<PAGE>
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 30, 1995
OR
[ ] 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 - 18032
---------
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421
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(Address of principal executive offices) (Zip Code)
(503) 681-0118
(Registrant'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 of 1934 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
----- -----
At September 30, 1995 there were 19,502,914 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three Months and Six Months Ended
September 30, 1995 and October 1, 1994 3
Consolidated Balance Sheet - September 30, 1995
and April 1, 1995 4
Consolidated Statement of Cash Flows -
Six Months Ended September 30, 1995
and October 1, 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 18
Holders
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ------------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
1995 1994 1995 1994
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenue $ 48,608 $ 34,564 $ 93,621 $ 67,477
Costs and expenses:
Cost of products sold 20,190 13,998 38,959 27,416
Research and development 6,690 5,578 13,073 10,884
Selling, general and administrative 7,716 6,069 15,087 11,838
-------- -------- -------- --------
Total costs and expenses 34,596 25,645 67,119 50,138
-------- -------- -------- --------
Income from operations 14,012 8,919 26,502 17,339
Other income, net 917 733 1,932 1,402
-------- -------- -------- --------
Income before provision for income taxes 14,929 9,652 28,434 18,741
Provision for income taxes 5,151 3,233 9,810 6,323
-------- -------- -------- --------
Net income $ 9,778 $ 6,419 $ 18,624 $ 12,418
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ 0.49 $ 0.34 $ 0.93 $ 0.65
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding 20,119 19,145 20,117 19,073
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets September 30, April 1,
1995 1995
------------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,463 $ 7,697
Short-term investments 86,134 81,113
Accounts receivable 20,630 18,147
Inventories 21,106 14,131
Prepaid expenses and other current assets 14,578 12,751
Deferred income taxes 8,901 7,302
------------- ---------
Total current assets 177,812 141,141
Wafer supply advance 24,657 31,320
Property and equipment, net 22,925 20,115
Other assets 374 341
------------ ---------
$ 225,768 $ 192,917
------------ ---------
------------ ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 22,722 $ 18,163
Deferred income on sales to
distributors 14,289 11,751
Income taxes payable 2,751 5,206
------------ ---------
Total current liabilities 39,762 35,120
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized; 19,502,914 and
18,889,703 shares issued and outstanding 195 189
Paid-in capital 92,381 82,802
Retained earnings 93,430 74,806
------------ ---------
Total stockholders' equity 186,006 157,797
------------ ---------
$ 225,768 $ 192,917
------------ ---------
------------ ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
Sept. 30, Oct. 1,
1995 1994
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,624 $ 12,418
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,533 2,941
Changes in assets and liabilities:
Accounts receivable (2,483) (1,759)
Inventories (6,975) 315
Prepaid expenses and other assets (10) (4,527)
Wafer supply advance 4,813 (18,500)
Deferred income taxes (1,599) 75
Accounts payable and other accrued
expenses 4,559 8,541
Income taxes payable (2,455) (1,067)
Deferred income 2,538 1,372
--------- -----------
Total adjustments 1,921 (12,609)
--------- -----------
Net cash provided (used) by operating activities 20,545 (191)
--------- -----------
Cash flows from investing activities:
Purchase of short-term investments (5,021) (8,222)
Capital expenditures (6,364) (1,978)
Proceeds from sale of equipment 21 --
--------- -----------
Net cash used by investing activities (11,364) (10,200)
--------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock 9,585 2,527
--------- -----------
Net cash provided by financing activities 9,585 2,527
--------- -----------
Net increase (decrease) in cash and cash equivalents 18,766 (7,864)
Beginning cash and cash equivalents 7,697 18,363
--------- -----------
Ending cash and cash equivalents $ 26,463 $ 10,499
---------- -----------
---------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements are unaudited and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary
for the fair statement of results for the interim periods. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year
ended April 1, 1995.
