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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-K
COMMISSION FILE NUMBER: 0-18032
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 28, 1998 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 93-0835214
(State of Incorporation) (I.R.S Employer Identification No.)
5555 NE MOORE COURT, HILLSBORO, OREGON 97124-6421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 681-0118
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class Name of Exchange
Common Stock, $.01 par value NASDAQ
Preferred Share Purchase Rights None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Yes X No
--- ---
As of June 18, 1998, the aggregate market value of the shares of voting
stock of the Registrant held by non-affiliates was approximately $349 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of June 18, 1998, 23,557,979 shares of the Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
March 28, 1998 are incorporated by reference in Part II hereof.
2. Portions of the definitive proxy statement of the Registrant to be
filed pursuant to Regulation 14A for the 1998 Annual Meeting of Stockholders to
be held on August 10, 1998 are incorporated by reference in Part III hereof.
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LATTICE SEMICONDUCTOR CORPORATION
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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Item of Form 10-K Page
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PART I
Item 1 - Business. . . . . . . . . . . . . . . . . . . . . . . 2
Item 2 - Properties. . . . . . . . . . . . . . . . . . . . . . . 15
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . 16
Item 4 - Submission of Matters to a Vote of Security Holders . . 16
Item 4(a) - Executive Officers of the Registrant. . . . . . . . . . 17
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 19
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . 19
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 20
Item 8 - Financial Statements and Supplementary Data . . . . ... 20
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . 20
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . 21
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . 21
Item 12 - Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . 21
Item 13 - Certain Relationships and Related Transactions. . . . . 21
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . .S-1
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ITEM 1. BUSINESS
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors set forth in "Factors Affecting Future Results" and elsewhere
in this Report.
GENERAL
Lattice Semiconductor Corporation (the "Company") designs, develops and
markets high performance programmable logic devices ("PLDs") and related
development system software. The Company is the inventor and world's leading
supplier of in-system programmable ("ISP-TM-") PLDs. PLDs are standard
semiconductor components that can be configured by the end customer as
specific logic functions, enabling shorter design cycle times and reduced
development costs. Lattice products are sold worldwide through an extensive
network of independent sales representatives and distributors, primarily to
original equipment manufacturers ("OEMs") of communications, computing,
industrial controls and military systems. Lattice was founded in 1983 and is
based in Hillsboro, Oregon.
PLD MARKET BACKGROUND
Three principal types of digital integrated circuits are used in most
electronic systems: microprocessors, memory and logic. Microprocessors are
used for control and computing tasks, memory is used to store programming
instructions and data, and logic is employed to manage the interchange and
manipulation of digital signals within a system. Logic contains
interconnected groupings of simple logical "AND" and logical "OR" functions,
commonly described as "gates". Typically, complex combinations of individual
gates are required to implement the specialized logic functions required for
systems applications. While system designers use a relatively small number of
standard architectures to meet their microprocessor and memory needs, they
require a wide variety of logic circuits in order to achieve end product
differentiation.
Logic circuits are found in a wide range of today's electronic systems
including communications equipment, computers, peripherals, instrumentation,
industrial controls and military systems. According to Integrated Circuit
Engineering Corporation, a semiconductor market research firm, logic
accounted for approximately 35 % of the estimated $108 billion worldwide
digital integrated circuit market in 1997. The logic market encompasses,
among other segments, standard logic, custom-designed application specific
integrated circuits ("ASICs", which include conventional gate-arrays,
standard cells and full custom logic circuits), and PLDs.
Manufacturers of electronic systems are increasingly challenged to bring
differentiated products to market quickly. These competitive pressures often
preclude the use of custom-designed ASICs, which generally entail significant
design risks and time delay. Standard logic products, an alternative to
custom-designed ASICs, limit a manufacturer's flexibility to adequately
customize an end system. Programmable logic addresses this inherent dilemma.
PLDs are standard products, purchased by systems manufacturers in a "blank"
state, that can be custom configured into a virtually unlimited number of
specific logic functions by programming the device with electrical signals.
PLDs give system designers the ability to quickly create their own custom
logic functions to provide product differentiation without sacrificing rapid
time to market. Certain PLD products, including the Company's, are
reprogrammable, meaning that the logic configuration can be modified, if
needed, after the initial
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programming. In-system programmable PLDs, first pioneered by the Company,
extend the flexibility of standard reprogrammable PLDs by allowing the system
designer to configure and reconfigure the logic functions of the PLD with
standard 5-volt or 3.3-volt power supplies without removing the PLD from the
system board.
Several common PLD market segments currently exist. These include low-density
PLDs (less than 1,000 logic gates) and high-density PLDs (greater than 1,000
logic gates). High-density PLD devices include devices based on both complex
PLD ("CPLD") architectures and field programmable gate array ("FPGA")
architectures.
Products in each high-density PLD architecture are generally optimal for
different types of logic functions, although many logic functions can be
implemented using either type of architecture. CPLDs are characterized by a
regular building block structure of wide-input logic cells, termed
macrocells, and use of a centralized logic interconnect scheme. CPLDs are
optimal for control logic applications, such as state machines, bus
arbitration, encoders, decoders and sequencers. FPGAs are characterized by a
narrow-input logic cell and use a distributed interconnect scheme. FPGAs are
optimal for register intensive and data path logic applications such as
interface logic and arithmetic functions. The Company believes that a
substantial portion of high-density PLD customers utilize both CPLD and FPGA
architectures within a single system design, partitioning logic functions
across multiple devices to optimize overall system performance and cost.
TECHNOLOGY
The Company believes that electrically erasable CMOS (Lattice's
"E2CMOS-Registered Trademark-") is the preferred process technology for PLD
products due to its inherent performance, reprogrammability and testability
benefits. E2CMOS technology, through its fundamental ability to be programmed
and erased electronically, serves as the foundation for the Company's ISP
products.
IN-SYSTEM PROGRAMMABLE (ISP) PRODUCTS AND TECHNOLOGY
The Company has pioneered the development of ISP products, based on a
proprietary technology, which affords it a competitive advantage in the PLD
market. In contrast to standard PLDs, ISP devices can be configured and
reconfigured by the system designer without being removed from the printed
circuit board. Standard E2CMOS programmable logic devices require 12-volt
electrical signals for programming and therefore must be removed from the
printed circuit board and programmed using stand alone, specialized hardware,
while ISP devices can be programmed with standard 5-volt or 3.3-volt
electrical signals. ISP devices offer enhanced flexibility versus standard
PLDs, providing a number of important benefits to a system manufacturer
across the full spectrum of an electronic system product cycle. ISP devices
can allow customers to reduce design cycle times, accelerate time to market,
reduce prototyping costs, reduce manufacturing costs and lower inventory
requirements. ISP devices can also provide customers the opportunity to
perform simplified and cost-effective field reconfiguration through a data
file transferred by computer disk or serial data signal.
E2CMOS PROCESS TECHNOLOGY
The Company's current silicon product offerings, including its ISP products,
are based on the Company's proprietary E2CMOS manufacturing process
technology, termed UltraMOS-Registered Trademark-. The Company's current
production processes, UltraMOS IV, UltraMOS V and UltraMOS VI are sub-micron
CMOS technologies.
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In comparison to bipolar technology, at one time the dominant technology for
PLDs, E2CMOS technology consumes less power and generates less heat while
operating at comparable speed. Additionally, in contrast to
one-time-programmable bipolar PLDs, E2CMOS PLDs are fully erasable and
reprogrammable, providing greater end customer design flexibility and
allowing the PLD manufacturer to fully test all programmable elements in a
device prior to shipment. An alternative CMOS technology, Erasable
Programmable Read Only Memory ("EPROM"), provides the same low power
consumption benefits as E2CMOS, but requires ultraviolet light exposure for
erasure, necessitating expensive quartz windowed packages and limiting
testability. Antifuse and Static Random Access Memory ("SRAM") technologies,
used primarily in the manufacture of high-density FPGAs, offer certain
advantages for very dense logic devices, but also have significant drawbacks
when compared with E2CMOS. Antifuse technology is non-erasable,
non-reprogrammable and subject to lengthy initial programming times that can
hinder usage in volume production applications. SRAM technology is volatile
(erases when electrical power is removed), and as such programmable SRAM
FPGAs require additional non-volatile memory, typically on a separate device,
to store programming code. This adds cost and printed circuit board area to a
design, and results in the devices not being completely functional at initial
system power-up.
PRODUCTS
ISP PRODUCTS
SILICON. The Company first entered the ISP market in fiscal 1993 and
currently offers six distinct families of ISP products, each consisting of
multiple devices. The Company is currently shipping over 200 speed, package
and temperature range combinations of its ISP products.
ISPLSI-Registered Trademark- 1000/E: The Company's original ISP family
utilizes an innovative, proprietary CPLD architecture incorporating familiar
GAL-Registered Trademark- ("Generic Array Logic") based logic building
blocks. This family provides performance of up to 125 MHz (7.5 nanosecond
propagation delay), densities of 2,000 to 8,000 gates and is available in 44-
to 128-pin standard surface mount packages.
ISPLSI 2000/V: The ispLSI 2000 family utilizes a CPLD architecture designed
for input/output ("I/O") intensive applications and offers industry leading
performance. This family provides performance of up to 180 MHz (5.0
nanosecond propagation delay), densities of 1,000 to 6,000 gates and is
available in 44- to 176-pin standard surface mount packages. The ispLSI 2000V
family, an extension of the ispLSI 2000 family, operates using the emerging
3.3-volt power supply standard. Offered with a range of density, performance
and package specifications, the ispLSI 2000V family is targeted towards
low-voltage system applications in the computing and communication markets.
ISPLSI 3000/E: The ispLSI 3000 family incorporates an enhanced CPLD
architecture to target higher density applications while retaining high
performance. This family provides densities of 7,000 to 22,000 gates,
performance of up to 125 MHz (7.5 nanosecond propagation delay), and is
available in 160- to 432-pin surface mount packages.
ISPLSI 6000: The ispLSI 6000 family extends the Company's high-density
CPLD density range to 25,000 gates. This family utilizes an innovative
cell-based architecture that combines a general purpose high-density CPLD
with memory and other function specific circuit blocks. Offered with
performance of up to 77 MHz (15.0 nanosecond
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propagation delay), the ispLSI 6000 family allows integration of complete
logic subsystems in the communications, computing and multimedia markets.
ISPGAL-Registered Trademark-: The ispGAL, a proprietary product family,
combines in-system programmability with the industry standard 22V10
low-density architecture. Offered with performance of up to 200 MHz, (5.0
nanosecond propagation delay), the ispGAL family is available in both 5-volt
and 3.3-volt operating supply versions.
ISPGDX-TM-: The ispGDX family, introduced in fiscal 1998, extends in-system
programmability to the circuit board level using an innovative, new digital
cross-point switch architecture. Offered with propagation delays as low as
5.0 nanoseconds, up to 160 I/O and complete pin-to-pin signal routing, the
ispGDX is targeted towards digital signal interconnect and interface
applications.
The Company plans to continue to introduce new families of ISP products, as
well as improve the performance of existing product families based on market
needs.
SOFTWARE DEVELOPMENT TOOLS. All of the Company's ISP products are supported
by the Company's ispDS-Registered Trademark- software development tools and
ispDS+-TM- software development tools (referred to as "fitters"). Designed to
be a low cost, fully integrated development tool, ispDS runs under the
Microsoft Windows operating system on a personal computer. ispDS software
allows a customer to enter and verify a logic design, perform logic
minimization, assign I/O pins and critical speed paths, simulate timing,
execute automatic place and route tasks and download a program to an ISP
device. Designed to provide a seamless integration of the Company's
development tools with standard design environments, ispDS+ software
leverages customers' existing investments in third-party CAE tools. Optimized
for HDL synthesis, ispDS+ software supports all popular third party CAE
development tool environments running on IBM compatible personal computers as
well as workstations from Sun Microsystems and Hewlett-Packard. The Company
offers ispDS+ products supporting common third party CAE design tool
environments, including ABEL, Cadence, Data I/O, Exemplar, Logical Devices,
Mentor Graphics, OrCAD, Synario, Synopsys, Synplicity and ViewLogic. ispDS+
software allows a customer to compile a design developed in a third party
environment, assign I/O pins and critical speed paths, simulate and analyze
timing, execute automatic place and route tasks and download a program to an
ISP device. In fiscal 1998, the Company released new versions of its existing
ispDS and ispDS+ software development tools to enhance performance,
functionality and ease of use.
The Company also provides several software algorithms that support in-system
programming of the Company's ISP devices. These software products include
ispCODE-TM-, Turbo ispDOWNLOAD-TM-, ispREMOTE-TM- and ispATE-TM-. ispATE
enables ISP product programming to be integrated into automatic test
equipment ("ATE") on the manufacturing floor.
During fiscal 1998, the number of installed seats of the Company's software
development tools, as measured by the Company, grew from over 17,000 to
approximately 25,000. The Company plans to continue to enhance and expand its
development tool offerings.
NON-ISP PRODUCTS
The Company offers the industry's broadest line of low-density CMOS PLDs
based on its 16 families of GAL products offered in over 180 speed, power,
package and temperature range combinations. GAL devices range in complexity
from approximately 200 to 1,000 logic gates and are typically assembled in
20-, 24-and 28-pin
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standard dual in-line packages and in 20- and 28-pin standard plastic leaded
chip carrier packages. The Company offers the industry standard GAL16V8,
GAL20V8, GAL22V10, GAL20RA10 and GAL20XV10 architectures in a variety of
speed grades, with propagation delays as low as 3.5 nanoseconds, the highest
performance in the industry. The Company also offers several proprietary
extension architectures, the GAL26CV12, GAL18V10, GAL16VP8, GAL20VP8,
GAL6001/2, GAL16V8Z and GAL20V8Z, each of which is optimized for specific
applications. The Company also offers a full range of 3.3-volt industry
standard architectures, the GAL16LV8, GAL20LV8, GAL22LV10 and GAL26CLV12 in a
variety of speed grades, with propagation delays as low as 3.5 nanoseconds,
the highest performance in the industry.
The Company's non-ISP products are supported by industry standard software
and hardware development tools marketed by independent manufacturers
specifically for PLD applications.
PRODUCT DEVELOPMENT
The Company places great emphasis on product development and believes that
continued investment in the development of new products that exploit market
trends is required to maintain its competitive position. The Company's
product development activities emphasize new proprietary ISP products,
performance enhancement and cost reduction of existing products, improvements
of its E2CMOS processes technologies and extension and enhancement of its
software development tools. Product development activities occur in the
Company's Hillsboro, Oregon headquarters, its Milpitas, California product
development center, and its Shanghai, China design center.
Research and development expenses were $26.8 million, $27.8 million and $32.0
million in fiscal years 1996, 1997 and 1998, respectively. The Company
expects to continue to make significant investments in research and
development in the future.
OPERATIONS
The Company does not manufacture its silicon wafers. The Company has
historically maintained strategic relationships with large semiconductor
manufacturers in order to source its finished silicon wafers, allowing the
Company to focus its internal resources on product, process and market
development. In addition, assembly is performed for the Company by outside
suppliers. The Company performs certain test operations and reliability and
quality assurance processes internally, as the Company believes it can add
significant customer value in these areas. The Company has achieved ISO 9001
quality certification, an indication of the Company's high internal
operational standards.
