<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 28, 1996
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
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LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
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(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 28, 1996 there were 22,354,569 shares of the Registrant's common
stock, $.01 par value, outstanding.
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LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Six Months Ended Sept. 28, 1996 and
Sept. 30, 1995 3
Consolidated Balance Sheet - Sept. 28, 1996
and March 30, 1996 4
Consolidated Statement of Cash Flows -
Six Months Ended Sept. 28, 1996
and Sept. 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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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. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 48,638 $ 48,608 $ 96,806 $ 93,621
Costs and expenses:
Cost of products sold 19,995 20,190 39,833 38,959
Research and development 6,888 6,690 13,642 13,073
Selling, general and administrative 8,194 7,716 16,091 15,087
--------- --------- --------- ---------
Total costs and expenses 35,077 34,596 69,566 67,119
--------- --------- --------- ---------
Income from operations 13,561 14,012 27,240 26,502
Other income, net 2,168 917 4,198 1,932
--------- --------- --------- ---------
Income before provision for income taxes 15,729 14,929 31,438 28,434
Provision for income taxes 5,269 5,151 10,530 9,810
--------- --------- --------- ---------
Net income $ 10,460 $ 9,778 $ 20,908 $ 18,624
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $ 0.46 $ 0.49 $ 0.92 $ 0.93
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding 22,630 20,119 22,642 20,117
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Assets Sept. 28, March 30,
1996 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,350 $ 54,600
Short-term investments 187,252 160,570
Accounts receivable 20,294 22,884
Inventories 28,359 21,761
Prepaid expenses and other current assets 22,408 19,301
Deferred income taxes 11,200 9,700
----------- ---------
Total current assets 314,863 288,816
Wafer supply advance 2,450 14,507
Property and equipment, net 29,095 25,471
Foundry investment and other assets 14,209 14,141
----------- ---------
$ 360,617 $ 342,935
----------- ---------
----------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 20,897 $ 22,471
Deferred income on sales to
distributors 14,016 16,896
Income taxes payable 2,214 4,800
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Total current liabilities 37,127 44,167
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, 22,354,569 and
22,123,069 shares issued and outstanding 223 221
Paid-in capital 185,769 181,957
Retained earnings 137,498 116,590
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Total stockholders' equity 323,490 298,768
----------- ---------
$ 360,617 $ 342,935
----------- ---------
----------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
Sept. 28, Sept. 30,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,908 $ 18,624
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,060 3,533
Changes in assets and liabilities:
Accounts receivable 2,590 (2,483)
Inventories (6,598) (6,975)
Prepaid expenses and other assets (367) (10)
Wafer supply advance 9,248 4,813
Deferred income taxes (1,500) (1,599)
Accounts payable and other accrued
expenses (1,574) 4,559
Income taxes payable (2,586) (2,455)
Deferred income (2,880) 2,538
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Total adjustments 393 1,921
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Net cash provided by operating activities 21,301 20,545
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Cash flows from investing activities:
Purchase of short-term investments, net (26,682) (5,021)
Capital expenditures (7,683) (6,364)
Proceeds from sale of equipment -- 21
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Net cash used by investing activities (34,365) (11,364)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 3,814 9,585
--------- ---------
Net cash provided by financing activities 3,814 9,585
--------- ---------
Net increase (decrease) in cash and cash equivalents (9,250) 18,766
Beginning cash and cash equivalents 54,600 7,697
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Ending cash and cash equivalents $ 45,350 $ 26,463
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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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 March 30, 1996.