The Company reports on a 52 or 53 week fiscal year, which ends on the
Saturday closest to March 31. The accompanying financial statements
include the accounts of Lattice Semiconductor Corporation and its wholly-
owned subsidiaries, Lattice Semiconducteurs SARL, Lattice GmbH, Lattice
Semiconductor KK, Lattice Semiconductor (Shanghai) Co. Ltd., Lattice
Semiconductor Asia Ltd., Lattice Semiconductor International Ltd. and
Lattice UK Limited. The operations of the subsidiaries have not been
significant to date and all intercompany accounts and transactions have
been eliminated. The results of the interim periods are not necessarily
indicative of the results for the entire year.
(2) Revenue Recognition
Revenue from sales to OEM (original equipment manufacturer) customers is
recognized upon shipment. Certain of the Company's sales are made to
distributors under agreements providing price protection and right of
return on unsold merchandise. Revenue and costs relating to distributor
sales are deferred until the product is sold by the distributor and the
related revenue and costs are then reflected in income.
(3) Net Income Per Share
Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents assumed to be
outstanding during the period (using the treasury stock method).
Common stock equivalents consist of stock options and warrants to purchase
common stock.
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<PAGE>
<TABLE>
<CAPTION>
(4) Inventories (in thousands): September 30, April 1,
1995 1995
-------- --------
<S> <C> <C>
Work in progress $14,226 $ 9,686
Finished goods 6,880 4,445
-------- --------
$21,106 $14,131
-------- --------
-------- --------
</TABLE>
(5) Changes in Stockholders' Equity (in thousands):
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings Total
------ ------- ----------- ---------
<S> <C> <C> <C> <C>
Balances, April 1, 1995 $ 189 $82,802 $ 74,806 $ 157,797
Stock option exercises 6 9,567 -- 9,573
Other -- 12 -- 12
Net income for the
six-month period -- -- 18,624 18,624
------ ------- ----------- ---------
Balances, Sept. 30, 1995 $ 195 $92,381 $ 93,430 $ 186,006
------ ------- ----------- ---------
------ ------- ----------- ---------
</TABLE>
(6) Commitments and Contingencies
The Company entered into a series of agreements with United
Microelectronics Corporation, a corporation formed under the laws of the
Republic of China ("UMC"), in September 1995 pursuant to which the Company
has agreed to join UMC and several other companies to form a separate
Taiwanese company for the purpose of building and operating an advanced
semiconductor manufacturing facility in Taiwan, Republic of China. Under the
terms of the agreements, the Company will invest $60 million, payable in
three installments over the next two and one-half years, for a 10% equity
interest in the corporation and the right to receive a percentage of the
facility's wafer production at market prices. UMC has committed to supply
the Company with sub-micron wafers beginning in the first calendar quarter of
1996 and continuing with phased increases for several years, until such
capacity is available from the new facility.
The Company is exposed to certain asserted and unasserted potential
claims. Patent and other proprietary rights infringement claims are common in
the semiconductor industry and the Company has received a letter from a
semiconductor manufacturer stating that it believes a number of its patents,
related to product packaging, cover certain products sold by the Company.
While this manufacturer has offered to license certain of such patents to the
Company, there can be no assurance that, on this or any other claim
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<PAGE>
which may be made against the Company, that the Company could obtain a
license on terms or under conditions that would be favorable to the Company.
Management believes that the disposition of these claims will not have a
material adverse effect on the Company's financial position or results of
operations.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Revenue was $48.6 million in the second quarter of fiscal 1996, an increase
of 41% over the second quarter of fiscal 1995. Revenue for the six months
ended September 30, 1995 was $93.6 million as compared to $67.5 million for
the first six months of 1995. Substantially all of the Company's revenue is
derived from sales of programmable logic devices (PLDs). The majority of the
Company's revenue for the periods presented was derived from sales of
GAL-REGISTERED TRADEMARK- (Generic Array Logic) products, which address the
low-density segment of the CMOS programmable logic market. The majority of
the Company's revenue growth for the periods presented resulted from the
sales of new products, primarily in the high-density segment of the PLD
market. The Company entered the high-density segment of the PLD market in
fiscal 1993 with its pLSI-REGISTERED TRADEMARK- and ispLSI-REGISTERED
TRADEMARK- product families.
