UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
[_] 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 November 6, 2001 the Registrant had outstanding 25,221,107 shares of
Common Stock.
Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended September 29, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1: Financial Statements
Condensed Balance Sheets as of
September 30, 2001 and June 30, 2001 3
Condensed Statements of Income
for the three months ended September 30, 2001
and three months ended September 30, 2000 4
Condensed Statements of Cash Flows
for the three months ended September 30, 2001
and three months ended September 30, 2000 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures about
Market Risk 20
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 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)
September 30, June 30,
2001 2001 (1)
---- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $85,894 $89,076
Short-term investments 66,078 61,811
Accounts receivable:
Trade (net of allowances of $4,736, and $4,296) 6,642 7,096
Other receivables 1,101 1,050
Inventories 12,869 14,440
Prepaid expenses and other current assets 738 732
Deferred income taxes 1,699 1,776
------------------------------
Total current assets 175,021 175,981
Property and equipment - net 10,240 10,473
Investment in and advances to joint venture 7,124 7,330
Goodwill, net of amortization 1,325 1,325
Other assets 3,829 1,318
------------------------------
Total $197,539 $196,427
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,574 $4,168
Accrued liabilities 3,536 3,747
------------------------------
Total current liabilities 8,110 7,915
Deferred income taxes 1,322 1,322
Shareholders' equity:
Common stock 136,462 136,007
Accumulated other comprehensive gain (loss) 187 (204)
Retained earnings 51,458 51,387
------------------------------
Total shareholders' equity 188,107 187,190
------------------------------
Total $197,539 $196,427
==============================
(1) Derived from the June 30, 2001 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
2001 2000
---- ----
Net revenues $13,114 $33,360
Cost of revenues 8,633 19,050
------------- ----------
Gross profit 4,481 14,310
------------- ----------
Operating expenses:
Research and development 2,579 2,587
Selling, general and administrative 2,943 3,985
------------- ----------
Total 5,522 6,572
------------- ----------
Income (loss) from operations (1,041) 7,738
Equity in net loss of investee (206) (225)
Interest income 1,357 2,223
------------- ----------
Income before income taxes 110 9,736
Provision for income taxes 39 3,700
------------- ----------
Net income $ 71 $ 6,036
============= ==========
Basic earnings per share $0.00 $0.24
============= ==========
Diluted earnings per share $0.00 $0.22
============= ==========
Shares used in computing basic earnings per share 25,189 24,694
============= ==========
Shares used in computing diluted earnings per share 27,114 27,475
============= ==========
See notes to condensed financial statements.
4
Pericom Semiconductor Corporation
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
September 30,
-------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71 $ 6,036
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,038 772
Equity in net loss of investee 206 225
Changes in assets and liabilities:
Accounts receivable 599 (2,092)
Inventories 1,571 1,314
Prepaid expenses and other current assets (6) (2)
Accounts payable 406 673
Accrued liabilities (211) (82)
Income taxes payable -- 1,854
--------- ---------
Net cash provided by operating activities 3,674 8,698
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (805) (1,066)
Purchase of short-term investments (10,489) (2,424)
Maturities of short-term investments 6,690 1,440
Decrease (increase) in other assets (2,511) 18
Advances to investee (196) (183)
--------- ---------
Net cash used in investing activities (7,311) (2,215)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net 455 857
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,182) 7,340
CASH AND CASH EQUIVALENTS:
Beginning of period 89,076 124,115
--------- ---------
End of period $ 85,894 $ 131,455
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 37 --
========= =========
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, 2001 and the results of
operations and cash flows for the three month periods ended September 30, 2001
and September 30, 2000. 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
accounting principles generally accepted in the United States of America
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, 2001 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. The Company's fiscal year 2001
ended on June 30, 2001. The three month periods in fiscal years 2002 and 2001
ended on September 29, 2001 and September 30, 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.