WAFER FABRICATION
The majority of the Company's silicon wafer requirements are currently
supplied by Seiko Epson Corporation ("Seiko Epson") in Japan pursuant to an
agreement with S MOS Systems, Inc. ("S MOS"), an affiliated U.S. distributor
of Seiko Epson. See "Licenses and Agreements - Seiko Epson/S MOS." The
Company negotiates wafer volumes, prices and terms with Seiko Epson and S MOS
on a periodic basis. In addition, the Company receives silicon wafers from
United Microelectronics Corporation ("UMC") in Taiwan pursuant to a series of
agreements entered into in 1995. Wafer prices and other purchase terms
related to this commitment are subject to periodic adjustment. See "
Licenses and Agreements - UMC." A significant interruption in supply from
Seiko Epson
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through S MOS or from UMC would have a material adverse effect on the
Company's business. See "Factors Affecting Future Results."
ASSEMBLY
After wafer fabrication and initial testing, the Company ships wafers to
independent subcontractors for assembly. During assembly, wafers are
separated into individual die and encapsulated in plastic or ceramic
packages. Presently, the Company has qualified long-term assembly partners in
Hong Kong, Malaysia, the Philippines, South Korea, Taiwan and the United
States.
TESTING
The Company electrically tests the die on each wafer prior to shipment for
assembly. Following assembly, prior to customer shipment, each product
undergoes final testing using test equipment, techniques and quality
assurance procedures. Final testing on certain products is performed at
independent contractors in Malaysia, the Philippines, South Korea and the
United States.
MARKETING, SALES AND CUSTOMERS
The Company sells its products directly to end customers through a network of
independent sales representatives and indirectly through a network of
distributors. The Company utilizes a direct sales management and field
applications engineering organization in combination with manufacturers'
representatives and distributors to reach a broad base of potential end
customers. The Company's end customers are primarily original equipment
manufacturers in the fields of communications, computing, industrial controls
and military systems. The Company believes its distribution channel is a
cost-effective means of reaching end customers.
At March 28, 1998, the Company had 20 sales representatives and five
distributors in the United States and Canada. In North America, Arrow
Electronics, Inc., Hamilton Hallmark, Insight Electronics, Inc. and Marshall
Industries provide nationwide distribution, while Future Electronics provides
regional distribution coverage in Canada. The Company has established sales
channels in over 30 foreign countries through a network of over 30 sales
representatives and distributors. Approximately one-half of the Company's
North American sales and most of its foreign sales are made through
distributors.
The Company protects each of its North American distributors and some of its
foreign distributors against reductions in published prices, and expects to
continue this policy in the foreseeable future. The Company also allows
returns from these distributors of unsold products under certain conditions.
For these reasons, the Company does not recognize revenue until products are
resold by these distributors.
The Company provides technical and marketing assistance to its end customers
and sales force with engineering staff based in the Company's headquarters,
design centers and selected field sales offices. The Company maintains 22
domestic and international sales offices where the Company's field sales
managers and applications engineers are based. These offices are located in
the metropolitan areas of Atlanta, Austin, Boston, Chicago, Dallas, Los
Angeles, Minneapolis, Orlando, Portland, Raleigh, San Diego, San Jose, Hong
Kong, London, Milan, Munich, Paris, Seoul, Shanghai, Stockholm, Taipei and
Tokyo.
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International revenues, including those from Canada, accounted for 48%, 49%
and 51% of the Company's revenues in fiscal 1996, 1997 and 1998,
respectively. Revenues from Europe were $37.9 million, $39.9 million and
$61.2 million, and from Asia were $52.4 million, $52.6 million and $ 55.9
million, in fiscal 1996, 1997 and 1998, respectively. Both international and
domestic revenues are generally invoiced in U.S. dollars, with the exception
of sales in Japan, which are invoiced in yen.
The Company's products are sold to a large and diverse group of customers. No
individual OEM customer accounted for more than 6% of revenue in either
fiscal 1996, 1997 or 1998. One distributor accounted for approximately 11% of
revenue in fiscal 1996. No distributor accounted for more than 10% of
revenue in either fiscal 1997 or fiscal 1998.
The Company's sales are primarily executed against purchase orders for
standard products. Customers frequently revise quantities and delivery
schedules, without penalty. The Company therefore does not believe that
backlog as of any given date is indicative of future revenue.
COMPETITION
The semiconductor industry overall is intensely competitive and is
characterized by rapid technological change, rapid rates of product
obsolescence and price erosion. The Company's current and potential
competitors include a broad range of semiconductor companies, ranging from
very large, established companies to emerging companies, many of which have
greater financial, technical, manufacturing, marketing and sales resources
than the Company.
The principal competitive factors in the PLD market include silicon product
features, price, customer support, and sales, marketing and distribution
strength. The availability of competitive software development tools is also
critical. In addition to product features such as speed, power consumption,
reprogrammability, design flexibility and reliability, competition in the PLD
market occurs on the basis of price and market acceptance of specific
products and technology. The Company believes that it competes favorably with
respect to each of these factors. The Company intends to continue to address
these competitive factors by working to continually introduce product
enhancements and new products, by seeking to establish its products as
industry standards in their respective markets, and by working to reduce the
manufacturing cost of its products over their respective life cycles.
In the ISP PLD market, the Company primarily competes directly with Altera,
Advanced Micro Devices ("AMD") and Xilinx, all of which offer competing
products. The Company also competes indirectly with other PLD suppliers as
well as other semiconductor companies providing non-PLD based logic
solutions. As the Company and these other companies seek to expand their
markets, competition may increase.
In the non-ISP, low-density, PLD market, the Company competes primarily with
AMD, a licensee of the Company's GAL patents, which offers a full line of
E2CMOS GAL-compatible PLDs. Atmel and Cypress Semiconductor offer products
based on similar and competing CMOS technologies and architectures; however,
these companies do not offer full product lines.
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. Any such
increases in competition could have a material adverse effect on the
Company's operating results.
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PATENTS
The Company seeks to protect its products and wafer fabrication process
technologies primarily through patents, trade secrecy measures, copyrights,
mask work protection, trademark registrations, licensing restrictions,
confidentiality agreements and other approaches designed to protect
proprietary information. There can be no assurance that others may not
independently develop competitive technology not covered by the Company's
intellectual property rights or that measures taken by the Company to protect
its technology will be effective.
The Company holds domestic, European and Japanese patents on its PLD products
and has patent applications pending in the United States, Japan and Europe.
There can be no assurance that pending patent applications or other
applications that may be filed will result in issued patents, or that any
issued patents will survive challenges to their validity. Although the
Company believes that its patents have value, there can be no assurance that
the Company's patents, or any additional patents that may be issued in the
future, will provide meaningful protection from competition. The Company
believes its success will depend primarily upon the technical expertise,
experience, creativity and the sales and marketing abilities of its
personnel.
Patent and other proprietary rights infringement claims are common in the
semiconductor industry. There can be no assurance that, with respect to
claims made against the Company, the Company could obtain a license on terms
or under conditions that would not have a material adverse effect on the
Company.
LICENSES AND AGREEMENTS
SEIKO EPSON/S MOS
S MOS, an affiliated U.S. distributor of Seiko Epson, has agreed to provide
manufactured wafers to the Company in quantities based on six-month rolling
forecasts provided by the Company. The Company has committed to buy certain
minimum quantities of wafers per month. Wafers for the Company's products are
manufactured in Japan at Seiko Epson's wafer fabrication facilities and are
delivered to the Company by S MOS. Prices for the wafers obtained from S MOS
are reviewed and adjusted periodically and may be adjusted to reflect
prevailing currency exchange rates. See "Factors Affecting Future Results."
Daniel S. Hauer, a member of the Company's Board of Directors, is Chairman of
the Board of Directors of S MOS.
In July 1994, the Company entered into an advance production payment
agreement with Seiko Epson and S MOS, under which it advanced to Seiko Epson
$42 million during fiscal 1995 to be used by Seiko Epson to finance
additional sub-micron semiconductor wafer manufacturing capacity. Under the
terms of the agreement, the advance is to be repaid in the form of advanced
technology sub-micron semiconductor wafers. In conjunction with the advance
production payment agreement, the Company also paid $2 million during fiscal
1995 for the development of sub-micron process technology and the fabrication
of engineering wafers. These agreements call for wafers to be supplied by
Seiko Epson through S MOS pursuant to a purchase agreement concluded with S
MOS. As of March 28, 1998, substantially all wafers pursuant to these
agreements had been received by the Company.
In March 1997, the Company entered into a second advance production payment
agreement with Seiko Epson and SMOS under which it agreed to advance
approximately $86 million, payable over two years, to Seiko Epson to
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finance construction of an eight-inch sub-micron semiconductor wafer
manufacturing facility. The timing of the payments is related to certain
milestones in the development of the facility. Under the terms of the
agreement, the advance is to be repaid with semiconductor wafers over a
multi-year period. The agreement calls for wafers to be supplied by Seiko
Epson through S MOS pursuant to purchase agreements concluded with S MOS. The
Company also has an option under the agreement to advance Seiko Epson an
additional $60 million for additional wafer supply under similar terms. The
first payment under this agreement, approximately $17.0 million, was made
during fiscal 1997. During fiscal 1998, the Company made two additional
payments aggregating approximately $34.2 million.
UMC
The Company entered into a series of agreements with UMC in September 1995
pursuant to which the Company 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 agreement, the Company invested
approximately $49.7 million, paid in three installments, for an approximate
10% equity interest in UICC and the right to receive a percentage of the
facility's wafer production at market prices.
In October 1997, the UICC foundry was substantially destroyed by fire. UMC,
the majority owner of UICC, has informed the Company that this loss is
insured and has begun the process of rebuilding the foundry. Further,
alternative capacity arrangements have been made available to the Company by
UMC. Based on these assurances from UMC, management believes the Company will
not be materially adversely affected by this event.
AMD
In November 1987, as part of the settlement of a patent infringement suit
against the Company, the Company and Monolithic Memories Inc. ("MMI",
subsequently merged with AMD) entered into an agreement cross-licensing each
other's patents covering programmable and reprogrammable logic devices based
on patent applications having a first filing date prior to November 1989. The
agreement was subsequently amended in May 1989 by the Company and AMD, the
successor to the rights and obligations of MMI in the original agreement. The
amendment covers those patents relating to PLD products which are based on
patent applications originally filed by the Company, MMI and AMD prior to
December 31, 1991. The license, with respect to certain patents asserted by
AMD, ceases to cover the Company's current principal products if the Company
is acquired by a semiconductor manufacturer with sales in excess of a stated
amount or by certain types of companies headquartered in designated Asian
countries. No license has been granted to either party for any copyright
work, trademark or process technology and, therefore, AMD has not been
licensed to use the GAL trademark on its products.
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 end markets
addressed by the Company's products, general economic conditions in countries
where the Company's products are sold, price erosion, timing of new product
introductions, product obsolescence, scheduling, rescheduling and
cancellation of large orders, competitive factors, ability to develop and
implement new process technologies, fluctuations in manufacturing yields,
ability to achieve volume production at Seiko Epson's and UICC's new
10
<PAGE>
eight-inch wafer fabs, substantial adverse currency exchange rate movements,
availability of manufacturing capacity and wafer supply and potential
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 increased its level of
operating expenses and investment in manufacturing capacity in anticipation
of future growth in revenues, primarily from increased sales of its ISP
products. To the extent that this revenue growth does not materialize, the
Company's operating results would be adversely affected.
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, 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 can experience significant price
fluctuations. These fluctuations often are 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, could adversely affect the market price
of the Company's common stock.
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 and negatively impacted by 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 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.
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 with acceptable margins as well as enhancing the
performance of its existing products. The success of new products, including
the Company's ISP 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.
Future revenue growth will be largely dependent on market acceptance of the
Company's new and proprietary products, including its ISP 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 ISP 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.
11
<PAGE>
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 impacted 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 effect 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 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 development of new
products, both silicon and software, and process technology. 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 does not manufacture finished silicon wafers; however, its
products 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. Currently all of its silicon wafers are
manufactured by either Seiko Epson in Japan or UMC in Taiwan. A significant
interruption in supply from Seiko Epson, through S MOS, Seiko Epson's
affiliated U.S. distributor, or from UMC would have a material adverse effect
on the Company's business.
The Company's finished silicon wafers are assembled and packaged by
independent subcontractors located in Hong Kong, Malaysia, the Philippines,
South Korea, Taiwan, and the United States. 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 could have a material adverse effect
on the Company's operating results.
International revenues accounted for 48%, 49% and 51% of the Company's
revenues for fiscal 1996, 1997 and 1998, 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 regional economic
12
<PAGE>
conditions, 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 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 Hong Kong, Malaysia, the
Philippines, South Korea and Taiwan. Although the Company has yet not
experienced significant problems or interruption in supply from its
subcontractors, the social, economic 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 recession, exchange rate volatility,
changes in 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 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 E2CMOS
process technology. Successful implementation of the Company's proprietary
E2CMOS 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
Seiko Epson's or UICC's new eight-inch wafer fabs. Accordingly, there can be
no assurance that volume production at Seiko Epson's or UICC's new eight-inch
wafer fabs will be achieved in the near term or at all. The manufacture of
high performance E2CMOS 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.
13
<PAGE>
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's wafer purchases from Seiko Epson are denominated in Japanese
yen. In the past, the dollar has lost substantial value with respect to the
yen. There is no assurance that the value of the dollar with respect to the
yen will not again experience substantial deterioration. Any substantial
continued deterioration of dollar-yen exchange rates could have a material
adverse effect on the Company's results of operations.
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 1998, the Company has been
successful in obtaining adequate wafer capacity commitments; however, it has
in the past experienced delays in obtaining wafers. Although current
commitments are anticipated to be adequate through fiscal 1999, 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, S MOS and UMC 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. 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 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 could be
materially adversely affected.
In an effort to secure additional wafer supply, the Company may from time to
time consider various arrangements, including joint ventures, equity
investments, advanced purchase payments, loans, or similar arrangements with
independent wafer manufacturers in exchange for committed production
capacity. Such arrangements have become 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. In 1994, the Company entered into an advanced production payment
agreement with Seiko Epson pursuant to which it advanced a total of $42
million to Seiko Epson. In September 1995, the Company entered into an
agreement with UMC under which it invested a total of $49.7 million for an
approximate 10% equity interest in a separate Taiwanese company, UICC. In
March 1997, the Company entered into a second advanced production payment
agreement with Seiko Epson pursuant to which it plans to advance up to $150
million to Seiko Epson. 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
14
<PAGE>
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.
There can be no assurance that intellectual property claims will not be made
against the Company in the future or that in the event of such a claim, the
Company will be able to obtain a license on terms or under conditions that
would not have a material adverse impact on the Company.
The Company is currently working to address the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
internal computer systems, including its electronic interfaces to
distributor, customer and supplier systems. At present, the Company has
completed an initial assessment of its potential exposure. Based on this
assessment, the Company does not anticipate that resolution of potential
internal Year 2000 issues will have a material adverse impact on the
Company's operating results. However, there can be no assurance that the
Company's computer systems or the systems of the Company's major
distributors, suppliers, customers or financial service providers will
completely address all internal Year 2000 issues in a timely manner. In the
event that Year 2000 issues create significant disruption in the operations
of the Company or any of the Company's major distributors, suppliers,
customers or financial service providers, the Company's operating results
could be materially adversely affected.
EMPLOYEES
As of March 28, 1998, the Company had 569 full-time employees. The Company
believes that its future success will depend, in part, on its ability to
continue to attract and retain highly skilled technical, marketing and
management personnel.
None of the Company's employees is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and considers
its employee relations good.
ITEM 2. PROPERTIES
The Company's corporate offices, testing and principal research and design
facilities are located in two adjacent buildings owned by the Company in
Hillsboro, Oregon comprising a total of 90,000 square feet. The Company's
executive, administrative, marketing and production activities are also
located at these facilities. The Company leases a 41,000 square foot research
and design facility in Milpitas, California. This lease expires in February,
2001.
