------------
3. To ratify and approve the appointment of 22,507,665 8,474 12,876
Deloitte & Touche LLP as the independent
auditors for the Company for the fiscal year
ending June 30, 2001.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.13 Registrant's 2000 Employee Stock Purchase Plan, including
Forms of Agreement thereunder
10.14 Registrant's 2001 Stock Incentive Plan, including Forms of
Agreement thereunder
b. Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended December 31, 2000.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pericom Semiconductor Corporation
(Registrant)
Date: February 8, 2001 By: /s/ Alex Hui
----------------------------------
Alex Hui
Chief Executive Officer
Date: February 8, 2001 By: /s/ Michael D. Craighead
----------------------------------
Michael D. Craighead
Chief Financial Officer
(Chief Accounting Officer)
22