6
Basic and diluted earnings per share for the three month periods ended September
30, 2001 and September 30, 2000 are computed as follows (in thousands, except
for per share data):
Three Months Ended
September 30,
2001 2000
---- ----
Net income $ 71 $ 6,036
======= =======
Computation of common shares outstanding - basic earnings per share:
Weighted average shares of common stock 25,189 24,694
------- -------
Shares used in computing basic earnings per share 25,189 24,694
======= =======
Basic earnings per share $ 0.00 $ 0.24
======= =======
Computation of common shares outstanding - diluted earnings per share:
Weighted average shares of common stock 25,189 24,694
Dilutive options using the treasury stock method 1,925 2,781
------- -------
Shares used in computing diluted earnings per share 27,114 27,475
======= =======
Diluted earnings per share $ 0.00 $ 0.22
======= =======
Options to purchase 2,395,192 shares of Common stock at prices ranging from
$14.50 to $42.75 and options to purchase 102,535 shares of Common stock at
prices ranging from $32.69 to $41.13 were outstanding as of September 30, 2001
and September 30, 2000, respectively, but not included in the computation of
diluted net income per share because the options' exercise prices were greater
than the average market price of the common shares as of such dates and
therefore, would be anti-dilutive under the treasury stock method.
3. Inventories
Inventories consist of (in thousands):
September 30, June 30,
2001 2001
---- ----
Raw materials $ 4,785 $ 5,674
Work in process 4,490 3,341
Finished goods 3,594 5,425
-----------------------------
$12,869 $14,440
=============================
7
4. Accrued Liabilities
Accrued liabilities consist of (in thousands):
September 30 June 30,
2001 2001
---- ----
Accrued compensation $1,338 $1,598
External sales representative commissions 805 819
Other accrued expenses 1,393 1,330
-----------------------------
$3,536 $3,747
=============================
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 non-owner sources. For the three month periods ended September 30,
2001 and 2000, 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,
----------------------------
2001 2000
---- ----
Net income $ 71 $6,036
Unrealized gain on investment 391 73
----------------------------
Comprehensive income $462 $6,109
============================
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
September 30, 2001. There was no impact to the Company's financial statements
due to the adoption of SFAS No. 133.
8. Business Combinations
On June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" which eliminates the pooling of interests method of
accounting for all business combinations initiated after June 30, 2001 and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination.
9. Intangible Assets
As of July 1, 2001 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside a business
combination and for goodwill and other intangible assets subsequent to their
acquisition. This
8
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the statements of financial position, and no longer be
amortized but tested for impairment on a periodic basis. The provisions of this
accounting standard also require the completion of a transitional impairment
test within six months of adoption, with any impairments identified treated as a
cumulative effect of a change in accounting principle.
In accordance with SFAS No. 142, Pericom discontinued the amortization of
goodwill effective July 1, 2001. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization net of the related income tax effect follows:
Three Months Ended
September 30,
--------------------------
2001 2000
---- ----
Reported net income $ 71 $6,036
Add: Goodwill amortization, net of tax - -- 48
--------------------------
Adjusted net income $ 71 $6,084
==========================
Reported basic earnings per share $0.00 $ 0.24
Add: Goodwill amortization, net of tax
per basic share --- $ 0.00
--------------------------
Adjusted basic earnings per share $0.00 $ 0.24
==========================
Reported basic earnings per share $0.00 $ 0.22
Add: Goodwill amortization, net of tax
per basic share --- $ 0.00
--------------------------
Adjusted basic earnings per share $0.00 $ 0.22
==========================
10. Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. It supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the
accounting and reporting provisions of APB 30, "Reporting the results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
the disposal of a segment of a business. The Company is required to adopt SFAS
No. 144 on July 1, 2002. The Company has not yet determined the impact that the
adoption of SFAS No. 144 will have on its results of operations or financial
position.
9
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
September 30,
--------------------------
2001 2000
---------- -----------
Net revenues 100.0% 100.0%
Cost of revenues 65.8% 57.1%
---------- ----------
Gross profit 34.2% 42.9%
---------- ----------
Operating expenses:
Research and development 19.7% 7.8%
Selling, general and administrative 22.4% 11.9%
---------- ----------
Total 42.1% 19.7%
---------- ----------
Income from operations (7.9%) 23.2%
Other income, net 8.7% 6.0%
---------- ----------
Income before income taxes 0.8% 29.2%
Provision for income taxes 0.3% 11.1%
---------- ----------
Net income 0.5% 18.1%
========== ==========
Net Revenues
Net revenues consist primarily of product sales, which are recognized upon
shipment, less an estimate for returns and allowances. Net revenues decreased
60.7% from $33.4 million for the quarter ended September 30, 2000 to $13.1
million for the quarter ended September 30, 2001. The decrease in net revenues
resulted from the rapid, steep and prolonged decline in world wide semiconductor
demand and a decline in the weighted average selling price of certain products.