Revenue from international sales increased as a percentage of total revenue
in the second fiscal 1996 quarter compared to the second fiscal 1995 quarter,
from 45 percent to 49 percent, and increased from 44 percent to 49 percent
between the two six-month periods. The Company expects export sales to
continue to represent a significant portion of revenue.
Overall average selling prices, while remaining relatively constant between
the 1995 and 1996 six-month fiscal periods, increased slightly in the fiscal
1996 second quarter as compared to the same fiscal 1995 quarter. This was
due to an overall stronger market for the Company's products and a higher
proportion of high-density products included in revenue. Although selling
prices of mature products generally decline over time, this decline is at
times offset by higher selling prices of new products. The Company's ability
to maintain its recent trend of revenue growth and market penetration is in
large part dependent on the continued development, introduction and market
acceptance of new products.
GROSS MARGIN
The Company's gross margin as a percentage of revenue was 58.5% in the second
quarter of fiscal 1996 as compared to 59.5% for the same quarter of fiscal
1995. For the 1996 six-month period, the gross margin was 58.4%, down from
59.4% in the previous year. These decreases in gross margin percentage were
primarily due to higher period costs associated with increased production of
high-density products offsetting improved capacity utilization and other
reductions in the Company's manufacturing costs. Profit margins
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<PAGE>
on older products generally tend to decrease over time as selling prices
decline, but the Company's strategy has been to offset these decreases by
continuously introducing new products with higher margins.
RESEARCH AND DEVELOPMENT
Research and development expense increased by approximately $1.1 million, or
20%, from the second quarter of fiscal 1995 to the second quarter of fiscal
1996, and increased $2.2 million, or 20%, between the two fiscal six-month
periods. Such expense represented 14% of revenue in the fiscal 1996 periods
as compared to 16% in the fiscal 1995 periods. The spending increases were
related primarily to the development of new technologies and new products,
including the Company's high-density product families and their related
software development tools. The Company believes that a continued commitment
to research and development is essential in order to maintain product
leadership, and therefore expects to continue to make significant investments
in research and development in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased by approximately $1.6
million, or 27%, between the second quarter of fiscal 1995 and the fiscal
1996 second quarter, and increased $3.2 million, or 27%, between the two
six-month fiscal periods. This increase was primarily due to expansion of
the Company's sales force, the addition of field application engineers to
provide enhanced customer assistance, and higher sales commissions associated
with the higher revenue levels. Selling, general and administrative expense
as a percentage of revenue decreased slightly from approximately 17.5% in the
fiscal 1995 periods to just over 16% in the fiscal 1996 periods.
INTEREST AND OTHER INCOME
Interest and other income (net of expense), while remaining relatively
constant as a percentage of revenue, increased by approximately $530,000, or
38%, from the fiscal 1995 periods to the fiscal 1996 periods. This was due
primarily to higher interest rates in the fiscal 1996 periods.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.5% for the fiscal 1996 periods
presented as compared to 33.7% recorded in the fiscal 1995 periods. This
increase occurred primarily because of the utilization of the Company's
remaining tax credit carry forwards during fiscal 1995.
Deferred tax asset valuation allowances are recorded to offset deferred tax
assets that can only be realized by earning taxable income in distant future
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<PAGE>
years. Management established the valuation allowances because it cannot
determine if it is more likely than not that such income will be earned.
FACTORS AFFECTING FUTURE RESULTS
The Company does not manufacture finished silicon wafers. Its products,
however, require wafers manufactured with state-of-the-art fabrication
equipment and techniques. Accordingly, the Company's strategy has been to
maintain relationships with large semiconductor manufacturers for the
production of its wafers. All of its silicon wafers are currently
manufactured by Seiko Epson Corporation ("Seiko Epson") in Japan and sold to
the Company, through Seiko Epson's affiliated U.S. distributor, S MOS Systems
Inc. ("S MOS"). In connection with a series of agreements recently entered
into with United Microelectronics Corporation ("UMC") providing for the
formation of a separate Taiwanese company for the purpose of building and
operating an advanced semiconductor manufacturing facility in Taiwan,
Republic of China, UMC committed to supply the Company with sub-micron wafers
beginning in the first calendar quarter of 1996 and continuing with phased
increases for several years. A significant interruption in supply from Seiko
Epson through S MOS or from UMC would have a material adverse effect on the
Company's business.