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<PAGE>
The Company leases space in various locations in the United States for its
domestic sales offices, and also leases space in Hong Kong, London, Munich,
Paris, Seoul, Stockholm, Taipei and Tokyo for its international sales
offices. The Company owns a 13,000 square foot research and development
facility and approximately 6,000 square feet of dormitory facilities in
Shanghai.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
<PAGE>
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT.
As of June 25, 1998, the executive officers of the Company are as set forth
below.
<TABLE>
<CAPTION>
Name Age Position
- -------------------- --- --------------------------------------------
<S> <C> <C>
Cyrus Y. Tsui 52 President, Chief Executive Officer and
Chairman of the Board
Steven A. Laub 39 Senior Vice President and Chief Operating
Officer
Stephen A. Skaggs 35 Senior Vice President, Chief Financial
Officer and Secretary
Stephen M. Donovan 47 Corporate Vice President, Sales
Jonathan K. Yu 57 Corporate Vice President, Business
Development
Martin R. Baker 42 Vice President and General Counsel
Randy D. Baker 39 Vice President, Manufacturing
Albert L. Chan 48 Vice President and General Manager, Lattice
Silicon Valley
Thomas J. Kingzett 51 Vice President, Reliability and Quality
Assurance
Stanley J. Kopec 47 Vice President, Corporate Marketing
Rodney F. Sloss 54 Vice President, Finance
Kenneth K. Yu 50 Vice President and Managing Director, Lattice
Asia
</TABLE>
Executive officers of the Company are appointed by the Board of Directors
to serve at the discretion of the Board and hold office until the officers'
successors are appointed.
Cyrus Y. Tsui joined the Company in September 1988 as President, Chief
Executive Officer and Director, and in March 1991 was named Chairman of the
Board. From 1987 until he joined the Company, Mr. Tsui was Corporate Vice
President and General Manager of the Programmable Logic Division of AMD. He was
Vice President and General Manager of the Commercial Products Division of
Monolithic Memories Incorporated from 1983 until the merger with AMD in 1987.
Mr. Tsui has held technical and managerial positions in the
17
<PAGE>
semiconductor industry for over 25 years. He has worked in the programmable
logic industry since its inception.
Steven A. Laub joined the Company in June 1990 as Vice President and General
Manager. He was elected Senior Vice President and Chief Operating Officer in
August 1996.
Stephen A. Skaggs joined the Company in December 1992 as Director, Corporate
Development. He was elected Senior Vice President, Chief Financial Officer
and Secretary in August 1996.
Stephen M. Donovan joined the Company in October 1989 and has served as
Director of Marketing and Director of International Sales. He was elected
Vice President, International Sales in August 1993. He was elected Corporate
Vice President, Sales, in May 1998. Mr. Donovan has worked in the
programmable logic industry since 1982.
Jonathan K. Yu joined the Company in February 1992 as Vice President,
Operations. He was elected Corporate Vice President, Business Development in
August 1996. Mr. Yu has held technical and managerial positions in the
semiconductor industry for over 30 years.
Martin R. Baker joined the Company in January 1997 as Vice President and
General Counsel. From 1991 until he joined the Company, Mr. Baker held legal
positions with Altera Corporation.
Randy D. Baker joined the Company in April 1985 as Manager, Manufacturing and
was promoted in 1988 to Director, Manufacturing. He was elected Vice
President, Manufacturing in August 1996. Mr. Baker has worked in the
semiconductor industry for over 15 years.
Albert L. Chan joined the Company in May 1989 as California Design Center
Manager and was promoted in 1991 to Director, California Product Development
Center. He was elected Vice President, California Product Development in
August 1993. He was elected Vice President and General Manager, Lattice
Silicon Valley, in August 1997. Mr. Chan has worked in the programmable logic
industry since 1983.
Thomas J. Kingzett joined the Company in July 1992 as Director, Reliability
and Quality Assurance. He was elected Vice President, Reliability and Quality
Assurance in May 1998. Mr. Kingzett has worked in the semiconductor industry
for over 25 years.
Stanley J. Kopec joined the Company in August 1992 as Director, Marketing. He
was elected Vice President, Corporate Marketing in May 1998. Mr. Kopec has
worked in the programmable logic industry since 1985.
Rodney F. Sloss joined the Company in May 1994 as Vice President, Finance.
From 1992 to 1994, Mr. Sloss served as Chief Financial Officer of The
Alexander Haagen Company, a real estate developer.
Kenneth K. Yu joined the Company in January 1991 as Director of Process
Technology. He has served as Managing Director, Lattice Asia since November
1992 and was elected Vice President, Lattice Asia in August 1993. Mr. Yu has
held technical and managerial positions in the semiconductor industry for
over 20 years.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the over-the-counter market and
prices are quoted on the Nasdaq National Market under the symbol "LSCC". The
following table sets forth the high and low sale prices for the common stock for
the last two fiscal years and for the period since March 28, 1998. On June 18,
1998, the last reported sale price of the common stock was $27 5/8. As of June
18, 1998, the Company had approximately 343 stockholders of record.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1997:
First Quarter . . . . . . . . . . . . . $36 1/4 $21 5/8
Second Quarter. . . . . . . . . . . . . 31 1/2 19 3/4
Third Quarter . . . . . . . . . . . . 47 27 1/2
Fourth Quarter. . . . . . . . . . . . . 54 7/8 39 3/4
Fiscal 1998:
First Quarter . . . . . . . . . . . . . $62 5/8 $41 1/2
Second Quarter. . . . . . . . . . . . . 74 1/2 54 7/8
Third Quarter . . . . . . . . . . . . . 67 1/2 45
Fourth Quarter. . . . . . . . . . . . . 57 39 3/4
Fiscal 1999:
First Quarter (through June 18, 1998) . $54 5/8 $25 5/8
</TABLE>
The payment of dividends on the common stock is within the discretion of the
Company's Board of Directors. The Company intends to retain earnings to
finance the growth of its business. The Company has not paid cash dividends
on its common stock and the Board of Directors does not expect to declare
cash dividends on the common stock in the near future.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in the Company's 1998
Annual Report to Stockholders at page 11 under the caption "Selected Financial
Data", which information is incorporated herein by reference.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth in the Company's 1998
Annual Report to Stockholders at pages 8 through 10 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS
The information required by this Item is set forth in the Company's 1998
Annual Report to Stockholders, at pages 12 through 23, which information is
incorporated herein by reference.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants on Financial Statement Schedule . . S-1
Schedule VIII - Valuation and qualifying accounts . . . . . . . . . . S-2
</TABLE>
No other schedules are included because the required information is
inapplicable, not required or is presented in the financial statements or
related notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
With the exception of the information expressly incorporated by reference
from the Annual Report to Stockholders into Parts II and IV of this Form 10-K,
the Company's Annual Report to Stockholders is not to be deemed filed as part of
this Report.
20
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that
the Company will file its definitive proxy statement for the Annual Meeting
of Stockholders to be held on August 10, 1998, pursuant to Regulation 14A of
the Securities Exchange Act of 1934 (the "Proxy Statement"), not later than
120 days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by
reference. With the exception of the information expressly incorporated by
reference from the Proxy Statement, the Company's Proxy Statement is not to
be deemed filed as a part of this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to directors of the
Company is included under "Proposal 1: Election of Directors" in the
Company's Proxy Statement, which information is incorporated herein by
reference. Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this Report and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item with respect to executive compensation
is included under "Proposal 1: Election of Directors-Directors," "Executive
Compensation" and "Comparison of Total Cumulative Stockholder Return" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is included in the Company's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners
and Management", which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is included under "Proposal 1: Election
of Directors - Transactions with Management" in the Company's Proxy
Statement, which information is incorporated herein by reference.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The information required by this Item is included under
Item 8 of this Report.
(a)(3) EXHIBITS.
3.1 The Company's Certificate of Incorporation, as amended
(including (i) the Company's Certificate Eliminating
Matters set forth in Certificates of Designation with
respect to Series A, Series B, Series D and Series E,
dated February 15, 1990 (ii) the Company's Restated
Certificate of Incorporation, as amended, incorporated
by reference to Exhibit 3.1 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
March 31, 1990; (iii) the Company's Certificate of
Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock incorporated by
reference to Exhibit 1 filed with the Company's
Registration Statement on Form 8-A on September 13,
1991; and (iv) the Certificate of Amendment, dated
September 8, 1993, of the Company's Certificate of
Incorporation, filed as an exhibit hereto).
3.2 The Company's Bylaws, as amended (including (i) the
Company's Amended Bylaws, incorporated by reference to
Exhibit 3.2 filed with the Company's Annual Report on
Form 10-K for the fiscal year ended March 30, 1991; (ii)
Amendment to the Company's Bylaws authorized by the Board
of Directors on May 24, 1991, filed as an exhibit hereto;
(iii) Amendment to the Company's Bylaws authorized by the
Board of Directors on May 16, 1995, filed as an exhibit
hereto; and (iv) Amendment to the Company's Bylaws
authorized by the Board of Directors on February 4, 1997,
filed as an exhibit hereto).
4.1 Preferred Shares Rights Agreement dated as of September
11, 1991 between Lattice Semiconductor Corporation and
First Interstate Bank of Oregon, N.A., as Rights Agent
(Incorporated by reference to Exhibit 1 filed with the
Company's Registration Statement on Form 8-A on September
13, 1991).
10.3 Patent License Agreement dated November 10, 1989 between
Monolithic Memories, Inc. and Lattice Semiconductor
Corporation, as amended (Incorporated by reference to
Exhibit 10.3, File No. 33-31231).(1)
10.7 Form of Distributor Agreement (Incorporated by reference
to Exhibit 10.6, File No. 33-31231).
10.9 * Lattice Semiconductor Corporation 1988 Stock Incentive
Plan, as amended (Incorporated by reference to Exhibit
10.9 filed with the Company's Annual Report on Form 10-K
for the fiscal year ended March 28, 1992).
10.10 * Form of Stock Option Agreement (Incorporated by
reference to Exhibit 10.9, File No. 33-31231).
10.11 * Employment Letter dated September 2, 1988 from Lattice
Semiconductor Corporation to Cyrus Y. Tsui (Incorporated
by reference to Exhibit 10.10, File No. 33-31231).
10.12 Form of Proprietary Rights Agreement (Incorporated by
reference Exhibit 10.11, File No. 33-31231).
10.13 * Outside Directors Compensation Plan (Incorporated by
reference to Exhibit 10.12, File No. 33-31231).
22
<PAGE>
10.14 * Amended Outside Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.13, File No.
33-35427).
10.15 * 1993 Outside Directors Stock Option Plan (Incorporated
by reference to Exhibit 10.15 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
April 3, 1993).
10.16 * Employee Stock Purchase Plan, as amended (Incorporated
by reference to Exhibit 10.16 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
April 3, 1993).
10.17 Advance Production Payment Agreement dated July 5, 1994
among Lattice Semiconductor Corporation and Seiko Epson
Corporation and S MOS Systems, Inc. (Incorporated by
reference to Exhibit 10.17 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
April 1, 1995). (1)
10.18 Engineering Payment Agreement dated July 5, 1994 among
Lattice Semiconductor Corporation and Seiko Epson
Corporation and S MOS Systems, Inc. (Incorporated by
reference to Exhibit 10.18 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
April 1, 1995).
10.19 Bridge Capacity Letter dated September 12, 1995 between
Lattice Semiconductor Corporation and United
Microelectronics Corporation. (Incorporated by reference
to Exhibit 10.1 filed with the Company's Current Report
on Form 8-K dated September 28, 1995)(1).
10.20 Foundry Venture Side Letter dated September 13, 1995
among Lattice Semiconductor Corporation, United
Microelectronics Corporation and FabVen (Incorporated by
reference to Exhibit 10.2 filed with the Company's
Current Report on Form 8-K dated September 28, 1995)(1).
10.21 FabVen Foundry Capacity Agreement dated as of August ___,
1995 among FabVen, United Microelectronics Corporation
and Lattice Semiconductor Corporation (Incorporated by
reference to Exhibit 10.3 filed with the Company's
Current Report on Form 8-K dated September 28, 1995)(1).
10.22 Foundry Venture Agreement dated as of August ___, 1995,
between Lattice Semiconductor Corporation and United
Microelectronics Corporation (Incorporated by reference
to Exhibit 10.4 filed with the Company's Current Report
on Form 8-K dated September 28, 1995)(1).
23
<PAGE>
10.23 Advance Production Payment Agreement dated March 17, 1997
among Lattice Semiconductor Corporation and Seiko Epson
Corporation and S MOS Systems, Inc. (Incorporated by
reference to Exhibit 10.23 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended
March 29, 1997)(1).
10.24 * Lattice Semiconductor Corporation 1996 Stock Incentive
Plan (Incorporated by reference to Exhibit 4.1 filed on
Form S-8 dated November 7, 1996).
10.25 Form of North American Sales Representative Agreement
11.1 Computation of Net Income Per Share (2)
13.1 1998 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see pages 26-27).
27.1 Financial Data Schedule for Year Ended March 28, 1998.
27.2 Financial Data Schedules for the Years Ended March 29,
1997 and March 30, 1996, respectively, restated for the
effect of the adoption of Statement of Financial
Accounting Standard No. 128, ("SFAS 128"), "Earnings
Per Share".
27.3 Financial Data Schedules for the Quarters Ended December
28, 1996, September 28, 1996 and June 29, 1996,
restated for the effect of the adoption of SFAS 128.
27.4 Financial Data Schedules for the Quarters Ended
December 27, 1997, September 27, 1997 and June 28,
1997, restated for the effect of the adoption of SFAS
128.
- -------------
24
<PAGE>
(1) Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to portions of this exhibit,
which portions have been deleted and filed separately with the
Securities and Exchange Commission.
(2) Incorporated by reference to Note 1 to the Consolidated Financial
Statements in the Company's Annual Report to Stockholders for the
fiscal year ended March 28, 1998.
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Annual Report on Form 10-K pursuant to
Item 14(c) thereof.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1998.
(c) See (a)(3) above.
(d) See (a)(1) and (2) above.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Hillsboro, State of Oregon, on the 25th of June, 1998.