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 assets, liabilities and results of operations
of the subsidiaries were not material for the periods presented. The
results of the interim period 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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(4) Inventories (in thousands):
Sept. 28, March 30,
1996 1996
--------- ---------
Work in progress $20,598 $13,174
Finished goods 7,761 8,587
--------- ---------
$28,359 $21,761
--------- ---------
--------- ---------
(5) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
------- ------- -------- ----------
Balances, March 30, 1996 $ 221 $181,957 $116,590 $ 298,768
Stock option exercises 2 3,806 -- 3,808
Other -- 6 -- 6
Net income for the
six-month period -- -- 20,908 20,908
------- ------- -------- ----------
Balances, Sept. 28, 1996 $ 223 $185,769 $137,498 $ 323,490
------- ------- -------- ----------
------- ------- -------- ----------
(6) Contingencies:
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 certain patents held by it
cover products previously sold by the Company. While the manufacturer has
offered to license certain of such patents to the Company, there can be no
assurance that, on this or any other claim which may be made against the
Company, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in the section
entitled "Factors Affecting Future Results" and elsewhere in this report.
RESULTS OF OPERATIONS
REVENUE
Revenue was $48.6 million for the second quarter of fiscal 1997 and 1996,
respectively. Revenue for the first six month period of fiscal 1997 was $96.8
million, as compared to $93.6 million for the first six month period of fiscal
1996. The majority of the Company's revenue prior to fiscal 1997 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 six month period of fiscal 1997
as compared to six month period of fiscal 1996 resulted from the sales of new
products, primarily in the high-density segment of the PLD market. Increases in
the sales of the Company's high-density products have been significant and have
grown consistently as a percentage of the Company's overall revenue. For the
first six month period of fiscal 1997, revenue from the sale of high-density
products amounted to approximately one-half of the Company's overall revenue.
Revenue from international sales was 48% and 47% of total revenue in the second
quarter and the first six month period of fiscal 1997, respectively, as compared
to 49% in both the second quarter and the first six month period of fiscal 1996.
The Company expects export sales to continue to represent a significant portion
of revenue. See "Factors Affecting Future Results".
Overall average selling prices increased in the second quarter and the first six
month period of fiscal 1997 as compared to the second quarter and the first six
month period of fiscal 1996. This was due primarily to a higher proportion of
high-density products included in the revenue mix. 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 generate
revenue growth and increase market penetration is in large part dependent on the
continued development, introduction and market acceptance of new products. See
"Factors Affecting Future Results".
GROSS MARGIN
The Company's gross margin as a percentage of revenue was 58.9% in the second
quarter of fiscal 1997 as compared to 58.5% in the second quarter of
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fiscal 1996. For the first six month period of fiscal 1997, the gross margin
was 58.9%, an increase from 58.4% in the first six month period of fiscal
1996. This increase in gross margin percentage was primarily due to
reductions in the Company's manufacturing costs. Profit margins 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 $198,000, or 3%, in
the second quarter of fiscal 1997 when compared to the second quarter of fiscal
1996, and increased $569,000, or 4%, in the first six month period of fiscal
1997 when compared to the first six month period of fiscal 1996. This expense
represented approximately 14% of revenue for all 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 in its existing product families and to provide innovative new
product offerings, 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 $478,000,
or 6%, in the second quarter of fiscal 1997 when compared to the second quarter
of fiscal 1996, and increased by $1.0 million, or 7%, in the first six months of
fiscal 1997 when compared to the first six months of fiscal 1996. This increase
was primarily due to expansion of the Company's sales force and higher sales
commissions associated with the higher revenue levels. Selling, general and
administrative expense increased to approximately 17% of revenue in the fiscal
1997 periods from approximately 16% of revenue in the fiscal 1996 periods.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) more than doubled to approximately
$2.2 million for the second quarter of fiscal 1997 from approximately $917,000
for the second quarter of fiscal 1996, and to $4.2 million for the first six
month period of fiscal 1997 from $1.9 million for the first six month period of
fiscal 1996. This was due to higher cash and investment balances resulting from
cash generated from operations and the Company's follow-on public offering of
common stock in November 1995.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.5% for the second quarter and the first
six period of fiscal 1997 as compared to 34.5% for the second quarter and first
six period of fiscal 1996. This decrease is due primarily to a
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higher amount of non-taxable investment income associated with the higher
cash and investment balances as discussed above.
