<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 December 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 December 30, 1995 there were 22,026,598 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 Months and Nine Months Ended
December 30, 1995 and December 31, 1994 3
Consolidated Balance Sheet - December 30, 1995
and April 1, 1995 4
Consolidated Statement of Cash Flows --
Nine Months Ended December 30, 1995
and December 31, 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 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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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 Nine Months Ended
Dec. 30, Dec. 31, Dec. 30, Dec. 31,
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue $51,538 $36,288 $145,159 $103,765
Costs and expenses:
Cost of products sold 21,343 14,810 60,302 42,226
Research and development 6,816 5,790 19,889 16,674
Selling, general and
administrative 8,003 6,283 23,090 18,121
------- ------- -------- --------
Total costs and expenses 36,162 26,883 103,281 77,021
------- ------- -------- --------
Income from operations 15,376 9,405 41,878 26,744
Other income, net 1,514 895 3,446 2,297
------- ------- -------- --------
Income before provision for
income taxes 16,890 10,300 45,324 29,041
Provision for income taxes 5,827 3,450 15,637 9,773
------- ------- -------- --------
Net income $11,063 $ 6,850 $ 29,687 $ 19,268
------- ------- -------- --------
------- ------- -------- --------
Net income per share $ 0.52 $ 0.36 $ 1.45 $ 1.01
------- ------- -------- --------
------- ------- -------- --------
Weighted average common and
common equivalent shares
outstanding 21,409 19,134 20,513 19,091
------- ------- -------- --------
------- ------- -------- --------
</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 December 30, April 1,
1995 1995
---------- ---------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 86,407 $ 7,697
Short-term investments 125,610 81,113
Accounts receivable 23,577 18,147
Inventories 22,987 14,131
Prepaid expenses and other current assets 17,486 12,751
Deferred income taxes 9,375 7,302
---------- ---------
Total current assets 285,442 141,141
Wafer supply advance 18,817 31,320
Property and equipment, net 24,708 20,115
Other assets 365 341
---------- ---------
$ 329,332 $ 192,917
---------- ---------
---------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 21,464 $ 18,163
Deferred income on sales to
distributors 16,850 11,751
Income taxes payable 6,239 5,206
---------- ---------
Total current liabilities 44,553 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; 22,026,598 and
18,889,703 shares issued and outstanding 220 189
Paid-in capital 180,066 82,802
Retained earnings 104,493 74,806
---------- ---------
Total stockholders' equity 284,779 157,797
---------- ---------
$ 329,332 $ 192,917
---------- ---------
---------- ---------
</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>
Nine Months Ended
-----------------------
Dec. 30, Dec. 31,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,687 $ 19,268
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,280 4,464
Changes in assets and liabilities:
Accounts receivable (5,430) (2,392)
Inventories (8,856) (642)
Prepaid expenses and other assets (109) (5,937)
Wafer supply advance 7,853 (27,644)
Deferred income taxes (2,073) 75
Accounts payable and other accrued
expenses 3,301 8,491
Income taxes payable 1,033 (483)
Deferred income 5,099 1,792
--------- ---------
Total adjustments 6,098 (22,276)
--------- ---------
Net cash provided (used) by operating activities 35,785 (3,008)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (44,497) (6,480)
Capital expenditures (9,894) (4,030)
Proceeds from sale of equipment 21 --
--------- ---------
Net cash used by investing activities (54,370) (10,510)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 97,295 2,832
--------- ---------
Net cash provided by financing activities 97,295 2,832
--------- ---------
Net increase (decrease) in cash and cash equivalents 78,710 (10,686)
Beginning cash and cash equivalents 7,697 18,363
--------- ---------
Ending cash and cash equivalents $ 86,407 $ 7,677
--------- ---------
--------- ---------
</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 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 Semiconductors (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 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):
<TABLE>
<CAPTION>
December 30, April 1,
1995 1995
------------ ---------
<S> <C> <C>
Work in progress $14,733 $ 9,686
Finished goods 8,254 4,445
------- --------
$22,987 $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
Net proceeds from follow-on
public offering 25 86,680 -- 86,705
Stock option exercises 6 10,572 -- 10,578
Other -- 12 -- 12
Net income for the
nine-month period -- -- 29,687 29,687
------ -------- -------- ---------
Balances, Dec. 30, 1995 $ 220 $180,066 $104,493 $ 284,779
------ -------- -------- ---------
------ -------- -------- ---------
</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 fabless semiconductor
companies to form a separate Taiwanese Company for the purpose of
building and operating an advanced semiconductor manufacturing
facility in Taiwan, Republic of China. The new company is United
Integrated Circuits Corporation ("UICC"). Under the terms of the
agreements, the Company will invest approximately $60 million payable
in three installments over the next two and one-half years, for a 10%
equity interest in UICC and the right to receive a portion of the
facility's wafer production at market prices. In January 1996, the
Company paid to UICC approximately $13.7 million as the first
installment due under these agreements. UMC has also committed to
supply the Company with sub-micron wafers beginning in the first
quarter of calendar 1996 and continuing with phased increases for
several years, until such capacity is available from UICC.
The Company is exposed to certain asserted and unasserted potential
claims. Patent and other proprietary rights infringement claims are
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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 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 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
RESULTS OF OPERATIONS
REVENUE
Revenue was $51.5 million in the third quarter of fiscal 1996, an increase of
42% as compared to $36.3 million for the third quarter of fiscal 1995.
Revenue for the nine months ended December 30, 1995 was $145.2 million as
compared to $103.8 million for the first nine months of 1995, an increase of
40%. 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 was 48% of total revenue in the third
quarter of fiscal 1996 as compared to 46% in the same 1995 fiscal period, and
increased to 49% for the first nine months of fiscal 1996 as compared to 45%
for the same 1995 fiscal period. The Company expects export sales to continue
to represent a significant portion of revenue. See "Factors Affecting Future
Results".