LATTICE SEMICONDUCTOR CORPORATION
By: /s/Stephen A. Skaggs
-----------------------------------------
Stephen A. Skaggs, Senior Vice President,
Chief Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cyrus Y. Tsui and Stephen A. Skaggs, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on the 25th day of June, 1998 on
behalf of the Registrant and in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
- --------------------- -------------------------------------------
<S> <C>
/s/Cyrus Y. Tsui President, Chief Executive Officer
- --------------------- and Chairman of the Board (Principal Executive
Cyrus Y. Tsui Officer)
/s/Stephen A. Skaggs Senior Vice President, Chief Financial Officer and
- --------------------- Secretary (Principal Financial Officer)
Stephen A. Skaggs
/s/Mark O. Hatfield Director
- ---------------------
Mark O. Hatfield
/s/Daniel S. Hauer Director
- ---------------------
Daniel S. Hauer
26
<PAGE>
<CAPTION>
Signature Title
- --------------------- -------------------------------------------
<S> <C>
/s/Harry A. Merlo Director
- ---------------------
Harry A. Merlo
/s/Larry W. Sonsini Director
- ---------------------
Larry W. Sonsini
/s/Douglas C. Strain Director
- ---------------------
Douglas C. Strain
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Lattice Semiconductor Corporation
Our audits of the consolidated financial statements referred to in our report
dated April 15, 1998 appearing in the 1998 Annual Report to Stockholders of
Lattice Semiconductor Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Portland, Oregon
April 15, 1998
S-1
<PAGE>
Schedule VIII
LATTICE SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ------------ ---------- ---------- ---------- ---------
CHARGED TO
BALANCE AT CHARGED TO OTHER WRITE-OFFS BALANCE
BEGINNING OF COSTS AND ACCOUNTS NET OF AT END OF
CLASSIFICATION PERIOD EXPENSES (DESCRIBE) RECOVERIES PERIOD
-------------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 30, 1996:
Allowance for deferred tax asset... $2,819 $(483) -- -- $2,336
Allowance for doubtful accounts.... 743 70 -- (13) 800
------ ----- ---- ---- ------
$3,562 $(413) $ -- $(13) $3,136
------ ----- ---- ---- ------
------ ----- ---- ---- ------
Year ended March 29, 1997:
Allowance for deferred tax asset... $2,336 $(340) -- -- $1,996
Allowance for doubtful accounts.... 800 70 -- 4 874
------ ----- ---- ---- ------
$3,136 $(270) $ -- $ 4 $2,870
------ ----- ---- ---- ------
------ ----- ---- ---- ------
Year ended March 28, 1998:
Allowance for deferred tax asset... $1,996 $(205) -- -- $1,791
Allowance for doubtful accounts.... 874 3 -- (80) 797
------ ----- ---- ---- ------
$2,870 $(202) $ -- $(80) $2,588
------ ----- ---- ---- ------
------ ----- ---- ---- ------
</TABLE>
S-2
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
LATTICE SEMICONDUCTOR CORPORATION
A DELAWARE CORPORATION
Lattice Semiconductor Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware
(the "Corporation"), does hereby certify:
FIRST: That at a regular meeting of the Board of Directors of this
Corporation, resolutions were duly adopted (in accordance with Section 242 of
the General Corporation Law of the State of Delaware) setting forth the
proposed amendment to the Certificate of Incorporation of this Corporation,
declaring said amendment to be advisable, and calling for the approval by the
stockholders of this Corporation upon consideration thereof. The resolutions
setting forth the proposed amendment are as follows:
RESOLVED: That the first paragraph of Article IV of the Certificate of
Incorporation of the Company be amended in its entirety to read as follows:
"ARTICLE IV
-----------
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is One Hundred Ten Million (110,000,000)
shares, par value One Cent ($0.01) each, consisting of One Hundred Million
(100,000,000) shares of Common Stock, par value One Cent ($0.01) each
("Common Stock") and Ten Million (10,000,000) shares of Preferred Stock, par
value One Cent ($0.01) each ("Preferred Stock")."
SECOND: That thereafter, pursuant to a resolution of its Board of
Directors, the Board directed that the amendment be considered at the next
annual meeting of the stockholders of this
<PAGE>
Corporation, and at such meeting, the holders of the necessary number of
shares as required by statute voted in favor of said amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Lattice Semiconductor Corporation has duly caused
this Certificate of Amendment of Certificate of Incorporation to be signed by
Cyrus Y. Tsui, its Chairman, Chief Executive Officer and President, and
attested to by Frances J. Dishman, its Assistant Secretary, this 8th day of
September, 1993.
LATTICE SEMICONDUCTOR CORPORATION
A Delaware Corporation
By: /s/ Cyrus Y. Tsui
-------------------------------------
Cyrus Y. Tsui,
Chairman, Chief Executive Officer
and President
ATTEST:
By: /s/ Frances J. Dishman
--------------------------------
Frances J. Dishman,
Assistant Secretary
-2-
<PAGE>
EXHIBIT 3.2
AMENDMENT TO THE COMPANY'S BYLAWS AUTHORIZED BY THE BOARD OF DIRECTORS ON MAY
24, 1991:
"RESOLVED: That the number of directors of the Company be, and it hereby is,
reduced pursuant to Section 3.2 of the Company's Bylaws from seven to six."
AMENDMENT TO THE COMPANY'S BYLAWS AUTHORIZED BY THE BOARD OF DIRECTORS ON MAY
16, 1995:
"RESOLVED: That the number of directors of the Company be, and hereby is,
reduced pursuant to Section 3.2 of the Company's Bylaws from six to five."
AMENDMENT TO THE COMPANY'S BYLAWS AUTHORIZED BY THE BOARD OF DIRECTORS ON
FEBRUARY 4, 1997:
"RESOLVED: That the second sentence of Article III, Section 3.2 of the
Company's Bylaws is hereby amended to read as follows: 'The exact number of
Directors shall be six (6) until changed within the limits specified above by
a bylaw amending this Section 3.2, duly adopted by the Board of Directors or
the shareholders.'"
<PAGE>
EXHIBIT 10.25
NORTH AMERICA SALES REPRESENTATIVE AGREEMENT
THIS AGREEMENT is entered into in Hillsboro, Oregon, as of
______________("Effective Date"), between Lattice Semiconductor Corporation,
a Delaware corporation with principal offices at 5555 N.E. Moore Court,
Hillsboro, Oregon, 97124 ("Lattice"), and _______, a corporation with
principal offices at _________ ("Representative").
IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE
AS FOLLOWS:
1. DEFINITIONS
1.1 "Product(s)" means Lattice's hardware and software products
identified in Lattice's current price list. Products may be changed,
reclassified, abandoned or added by Lattice, in its sole discretion. Lattice
shall be under no obligation to continue the production or sale of any
Product.
1.2 "Territory" shall initially mean those geographical areas set forth
in Exhibit A attached hereto. Lattice retains the sole authority and right
to redefine the Territory at any time and for any or no reason, and to
resolve as it sees fit any and all conflicts between its sales
representatives in the event of conflicting, overlapping, or changing
Territories and Territory boundaries.
2. APPOINTMENT AND AUTHORITY OF REPRESENTATIVE
2.1 APPOINTMENT. Subject to the terms and conditions of this
Agreement, Lattice hereby appoints Representative as Lattice's exclusive
sales representative for the Products in the Territory, and Representative
hereby accepts such appointment. Representative's sole authority is to
solicit orders for the Products in the Territory in accordance with the terms
of this Agreement. Representative shall not have the authority to make any
commitments whatsoever on behalf of Lattice.
2.2 RESERVED RIGHTS. Notwithstanding the provisions of Section 2.1
above, Lattice reserves the right to (a) solicit orders directly from and
sell Products directly to any customer within the Territory, and (b)
authorize third party distributors to solicit orders and sell Products in the
Territory.
2.3 TERRITORIAL LIMITATION. Representative shall not advertise, sell
or solicit orders for the Products from outside the Territory without the
prior written consent of Lattice.
2.4 CONFLICT OF INTEREST. The parties acknowledge that any efforts by
Representative to market or sell competing products in the Territory would
constitute a conflict of interest with respect to Representative's
obligations to market the Products. Representative warrants that it does not
currently represent or sell any Products which compete with Lattice's
Products. If Representative
Page 1
<PAGE>
intends to market, promote or distribute products that compete with the
Products, Representative shall notify Lattice of its intent at least sixty
(60) days prior to commencing such activity and Lattice shall have the right
at such time and at any time thereafter to immediately terminate this
Agreement upon written notice to Representative without obligation to pay
post-termination commissions to Representative as provided for in Section 9
below. Failure to so notify Lattice will be deemed to be a material breach of
this Agreement. A product will be deemed to compete with the Products if, in
Lattice's sole discretion, such product provides substantial overlap of any
of the functionality or features of the Products. If Lattice introduces a
new Product which competes with a product marketed or distributed by
Representative, Representative will have sixty (60) days to cease
representing such competing product in order to remain in compliance with
this provision.
2.5 INDEPENDENT CONTRACTORS. The relationship of Lattice and
Representative established by this Agreement is that of independent
contractors, and nothing in this Agreement may be construed to (a) give
either party the power to direct and control the day-to-day activities of the
other, (b) constitute the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint undertaking, or (c) allow Representative
to create or assume any obligation on behalf of Lattice for any propose
whatsoever. All financial and other obligations associated with
Representative's business are the sole responsibility of Representative.
Representative shall be solely responsible for, and shall indemnify and hold
Lattice free and harmless from any and all claims, damages or lawsuits
(including reasonable attorneys' fees) arising out of the willful or
negligent acts or omissions of Representative, its employees or its agents.
3. COMPENSATION
3.1 SOLE COMPENSATION. Representative's sole compensation under the
terms of this Agreement shall be commissions computed in accordance with
commission schedules set by Lattice. Commission schedules are typically
revised annually, but may be revised at any time, in Lattice's sole
discretion. For convenience of reference only, the initial schedule is set
forth in Exhibit B.
3.2 BASIS OF COMMISSION. The commission shall apply to all Product
sales shipped to end users in the Territory by Lattice's authorized
distributors or Lattice. Commissions shall be computed on the net amount
received by Lattice from the customer for Products only, and no commission
shall be paid with respect to charges for handling or freight, sales taxes,
COD charges, start-up charges, Product manual charges, qualification or test
data charges, and the like. In the case of sales by authorized distributors,
the basis of the commission will be the cost of the Product paid by the
authorized distributor, net of all discounts and adjustments. In the event
that Lattice, in its sole discretion determines to use the gross amount of
distributor resales to end customers (or any other measure which exceeds the
net distributor cost) as the basis for computing commissions, Lattice shall
have the right at any time on written notice effective immediately to revert
to the net distributor cost basis of commission as provided herein. In
addition, if Lattice does choose to use distributor resale cost as the basis
for commission, Lattice shall have the right to compute resale cost on any
basis it deems reasonable, including Lattice's estimate of average
distributor margins, and to change such method at any time. With respect to
software Products, "sales," "cost," and similar terms will be construed as
"licenses," "sublicenses," "license fees" and other terms used with respect
to
Page 2
<PAGE>
intellectual property transactions as appropriate in context. For Products
which are held on consignment in end-user warehouses, a sale will be
recognized only when such Products are drawn out of consignment inventory by
the end user. The parties may agree, in writing from time to time, on
adjustments to the regular commission schedule for specific customers,
Products, or circumstances.
3.3 TIME OF PAYMENT. For shipments made directly by Lattice to a
customer, commissions shall be due and payable thirty (30) days after the end
of the month in which Lattice invoices the customer for the Products sold in
the Territory. Commissions on distributor resales to customers shall be due
and payable thirty (30) days after the end of the month in which Lattice
receives the distributor's resale information. Commission payments shall be
subject to all applicable governmental regulations and rulings, including the
withholding of any taxes required by law.
3.4 SPLIT COMMISSIONS. If more than one sales representative is
involved in the solicitation of a particular order, Lattice, in its sole
discretion, may split the total commission for the order between or among the
sales representatives involved. In no event will the total commission for an
order exceed the total commission calculated without splitting. Lattice will
not make split commission adjustments on any sales more than ninety (90) days
old, with such ninety (90) day period measured by the time from the shipment
of the Product by Lattice to the customer (and the date of receipt of the
authorized distributor's resale report for distributor's sales) to the date
of Lattice's approval of the commission split.
3.5 COMMISSION ADJUSTMENTS. Lattice shall have the absolute right to
set such discounts, to make such allowances and adjustments, to accept such
returns from its customers, and to write off as bad debts such overdue
customer accounts as it deems advisable. In each such case, Lattice shall
have the right to retroactively reduce commissions paid on such revised,
adjusted, or written off amounts against future commissions payable to
Representative. Commissions with respect to sales to customers who fail to
pay within sixty (60) days of the invoice date may in Lattice's sole
discretion be deducted from current commissions until such customer payments
are collected.
4. SALE OF PRODUCTS
4.1 SOLICITATION OF ORDERS. Representative shall use its best
efforts to solicit customer order for the Products. All inquiries from
potential customers will be followed up promptly and all prospective orders
obtained will be promptly forwarded to Lattice for Lattice's response. All
orders from end users must show Lattice, rather than Representative, as the
manufacturer/seller and shall correctly indicate part numbers,
specifications, quantities, shipping destination and method, desired shipping
date, and other significant customer data. Lattice is not required to pay
commissions on orders which show representative as the manufacturer or
seller. Representative shall work closely with customers to ensure proper
preparation of orders.
4.2 ACCEPTANCE. All prospective orders obtained by Representative are
conditioned on acceptance by Lattice at its principal office currently
located at the address listed for Lattice at the beginning of this Agreement.
Representative shall have no authority to make any acceptance or
Page 3
<PAGE>
delivery commitments to customers. Lattice specifically reserves the right
to reject any order or any part thereof for any reason.
4.3 CREDIT APPROVAL. Lattice shall have the sole right of credit
approval or credit refusal for customers in all cases.
4.4 INVOICES. Lattice shall render all invoices directly to the
customers and shall send summary reports of commissionable invoices to the
Representative. Customer payments will be made directly to Lattice.
4.5 COLLECTION. It is understood by Representative that responsibility
for collection of invoices rests with Lattice, and Representative will not
take any action toward collection of invoices absent express written
authorization from Lattice.
4.6 INQUIRIES FROM OUTSIDE THE TERRITORY. Representative shall
promptly submit to Lattice, for Lattice's attention and handling, the
originals of all inquires received by Representative from customers outside
the Territory.
4.7 POLICIES. Representative agrees to abide by Lattice's sales
policies and procedures as may be modified by Lattice from time to time,
including without limitation those provisions which may limit, delay, or
restrict payment of commissions in the event of violations of such policies.
5. PRODUCT WARRANTY AND PRODUCT AVAILABILITY
5.1 PRODUCT WARRANTY. Any warranty for the Products shall run directly
from Lattice to the customer, and pursuant to the warranty the customer shall
return any allegedly defective Products to Lattice in compliance with
Lattice's return procedures. Representative shall have no authority to
accept any returned Products.
LATTICE MAKES AND REPRESENTATIVE RECEIVES NO WARRANTIES OR CONDITIONS OF
ANY KIND ON THE PRODUCTS, WHETHER EXPRESS, IMPLIED, STATUTORY, OR IN ANY
OTHER PROVISION OF THIS AGREEMENT OR COMMUNICATION WITH REPRESENTATIVE, AND
LATTICE SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY,
NONINFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE.
5.2 PRODUCT AVAILABILITY. Under no circumstances shall Lattice be
responsible to Representative in any way for Lattice's failure to fill
accepted orders, or for its delay in filling accepted orders, regardless of
the reason therefor.
6. DEMONSTRATION PRODUCTS
Lattice may loan certain Products and examples of Product applications
to Representative as
Page 4
<PAGE>
sample or demonstration Products ("Demonstrators"). All such Demonstrators
will remain the property of Lattice. All loans of software products shall be
further subject to the terms and conditions of Lattice's standard software
license agreement. Representative shall have full responsibility for keeping
Demonstrators in proper operating condition during the entire time that the
Demonstrators are in its possession and Representative shall be responsible
for any damages to such Demonstrators except for damages or deterioration
which result from normal wear and tear. Within fifteen (15) calendar days of
a written request from Lattice, Representative shall return each Demonstrator
to Lattice in good condition.
7. ADDITIONAL RESPONSIBILITIES OF REPRESENTATIVE
Representative shall have the following responsibilities:
(a) provide sales coverage of OEM accounts and distributor resale
within the Territory in a competent, professional manner consistent with good
business practice;
(b) achieve and maintain adequate personnel staffing levels and other
resources, and adequate levels of technical competence with respect to the
Products, all as determined by Lattice;
(c) provide business forecasts, reviews of business activity,
reviews of sales processes in the Territory with Lattice and its authorized
distributors, and all other information reasonably requested by Lattice, in
writing or approved electronic form, in the format required by Lattice; all
on a timely basis, and including all information required pursuant to
Lattice's standard representative policies and procedures, as they may be
modified by Lattice from time to time;
(d) cooperate with and assist Lattice in promotional and
merchandising campaigns;
(e) maintain an office or answering service, which shall be open
during normal business hours;
(f) pay all expenses of the operation of Representative's business
including, but not limited to, salespersons' expenses, travel, and account
visits; and
(g) attend all Lattice training and sales meetings as required.