Worldwide manufacturing capacity for silicon wafers is limited and
inelastic. Therefore, significant increases in demand or interruptions in
supply could adversely affect the Company. Through fiscal 1995, the Company
has been successful in obtaining adequate wafer capacity commitments and has
not experienced any material difficulties or delays in the supply of wafers.
Presently, demand on wafer suppliers for silicon wafers is growing and
existing capacity commitments may not be sufficient to permit the Company to
satisfy all of its customers' demand in future periods. The Company
negotiates wafer prices and certain wafer supply commitments with Seiko Epson
and S MOS on an annual basis, and, in some cases, as frequently as
semiannually. Moreover, wafer prices and commitments are subject to
continuing review and revision by the parties. Although current commitments
are anticipated to be adequate through fiscal 1996, Seiko Epson and S MOS
advised the Company in July 1995 that, due to high levels of demand and
limited manufacturing capacity, there were significant uncertainties as to
whether they would be able to supply wafers to the Company for the Company's
fiscal 1997 at increased levels relative to fiscal 1996 or even at historical
levels. More recently, however, the Company received indications from Seiko
Epson and S MOS that they believe they will be able to supply wafers to the
Company in fiscal 1997 at levels moderately higher than in fiscal 1996. In
addition, the Company recently obtained a commitment from UMC to supply the
Company with sub-micron wafers beginning in the first calendar quarter of
1996 and continuing with phased increases for several years. Wafer prices
and other purchase terms are expected to be negotiated prior to initiating
wafer production and will be subject to periodic adjustment. The availability
of wafers from UMC will depend on, among other things, UMC successfully
achieving volume production. There can be no assurance that UMC will
successfully achieve volume production of Company wafers or that Seiko Epson,
S MOS or UMC will not reduce their allocations of wafers or increase prices
to the Company in future periods or that any such reduction in supply could
be offset pursuant to arrangements with alternate sources of supply. If any
substantial reduction of supply or substantial price increase were to occur,
the Company's operating results would be materially adversely affected. The
Company's future revenue growth will depend in part on improving yields of
die per wafer through reductions in the die size of its products, shifting
capacity to a higher revenue per wafer product mix, successfully achieving
production volumes at UMC, increasing its wafer allocations from its
suppliers or obtaining additional wafer allocations from other suppliers.
There can be no assurance that the Company will be successful in improving
yields, enhancing product mix, achieving volume production at UMC or
otherwise increasing wafer supply.
The Company's wafer purchases from Seiko Epson are denominated in
Japanese yen. During the first two calendar quarters of 1995, the dollar lost
substantial value with respect to the yen. Such loss was regained in the
third calendar quarter of 1995. There is no assurance that the value of the
dollar with respect to the yen will not again experience substantial
deterioration or that any such deterioration will not continue in the
future. Any substantial continued deterioration of dollar-yen exchange
rates could have a material adverse effect on the Company's results of
operations.
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<PAGE>
The Company depends upon wafer suppliers to produce wafers with
acceptable yields and to deliver them to the Company in a timely manner.
Substantially all of the Company's revenues are derived from products based
on E(2)CMOS process technology. Successful implementation of the Company's
proprietary E(2)CMOS process technology, UltraMOS, requires a high degree of
coordination between the Company and its wafer supplier. Therefore,
significant lead time is required to reach volume production at a new wafer
supply location such as UMC. Accordingly, there can be no assurance that
volume production at UMC will be achieved in the near term or at all. The
manufacture of high performance E(2)CMOS semiconductor wafers is a complex
process that requires a high degree of technical skill, state-of-the-art
equipment and effective cooperation between the wafer supplier and the
circuit designer to produce acceptable yields. Minute impurities, errors in
any step of the fabrication process, defects in the masks used to print
circuits on a wafer and other factors can cause a substantial percentage of
wafers to be rejected or numerous die on each wafer to be non-functional. As
is common in the semiconductor industry, the Company has from time to time
experienced in the past and expects that it will experience in the future
production yield problems and delivery delays. Any prolonged inability to
obtain adequate yields or deliveries could adversely affect the Company's
operating results.
