<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 0 - 18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 681-0118
(Registrant's telephone number, including area code)
--------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At January 2, 1999 there were 23,383,942 shares of the Registrant's common
stock, $.01 par value, outstanding.
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LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended Jan. 2, 1999 and
Dec. 27, 1997 3
Consolidated Balance Sheet - Jan. 2, 1999
and March 28, 1998 4
Consolidated Statement of Cash Flows -
Nine Months Ended Jan. 2, 1999
and Dec. 27, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ --------------------------------
Jan. 2, Dec. 27, Jan. 2, Dec. 27,
1999 1997 1999 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 50,168 $ 60,038 $ 146,284 $ 185,726
Costs and expenses:
Cost of products sold 19,545 23,855 57,697 74,786
Research and development 8,498 7,983 24,313 23,824
Selling, general and administrative 9,332 10,184 27,342 30,258
---------- ---------- ---------- ------------
Total costs and expenses 37,375 42,022 109,352 128,868
---------- ---------- ---------- ------------
Income from operations 12,793 18,016 36,932 56,858
Other income, net 2,782 2,667 7,808 7,913
---------- ---------- ---------- ------------
Income before provision for income taxes 15,575 20,683 44,740 64,771
Provision for income taxes 5,062 7,032 14,541 22,022
---------- ---------- ---------- ------------
Net income $ 10,513 $ 13,651 $ 30,199 $ 42,749
========== ========== ========== ============
Basic net income per share $ 0.45 $ 0.58 $ 1.29 $ 1.84
========== ========== ========== ============
Diluted net income per share $ 0.45 $ 0.57 $ 1.27 $ 1.79
========== ========== ========== ============
Shares used in per share calculations:
Basic net income 23,393 23,342 23,460 23,186
========== ========== ========== ============
Diluted net income 23,618 23,981 23,701 23,888
========== ========== ========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS Jan. 2, March 28,
1999 1998
---------------- -----------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 54,744 $ 60,344
Short-term investments 244,421 206,766
Accounts receivable 18,502 28,229
Inventories 19,060 22,647
Prepaid expenses and other current assets 5,471 5,572
Deferred income taxes 13,246 14,500
---------------- -----------------
Total current assets 355,444 338,058
Foundry investments, advances and other assets 114,587 114,338
Property and equipment, net 43,490 36,670
---------------- -----------------
$ 513,521 $ 489,066
================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 28,698 $ 29,427
Deferred income on sales to
distributors 16,689 20,743
Income taxes payable 4,729 4,210
---------------- -----------------
Total current liabilities 50,116 54,380
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized, 23,383,942 and
23,428,072 shares issued and outstanding 234 234
Paid-in capital 214,810 216,290
Retained earnings 248,361 218,162
---------------- -----------------
Total stockholders' equity 463,405 434,686
---------------- -----------------
$ 513,521 $ 489,066
================ =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
Jan. 2, Dec. 27,
1999 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30,199 $ 42,749
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,189 7,160
Changes in assets and liabilities:
Accounts receivable 9,727 (1,577)
Inventories 3,587 4,792
Prepaid expenses and other assets (148) (24,093)
Wafer supply advance -- 12,516
Deferred income taxes 1,254 (700)
Accounts payable and accrued
expenses (729) 1,281
Deferred income (4,054) 1,013
Income taxes payable 519 806
-------------- --------------
Total adjustments 17,345 1,198
-------------- --------------
Net cash provided by operating activities 47,544 43,947
-------------- --------------
Cash flows from investing activities:
Purchase of short-term investments, net (37,655) (24,541)
Foundry investments -- (10,260)
Capital expenditures (14,009) (13,400)
-------------- --------------
Net cash used by investing activities (51,664) (48,201)
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 7,678 15,671
Repurchase of common stock (9,158) --
-------------- --------------
Net cash (used) provided by financing activities (1,480) 15,671
-------------- --------------
Net (decrease) increase in cash and cash equivalents (5,600) 11,417
Beginning cash and cash equivalents 60,344 53,949
-------------- --------------
Ending cash and cash equivalents $ 54,744 $ 65,366
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation:
The accompanying consolidated financial statements are unaudited and
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission and in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of results for the
interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. These consolidated financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-K for
the fiscal year ended March 28, 1998.