8. ADDITIONAL RESPONSIBILITIES OF LATTICE
8.1 ASSISTANCE IN PROMOTION. Lattice shall, at its own expense, provide
Representative with commercially reasonable sales and technical assistance
concerning the Products as well as reasonable quantities of brochures,
instructional materials, advertising literature and other Product data.
Page 5
<PAGE>
8.2 TRAINING. Lattice shall provide Representative with reasonable
training regarding Lattice's Products, policies and services as reasonably
required for Representative to understand and effectively market the
Products.
9. TERM AND TERMINATION
9.1 TERM. This Agreement will commence upon the Effective Date and
continue for a period of one (1) year unless terminated earlier as provided
herein. This Agreement will renew automatically on each anniversary of the
Effective Date for an additional one (1) year term unless written notice of
non-renewal is provided by either party not less than thirty (30) days prior
to the renewal date.
9.2 TERMINATION FOR CAUSE. This Agreement may be terminated
immediately by either party upon notice, if the other party (a) is in breach
of any material term or condition of this Agreement and does not cure such
breach within thirty (30) days after being given written notice thereof, (b)
becomes the subject of any voluntary or involuntary proceeding under the U.S.
Bankruptcy Code or state insolvency proceeding and such proceeding is not
terminated within sixty (60) days of its commencement, or (c) ceases to be
actively engaged in business. Notwithstanding the foregoing, if Lattice
becomes aware of a conflict of interest, or an impending conflict of
interest, pursuant to paragraph 2.4, Lattice may terminate this Agreement
immediately upon notice to Representative. Lattice may, in its sole
discretion, delay such termination until any other time, but expressly
reserves the right to revoke such delay in termination at any time and for
any or no reason.
9.3 TERMINATION FOR CONVENIENCE. This Agreement may be terminated at
any time by either party with or without cause upon thirty (30) days written
notice to the other party prior to the date of termination.
9.4 TERMINATION OF COMMISSIONS.
(a) In the event that the Representative terminates this Agreement
for convenience, Lattice will pay commissions to the Representative for
Product shipments to OEM customers through the date of termination, and for
distributor Product resales which occur through the date of termination and
are reported to Lattice, in the report for the distributor's fiscal month in
which the date of termination occurs..
(b) In the event that Lattice terminates this Agreement for cause
as provided in Section 9.2, Lattice will pay commissions to the
Representative for Product shipments to OEM customers through the date of
termination, and for distributor Product resales which occur and are reported
to Lattice, through the date of termination.
(c) In the event that Lattice terminates this Agreement as
provided in Section 9.2 due to a conflict of interest by the Representative
pursuant to Section 2.4, all Lattice obligations to pay commissions to the
Representative will immediately terminate.
Page 6
<PAGE>
(d) In the event that Lattice terminates this Agreement for
convenience, or the Representative terminates this Agreement due to Lattice's
breach or insolvency, Lattice will pay commissions to the Representative for
OEM customer Product orders booked before the termination date which are
shipped through the date of termination. If the Representative has been a
sales representative for Lattice for at least two (2) years as of the date of
termination, then in the event of such termination Lattice will pay
commissions for OEM customer Product orders booked before the termination
date which are shipped within thirty (30) days after the date of termination.
The thirty (30) days after termination shipment period will be extended an
additional thirty (30) days if the Representative has been a sales
representative for Lattice for at least three (3) years as of the date of
termination, but in no event will be extended beyond a maximum of sixty (60)
days after the date of termination. Lattice will also pay commissions on
distributor Product resales which occur through the date of termination and
are reported to Lattice in the report for the distributor's fiscal month in
which the date of termination occurs.
9.5 RETURN OF MATERIALS. All confidential information, customer files,
trademarks, trade names, patents, copyrights, designs, drawings, formulas or
other data, photographs, literature, and sales aids of every kind shall
remain the property of Lattice, and Representative shall promptly return or
destroy, as Lattice may direct, all such materials upon termination of this
Agreement.
9.6 LIMITATION OF LIABILITY. In the event of termination by either
party in accordance with any of the provisions of this Agreement, neither
party shall be liable to the other, because of such termination, for
compensation, reimbursement of expenses, or damages on account of loss of
prospective profits or anticipated sales or on account of any other
expenditures, investments, leases or commitments made in connection with the
business or goodwill of Lattice or Representative or made in connection with
this Agreement or the anticipation of extended performance hereunder.
Lattice's sole liability under the terms of this Agreement shall be for any
unpaid commissions under Sections 3 and 9.4 above.
9.7 SURVIVAL OF CERTAIN TERMS. The provisions of Sections 1, 2.5, 3,
4.5, 5, 6, 9, 10, 11, 12 and 13 shall survive the termination of this
Agreement for any reason. All other rights and obligations of the parties
shall cease upon termination of this Agreement.
10. LIMITATION ON LIABILITY
IN NO EVENT SHALL LATTICE HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY SPECIAL,
INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY
CAUSE OF ACTION INCLUDING, WITHOUT LIMITATION, THOSE RESULTING FROM THE USE
OF THE PRODUCTS, OR THE FAILURE OF THE PRODUCTS TO PERFORM, OR FOR ANY OTHER
REASON. THESE LIMITATIONS SHALL APPLY WHETHER OR NOT LATTICE HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH LOSS AND NOTWITHSTANDING THE FAILURE OF
THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE PARTIES ACKNOWLEDGE THAT
THIS SECTION 10
Page 7
<PAGE>
REPRESENTS A REASONABLE ALLOCATION OF RISK AND FORMS THE BASIS FOR THE
LEVEL OF COMMISSIONS PAYABLE TO REPRESENTATIVE HEREUNDER.
11. CONFIDENTIALITY
Representative acknowledges that by reason of its relationship to
Lattice hereunder it will have access to certain information and materials
concerning Lattice's business, plans, customers, technology, and products
that are confidential and of substantial value to Lattice, which value would
be impaired if such information were disclosed to third parties.
Representative agrees that it will not use in any way for its own account or
the account of any third party, nor disclose to any third party, any such
confidential information revealed to it by Lattice. Representative shall take
every reasonable precaution to protect the confidentiality of such
information. Upon request by Representative, Lattice shall advise whether or
not it considers any particular information or materials to be confidential.
Representative shall not publish any technical description of the Products
beyond any description which may be published by Lattice. In the event of
termination of this Agreement, Representative will no longer use, and will
not disclose to any third party, any confidential information of Lattice, and
Representative will not manufacture or have manufactured or sell or
distribute or represent any products utilizing any of Lattice's confidential
information.
12. TRADEMARKS AND TRADE NAMES
12.1 USE. During the term of this Agreement, Representative shall have
the right to indicate to the public that it is an authorized representative
of Lattice's Products and to advertise within the Territory such Products
under the trademarks, marks and trade names that Lattice may adopt from time
to time ("Lattice's Trademarks"). Nothing herein grants Representative any
right, title or interest in or to Lattice's Trademarks. At no time during or
after the term of this Agreement shall Representative challenge or assist
others to challenge the validity or ownership of Lattice's Trademarks or the
registration thereof, or attempt to register any trademarks, marks or trade
names confusingly similar to those of Lattice.
12.2 APPROVAL OF REPRESENTATIONS. All representations of Lattice's
Trademarks that Representative intends to use must first be submitted to
Lattice for approval (which shall not be unreasonably withheld) of design,
color, and other details or shall be exact copies of those used by Lattice.
If any of Lattice's Trademarks are to be used in conjunction with another
trademark on or in relation to the Products, Lattice's Trademarks shall be
equally legible, prominent and of equal or greater size than the other but
nevertheless separated from the other so that each appears to be a mark in
its own right, distinct from the other mark.
13. MISCELLANEOUS
This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and no waiver or modification of this
Agreement will be valid unless in writing signed
Page 8
<PAGE>
by each party. The waiver of a breach of any term hereof will in no way be
construed as a waiver of any other term or breach hereof. If any provision
of this Agreement is held by a court of competent jurisdiction to be contrary
to law or otherwise unenforceable or of no effect, the remaining provisions
of this Agreement shall remain in full force and effect. Lattice shall have
no liability for its failure to perform its obligations hereunder when due to
circumstances beyond Lattice's reasonable control. This Agreement shall
inure to the benefit of and be binding upon each party's successors and
assigns. This Agreement is governed by the laws of the State of Oregon
without reference to conflict of laws principles. All disputes arising out
of this Agreement shall be subject to the exclusive jurisdiction of the state
and Federal courts located in Multnomah County, Oregon, and the parties agree
and submit to the personal and exclusive jurisdiction and venue of such
courts.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of
the day and year first above written.
LATTICE SEMICONDUCTOR CORPORATION
-------------------------------------
By: By:
-------------------------------- --------------------------------
Print Name: Print Name:
------------------------ ------------------------
Title: Title:
------------------------------ ------------------------------
Date: Date:
------------------------------ ------------------------------
Page 9
<PAGE>
EXHIBIT A
TERRITORY
Territory includes:
Page 10
<PAGE>
EXHIBIT B
COMMISSION SCHEDULE
Page 11
<PAGE>
EXHIBIT 13.1
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $245,894 $204,089 $198,167
Net income $56,567 $45,005 $41,784
Basic net income per share $2.43 $2.00 $2.06
Diluted net income per share $2.37 $1.96 $1.99
Cash and short-term investments $267,110 $228,647 $215,170
Total assets $489,066 $403,462 $342,935
Stockholders' equity $434,686 $360,491 $298,768
</TABLE>
- ------------------------------------------------------------------------------
CORPORATE PROFILE
- ------------------------------------------------------------------------------
Lattice Semiconductor Corporation designs, develops and markets high
performance programmable logic devices ("PLDs") and related development
system software. Lattice is the inventor and world's leading supplier of
in-system programmable ("ISP(TM)") logic devices. PLDs are standard
semiconductor components that can be configured by the end customer as
specific logic functions, enabling shorter design cycle times and reduced
development costs. Lattice's end customers are primarily original equipment
manufacturers ("OEMs") of communications, computing, industrial controls and
military systems. Approximately one-half of Lattice's revenue is derived from
international sales, mainly in Europe and Asia. Lattice was founded in 1983
and is based in Hillsboro, Oregon.
1
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
- ------------------------------------------------------------------------------
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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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.
Lattice Semiconductor Corporation (the "Company") designs, develops and
markets high performance programmable logic devices ("PLDs") and related
development system software. The Company is the inventor and world's leading
supplier of in-system programmable ("ISP(TM)") logic devices. PLDs are
standard semiconductor components that can be configured by the end customer
as specific logic functions, enabling shorter design cycle times and reduced
development costs. Lattice products are sold worldwide through an extensive
network of independent sales representatives and distributors, primarily to
original equipment manufacturers ("OEMs") of communications, computing,
industrial controls and military systems. Approximately one-half of the
Company's revenue is derived from international sales, mainly in Europe and
Asia. The Company was founded in 1983 and is based in Hillsboro, Oregon.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenue represented by selected items reflected in the Company's consolidated
statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
MAR. 28, MAR. 29, MAR. 30,
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100% 100% 100%
Costs and expenses:
Cost of products sold 40 41 41
Research and development 13 14 14
Selling, general and administrative 16 16 16
--------------------------------
69 71 71
--------------------------------
Income from operations 31 29 29
Interest and other income (net) 4 4 3
--------------------------------
Income before provision
for income taxes 35 33 32
Provision for income taxes 12 11 11
--------------------------------
Net income 23% 22% 21%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
REVENUE Revenue was $245.9 million in fiscal 1998, an increase of 20% over
fiscal 1997. Fiscal 1997 revenue of $204.1 million represented an increase of
3% from the $198.2 million recorded in fiscal 1996. The majority of the
Company's revenue in fiscal 1998 was derived from the sale of products that
address the ISP segment of the programmable logic market. All of the
Company's revenue growth for the periods presented resulted from sales of ISP
products. Revenue from ISP products was approximately 65%, 48% and 28% of
total revenue for fiscal 1998, 1997 and 1996, respectively.
Revenue from international sales was approximately 51%, 49% and 48% of
total revenue for fiscal 1998, 1997 and 1996, respectively. 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 all three fiscal years
presented. This was due primarily to a higher proportion of ISP products 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 maintain its recent trend of revenue
growth 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 60%,
59% and 59% for fiscal years 1998, 1997 and 1996, respectively. The gross
margin improvement in fiscal 1998 was primarily due to changes in product mix
and reductions in the Company's manufacturing costs. Profit margins on older
products tend to decrease over time as selling prices decline, however the
Company's strategy has been to offset these decreases by introducing new
products with higher margins.
RESEARCH AND DEVELOPMENT Research and development expense was $32.0 million,
$27.8 million and $26.8 million in fiscal 1998, 1997 and 1996, respectively.
Spending increases were related primarily to the development of new products,
including the Company's ISP product families and related software development
tools. The Company believes that a continued commitment to research and
development is essential in order to maintain a competitive offering in
existing products and to introduce innovative new products, and therefore
expects to continue to make significant investments in research and
development in the future.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expense was $39.9 million, $33.6 million and $31.3 million in fiscal 1998,
1997 and 1996, respectively. Spending increases were primarily due to
expansion of the Company's sales force and increased sales commissions
associated with higher revenue levels. Selling, general and administrative
expense as a percentage of revenue was approximately 16% for all fiscal years
presented.
INCOME FROM OPERATIONS Income from operations increased 27%, from $59.0
million to $75.1 million, from fiscal 1997 to fiscal 1998, and increased 2%,
from $57.8 million, between fiscal 1996 and fiscal 1997. Income from
operations increased as a percentage of revenue, from 29% in fiscal 1996 and
fiscal 1997 to 31% in fiscal 1998.
INTEREST AND OTHER INCOME Interest and other income (net of expense)
increased by approximately $1.9 million from fiscal 1997 to fiscal 1998, and
by approximately $3.3 million from fiscal 1996 to fiscal 1997. The increase
in both fiscal years was due to higher cash and investment balances resulting
from the Company's follow-on public offering of common stock in November
1995, cash generated from operations and common stock issuances from employee
stock option exercises.
8
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
PROVISION FOR INCOME TAXES The Company's effective tax rate was 34.0% for
fiscal 1998 as compared to 33.5% and 33.9% recorded in fiscal 1997 and 1996,
respectively. The fiscal 1998 and 1997 rate increase and decrease,
respectively, was due primarily to variation in the benefit from tax-exempt
investment income.
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.
NET INCOME Net income increased 26%, from $45.0 million to $56.6 million,
from fiscal 1997 to fiscal 1998, and increased 8%, from $41.8 million,
between fiscal 1996 and fiscal 1997. Net income increased as a percentage of
revenue each fiscal year, from 21% in fiscal 1996 to 22% in fiscal 1997, and
then to 23% in fiscal 1998.
FACTORS AFFECTING FUTURE RESULTS
Notwithstanding the objectives, projections, estimates and other
forward-looking statements in this Annual Report, the Company's future
operating results will continue to be subject to quarterly variations based
on a wide variety of competitive factors, including, but not limited to, the
following: timely introduction of new products that meet market needs at
competitive prices with acceptable margins, market acceptance of the
Company's new products and proprietary software development tools,
scheduling, rescheduling and cancellation of large orders, successful
protection of the Company's intellectual property rights, potential
litigation relating to competitive patents and intellectual property and the
Company's ability to attract and retain highly qualified technical and
management personnel.