The Company expects that, as is customary in the semiconductor business,
it will in the future seek to convert its fabrication process technology to
larger wafer sizes, to smaller device geometries or to new or additional
suppliers in order to maintain or enhance its competitive position. Such
conversions entail inherent technological risks that could adversely affect
yields and delivery times and could have a material adverse impact on the
Company's operating results. To a considerable extent, the Company's ability
to execute its strategies will depend upon its ability to maintain and
enhance its advanced process technologies. As the Company does not presently
operate its own wafer fabrication or process development facility, the
Company depends upon silicon wafer manufacturers to provide the facilities
and support for its process development. In light of this dependency and the
intensely competitive nature of the semiconductor industry, there is no
assurance that either process technology development or timely product
introduction can be sustained in the future.
In addition, other unanticipated changes in or disruptions of the
Company's wafer supply arrangements could reduce product availability,
increase cost or impair product quality and reliability. Many of the factors
that could result in such changes are beyond the Company's control. For
example, a disruption of operations at Seiko Epson's or UMC's manufacturing
facilities as a result of a work stoppage, fire, earthquake or other natural
disaster, would cause delays in shipments of the Company's products and could
have a material adverse effect on the Company's operating results.
The Company's finished silicon wafers are assembled and packaged by
independent subcontractors located in the Philippines and South Korea.
Although the Company has not yet experienced significant problems or
interruptions in supply from its assembly contractors, any prolonged work
stoppages or other failure of these contractors to supply finished products
would have a material adverse effect on the Company's operating results.
The Company believes that its future operating results will be subject to
quarterly variations based upon a wide variety of factors, including the
cyclical nature of both the semiconductor industry and the markets addressed
by the Company's products, the timing of new product introductions, price
erosion, product obsolescence, substantial adverse currency exchange rate
movements, variations in product mix, scheduling, rescheduling and
cancellation of large orders, competitive factors, the availability of
manufacturing capacity and wafer supply, the ability to achieve volume
production at UMC, the ability to develop and implement new process
technologies, fluctuations in manufacturing yields, changes in effective tax
rates and litigation expenses. Due to these and other factors, the Company's
past results are a less useful predictor of future results than is the case
in more mature and less dynamic industries. The Company has increased its
level of operating expenses and investment in manufacturing capacity in
anticipation of future growth in revenues, primarily from increased sales of
its high-density products. To the extent that this revenue growth does not
materialize, the Company's operating results would be adversely affected.
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<PAGE>
Because of the rapid rate of technological change in the semiconductor
industry, the Company's success will ultimately depend in large part on its
ability to introduce new products on a timely basis that meet a market need
at a competitive price and with acceptable margins as well as enhancing the
performance of its existing products. The success of new products,
including the Company's high-density product families, depends on a variety
of factors, including product selection, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes, product performance, quality and reliability in the field
and effective sales and marketing. Because new product development
commitments must be made well in advance of sales, new product decisions must
anticipate both future demand and the technology that will be available to
supply that demand. New and enhanced products are continually being
introduced into the Company's markets by others, and these products can be
expected to affect the competitive environment in the markets in which they
are introduced. There is no assurance that the Company will be successful in
enhancing its existing products or in selecting, developing, manufacturing,
marketing and selling new products.
The majority of the Company's revenue and gross margin percentage over
the past three fiscal years was due to revenues from low-density GAL
products, many of which are second sourced by other suppliers. Future
revenue growth will be largely dependent on market acceptance of the
Company's new and proprietary products, including its high-density product
families, and market acceptance of the Company's proprietary software
development tools. There can be no assurance that the Company's product and
process development efforts will be successful or that new products,
including the Company's high-density products, will continue to achieve
market acceptance. If the Company were unable to successfully define, develop
and introduce competitive new products in a timely manner, its future
operating results would be adversely affected.