The Company reports on a 52 or 53 week fiscal year, which ends on the
Saturday closest to March 31. The accompanying financial statements
include the accounts of Lattice Semiconductor Corporation and its
wholly-owned subsidiaries, Lattice Semiconducteurs SARL, Lattice GmbH,
Lattice Semiconductor KK, Lattice Semiconductor (Shanghai) Co. Ltd.,
Lattice Semiconductor Asia Ltd., Lattice Semiconductor International
Ltd., Lattice UK Limited and Lattice Semiconductor AB. The assets,
liabilities and results of operations of the subsidiaries were not
material for the periods presented. The results of the interim period
are not necessarily indicative of the results for the entire year.
(2) Revenue Recognition:
Revenue from sales to OEM (original equipment manufacturer) customers
is recognized upon shipment. Certain of the Company's sales are made to
distributors under agreements providing price protection and right of
return on unsold merchandise. Revenue and costs relating to such
distributor sales are deferred until the product is sold by such
distributors and the related revenue and costs are then reflected in
income.
(3) Net Income Per Share:
Net income per share is computed based on the weighted average number
of shares of common stock and common stock equivalents assumed to be
outstanding during the period (using the treasury stock method). Common
stock equivalents consist of stock options and warrants to purchase
common stock.
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<PAGE>
A reconciliation of the numerators and denominators of basic and
diluted net income per share is presented below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
----- -----
Jan. 2, Dec.27 Jan. 2, Dec.27
1999 1997 1999 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Basic and diluted
net income $ 10,513 $13,651 $ 30,199 $42,749
======== ======= ======== =======
Shares used in basic net income per
share calculations
23,393 23,342 23,460 23,186
Dilutive effect of
options and warrants 225 639 241 702
--- --- --- ---
Shares used in diluted
net income per share
calculations 23,618 23,981 23,701 23,888
====== ====== ====== ======
Basic net income per share $0.45 $0.58 $1.29 $1.84
===== ===== ===== =====
Diluted net income per share $0.45 $0.57 $1.27 $1.79
===== ===== ===== =====
</TABLE>
<TABLE>
<S> <C> <C>
(4) Inventories (in thousands): Jan. 2, March 28,
1999 1998
-------- -------
Work in progress $11,400 $12,675
Finished goods 7,660 9,972
------- -------
$19,060 $22,647
======= =======
</TABLE>
(5) Changes in Stockholders' Equity (in thousands):
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings Total
------ ------- ---------- ------
<S> <C> <C> <C> <C>
Balances, March 28, 1998 $ 234 $ 216,290 $218,162 $434,686
Stock option exercises 3 7,811 -- 7,814
Stock repurchases (3) (9,155) -- (9,158)
Other comprehensive income -- (136) -- (136)
Net income for the
nine-month period -- -- 30,199 30,199
--------- --------- ----------------- ---------
Balances, Jan. 2, 1999 $ 234 $ 214,810 $248,361 $463,405
========= ========= ================= =========
</TABLE>
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<PAGE>
(6) New Accounting Pronouncements:
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
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. For the Company, comprehensive
income consists principally of net income. However, it also consists of
translation of net assets held in foreign subsidiaries and other minor
items. This portion of comprehensive income is included in Note 5 as
"Other comprehensive income".
Also in June 1997, the FASB issued SFAS 131, "Disclosure About Segments
of an Enterprise and Related Information". This pronouncement
establishes standards for the way companies report information about
operating segments for 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 has adopted this pronouncement for the year ending April 3,
1999. Required disclosures, if any, will be reflected in the Company's
year end consolidated financial statements. It is anticipated that such
disclosures will not have a significant impact on the consolidated
financial statements.
(7) Contingencies:
Patent and other proprietary rights infringement claims are common in
the semiconductor industry. The Company is exposed to certain asserted
and unasserted potential claims. The Company has recently received
notification of possible infringements of certain patents. There can be
no assurance that, with respect to these or any other such claims made
against the Company, the Company could obtain licenses on terms or
under conditions that would not have a material adverse effect on the
Company.
(8) Reclassification:
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 facility in Taiwan, Republic
of China. Under the terms of the agreements, the Company invested
approximately $49.7 million for an approximate 10% interest in UICC
and the right to receive a percentage of the facility's wafer
production at market prices.