In addition, the Company's operating results are subject to variations
based upon the following factors: the Company's continued ability to obtain
adequate wafer capacity supply commitments under competitive pricing terms,
successful development and implementation of future new advanced process
technologies at its wafer manufacturers, attainment of acceptable wafer
manufacturing yields, the ability to achieve volume production at Seiko
Epson's and UICC's new eight-inch wafer fabs, and potential interruptions in
supply from the Company's wafer manufacturers and assembly contractors as a
result of work stoppages, political instability or natural or man-made
disasters.
The Company's operating results also depend in large part on various
factors outside the Company's control such as general economic conditions and
specific conditions in countries where the Company's products are sold, the
cyclical nature of both the semiconductor industry and the end markets served
by the Company's products, sudden price fluctuations, general price erosion
and substantial adverse currency change movements. 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 and negatively impacted
by 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, 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 have a material
adverse effect on the Company's operating results. The Company's operating
results are also dependent upon international revenues which may be adversely
affected by the imposition of government controls, export license
requirements, trade restrictions, financial and political instability,
changes in tariffs and other factors outside the Company's control.
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 market price of the Company's common stock could be subject
to significant fluctuations due to the inherent volatility of the
semiconductor industry combined with the aforementioned or other factors,
including variations in the Company's quarterly operating results and
shortfalls in revenues or earnings from levels expected by securities
analysts. In addition, the stock market can experience significant price
fluctuations, which often are 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.
The Company is currently working to address the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
internal computer systems, including its electronic interfaces to
distributor, customer and supplier systems. At present, the Company has
completed an initial assessment of its potential exposure. Based on this
assessment, the Company does not anticipate that resolution of potential
internal Year 2000 issues will have a material adverse impact on the
Company's operating results. However, there can be no assurance that the
Company's computer systems or the systems of the company's major
distributors, suppliers, customers or financial service providers will
completely address all Year 2000 issues in a timely manner. In the event that
Year 2000 issues create significant disruption in the operations of the
Company or any of the Company's major distributors, suppliers, customers or
financial service providers, the Company's operating results could be
materially adversely affected.
For further explanation of the factors set forth above, see "Factors
Affecting Future Results" in Item 1 of the Company's Annual Report on Form
10-K for the fiscal year ended March 28, 1998.
9
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 28, 1998, the Company's principal source of liquidity was $267.1
million of cash and short-term investments, an increase of $38.5 million from
the balance of $228.6 million at March 29, 1997. This increase was primarily
the result of cash generated from operations and common stock issuances in
excess of cash required for foundry investments and wafer supply advances
made in fiscal 1998. 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 $2.3 million and $2.5 million, or 9% and 14%, respectively, as
compared to the balances at March 29, 1997. These increases were primarily
due to higher revenue levels in the fiscal 1998 fourth quarter and the timing
of billings to end customers and distributors. Inventories decreased by $5.2
million, or 19%, versus amounts recorded at March 29, 1997 in response to
shorter lead time of supply, availability of manufacturing capacity and
anticipated customer requirements. Prepaid expenses and other current assets
decreased by $10.9 million, or 66%, as compared to the balance at March 29,
1997 due primarily to a decrease in the current portion of wafer supply
advances. The $48.9 million increase in Foundry investments, advances and
other assets resulted primarily from the payment of approximately $34.2
million to Seiko Epson in fiscal 1998 pursuant to an advance payment purchase
agreement. Additionally, in fiscal 1998 the Company paid approximately $10.2
million, the last of three planned payments, to fund the Company's investment
in United Integrated Circuits Corporation ("UICC"). See below and note 4 of
notes to consolidated financial statements. Accounts payable and other
accrued expenses increased by $3.9 million, or 27%, due primarily to
increased cash payments for wafers. Accrued payroll obligations increased
$1.6 million, or 16%, as compared to the balance at March 29, 1997 due to
increased headcount and timing of payments. Income taxes payable increased
$3.4 million, or 438%, as compared to the balance at March 29, 1997 due to
the timing of tax deductions and payments.
Stockholders' equity increased by approximately $74.2 million, primarily
due to net income of approximately $56.6 million for fiscal 1998 and net
proceeds from common stock issuances.
Capital expenditures were approximately $18.8 million, $10.6 million and
$12.6 million for fiscal years 1998, 1997 and 1996, respectively. These
expenditures consisted primarily of manufacturing test equipment, engineering
equipment, buildings and building improvements. The increase in fiscal 1998
capital expenditures as compared to fiscal 1997 and 1996 was associated with
construction in progress of additional corporate facilities and increased
investment in manufacturing test equipment to support the growth in revenue
from ISP products.
The Company currently anticipates capital expenditures of approximately
$20 million to $25 million for the fiscal year ending April 3, 1999.
The majority of the Company's silicon wafer purchases are denominated in
Japanese yen. The Company maintains yen-denominated bank accounts and bills
its Japanese customers in yen. The yen bank deposits are utilized to hedge
yen-denominated wafer purchases and are accounted for as identifiable hedges
against specific and firm wafer purchases.
The Company entered into a series of agreements with United
Microelectronics Corporation ("UMC") in September 1995 pursuant to which the
Company 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 invested approximately $49.7
million, for an approximate 10% equity interest in UICC and the right to
receive a percentage of the facility's wafer production at market prices.
In March 1997, the Company entered into an advance payment production
agreement with Seiko Epson Corporation ("Seiko Epson") and its affiliated
U.S. distributor, S MOS Systems Inc. ("S MOS") under which it agreed to
advance approximately $86 million, payable over two years, to Seiko Epson to
finance construction of an eight-inch sub-micron semiconductor wafer
manufacturing facility. Under the terms of the agreement, the advance is to
be repaid with semiconductor wafers over a multi-year period. The agreement
calls for wafers to be supplied by Seiko Epson through S MOS pursuant to
purchase agreements with S MOS. The Company also has an option under this
agreement to advance Seiko Epson an additional $60 million for additional
wafer supply under similar terms. The first payment pursuant to this
agreement, approximately $17.0 million, was made during March 1997. During
fiscal 1998, the Company made two additional payments aggregating
approximately $34.2 million. As a result of future payments to Seiko Epson,
the Company's working capital will be reduced by approximately $35 million
during fiscal 1999.
On June 12, 1998, the Company's Board of Directors authorized management
to repurchase up to 1.2 million shares of the Company's common stock. As of
June 16, 1998, the Company had not repurchased any shares.
The Company believes that its existing sources of liquidity and expected
cash generated from operations will be adequate to fund the Company's
anticipated cash needs for the next fiscal year.
In an effort to secure additional wafer supply, the Company may from
time to time consider various financial arrangements including joint
ventures, equity investments, advance purchase payments, loans, or similar
arrangements with independent wafer manufacturers in exchange for committed
wafer capacity. To the extent that 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.
10
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
-----------------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30, APRIL 1, APRIL 2,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $245,894 $204,089 $198,167 $144,083 $126,241
Costs and expenses:
Cost of products sold 98,883 83,736 82,216 58,936 53,266
Research and development 32,012 27,829 26,825 22,859 20,636
Selling, general and administrative 39,934 33,558 31,323 25,020 22,299
----------------------------------------------------------------------
170,829 145,123 140,364 106,815 96,201
----------------------------------------------------------------------
Income from operations 75,065 58,966 57,803 37,268 30,040
Interest and other income, net 10,643 8,712 5,442 3,349 2,566
----------------------------------------------------------------------
Income before provision for income taxes 85,708 67,678 63,245 40,617 32,606
Provision for income taxes 29,141 22,673 21,461 13,651 10,116
----------------------------------------------------------------------
Net income $ 56,567 $ 45,005 $ 41,784 $ 26,966 $ 22,490
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 2.43 $ 2.00 $ 2.06 $ 1.45 $ 1.24
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 2.37 $ 1.96 $ 1.99 $ 1.41 $ 1.19
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Shares used in per share calculations:
Basic net income 23,239 22,460 20,327 18,627 18,182
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Diluted net income 23,894 22,973 20,979 19,164 18,946
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $283,678 $267,669 $244,649 $106,021 $105,007
Total assets 489,066 403,462 342,935 192,917 146,093
Stockholders' equity 434,686 360,491 298,768 157,797 125,068
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 28, 1998 YEAR ENDED MARCH 29, 1997
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED QUARTERLY DATA:
Revenue $60,168 $60,038 $64,068 $61,620 $56,268 $51,015 $48,638 $48,168
Gross profit $36,071 $36,183 $38,165 $36,592 $33,332 $30,048 $28,643 $28,330
Net income $13,818 $13,651 $14,930 $14,168 $12,819 $11,278 $10,460 $10,448
Basic net income per share $ 0.59 $ 0.58 $ 0.64 $ 0.62 $ 0.56 $ 0.50 $ 0.47 $ 0.47
Diluted net income per share $ 0.58 $ 0.57 $ 0.62 $ 0.60 $ 0.55 $ 0.49 $ 0.46 $ 0.46
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
ALL SHARE AND PER SHARE AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE THREE-FOR-TWO
STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND WHICH WAS PAID ON JULY 6,
1993.
11
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------
MARCH 28, MARCH 29,
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,344 $ 53,949
Short-term investments 206,766 174,698
Accounts receivable, net 28,229 25,940
Inventories (note 2) 22,647 27,809
Prepaid expenses and other current assets 5,572 16,519
Deferred income taxes (note 7) 14,500 11,725
-------------------------
Total current assets 338,058 310,640
Foundry investments, advances and other assets (notes 4 and 9) 114,338 65,419
Property and equipment, less accumulated depreciation (note 3) 36,670 27,403
-------------------------
$489,066 $403,462
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (note 9) $ 18,196 $ 14,276
Accrued payroll obligations 11,231 9,648
Income taxes payable (note 7) 4,210 782
Deferred income 20,743 18,265
---------------------
Total current liabilities 54,380 42,971
---------------------
Commitments and contingencies (notes 4, 6, 9, 10 and 11) -- --
Stockholders' equity (note 8):
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized;
23,428,072 and 22,877,724 shares issued and outstanding 234 229
Paid-in capital 216,290 198,667
Retained earnings 218,162 161,595
---------------------
434,686 360,491
---------------------
$489,066 $403,462
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
12
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
YEAR ENDED
----------------------------------------
MARCH 28, MARCH 29, MARCH 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $245,894 $ 204,089 $ 198,167
Costs and expenses:
Cost of products sold (note 9) 98,883 83,736 82,216
Research and development 32,012 27,829 26,825
Selling, general and administrative (note 12) 39,934 33,558 31,323
------------------------------------
170,829 145,123 140,364
------------------------------------
Income from operations 75,065 58,966 57,803
Other income (expense):
Interest income 10,277 8,886 5,570
Other income (expense), net 366 (174) (128)
------------------------------------
Income before provision for income taxes 85,708 67,678 63,245
Provision for income taxes (note 7) 29,141 22,673 21,461
------------------------------------
Net income $ 56,567 $ 45,005 $ 41,784
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Basic net income per share $ 2.43 $ 2.00 $ 2.06
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Diluted net income per share $ 2.37 $ 1.96 $ 1.99
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Shares used in per share calculations:
Basic net income 23,239 22,460 20,327
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Diluted net income 23,894 22,973 20,979
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
13
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------------
($.01 PAR VALUE) PAID-IN RETAINED
(IN THOUSANDS, EXCEPT PAR VALUE) SHARES AMOUNT CAPITAL EARNINGS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, April 1, 1995 18,890 $189 $ 82,802 $ 74,806 $ 157,797
Net proceeds from public offering 2,500 25 86,676 -- 86,701
Other common stock issued 733 7 5,416 -- 5,423
Tax benefit of option exercises -- -- 6,961 -- 6,961
Other -- -- 102 -- 102
Net income for fiscal 1996 -- -- -- 41,784 41,784
-------------------------------------------------------
Balances, March 30, 1996 22,123 221 181,957 116,590 298,768
Common stock issued 755 8 10,516 -- 10,524
Tax benefit of option exercises -- -- 6,179 -- 6,179
Other -- -- 15 -- 15
Net income for fiscal 1997 -- -- -- 45,005 45,005
-------------------------------------------------------
Balances, March 29, 1997 22,878 229 198,667 161,595 360,491
Common stock issued 550 5 12,546 -- 12,551
Tax benefit of option exercises -- -- 5,225 -- 5,225
Other -- -- (148) -- (148)
Net income for fiscal 1998 -- -- -- 56,567 56,567
-------------------------------------------------------
Balances, March 28, 1998 23,428 $234 $ 216,290 $218,162 $ 434,686
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
14
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------
YEAR ENDED
---------------------------------------
MARCH 28, MARCH 29, MARCH 30,
(IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 56,567 $ 45,005 $ 41,784
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 9,558 8,629 7,137
Deferred income taxes (2,775) (2,025) (2,398)
Changes in assets and liabilities:
Accounts receivable (2,289) (3,056) (4,737)
Inventories 5,162 (6,048) (7,630)
Prepaid expenses and other current assets (2,654) (750) (450)
Foundry investments, advances and other assets (35,318) (33,239) (3,087)
Accounts payable and accrued expenses 3,920 (739) 2,241
Accrued payroll obligations 1,583 2,192 2,067
Income taxes payable 3,428 (4,018) (406)
Deferred income 2,478 1,369 5,145
----------------------------------
Net cash provided by operating activities 39,660 7,320 39,666
----------------------------------
Cash flow from investing activities:
Purchase of short-term investments, net (32,068) (14,128) (79,457)
Proceeds from sale of property and equipment -- -- 98
Capital expenditures (18,825) (10,561) (12,591)
----------------------------------
Net cash used by investing activities (50,893) (24,689) (91,950)
----------------------------------
Cash flow from financing activities:
Net proceeds from issuance of common stock 17,628 16,718 99,187
----------------------------------
Net cash provided by financing activities 17,628 16,718 99,187
----------------------------------
Net increase (decrease) in cash and cash equivalents 6,395 (651) 46,903
Beginning cash and cash equivalents 53,949 54,600 7,697
----------------------------------
Ending cash and cash equivalents $ 60,344 $ 53,949 $ 54,600
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
15
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS Lattice Semiconductor Corporation (the "Company")
designs, develops and markets high performance programmable logic devices
("PLDs") and related development system software. The Company is the inventor
and world's leading supplier of in-system programmable ("ISP(TM)") logic
devices. PLDs are standard semiconductor components that can be configured by
the end customer as specific logic functions, enabling shorter design cycle
times and reduced development costs. The Company's end customers are
primarily original equipment manufacturers ("OEMs") of communications,
computing, industrial controls and military systems. Approximately one-half
of the Company's revenue is derived from international sales, mainly in
Europe and Asia. The Company was founded in 1983 and is based in Hillsboro,
Oregon.
FISCAL REPORTING PERIOD AND PRINCIPLES OF CONSOLIDATION The Company reports
on a 52 or 53 week fiscal year, which ends on the Saturday closest to March
31. The accompanying consolidated financial statements include the accounts
of Lattice Semiconductor Corporation and its wholly-owned foreign
subsidiaries, Lattice GmbH, Lattice Semiconducteurs SARL, Lattice
Semiconductor KK, Lattice Semiconductor Shanghai Co., Ltd., Lattice
Semiconductor Asia Ltd., Lattice Semiconductor International Ltd., Lattice
Semiconductor UK Ltd. and Lattice Semiconductor AB. The assets, liabilities,
and results of operations of these entities were not material for any of the
years presented in the consolidated financial statements and all intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly
liquid investments, which are readily convertible into cash and have original
maturities of three months or less, to be cash equivalents. Short-term
investments, which have maturities greater than three months and less than
one year, are composed of money market preferred stocks ($110.2 million),
government obligations ($70.2 million), commercial paper ($6.9 million) and
time deposits ($19.5 million) at March 28, 1998.