Overall average selling prices, while remaining relatively constant between
the 1995 and 1996 nine-month fiscal periods, increased slightly in the fiscal
1996 third 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 58.6% in the third
quarter of fiscal 1996 as compared to 59.2% for the same quarter of fiscal
1995. For the 1996 nine-month period, the gross margin was 58.5%, down from
59.3% 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 on
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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 $1.0 million, or
18%, from the third quarter of fiscal 1995 to the third quarter of fiscal
1996, and increased $3.2 million, or 19%, between the two fiscal nine-month
periods. Research and development expense represented 13% and 14% of revenue
for the three month and nine month periods ended December 30, 1995,
respectively, as compared to 16% for each of the same 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 $1.7
million, or 27%, between the third quarter of fiscal 1995 and the fiscal 1996
third quarter, and increased $5.0 million, or 27%, between the two nine-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
three month and nine month fiscal 1995 periods to just under 16% for each of
the comparable fiscal 1996 periods.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) increased by approximately
$619,000 between the third quarter of fiscal 1995 and the 1996 fiscal third
quarter, and increased $1.1 million between the two nine-month fiscal
periods. 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, as well as higher interest rates.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.5% for the fiscal 1996 periods
presented as compared to approximately 33.5% recorded in the fiscal 1995
periods. This increase occurred primarily because
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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
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
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 elsewhere
in this report.
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, United Integrated Circuits
Corporation ("UICC"), 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 future interruptions in supply 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 calendar 1995, the Company was
successful in obtaining adequate wafer capacity commitments; however, it did
experience minor delays in obtaining wafers. 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 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
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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. Subsequently, 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, as noted above, 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 of the Company's proprietary E(2)CMOS
submicron technology. 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 of the Company's proprietary E(2)CMOS submicron technology
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 of the Company's proprietary E(2)CMOS
submicron technology at UMC or otherwise increasing wafer supply.
The Company's wafer purchases from Seiko Epson are denominated in Japanese
yen. During the first half of calendar 1995, the dollar lost substantial
value with respect to the yen. This exchange rate decline was regained in
the second half of calendar 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.
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
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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, South Korea and
Malaysia. Although the Company has not yet experienced significant problems
or interruptions in supply from its assembly
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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.
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 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
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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. 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.
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
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and have a material adverse effect on the Company's operating results.
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 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,
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<PAGE>
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.
International revenues accounted for 45% and 49% of the Company's revenues
for the first nine months of fiscal 1995 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.
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 and UICC, both Taiwanese 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, the Philippines and Malaysia. 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.
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<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 30, 1995, the Company's principal source of liquidity was
$212.0 million of cash and short-term investments, an increase of $123.2
million from the balance of $88.8 million at April 1, 1995. This increase
was primarily the result of net proceeds of approximately $86.7 million from
the Company's follow-on public offering of 2,500,000 shares of common stock
completed in November 1995 and 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 30% and 43%, respectively, as compared to the balances at April 1,
1995. These increases were primarily due to the higher revenue level in the
fiscal 1996 third quarter and the timing of billings to end customers and
distributors. Inventories increased by 63% 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 18% 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 approximately $12.5 million, or 40%, 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 $4.7 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 increase in income taxes payable of $1.0 million between April 1,
1995 and December 30, 1995 is primarily attributable to the timing of
quarterly tax payments and higher pretax profits in the fiscal 1996 period.
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<PAGE>
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 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, United Integrated Circuits
Corporation ("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 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. 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 $30 million, is anticipated to be required during
the three months ending February 1997, and the final payment, in the amount
of approximately $15 million, is anticipated to be required within the six
months ending March 1998. The Company expects to finance these payments from
existing sources and funds generated from operations. As a result of these
payments, the Company's working capital will be reduced by an aggregate of
approximately $60 million over the time period of the payments.
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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of Net Income Per Share
27 Financial Data Schedule for Nine Months Ended
December 30, 1995
(b) 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 fabless
semiconductor 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION
Date: February 12, 1996 /s/ Rodney F. Sloss
----------------- --------------------------------------------
By: Rodney F. Sloss
Vice President, Finance (Principal Financial
and 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 Nine Months Ended
------------------ -----------------
<S> <C> <C> <C> <C>
Dec. 30, Dec. 31, Dec. 30, Dec. 31,
1995 1994 1995 1994
------- -------- ------- -------
Net income $11,063 $ 6,850 $29,687 $19,268
------- -------- ------- -------
------- -------- ------- -------
Weighted average common stock and
common stock equivalents:
Common stock 20,765 18,673 19,789 18,567
Options and warrants 644 461 724 524
------- -------- ------- -------
21,409 19,134 20,513 19,091
------- -------- ------- -------
------- -------- ------- -------
Net income per share $ 0.52 $ 0.36 $ 1.45 $ 1.01
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> DEC-30-1995
<CASH> 86,407
<SECURITIES> 125,610
<RECEIVABLES> 23,577
<ALLOWANCES> 788
<INVENTORY> 22,987
<CURRENT-ASSETS> 285,442
<PP&E> 54,294
<DEPRECIATION> 29,586
<TOTAL-ASSETS> 329,332
<CURRENT-LIABILITIES> 44,553
<BONDS> 0
0
0
<COMMON> 220
<OTHER-SE> 284,559
<TOTAL-LIABILITY-AND-EQUITY> 329,332
<SALES> 145,159
<TOTAL-REVENUES> 145,159
<CGS> 60,302
<TOTAL-COSTS> 103,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,446)
<INCOME-PRETAX> 45,324
<INCOME-TAX> 15,637
<INCOME-CONTINUING> 29,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,687
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
</TABLE>