The semiconductor industry is intensely competitive and is characterized
by rapid technological change, sudden price fluctuations, general price
erosion, rapid rates of product obsolescence, periodic shortages of materials
and manufacturing capacity and variations in manufacturing costs and yields.
The Company's competitive position is affected by all of these factors and by
industry competition for effective sales and distribution channels. The
Company's existing and potential competitors range from established major
domestic and international semiconductor companies to emerging companies.
Many of the Company's competitors have substantially greater financial,
technological, manufacturing, marketing and sales resources than the Company.
The Company faces direct competition from companies that have developed or
licensed similar technology and from licensees of the Company's products and
technology. The Company also faces indirect competition from a wide variety
of semiconductor companies offering products and solutions based on
alternative technologies. Although to date the Company has not experienced
significant competition from companies located outside the United States,
such companies may become a more significant competitive factor in the
future. As the Company and its current competitors seek to expand their
markets, competition may increase, which could have an adverse effect on the
Company's operating results. Development of new technologies that have
price/performance characteristics superior to the Company's technologies
could adversely affect the Company's results of operations. There can be no
assurance that the Company will be able to develop and market new products
successfully or that the products introduced by others will not render the
Company's products or technologies non-competitive or obsolete. The Company
expects that its markets will become more competitive in the future.
The semiconductor industry is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity and accelerated erosion of
average selling prices. The Company's rate of growth in recent periods has
been positively impacted by recent trends in the semiconductor industry. Any
material imbalance in industry-wide production capacity relative to demand,
shift in industry capacity toward products competitive with the Company's
products, reduced demand or reduced growth in demand or other factors could
result in a rapid decline in product pricing and have a material adverse
effect on the Company's operating results.
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<PAGE>
In an effort to secure additional wafer supply, the Company may from
time to time consider various arrangements, including joint ventures
with, minority investments in, advanced purchase payments to, loans to or
similar arrangements with independent wafer manufacturers in exchange for
committed production capacity. Such arrangements are becoming common within
the industry as independent wafer manufacturers increasingly seek to require
their customers to share a portion of the cost of capital intensive wafer
fabrication facilities. The Company entered into an advanced production
payment arrangement with Seiko Epson in 1994 pursuant to which it advanced a
total of $42 million to Seiko Epson. In September 1995, the Company entered
into an agreement with UMC to invest $60 million for a 10% equity
interest in a separate Taiwanese company providing for the formation of a
joint venture with UMC and several other companies for the purpose of
building and operating an advanced semiconductor manufacturing facility.
To the extent the Company pursues any other such transactions with Seiko
Epson, UMC or any other wafer manufacturers, such transactions could
entail even greater levels of investment requiring the Company to seek
additional equity or debt financing to fund such activities. There can be no
assurance that any such additional funding could be obtained when needed or,
if available, on terms acceptable to the Company.
The Company's success depends in part on its proprietary technology.
While the Company attempts to protect its proprietary technology through
patents, copyrights and trade secrets, it believes that its success
will depend more upon technological expertise, continued development of
new products, and successful market penetration of its silicon and software
products. There can be no assurance that the Company will be able to
protect its technology or that competitors will not be able to develop
similar technology independently. The Company currently has a number of
United States and foreign patents and patent applications. There can be
no assurance that the claims allowed on any patents held by the Company will
be sufficiently broad to protect the Company's technology, or that any
patents will issue from any application pending or filed by the Company.
In addition, there can be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
The semiconductor industry is generally characterized by vigorous
protection and pursuit of intellectual property rights and positions,
which have on occasion resulted in protracted litigation that utilizes
cash and management resources, which can have a significant adverse effect on
operating results. The Company has received a letter from a semiconductor
manufacturer stating that it believes a number of its patents, related to
product packaging, cover certain products sold by the Company. While the
manufacturer has offered to license certain of such patents to the
Company, there can be no assurance, on this or any other claim which may be
made against the Company, that the Company could obtain a license on
terms or under conditions that would be favorable to the Company. In
addition, there can be no assurance that other intellectual property claims
will not be made against the Company in the future or that the Company
will not be prohibited from using the technologies subject to such claims or
be required to obtain licenses and make corresponding royalty payments for
past or future use.