The Company categorizes its short-term investments as held-to-maturity,
which are stated at amortized cost with corresponding premiums or discounts
amortized over the life of the investment to interest income. Amortized cost
approximates market value at March 28, 1998.
FINANCIAL INSTRUMENTS All of the Company's significant financial assets and
liabilities are recognized in the Consolidated Balance Sheet as of March 28,
1998 and March 29, 1997. The carrying value of the Company's financial
instruments approximate current market value except foundry equity
investments in Taiwan which are either not readily marketable or where market
prices are not necessarily indicative of realizable value. The Company
estimates the fair value of its cash and cash equivalents, short-term
investments, accounts receivable, other current assets and current
liabilities based upon existing interest rates related to such assets and
liabilities compared to the current market rates of interest for instruments
of similar nature and degree of risk.
DERIVATIVE FINANCIAL INSTRUMENTS In order to minimize exposure to foreign
exchange risk with respect to its long-term investments made with foreign
currencies as further described in note 4 of notes to consolidated financial
statements, the Company has at times entered into foreign forward exchange
contracts in order to hedge these transactions. These contracts are accounted
for as identifiable hedges against firm Company commitments. Realized gain or
loss with respect to these contracts for the fiscal periods presented was not
material. As of March 28, 1998, the Company had no open foreign exchange
contracts for the purchase or sale of foreign currencies. The Company does
not enter into derivative financial instruments for trading purposes.
FOREIGN EXCHANGE The majority of the Company's silicon wafer purchases are
denominated in Japanese yen. The Company maintains yen-denominated bank
accounts and bills its Japanese customers in yen. The yen bank deposits are
utilized to hedge yen-denominated wafer purchases and are accounted for as
identifiable hedges against specific and firm wafer purchases. Gains or
losses from foreign exchange rate fluctuations on unhedged balances
denominated in foreign currencies are reflected in Other income. Realized and
unrealized gains or losses were not significant for the fiscal periods
presented.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose
the Company to concentrations of credit risk consist primarily of short-term
investments and trade receivables. The Company places its investments through
several financial institutions and mitigates
16
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
the concentration of credit risk by placing percentage limits on the maximum
portion of the investment portfolio which may be invested in any one
investment instrument. Investments consist primarily of A1 and P1 or better
rated U.S. commercial paper, U.S. government agency obligations and other
money market instruments, "AA" or better rated municipal obligations, money
market preferred stocks and other time deposits. Concentrations of credit
risk with respect to trade receivables are mitigated by a geographically
diverse customer base and the Company's credit and collection process. The
Company performs credit evaluations for all customers and secures
transactions with letters of credit or advance payments where necessary.
Write-offs for uncollected trade receivables have not been significant to
date.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE Revenue from sales to OEM
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 cost relating to such distributor
sales are deferred until the product is sold by the distributor and related
revenue and costs are then reflected in income. Accounts receivable are shown
net of allowance for doubtful accounts of $797,000 and $874,000 at March 28,
1998 and March 29, 1997, respectively.
No individual customer or distributor accounted for more than 10% of revenue
in fiscal 1998 or 1997. Revenue from one distributor was $21.1 million for
fiscal 1996. Export revenue was approximately $125.6 million, $99.8 million
and $95.1 million for fiscal 1998, 1997 and 1996, respectively. Sales to
Europe were approximately $61.2 million, $39.9 million and $37.9 million, and
to Asia $55.9 million, $52.6 million and $52.4 million in fiscal 1998, 1997
and 1996, respectively.
INVENTORIES Inventories are stated at the lower of first-in, first-out cost
or market.
LONG-LIVED ASSETS During the fiscal year ended March 29, 1997, the Company
adopted Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," which requires the Company to review the impairment of
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of SFAS
121 did not have a material impact on the Company's financial condition or
results of operations.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation is computed using the straight-line method for financial
reporting purposes over the estimated useful lives of the related assets,
generally three to five years for equipment and thirty years for buildings.
Accelerated methods of computing depreciation are generally used for income
tax purposes.
TRANSLATION OF FOREIGN CURRENCIES The Company translates accounts denominated
in foreign currencies in accordance with SFAS 52, "Foreign Currency
Translation." Translation adjustments related to the consolidation of foreign
subsidiary financial statements have not been significant to date.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred.
STOCK-BASED COMPENSATION The Company accounts for its employee and director
stock options and employee stock purchase plan in accordance with provisions
of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." During 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS 123, "Accounting for Stock-Based Compensation."
SFAS 123, effective for fiscal years beginning after December 31, 1995,
provides an alternative to APB 25, but allows companies to account for
employee and director stock-based compensation under the current intrinsic
value method as prescribed by APB 25. The Company has continued to account
for its employee and director stock plans in accordance with APB 25.
Additional pro forma disclosures as required under SFAS 123 are presented in
note 8 of notes to consolidated financial statements.
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. All share and per share amounts presented in the accompanying
consolidated financial statements and notes thereto have been adjusted to
reflect the three-for-two stock split effected in the form of a stock
dividend which was paid on July 6, 1993.
17
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
In February 1997, the FASB issued SFAS 128, "Earnings Per Share," which
is effective for the Company for periods ending after December 15, 1997.
Accordingly, the Company adopted this pronouncement in the quarter ended
December 27, 1997. Primary net income per share as previously reported has
been replaced by "basic net income per share" and "diluted net income per
share." Prior period results have been restated to conform to the new
presentation.
The most significant difference between basic and diluted net income per
share is that basic net income per share does not treat potentially dilutive
securities such as options and warrants as outstanding. For the Company,
there is no difference between diluted net income per share and primary net
income per share as previously reported. A reconciliation of the numerators
and denominators of basic and diluted net income per share is presented below:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted net income $56,567 $45,005 $41,784
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Shares used in basic net income
per share calculations 23,239 22,460 20,327
Dilutive effect of stock options
and warrants 655 513 652
------------------------------
Shares used in diluted net income
per share calculations 23,894 22,973 20,979
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Basic net income per share $ 2.43 $ 2.00 $ 2.06
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Diluted net income per share $ 2.37 $ 1.96 $ 1.99
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS Income taxes paid approximated $23.1 million, $22.6
million and $17.3 million in fiscal 1998, 1997, and 1996, respectively.
Interest paid does not differ materially from interest expense, which
aggregated approximately $83,000, $152,000 and $42,000 in fiscal 1998, 1997
and 1996, respectively.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the fiscal periods presented. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Net Income." Under SFAS 130, the Company is required
to report comprehensive income and its components in its consolidated
financial statements, in addition to net income.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About Segments
of an Enterprise and Related Information." This pronouncement establishes
standards for the way companies report information about operating segments
for the fiscal years beginning after December 15, 1997. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers.
The Company will adopt these two new pronouncements in the fiscal year
ending April 3, 1999. It is expected that adoption will not have a
significant impact on the consolidated financial statements.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Work in progress $ 12,675 $ 20,286
Finished goods 9,972 7,523
---------------------
$ 22,647 $ 27,809
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Land $ 2,098 $ 2,098
Buildings 7,135 7,132
Construction in progress 6,750 --
Computer and test equipment 62,863 52,204
Office furniture and equipment 3,054 2,881
Leasehold and building improvements 2,547 2,501
---------------------
84,447 66,816
Accumulated depreciation and amortization (47,777) (39,413)
---------------------
$ 36,670 $ 27,403
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
NOTE 4. FOUNDRY INVESTMENTS, ADVANCES
AND OTHER ASSETS
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Foundry investments and other assets $ 63,076 $ 48,399
Wafer supply advances 51,262 17,020
----------------------
$114,338 $ 65,419
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
The Company entered into a series of agreements with United Microelectronics
Corporation ("UMC") in September 1995 pursuant to which the Company has
agreed to join UMC and several other companies to form a separate Taiwanese
corporation ("UICC") for the
18
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
purpose of building and operating an advanced semiconductor manufacturing
facility in Taiwan, Republic of China. Under the terms of the agreements, the
Company invested approximately $49.7 million, paid in three installments, for
an approximate 10% equity interest in the corporation and the right to
receive a percentage of the facility's wafer production at market prices.
This investment is accounted for at cost. The first payment, in the amount of
approximately $13.7 million, was paid in January 1996, the second payment, in
the amount of approximately $25.8 million, was paid during January 1997, and
the final payment of approximately $10.2 million was made in December 1997.
In October 1997, the UICC foundry was substantially destroyed by fire.
UMC, the majority owner of UICC, has informed the Company that this loss is
insured and has begun the process of rebuilding the foundry. Further,
alternative capacity arrangements have been made available to the Company.
Based on these assurances from UMC, management believes the Company will not
be materially adversely affected by this event.
In July 1994, the Company signed an agreement with Seiko Epson
Corporation ("Seiko Epson") and its affiliated U.S. distributor, S MOS
Systems Inc. ("S MOS"), under which it advanced $44 million to be used to
finance additional sub-micron wafer manufacturing capacity and technological
development. The advance is being repaid in the form of semiconductor wafers
over a multi-year period. No interest income is recorded. Total wafer
receipts under this agreement aggregated approximately $15,425,000,
$18,042,000 and $10,713,000 during fiscal 1998, 1997 and 1996, respectively.
In March 1997, the Company entered into a second advance payment
production agreement with Seiko Epson and S MOS under which it agreed to
advance approximately $86 million, payable over two years, to Seiko Epson to
finance construction of an eight-inch sub-micron semiconductor wafer
manufacturing facility. Under the terms of the agreement, the advance is to
be repaid with semiconductor wafers over a multi-year period. No interest
income is recorded. The agreement calls for wafers to be supplied by Seiko
Epson through S MOS pursuant to purchase agreements with S MOS. The Company
also has an option under the agreement to advance Seiko Epson an additional
$60 million for additional wafer supply under similar terms. The first
payment under this agreement, approximately $17.0 million, was made during
fiscal 1997. During fiscal 1998, the Company made two additional payments
aggregating approximately $34.2 million.
NOTE 5. CREDIT FACILITIES
The Company 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.
NOTE 6. LEASE OBLIGATIONS
Certain facilities and equipment of the Company are leased under operating
leases, which expire at various times through fiscal 2001. Rental expense
under the operating leases was approximately $1,026,000, $984,000 and
$993,000 for fiscal 1998, 1997 and 1996, respectively. Future minimum lease
commitments at March 28, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ---------------------------------------------
<S> <C>
1999 $ 884
2000 892
2001 703
---------
$2,479
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
NOTE 7. INCOME TAXES
The components of the provision for income taxes for fiscal 1998, 1997 and 1996
are presented in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
MARCH 28, MARCH 29, MARCH 30,
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 29,204 $ 22,308 $ 21,550
State 2,712 2,390 2,309
----------------------------------
31,916 24,698 23,859
----------------------------------
Deferred:
Federal (2,539) (1,829) (2,166)
State (236) (196) (232)
----------------------------------
(2,775) (2,025) (2,398)
----------------------------------
$ 29,141 $ 22,673 $ 21,461
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
Foreign income taxes were not significant for the fiscal years presented.
19
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
MARCH 28, MARCH 29, MARCH 30,
(IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed income tax expense
at the statutory rate $ 29,998 $ 23,687 $ 22,136
Adjustments for tax effects of:
State taxes, net 2,402 2,048 1,636
Research and development credits (154) (62) (196)
Nontaxable investment income (3,009) (2,579) (1,506)
Other (96) (421) (609)
-----------------------------------
$ 29,141 $ 22,673 $ 21,461
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Deferred income $ 7,934 $ 7,102
Expenses and allowances not currently deductible 8,357 6,619
---------------------
Total deferred tax assets 16,291 13,721
Valuation allowance (1,791) (1,996)
---------------------
$ 14,500 $ 11,725
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
The valuation allowances are recorded to reduce deferred tax assets which 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.
NOTE 8. STOCKHOLDERS' EQUITY
COMMON STOCK In November 1995, the Company completed its third public
offering, consisting of 2,500,000 shares of common stock at $36.63 per share.
Net proceeds to the Company were approximately $86.7 million after
underwriting discount and offering expenses.
STOCK WARRANTS As of March 28, 1998, the Company has issued to a vendor
warrants to purchase 583,094 shares of common stock. Of this amount, 464,125
warrants were issued and 340,500 exercised prior to fiscal 1996. During
fiscal 1997, 67,419 warrants were issued and none were exercised. During
fiscal 1998, a warrant was issued to purchase 51,550 shares of common stock,
earned ratably from March 1997 through February 1998. Additionally, the
vendor exercised warrants for 123,625 shares at an average exercise price of
$18.77 per share.
STOCK OPTION PLANS As of March 28, 1998, the Company had reserved 2,000,000
and 5,775,000 shares of common stock for issuance to officers and key
employees under the 1996 Stock Incentive Plan and 1988 Stock Incentive Plan,
respectively. The 1996 Plan options generally vest over four years in
increments as determined by the Board of Directors and have terms up to ten
years. The 1988 Plan options are exercisable immediately and have terms up to
ten years. The transfer of certain shares of common stock acquired through
the exercise of 1988 Plan stock options is restricted under stock vesting
agreements that grant the Company the right to repurchase unvested shares at
the exercise price if employment is terminated. Generally, the Company's
repurchase rights lapse quarterly over four years.
The 1993 Directors' Stock Option Plan provides for the issuance of stock
options to members of the Company's Board of Directors who are not employees
of the Company; 225,000 shares of the Company's Common Stock have been
reserved for issuance thereunder. These options are granted at fair market
value at the date of grant and generally become exercisable quarterly over a
four year period beginning on the date of grant and expire five years from
the date of grant.
20
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
The following table summarizes the Company's stock option activity and
related information for the past three years:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES UNDER EXERCISE SHARES UNDER EXERCISE SHARES UNDER EXERCISE
(NUMBER OF SHARES IN THOUSANDS) OPTION PRICE OPTION PRICE OPTION PRICE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of fiscal year 2,290 $27.50 2,330 $22.20 2,340 $14.15
Options granted 983 63.13 827 30.82 807 33.37
Options canceled (134) 39.78 (176) 28.31 (196) 14.90
Options exercised (383) 21.76 (691) 13.31 (621) 8.79
--------------------------------------------------------------------------
Options outstanding at end of fiscal year 2,756 $40.38 2,290 $27.50 2,330 $22.20
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
March 28, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACT LIFE EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14.88 - $17.38 131 0.27 $17.02 118 $17.04
$17.83 - $28.13 989 1.52 25.26 574 23.77
$31.63 - $51.75 743 1.86 36.44 353 33.50
$51.88 - $66.25 893 3.36 63.76 105 63.44
-----------------------------------------------------------
2,756 2.15 $40.38 1,150 $29.69
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
STOCK PURCHASE PLAN The Company's employee stock purchase plan was approved
by the stockholders in August 1990, and became effective January 1, 1991. The
plan permits eligible employees to purchase shares of common stock through
payroll deductions, not to exceed 10% of the employee's compensation. The
purchase price of the shares is the lower of 85% of the fair market value of
the stock at the beginning of each six-month period or 85% of the fair market
value at the end of such period, but in no event less than the book value per
share at the mid-point of each offering period. Amounts accumulated through
payroll deductions during the offering period are used to purchase shares on
the last day of the offering period. Of the 700,000 shares authorized to be
issued under the plan, 34,945, 57,421 and 54,239 shares were issued during
fiscal 1998, 1997 and 1996, respectively, and 272,864 shares were available
for issuance at March 28, 1998.
PRO FORMA DISCLOSURES The Company accounts for its stock options and employee
stock purchase plan in conformity with APB 25 and has adopted the additional
proforma disclosure provisions of SFAS 123.