Deferred tax asset valuation allowances are recorded to offset deferred tax
assets that can only be realized by earning taxable income in distant future
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 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, 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 stable
industries. The Company has over time increased its level of operating expenses
and investment in manufacturing capacity in anticipation of future growth in
revenues. To the extent that this revenue growth does not materialize, the
Company's operating results would be adversely affected.
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
impacted by the cyclicality of 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
decline in the demand for or the prices of the Company's products and could have
a material adverse effect on the Company's operating results.
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 at times 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
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specifically, could adversely affect the market price of the Company's Common
Stock.
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. Substantially 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 entered into in September 1995 with
United Microelectronics Corporation ("UMC") providing for the formation of a
separate Taiwanese company, United Integrated Circuits Corporation ("UICC"), for
the purpose of building and operating an advanced semiconductor manufacturing
facility in Taiwan, Republic of China, UMC began supplying the Company with
sub-micron production wafers in the third calendar quarter of 1996. A
significant interruption in supply from Seiko Epson through S MOS, or from UMC,
could 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. Although current commitments are anticipated to be
adequate through fiscal 1997, there can be no assurance that existing capacity
commitments will be sufficient to permit the Company to satisfy all of its
customers' demand in future periods. The Company negotiates wafer prices and
wafer supply commitments with its principal wafer suppliers on a periodic basis.
Moreover, wafer prices and commitments are subject to continuing review and
revision by the parties. However, there can be no assurance that Seiko Epson, S
MOS or UMC will not reduce their allocations of wafers or increase prices to the
Company in future periods. If any substantial reduction of supply or
substantial price increase were to occur, the Company's operating results could
be materially adversely affected.
The Company's wafer purchases from Seiko Epson are denominated in Japanese yen.
Historical fluctuations in the dollar/yen exchange rate have been significant.
There is no assurance that the value of the dollar with respect to the yen will
not experience substantial deterioration in the future. Any substantial
prolonged or permanent deterioration of dollar/yen exchange rates could have a
material adverse effect on the Company's results of operations.
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-Registered Trademark- process technology. Successful implementation of
the Company's proprietary E(2) CMOS process technology, UltraMOS-Registered
Trademark-, requires a high degree of coordination between the Company and
its wafer suppliers. 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
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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 would have a material adverse effect on
the Company's operating results.
The Company currently depends on foreign manufacturers -- Seiko Epson, a
Japanese company, and UMC, a Taiwanese company -- for the manufacture of all of
its finished silicon wafers, and anticipates depending on UICC, a Taiwanese
company, 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, the Philippines, Hong
Kong, the United States and Malaysia. Although the Company has not experienced
any interruption in supply from its subcontractors, 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.
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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 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.
Competitors' 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.
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
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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 approximately $60 million for a 10%
equity interest in a separate Taiwanese company (UICC) 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
previously 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.
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International revenues accounted for 47% and 49% of the Company's revenues for
the first six month periods of fiscal 1997 and 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1996, the Company's principal source of liquidity was
$232.6 million of cash and short-term investments, an increase of approximately
$17.4 million from the balance of $ 215.2 million at March 30, 1996. 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 decreased by 11%, or $2.6 million, as compared to the
balance at March 30, 1996. This decrease was primarily due to the lower revenue
level in the second quarter of fiscal 1997 as compared to the fourth quarter of
fiscal 1996 and the timing of billings to end customers and distributors.