The portion of this investment made during the nine month period
ended December 27, 1997, approximately $10.3 million, has been
reclassified in the accompanying Consolidated Statement of Cash
Flows as a component of cash flows from investing activities.
Previously, this investment was classified as a component of
cash flows from operating activities.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in the section
entitled "Factors Affecting Future Results" and elsewhere in this report.
RESULTS OF OPERATIONS
REVENUE
Revenue was $50.2 million in the third quarter of fiscal 1999, as compared to
$60.0 million in the third quarter of fiscal 1998. Revenue for the first nine
month period of fiscal 1999 was $146.3 million, as compared to $185.7 million
for the first nine month period of 1998. Revenue in the third quarter and
first nine month period of fiscal 1999 as compared to the same fiscal periods
in fiscal 1998 was negatively impacted by a decline in demand in Asia due to
the economic crisis in that region, and a decline in demand from the
computing and communications end markets. The majority of the Company's
revenue in the fiscal periods presented was derived from the sale of products
that address the in-system programmable ("ISP-TM-") segment of the CMOS
programmable logic market. Revenue from these products comprised
approximately 73% and 72% of total revenue for the third quarter and first
nine month period of fiscal 1999, respectively, as compared to 67% and 63% in
the third quarter and first nine month period of fiscal 1998.
Revenue from export sales was 51% in the third quarter of fiscal 1999 and
the third quarter of fiscal 1998. For the first nine month period of fiscal
1999, revenue from export sales was 50%, as compared to 51% for the first
nine month period of fiscal 1998. The Company expects export sales to continue
to represent a significant portion of revenue. See "Factors Affecting Future
Results".
Overall average selling prices decreased slightly in the third quarter of fiscal
1999 as compared to the third quarter of fiscal 1998. For the first nine month
period of fiscal 1999, overall average selling prices increased slightly when
compared to the first nine month period of fiscal 1998. Fluctuations in overall
average selling prices were due primarily to product mix changes. 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 achieve revenue growth is in large part dependent on the continued
development, introduction and market acceptance of new products. See "Factors
Affecting Future Results".
GROSS MARGIN
The Company's gross margin as a percentage of revenue was 61.0% in the third
quarter of fiscal 1999 as compared to 60.3% in the third quarter of fiscal
1998. For the first nine month period of fiscal 1999, the gross margin was
60.6%, an increase from 59.7% in the first nine month period of fiscal 1998.
This increase in gross margin percentages was primarily due to product mix
changes resulting from an increase in the percentage of revenue from ISP
products and reductions in the Company's manufacturing costs. Reductions in
manufacturing costs were primarily due to learning curve related cost
improvements passed on by contract manufacturers, internal yield improvements
and the migration of products to more advanced technologies and smaller die
sizes.
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<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expense increased by approximately $0.5 million, or six
percent, in the third quarter of fiscal 1999 when compared to the third quarter
of fiscal 1998, and increased by $0.5 million, or two percent, in the first nine
month period of fiscal 1999 when compared to the first nine month period of
fiscal 1998. As a percentage of revenue, this expense increased to approximately
17% in the third quarter and first nine month period of fiscal 1999 from
approximately 13% in the third quarter and first nine month period of fiscal
1998. This increase in spending resulted primarily from the development of new
products, including the Company's new 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 product leadership in its
existing product families and to provide innovative new product offerings, and
therefore expects to continue to make significant investments in research and
development in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased by approximately $0.9
million, or eight percent, in the third quarter of fiscal 1999 when compared to
the third quarter of fiscal 1998, and decreased by $2.9 million, or 10%, in the
first nine month period of fiscal 1999 when compared to the first nine month
period of fiscal 1998. This decrease was primarily due to lower sales
commissions associated with the lower revenue levels. Selling, general and
administrative expense represented approximately 19% of revenue for the fiscal
1999 periods, as compared to between 16% and 17% of revenue for the fiscal 1998
periods.
OTHER INCOME, NET
Interest and other income (net of expense) was approximately flat in the third
quarter and first nine month period of fiscal 1999, respectively, as compared to
the third quarter and first nine month period of fiscal 1998 as higher cash
balances were offset by lower yields on invested balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 32.5% for the third quarter and first nine
month period of fiscal 1999 as compared to 34.0% for the third quarter and first
nine month period of fiscal 1998. This decrease was due primarily to a change in
the proportion of tax-exempt investment income as a percentage of the Company's
overall net 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.