-14-
<PAGE>
International revenues accounted for 47% and 49% of the Company's
revenues for fiscal year 1995 and the first six months of fiscal 1996,
respectively. The Company believes that international revenues will continue
to represent a significant percentage of revenues. International revenues and
operations may be adversely affected by the imposition of governmental
controls, export license requirements, restrictions on the export
of technology, political instability, trade restrictions, changes in
tariffs and difficulties in staffing and managing international
operations.
The future success of the Company is dependent, in part, on its
ability to attract and retain highly qualified technical and management
personnel, particularly highly skilled engineers involved in new
product, both silicon and software, and process technology development.
Competition for such personnel is intense. There can be no assurance
that the Company will be able to retain its existing key technical
and management personnel or attract additional qualified employees in the
future. The loss of key technical or management personnel could delay
product development cycles or otherwise have a material adverse effect on
the Company's business.
The Company currently depends on Seiko Epson, a Japanese company, for
the manufacture of all of its finished silicon wafers, and anticipates
depending on UMC, a Taiwanese company, and a joint venture formed with
UMC and other semiconductor companies for the manufacture of a portion of its
finished silicon wafers. In addition, after wafer manufacturing is completed
and each wafer is tested, products are assembled by subcontractors in South
Korea and the Philippines. Although the Company's subcontractors have not
recently experienced any serious work stoppages, the social and political
situations in these countries can be volatile, and any prolonged work
stoppages or other disruptions in the Company's ability to manufacture and
assemble its products would have a material adverse effect on the
Company's results of operations. Furthermore, economic risks, such as
changes in currency exchange rates, tax laws, tariffs, or freight
rates, or interruptions in air transportation, could have a material
adverse effect on the Company's results of operations.
The market price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, shortfalls in revenues or earnings from levels expected by
securities analysts and other factors such as announcements of
technological innovations or new products by the Company or by the
Company's competitors, government regulations, developments in patent or
other proprietary rights, and developments in the Company's
relationships with parties to collaborative agreements. In addition, the
stock market has recently experienced significant price fluctuations. These
fluctuations often have been unrelated to the operating performance of the
specific companies whose stocks are traded. Broad market fluctuations, as
well as economic conditions generally and in the semiconductor industry
specifically, may adversely affect the market price of the Company's Common
Stock.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, the Company's principal source of liquidity was $112.6
million of cash and short-term investments, an increase of $23.8 million from
the balance of $88.8 million at April 1, 1995. This increase was primarily the
result of cash generated from operations. The Company also has available an
unsecured $10 million demand bank credit facility with interest due on
outstanding balances at a money market rate. This facility has not been used.
Accounts receivable and deferred income on sales to distributors increased 14%
and 22%, respectively, as compared to the balances at April 1, 1995. These
increases were primarily due to the higher revenue level in the fiscal 1996
second quarter and the timing of billings to end customers and distributors.
Inventories increased by 49% versus amounts recorded at April 1, 1995 due to
increased production in response to higher revenue levels and the timing of
silicon wafer receipts. Accounts payable and accrued expenses increased 25% as
compared to the balance at April 1, 1995 due to the higher level of wafer
receipts, increased expense activity associated with the higher revenue levels
and timing of payments. The wafer supply advance decreased by 27% as compared to
the balance at April 1, 1995 due to the receipt of wafers under the advance
production payment agreement with Seiko Epson and a $1.8 million
reclassification to "Prepaid expenses and other current assets" as an increase
in management's estimate of wafers to be received under this agreement in the
next twelve months.
The decrease in income taxes payable of $2.4 million between April 1, 1995 and
September 30, 1995 is primarily attributable to the timing of quarterly tax
payments.
Substantially all of the Company's silicon wafer purchases are currently
denominated in Japanese yen. The Company maintains yen-denominated bank
accounts and bills its Japanese customers in yen. The yen bank deposits
utilized to hedge yen-denominated wafer purchases are accounted for as
identifiable hedges against specific and firm wafer purchases.