The fair value, as defined by SFAS 123, for stock options and employee
stock plan purchase rights was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
GRANTS FOR YEARS ENDED
-----------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock options:
Expected volatility 48.6% 46.4% 46.4.%
Risk-free interest rate 5.6% 6.1% 5.9%
Expected life from vesting date 1.2 years 0.9 years 0.9 years
Dividend yield 0% 0% 0%
Stock purchase rights:
Expected volatility 36.0% 36.7% 36.7%
Risk-free interest rate 5.9% 5.3% 6.2%
Expected life 6 months 6 months 6 months
Dividend yield 0% 0% 0%
- ----------------------------------------------------------------------------------
</TABLE>
21
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of freely tradable, fully transferable options without vesting
restrictions. The Company's stock options have characteristics which
significantly differ from those of freely tradable, fully transferable
options. The Black-Scholes option pricing model also requires highly
subjective assumptions, including expected stock price volatility and
expected stock option term which greatly affect the calculated fair value of
an option. The Company's actual stock price volatility and option term may be
materially different from the assumptions used herein.
The resultant grant date weighted-average fair values calculated using
the Black-Scholes option pricing model and the noted assumptions for stock
options granted was $25.20, $11.54 and $12.44, and for stock purchase rights
$12.30, $6.80 and $5.49, for fiscal 1998, 1997 and 1996, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 48,777 $ 40,681 $ 38,836
Pro forma basic earnings per share $ 2.10 $ 1.81 $ 1.91
Pro forma diluted earnings per share $ 2.05 $ 1.78 $ 1.86
- ------------------------------------------------------------------------------------
</TABLE>
Because the SFAS 123 pro forma disclosure applies only to options granted
subsequent to April 1, 1995, its pro forma effect will not be fully reflected
until subsequent years. The effects on pro forma disclosures of applying SFAS
123 are not likely to be representative of the effects on pro forma
disclosures in future years.
SHAREHOLDER RIGHTS PLAN A shareholder rights plan approved on September 11,
1991 provides for the issuance of one right for each share of outstanding
common stock. With certain exceptions, the rights will become exercisable
only in the event that an acquiring party accumulates beneficial ownership of
20% or more of the Company's outstanding common stock or announces a tender
or exchange offer, the consummation of which would result in ownership by
that party of 20% or more of the Company's outstanding common stock. The
rights expire on September 11, 2001 if not previously redeemed or exercised.
Each right entitles the holder to purchase, for $60.00, a fraction of a share
of the Company's Series A Participating Preferred Stock with economic terms
similar to that of one share of the Company's common stock. The Company will
generally be entitled to redeem the rights at $0.01 per right at any time on
or prior to the tenth day after an acquiring person has acquired beneficial
ownership of 20% or more of the Company's common stock. If, prior to the
redemption or expiration of the rights, an acquiring person or group acquires
beneficial ownership of 20% or more of the Company's outstanding common
stock, each right not beneficially owned by the acquiring person or group
will entitle its holder to purchase, at the rights' then current exercise
price, that number of shares of common stock having a value equal to two
times the exercise price.
NOTE 9. TRANSACTIONS WITH PRINCIPAL SUPPLIERS
The majority of the Company's silicon wafers are currently manufactured by
Seiko Epson in Japan and are sold to the Company through Seiko Epson's
affiliated U.S. distributor, S MOS. The Chairman of the Board of S MOS is a
member of the Company's Board of Directors. The Company also receives wafers
in connection with the series of agreements entered into with UMC as
described in note 4 of notes to consolidated financial statements. 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.
The Company has signed two advance payment production agreements with
Seiko Epson and S MOS, in July 1994 and March 1997, respectively, under which
it has advanced or will advance cash to be used in conjunction with the
construction of additional wafer capacity, with the advances being repaid in
the form of semiconductor wafers over a multi-year period. These transactions
are more fully described in note 4 of notes to consolidated financial
statements.
The Company continues to purchase a portion of its wafer supply from
Seiko Epson for cash using commercial terms. Wafer purchases totaled $20.9
million, $22.8 million and $34.7 million for fiscal 1998, 1997 and 1996,
respectively. Accounts payable and accrued expenses at March 28, 1998 and
March 29, 1997 include $4.5 and $1.9 million, respectively, due this vendor.
Open purchase commitments to this vendor approximated $6.8 million at March
28, 1998.
22
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
NOTE 10. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan The Company initiated a profit sharing plan effective
April 1, 1990. Under the provisions of this plan, as approved by the Board of
Directors, a percentage of the operating income of the Company, as defined
and calculated at the end of the second and fourth quarter of each fiscal
year for each respective six-month period, is paid equally to qualified
employees. In fiscal 1998, 1997 and 1996, approximately $3.0 million, $2.4
million and $2.3 million, respectively, were charged against operations in
connection with the plan.
QUALIFIED INVESTMENT PLAN In 1990, the Company adopted a 401(k) plan, which
provides participants with an opportunity to accumulate funds for retirement.
Under the terms of the plan, eligible participants may contribute up to 15%
of their eligible earnings to the plan Trust. The plan allows for
discretionary matching contributions by the Company; no such contributions
occurred through fiscal 1996. Beginning in fiscal 1997, the Company matched
eligible employee contributions of up to 5% of base pay. Company
contributions are discretionary and vest over four years.
NOTE 11. COMMITMENTS AND 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. There can be no assurance that, with respect to any
such claims made against the Company, the Company could obtain a license on
terms or under conditions that would not have a material adverse effect on
the Company.
NOTE 12. RELATED PARTY
Larry W. Sonsini is a member of the Company's Board of Directors and is
presently the Chairman of the Executive Committee of Wilson, Sonsini,
Goodrich & Rosati, a law firm that provides corporate legal services to the
Company. Legal services billed to the Company aggregated approximately
$51,000, $61,000 and $177,000, respectively, for fiscal 1998, 1997 and 1996.
Amounts payable to the law firm were not significant at March 28, 1998 or
March 29, 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lattice Semiconductor
Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of Lattice Semiconductor Corporation and its subsidiaries at March
28, 1998 and March 29, 1997, and the results of their operations and their
cash flows for each of the three years in the period ended March 28, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
April 15, 1998
23
LATTICE SEMICONDUCTOR CORPORATION
<PAGE>
- ------------------------------------------------------------------------------
CORPORATE DIRECTORY
- ------------------------------------------------------------------------------
BOARD OF DIRECTORS
Cyrus Y. Tsui
Chairman of the Board, President and
Chief Executive Officer
Mark O. Hatfield
Former U.S. Senator
Daniel S. Hauer(1)
Chairman of the Board,
S MOS Systems Inc.
Harry A. Merlo(1), (2)
President,
Merlo Corporation
Douglas C. Strain(2)
Vice Chairman and Founder,
Electro Scientific Industries, Inc.
Larry W. Sonsini
Partner and Chairman of the
Executive Committee,
Wilson, Sonsini, Goodrich & Rosati
OFFICERS
Cyrus Y. Tsui
Chairman of the Board, President and
Chief Executive Officer
Steven A. Laub
Senior Vice President and
Chief Operating Officer
Stephen A. Skaggs
Senior Vice President,
Chief Financial Officer and Secretary
Stephen M. Donovan
Corporate Vice President, Sales
Jonathan K. Yu
Corporate Vice President,
Business Development
Martin R. Baker
Vice President and General Counsel
Randy D. Baker
Vice President, Manufacturing
Albert L. Chan
Vice President and General Manager
Lattice Silicon Valley
Thomas J. Kingzett
Vice President, Reliability and
Quality Assurance
Stanley J. Kopec
Vice President, Corporate Marketing
Rodney F. Sloss
Vice President, Finance
Kenneth K. Yu
Vice President and Managing Director,
Lattice Asia
Technology Advisor to the
Office of the President
CORPORATE HEADQUARTERS
Lattice Semiconductor Corporation
5555 N.E. Moore Court
Hillsboro, Oregon 97124-6421
Telephone: 503/681-0118
Facsimile: 503/681-0347
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, California
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Portland, Oregon
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
520 Pike St., Suite 1220
Seattle, Washington 98101
800/522-6645
ANNUAL MEETING
The annual meeting of stockholders for Lattice Semiconductor Corporation will
be held at The Greenwood Inn, 10700 S.W. Allen Blvd., Beaverton, Oregon 97005
on Monday, August 10, 1998, at 1:00 pm, Pacific Time.
FORM 10-K
Financial information, including the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission, and quarterly operating
results, is available by accessing http://www.lscc.com or by written or
telephone request to the Lattice Semiconductor shareholder relations
department.
COMMON STOCK
Lattice Semiconductor Corporation's common stock is traded on the Nasdaq
National Market System under the symbol "LSCC."
STOCK PRICE HISTORY
The following table sets forth the low and high sale prices of the Company's
common stock for the last two fiscal years.
<TABLE>
<CAPTION>
Low High
- ------------------------------------------------------
<S> <C> <C>
Fiscal 1997:
First Quarter 21 5/8 36 1/4
Second Quarter 19 3/4 31 1/2
Third Quarter 27 1/2 47
Fourth Quarter 39 3/4 54 7/8
Fiscal 1998:
First Quarter 41 1/2 62 5/8
Second Quarter 54 7/8 74 1/2
Third Quarter 45 67 1/2
Fourth Quarter 39 3/4 57
</TABLE>
(1) MEMBER OF THE AUDIT COMMITTEE
(2) MEMBER OF THE COMPENSATION COMMITTEE
24
<PAGE>
EXHIBIT 21.1
LATTICE SEMICONDUCTOR CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C> <C>
1. Lattice GmbH Germany
2. Lattice Semiconducteurs SARL France
3. Lattice Semiconductor AB Sweden
4. Lattice Semiconductor Asia Limited Hong Kong
5. Lattice Semiconductor International Limited Jamaica
6. Lattice Semiconductor KK Japan
7. Lattice Semiconductor (Shanghai) Co. Ltd. China
8. Lattice UK Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-33933, No. 33-35259, No. 33-38521, No.
33-76358, No. 33-51232, No. 33-69496, No. 333-15737 and No. 333-40031) and
the Registration Statements on Form S-3 (No. 33-57512, No. 333-15741 and No.
333-40043) of Lattice Semiconductor Corporation of our report dated April 15,
1998 appearing in the Annual Report to Stockholders which is incorporated by
reference in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule.
PRICE WATERHOUSE LLP
Portland, Oregon
June 22, 1998
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<PAGE>
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<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1997
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 60,344
<SECURITIES> 206,766
<RECEIVABLES> 28,229
<ALLOWANCES> (797)
<INVENTORY> 22,647
<CURRENT-ASSETS> 338,058
<PP&E> 84,447
<DEPRECIATION> (47,777)
<TOTAL-ASSETS> 489,066
<CURRENT-LIABILITIES> 54,380
<BONDS> 0
0
0
<COMMON> 234
<OTHER-SE> 434,452
<TOTAL-LIABILITY-AND-EQUITY> 489,066
<SALES> 245,894
<TOTAL-REVENUES> 245,894
<CGS> 98,883
<TOTAL-COSTS> 170,829
<OTHER-EXPENSES> (366)
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> (10,277)
<INCOME-PRETAX> 85,708
<INCOME-TAX> 29,141
<INCOME-CONTINUING> 29,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,567
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.37
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-29-1997 MAR-30-1996
<PERIOD-START> MAR-31-1996 APR-02-1995
<PERIOD-END> MAR-29-1997 MAR-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 53,949 54,600
<SECURITIES> 174,698 160,570
<RECEIVABLES> 25,940 22,884
<ALLOWANCES> (874) (800)
<INVENTORY> 27,809 21,761
<CURRENT-ASSETS> 310,640 288,816
<PP&E> 66,816 56,857
<DEPRECIATION> (39,413) (31,386)
<TOTAL-ASSETS> 403,462 342,935
<CURRENT-LIABILITIES> 42,971 44,167
<BONDS> 0 0
0 0
0 0
<COMMON> 229 221
<OTHER-SE> 360,262 298,547
<TOTAL-LIABILITY-AND-EQUITY> 403,462 342,935
<SALES> 204,089 198,167
<TOTAL-REVENUES> 204,089 198,167
<CGS> 83,736 82,216
<TOTAL-COSTS> 145,123 140,364
<OTHER-EXPENSES> 174 128
<LOSS-PROVISION> 18 0
<INTEREST-EXPENSE> (8,886) (5,570)
<INCOME-PRETAX> 67,678 63,245
<INCOME-TAX> 22,673 21,461
<INCOME-CONTINUING> 45,005 41,784
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 45,005 41,784
<EPS-PRIMARY> 2.00 2.06
<EPS-DILUTED> 1.96 1.99
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-29-1997 MAR-29-1997 MAR-29-1997
<PERIOD-START> MAR-31-1996 MAR-31-1996 MAR-31-1996
<PERIOD-END> DEC-28-1996 SEP-28-1996 JUN-29-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 59,756 45,350 47,738
<SECURITIES> 183,506 187,252 180,397
<RECEIVABLES> 22,850 20,294 16,238
<ALLOWANCES> (856) (839) (827)
<INVENTORY> 28,748 28,359 27,008
<CURRENT-ASSETS> 329,168 314,863 303,410
<PP&E> 65,556 64,498 61,100
<DEPRECIATION> (37,648) (35,403) (27,839)
<TOTAL-ASSETS> 379,561 360,617 354,160
<CURRENT-LIABILITIES> 37,303 37,127 42,543
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 227 223 223
<OTHER-SE> 342,031 323,267 311,394
<TOTAL-LIABILITY-AND-EQUITY> 379,561 360,617 354,160
<SALES> 147,821 96,806 48,168
<TOTAL-REVENUES> 147,821 96,806 48,168
<CGS> 60,800 39,833 19,838
<TOTAL-COSTS> 105,925 69,566 34,489
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (6,502) (4,198) (2,030)
<INCOME-PRETAX> 48,398 31,438 15,709
<INCOME-TAX> 16,212 10,530 5,261
<INCOME-CONTINUING> 32,186 20,908 10,448
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 32,186 20,908 10,448
<EPS-PRIMARY> 1.44 0.94 0.47
<EPS-DILUTED> 1.41 0.92 0.46
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-28-1998 MAR-28-1998 MAR-28-1998
<PERIOD-START> MAR-30-1997 MAR-30-1997 MAR-30-1997
<PERIOD-END> DEC-27-1997 SEP-27-1997 JUN-28-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 65,366 83,703 81,105
<SECURITIES> 199,239 179,915 171,578
<RECEIVABLES> 27,517 25,752 25,917
<ALLOWANCES> (858) (840) (824)
<INVENTORY> 23,017 23,166 24,679
<CURRENT-ASSETS> 334,127 335,866 329,127
<PP&E> 79,920 73,394 70,270
<DEPRECIATION> (46,277) (43,879) (41,619)
<TOTAL-ASSETS> 464,982 448,241 423,197
<CURRENT-LIABILITIES> 46,071 44,733 43,083
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 234 233 231
<OTHER-SE> 418,677 403,275 379,883
<TOTAL-LIABILITY-AND-EQUITY> 464,982 448,241 423,197
<SALES> 185,726 125,688 61,620
<TOTAL-REVENUES> 185,726 125,688 61,620
<CGS> 74,786 50,931 25,028
<TOTAL-COSTS> 128,868 86,846 42,677
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (7,913) (5,246) (2,524)
<INCOME-PRETAX> 64,771 44,088 21,467
<INCOME-TAX> 22,022 14,990 7,299
<INCOME-CONTINUING> 42,749 29,098 14,168
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 42,749 29,098 14,168
<EPS-PRIMARY> 1.84 1.26 .62
<EPS-DILUTED> 1.79 1.22 .60
</TABLE>