Sales to domestic and international distributors as a percentage of total
revenues decreased from 51.5% for the quarter ended September 30, 2000 to 45.9%
for the quarter ended September 30, 2001. Direct sales to Techmosa, an
international distributor, accounted for approximately 13.6% of sales in the
quarter ended September 30, 2001 and approximately 10.7% of sales in the quarter
ended September 30, 2000. Direct sales to Jabil Circuit, a global contract
manufacturer, accounted for approximately 13.6% of sales in the quarter ended
September 30, 2001 and less than 10% of sales in the quarter ended September 30,
2000. As a percentage of gross revenues, sales through distribution and contract
manufacturing sales channels to one end-user customer, Compaq Computer Corp.,
decreased from 14.7% in the quarter ended September 30, 2000 to 11.8% in the
quarter ended September 30, 2001. As a percentage of gross revenues, sales
through distribution and contract manufacturing sales channels to another
end-user customer, Cisco Systems, increased from 10.7% in the quarter ended
September 30, 2000 to 11.4% in the quarter ended September 30, 2001. As
a percentage of gross revenues, sales through
10
distribution and contract manufacturing sales channels to a third end-user
customer, IBM were 10.3% in the quarter ended September 30, 2001.
Gross Profit
Gross profit decreased 68.7% from $14.3 million for the quarter ended September
30, 2000 to $4.5 million for the quarter ended September 30, 2001. Gross profit
as a percentage of net revenues, or gross margin, decreased from 42.9% in the
quarter ended September 30, 2000 to 34.2% in the quarter ended September 30,
2001. The decrease in gross margin resulted from a shift in mix towards lower
margin products, pricing pressure resulting in lower average selling prices, and
lower manufacturing volumes resulting in a higher fixed cost per unit all of
which were partially offset by ongoing cost reduction efforts.
Research and Development
Research and development expenses were approximately flat at $2.6 million for
both the quarter ended September 30, 2000 and the quarter ended September 30,
2001, and increased as a percentage of net revenues from 7.8% to 19.7%.
Increases in personnel and equipment costs were offset by decreases in supplies
expenses due to the very tight expense control climate.
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 over the long term. In the short term,
research and development expenses are expected to be relatively flat, as the
Company focuses on cost control during the current industry slowdown.
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 decreased 26.1% from $4.0 million for the quarter ended
September 30, 2000 to $2.9 million for the quarter ended September 30, 2001, and
increased as a percentage of net revenues from 11.9% to 22.4%. The decrease in
expense in was primarily attributable to reduced sales commissions and bonus due
to the sales decline.
The Company anticipates that selling, general and administrative expenses will
increase in future periods over the long term 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. In the short term, selling,
general and administrative expenses are expected to be relatively flat as the
Company focuses on cost control during the current industry slowdown.
Other Income, Net
Other income, net, includes interest income and the Company's allocated portion
of net gains or losses of Pericom Technology, Inc. ("PTI"). Other income, net
decreased from $1,998,000 for the quarter ended September 30, 2000 to $1,151,000
for the quarter ended September 30, 2001. From the quarter ended September 30,
2000 to the quarter ended September 30, 2001, the Company's share of the net
gains or losses of PTI decreased from a loss of $225,000 to a loss of $206,000,
and interest income declined from $2,223,000 to $1,357,000 due to a decline in
the interest rate earned on the cash balances that resulted from the net
proceeds from the Company's follow-on public offering in March 2000. Interest
income increased from $3.6 million in fiscal 2000 to $8.3 million in fiscal 2001
primarily as a result of the investment of these net proceeds.