Inventories increased by $6.6 million, or 30%, versus amounts recorded at March
30, 1996 due to increased production based on wafer supply commitments made in
anticipation of future requirements. The wafer supply advance decreased by
approximately $12.1 million, or 83%, as compared to the balance at March 30,
1996 due to the receipt of wafers under the Advance Production Payment agreement
with Seiko Epson and a $2.8 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. Accounts payable and
accrued expenses decreased by $1.6 million, or 7%, as compared to the balance at
March 30, 1996 due to timing of wafer receipts and payments. Deferred income on
sales to distributors decreased approximately $2.9 million, or 17%, reflecting
lower inventory levels at the distributors. Income taxes payable decreased by
$2.6 million, or 54%, as compared to the balance at March 30, 1996 primarily due
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
-15-
<PAGE>
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 entered into a series of agreements with UMC in September 1995
pursuant to which the Company has agreed to join UMC and several other companies
to form a separate Taiwanese company, UICC, 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
approximately $60 million, payable in three installments over 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. The timing of
the payments is related to certain milestones in the development of the advanced
semiconductor manufacturing facility. The first payment, in the amount of
approximately $13.7 million, was paid in January 1996, the second payment, in
the amount of approximately $27.2 million, is anticipated to be required during
the three month period ending February 1997, and the final payment is
anticipated to be required within the six month period ending December 1997.
The Company expects to finance these payments from existing sources and funds
generated from operations. As a result of the future payments, the Company's
working capital will be reduced by an aggregate of approximately $46.3 million
over the time period of the remaining payments.
The Company currently anticipates capital expenditures of approximately $15
to $20 million for the fiscal year ending March 29, 1997. A significant portion
of these expenditures is planned for improvements and expansions to the
Company's manufacturing capacity and facilities.
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, including the anticipated
required payment to UICC during this period.
In an effort 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.
-16-
<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 12, 1996.
(b) The following directors were elected at the meeting to serve
a term of three years:
Harry A. Merlo
Larry W. Sonsini
The following directors are continuing to serve their terms:
Daniel S. Hauer
Douglas C. Strain
Cyrus Y. Tsui
(c) The matters voted upon at the meeting and results of the voting
with respect to those matters were as follows:
For Withheld
----------- ------------
(1) Election of directors:
Harry A. Merlo 19,366,776 219,677
Larry W. Sonsini 19,297,506 288,947
For Against Abstain Not Voted
---------- --------- ---------- -----------
(2) Adoption of
1996 Stock
Incentive Plan 12,553,973 3,143,100 44,696 6,530,670
(3) Ratification of
Price Waterhouse LLP
as the Company's
independent public
accountant for the
fiscal year ending
March 29, 1997 19,487,352 82,755 16,346 2,685,986
The foregoing matters are described in further detail in the Company's
definitive proxy statement dated July 8, 1996, for the Annual Meeting of
Stockholders held on August 12, 1996.
-17-
<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 28, 1996
(b) No reports on Form 8-K were filed during the six months ended
September 28, 1996.
-18-
<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: November 12, 1996 /s/ Rodney F. Sloss
--------------------------- ----------------------------------------
By: Rodney F. Sloss
Vice President, Finance (Principal
Accounting Officer)
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<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. 28, Sept. 30, Sept. 28, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 10,460 $ 9,778 $ 20,908 $ 18,624
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common stock and
common stock equivalents:
Common stock 22,319 19,412 22,253 19,226
Options and warrants 311 707 389 891
--------- --------- --------- ---------
22,630 20,119 22,642 20,117
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $ 0.46 $ 0.49 $ 0.92 $ 0.93
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> SEP-28-1996
<CASH> 45,350
<SECURITIES> 187,252
<RECEIVABLES> 20,294
<ALLOWANCES> 839
<INVENTORY> 28,359
<CURRENT-ASSETS> 314,863
<PP&E> 64,498
<DEPRECIATION> 35,403
<TOTAL-ASSETS> 360,617
<CURRENT-LIABILITIES> 37,127
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> 323,267
<TOTAL-LIABILITY-AND-EQUITY> 360,617
<SALES> 48,638
<TOTAL-REVENUES> 48,638
<CGS> 19,995
<TOTAL-COSTS> 35,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,168)
<INCOME-PRETAX> 15,729
<INCOME-TAX> 5,269
<INCOME-CONTINUING> 10,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,460
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