The Company believes its existing sources of liquidity and funds expected to be
generated from operations will provide adequate cash to fund the Company's
anticipated cash needs for the next twelve months. In an effort
-16-
<PAGE>
to secure additional wafer supply, the Company may from time to time consider
various financial arrangements including joint ventures with, minority
investments in, advance purchase payments to, loans to, or similar arrangements
with independent wafer manufacturers in exchange for committed wafer capacity.
To the extent the Company pursues any such additional financial arrangements,
additional debt or equity financing may be required. There can be no assurance
that any such additional funding could be obtained when needed or, if available,
on terms acceptable to the Company.
The Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission on October 17, 1995 relating to a proposed public offering
of up to 2,875,000 shares of common stock (including an over-allotment option to
purchase 375,000 shares in favor of the underwriters). Successful consummation
of this offering will depend on market conditions and other factors. There is no
guarantee that the proposed offering will be completed.
-17-
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The annual meeting of stockholders was held on August 14, 1995.
b) The following director was elected at the meeting to serve a term of three
years:
Cyrus Y. Tsui
The following directors are continuing to serve their terms:
Daniel S. Hauer
Douglas C. Strain
Harry A. Merlo
Larry W. Sonsini
c) The matters voted upon at the meeting and results of the voting with
respect to those matters were as follows:
<TABLE>
<CAPTION>
For Withheld
----------- --------
<S> <C> <C>
(1) Election of Director:
Cyrus Y. Tsui 16,868,039 137,524
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
----------- --------- ------- ---------
<S> <C> <C> <C> <C>
(2) Ratification of Price 16,894,032 7,825 103,706 0
Waterhouse LLP as the
Company's independent
public accountant for
the fiscal year
ending March 30,
1996.
</TABLE>
The foregoing matters are described in detail in the Company's definitive proxy
statement dated July 3, 1995, for the Annual Meeting of Stockholders held on
August 14, 1995.
-18-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Computation of Net Income Per Share
27 Financial Data Schedule for Six Months Ended
September 30, 1995
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1995. On October 3, 1995, the Company filed a Current
Report on Form 8-K dated September 28, 1995. Such filing announced the
signing of a definitive agreement on September 14, 1995 with United
Microelectronics Corporation to join several other companies in a
previously announced venture to form a separate Taiwanese company for
the purpose of building and managing an advanced semiconductor
manufacturing facility in Hsin Chu City, Taiwan, Republic of China.
-19-
<PAGE>
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.
LATTICE SEMICONDUCTOR CORPORATION
Date: October 17, 1995 /s/ Rodney F. Sloss
-------------------- ---------------------------------
By: Rodney F. Sloss
Vice President, Finance
(Principal Financial and Accounting
Officer)
-20-
<PAGE>
EXHIBIT 11.1
LATTICE SEMICONDUCTOR CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
1995 1994 1995 1994
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net income $ 9,778 $ 6,419 $ 18,624 $ 12,418
---------- --------- --------- ----------
---------- --------- --------- ----------
Weighted average common stock and common stock equivalents:
Common stock 19,412 18,586 19,226 18,519
Options and warrants 707 559 891 554
---------- --------- --------- ----------
20,119 19,145 20,117 19,073
---------- --------- --------- ----------
---------- --------- --------- ----------
Net income per share $ 0.49 $ 0.34 $ 0.93 $ 0.65
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> SEP-30-1995
<CASH> 26,463
<SECURITIES> 86,134
<RECEIVABLES> 20,630
<ALLOWANCES> 765
<INVENTORY> 21,106
<CURRENT-ASSETS> 177,812
<PP&E> 22,925
<DEPRECIATION> 27,861
<TOTAL-ASSETS> 225,768
<CURRENT-LIABILITIES> 39,762
<BONDS> 0
<COMMON> 195
0
0
<OTHER-SE> 185,811
<TOTAL-LIABILITY-AND-EQUITY> 225,768
<SALES> 0
<TOTAL-REVENUES> 93,621
<CGS> 38,959
<TOTAL-COSTS> 67,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,932)
<INCOME-PRETAX> 28,434
<INCOME-TAX> 9,810
<INCOME-CONTINUING> 18,624
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,624
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