11
Provision for Income Taxes
The provision for income taxes decreased from $3,700,000 for the quarter ended
September 30, 2000 to $39,000 for the quarter ended September 30, 2001. The
decrease in the provision for income taxes for the current fiscal quarter is due
primarily to the decrease in taxable income. The effective tax rate of 36.0% in
the quarter ended September 30, 2001 has decreased from the 38.0% rate used in
the comparable period in the prior year. The provision for income taxes also
differed from the federal statutory rate 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 the Company's operations, acquire capital
equipment and finance inventory and accounts receivable growth. Operating
activities generated $3.7 million of cash during the three months ended
September 30, 2001 and $8.7 million of cash during the three months ended
September 30, 2000.
Net cash used for investing activities increased from $2.2 million for the three
months ended September 30, 2000 to $7.3 million for the three months ended
September 30, 2001. The Company made capital expenditures of approximately
$805,000 during the three months ended September 30, 2001 compared with
$1,066,000 in the comparable period of the previous year, and also increased net
purchases of short-term investments by $2.8 million during the three months
ended September 30, 2001 compared to the three months ended September 30, 2000.
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 and other predominantly short-term taxable and tax advantaged
instruments.
As of September 30, 2001, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of approximately $152.0
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 twelve 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.
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; plans for increases in
research and development expenses and selling, general and administrative
expenses; plans to seek intellectual property protection for the Company's
technologies; expectations regarding export sales and net revenues; the
expansion of sales efforts; acquisition prospects; 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
12
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.
Our results of operations have been adversely affected by the recent slowdown in
the global economy.
Recently the global economy has been experiencing a slowdown due to many
factors, including decreased consumer confidence and reduced corporate profits
and capital spending. As a result of these unfavorable economic conditions, our
new customer order rates have stabilized at a much lower level than in the first
half of fiscal 2001. The significant order cancellations that we experienced
during the second half of fiscal 2001 have largely abated, however. In addition,
the recent terrorist attacks on September 11, 2001 appear to have further
depressed economic activity in the United States. If these weak economic
conditions in the United States continue or worsen or if a wider or global
economic slowdown occurs, our business, financial condition and results of
operations may be materially and adversely affected.
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. We believe that the
semiconductor industry is currently in such a downturn and that the decrease in
our net revenues from $33.4 million for the quarter ended September 30, 2000 to
$13.1 million for the quarter ended September 30, 2001 was primarily due to this
downturn. Our net revenues may continue to be adversely affected if this
downturn continues. In general, 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.
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:
. general conditions in the semiconductor and electronic systems industries;
13
. quarter-to-quarter variations in operating results;
. announcements of technological innovations or new products by us or our
competitors;
. 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.
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:
. general conditions in the semiconductor industry;
. changes in our product mix;
. a decline in the gross margins of our products;
. expenses incurred in obtaining, enforcing, and defending intellectual
property rights;
. the timing of new product introductions and announcements by us and by our
competitors;
. customer acceptance of new products introduced by us;
. delay or decline in orders received from distributors;
. growth or reduction in the size of the market for interface ICs;
. the availability of manufacturing capacity with our wafer suppliers;
. changes in manufacturing costs;
. fluctuations in manufacturing yields;
. the ability of customers to pay us; 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 650 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.
14
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.
15
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 2001, 2000 and 1999 we purchased approximately 59%, 75% and 85%,
respectively, of our wafers from Chartered Semiconductor Manufacturing Ltd., and
in the first three months of fiscal 2002 we purchased 60% of our wafers from
Chartered. In fiscal 2001 and 2002, only five other suppliers manufactured the
remainder of our wafers. In fiscal 2000 and 1999, 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.
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.
16
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 36 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 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.
In July 2001, Cypress Semiconductor Corporation ("Cypress"), a competitor of
Pericom, filed a complaint with the U.S. International Trade Commission against
Pericom, alleging, among other things, patent infringement. Cypress also filed
suit in federal district court against Pericom with respect to the same alleged
patent infringement. Pericom disputes Cypress'claims and intends to defend these
proceedings vigorously. For further information, see "Item 1: Legal Proceedings"
in Part II of this Quarterly Report.