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
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<PAGE>
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, the ability to develop and
implement new process technologies, fluctuations in manufacturing yields, the
ability to achieve volume production at Seiko Epson's and the UMC Group's new
wafer fabs, substantial adverse currency exchange rate movements, the
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 in the past increased its
level of operating expenses and investment in manufacturing capacity in
anticipation of future growth in revenues, primarily from increased sales of
its new ISP products. To the extent that this revenue growth does not
materialize, the Company's operating results will 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 and make improvements to its existing products on a
timely basis that meet a market need at a competitive price with acceptable
margins. The success of new products, including the Company's new 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
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<PAGE>
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 ISP product families, and continued 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 ISP product families will continue to achieve market acceptance. If the
Company were unable to successfully define, develop and introduce competitive
new products in a timely manner, its future operating results would be adversely
affected.
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, sudden price fluctuations, general price erosion,
rapid rates of product obsolescence, periodic shortages of materials and
manufacturing capacity and variations in manufacturing costs and yields. The
Company's competitive position is 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
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<PAGE>
manufactured by either Seiko Epson in Japan or the UMC Group in Taiwan. A
significant interruption in supply from Seiko Epson, through Epson
Electronics America, Inc., Seiko Epson's affiliated U.S. distributor, or from
the UMC Group 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.
Export sales accounted for 50% and 51% of the Company's revenues for the
first nine months of fiscal 1999 and 1998, respectively. The Company believes
that export sales will continue to represent a significant percentage of
revenues. Export sales may continue to be adversely affected by regional
economic conditions such as the recent Asian economic crisis, or may be
affected by the imposition of governmental controls, export license
requirements, restrictions on the export of technology, political
instability, trade restrictions, changes in tariffs and difficulties in
staffing and managing foreign sales offices.
The Company currently depends on Asian manufacturers -- Seiko Epson, a Japanese
company, and the UMC Group, a group of affiliated Taiwanese companies -- for the
manufacture of all its finished silicon wafers. In addition, after wafer
manufacturing is completed and each wafer is tested, products are assembled by
Asian 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 Asian subcontractors, the economic, financial,
social and political situation in Asia has recently been volatile. Specific
financial difficulties, prolonged work stoppages or other difficulties
experienced by the Company's subcontractors as a result of the conditions in
Asia may disrupt the Company's ability to manufacture and assemble its products
and would have a material adverse effect on the Company's results of operations.
Furthermore, general 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
E(2)CMOS-Registered Trademark- process technology. Successful implementation
of the Company's proprietary E(2)CMOS process technology, UltraMOS-Registered
Trademark-, requires a high degree of coordination between the Company and
its wafer supplier. Therefore, significant lead time is required to reach
volume production at a new wafer supply location such as Seiko Epson's or the
UMC Group's new wafer fabs. Accordingly, there can be no assurance that
volume production at Seiko Epson's or the UMC Group's new 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
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<PAGE>
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 depends upon assembly contractors to package and test its devices
with acceptable quality, yield and delivery schedules. The majority of the
Company's revenues are derived from products assembled in fine-pitched packages.
The assembly and testing of semiconductor devices in advanced fine-pitch
packages is a complex process that requires a high degree of technical skill,
state-of-the-art equipment and effective cooperation between the assembly
contractor and the device manufacturer to produce acceptable quality and yields.
Raw material impurities, errors in any step of the assembly process, defects in
lead frames used to attach devices to the package and other factors can cause
substantial problems in yield, quality and reliability of packaged products. 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, such
product problems and delivery delays. Any prolonged inability to obtain adequate
yields or deliveries of quality products could adversely affect the Company's
operating results.
The Company expects that, as is customary in the semiconductor business, it will
in the future seek to convert its fabrication process technology to larger wafer
sizes, to smaller device geometries or to new or additional suppliers in order
to maintain or enhance its competitive position. Such conversions entail
inherent technological risks that could adversely affect yields and delivery
times and could have a material adverse impact on the Company's operating
results. To a considerable extent, the Company's ability to execute its
strategies will depend upon its ability to maintain and enhance its advanced
process technologies. As the Company does not presently operate its own wafer
fabrication or process development facility, the Company depends upon silicon
wafer manufacturers to provide the facilities and support for its process
development. In light of this dependency and the intensely competitive nature of
the semiconductor industry, there is no assurance that either process technology
development or timely product introduction can be sustained in the future.