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
17
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 650 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 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
10.7% of net
18
revenues during the first three months of fiscal 2001 and approximately 13.6% of
net revenues during the first three months of fiscal 2002. Jabil Circuit, a
global contract manufacturer, accounted for approximately 13.6% of net revenues
in the first three months of fiscal 2002 and less than 10% of net revenues in
the first three months of fiscal 2001. Sales to our top five direct customers
accounted for approximately 43.5% of net revenues in the first three months of
fiscal 2001 and approximately 51.4% of net revenues in the first three months of
fiscal 2002. Of our end-user customers, Compaq Computer, Cisco Systems and IBM
accounted for approximately 11.7%, 11.4% and 10.3%, respectively, of our gross
revenues in the first three months of fiscal 2002 and sales to our top five
end-user customers accounted for approximately 44.2% of gross revenues in the
same period. For the first three months of fiscal 2001, sales to Compaq Computer
were approximately 14.7% and sales to Cisco Systems were approximately 10.7% of
gross revenues. Also during the first quarter of fiscal 2001, sales to our top
five end-user customers were approximately 46.0% 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 three months ended September 30, 2000, sales to
domestic and international distributors represented approximately 51.5% of net
revenues, and for the three months ended September 30, 2001 sales to our
distributors were 45.9% 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 three months ended September 30, 2000, approximately 30% of our net
revenues derived from sales in Asia excluding Japan, approximately 11% from
sales in Europe and approximately 7% from sales in Japan. In the three months
ended September 30, 2001, approximately 46% of our net revenues derived from
sales in Asia excluding Japan, approximately 7% from sales in Europe and
approximately 5% from sales in Japan. 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;
19
. 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 September 30, 2001, our investment portfolio consisted of investment-grade
fixed income securities, excluding those classified as cash equivalents, of
$66.1 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 September 30, 2001, the fair 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 1. Legal Proceedings.
On July 20, 2001, a complaint was filed with the U.S. International Trade
Commission ("USITC"), under section 337 of the Tariff Act of 1930, as amended,
19 U.S.C. ss.1337, on behalf of Cypress Semiconductor Corporation ("Cypress"),
of San Jose, California, a competitor of Pericom. Supplements to the complaint
were filed on July 30, August 1, and August 3, 2001. The complaint, as
supplemented, alleges violations of section 337 in the importation into the
United States, the sale for importation and the sale within the United States
after importation of certain power saving integrated circuits and products
containing those power saving integrated circuits that infringe claims 1-4,
6-10, and 12-15 of United States Patent No. 5,949,261 entitled "Method and
Circuit for Reducing Power and/or Current Consumption." ("the `261 patent"). The
complaint further alleges that an industry in the United States exists as
required by subsection (a)(2) of section 337. Among the power saving integrated
circuits and products that Cypress alleges infringe the `261 patent are certain
of Pericom products. In the complaint, Cypress requested that the USITC
institute an investigation and, after the investigation, issue a permanent
exclusion order and permanent cease and desist order. On August 16, 2001, the
USITC ordered that (1) Pursuant to subsection (b) of section 337 of the Tariff
Act of 1930, as amended, an investigation be instituted to determine whether
there is a violation of subsection (a)(1)(B) of section 337 in the importation
into the United States, the sale for importation, or the sale within the United
States after importation of certain power saving integrated circuits and
products containing same by reason of infringement of claims 1-4, 6-10, 12-14,
or 15 of the `261 patent and whether an industry in the United States exists as
required by subsection (a)(2) of section 337. Pericom disputes Cypress' claims
and intends to defend the lawsuit vigorously.
On July 24, 2001, Cypress Semiconductor Corporation ("Cypress") filed suit in
Federal District Court in the Eastern District of Texas - Sherman Division,
generally alleging that Pericom infringes United States Patent No. 5,949,261
entitled "Method and Circuit for Reducing Power and/or Current Consumption." The
suit seeks injunctive relief, damages, costs, attorney fees, and pre-judgment
and post-judgment interest, and further alleges that Pericom's infringement is
willful and that any damages awarded should be trebled. Pericom disputes
Cypress' claims and intends to defend the lawsuit vigorously.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit
Number Description
------ -----------
10.15 Sublease of 2249 Zanker Road, San Jose, California
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,
2001.
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: November 12, 2001 By: /s/ Alex Hui
------------
Alex Hui
Chief Executive Officer
Date: November 12, 2001 By: /s/ Michael D. Craighead
------------------------
Michael D. Craighead
Chief Financial Officer
(Chief Accounting Officer)
22