In addition, other unanticipated changes in or disruptions of the Company's
wafer supply arrangements could reduce product availability, increase cost or
impair product quality and reliability. Many of the factors that could result in
such changes are beyond the Company's control. For example, a disruption of
operations at Seiko Epson's or the UMC Group'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.
The value of the dollar with respect to the yen has fluctuated in the past.
There is no assurance that the value of the dollar with respect to the yen will
be stable in the future. Any substantial and prolonged deterioration of
dollar-yen exchange rates could have a material adverse effect on the Company's
results of operations.
-14-
<PAGE>
Worldwide manufacturing capacity for silicon wafers is limited and inelastic.
Therefore, significant increases in demand or interruptions in supply could
adversely affect the Company. In the past, the Company has experienced delays in
obtaining wafers and capacity commitments. 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, Epson
Electronics America, Inc. and the UMC Group 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, Epson Electronics America, Inc. or the UMC Group
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.
The Company's success depends in part on its proprietary technology. While the
Company attempts to protect its proprietary technology through patents,
copyrights and trade secrets, it believes that its success will depend more upon
technological expertise, continued development of new products, and successful
market penetration of its silicon and software products. There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. The
Company currently has a number of United States and foreign patents and patent
applications. There can be no assurance that the claims allowed on any patents
held by the Company will be sufficiently broad to protect the Company's
technology, or that any patents will issue from any application pending or filed
by the Company. In addition, there can be no assurance that any patents issued
to the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
The semiconductor industry is generally characterized by vigorous protection and
pursuit of intellectual property rights and positions, which have on occasion
resulted in protracted litigation that utilizes cash and management resources,
which can have a significant adverse effect on operating results. 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 information by the Company's computerized systems,
including interfaces to its business partners. The Company has established a
project team to manage Year 2000 activities and divided the project into three
phases: assessment, compliance and testing. At present, the Company is generally
in the compliance phase. The Company plans to complete its Year 2000 compliance
and testing effort by the third calendar quarter of 1999 and does not anticipate
that resolution of Year 2000 issues will have a material adverse impact on the
Company's financial position or operating results. Accordingly, the Company has
not yet established formal contingency plans. However, in the event the Company,
or any of its critical business partners is not successful in addressing Year
2000 issues
-15-
<PAGE>
on a timely basis, there could be a material adverse impact on the Company's
operating results. Management believes the most reasonably likely worst case
scenario is a temporary disruption in supplier deliveries or customer
shipments. If severe disruptions occur in these areas and are not corrected
in a timely manner, a revenue or profit shortfall may result in the first
half of calendar year 2000. The status of the Company's Year 2000 effort by
area is as follows:
INTERNAL BUSINESS SOFTWARE AND SYSTEMS: The Company has completed an inventory
and assessment of its internal business software and systems, including
electronic business partner interfaces. At present, two main compliance projects
are ongoing. During 1998, as part of a business modernization effort, the
Company purchased an Enterprise Resource Planning (ERP) package that the vendor
has contractually stipulated to be Year 2000 compliant. Implementation of this
ERP package is currently in process and is scheduled for completion during the
first half of calendar 1999. The Company is also modifying its internally
developed inventory management system to achieve Year 2000 compliance.
Modification of the inventory management system is scheduled for completion
during the first half of calendar 1999. The total combined cost of these two
projects is not expected to exceed $2 million. Based on current schedules, the
Company expects its internal business software and systems to be in compliance
before the start of calendar year 2000. However, if due to unforeseen
circumstances compliance projects are not successful or are not completed on a
timely basis, Year 2000 issues could have a material adverse impact on the
Company's operating results.
INTERNAL EQUIPMENT AND NON-BUSINESS SOFTWARE: The Company has completed an
inventory and assessment of its internal equipment and non-business software. At
present, the Company is working with suppliers of non-compliant equipment and
software in order to resolve identified Year 2000 issues. The cost of this
activity is not expected to be material. Based on current schedules, the Company
expects to complete this activity and achieve compliance of its equipment and
non-business software by the first half of calendar 1999. However, if due to
unforeseen circumstances this activity is not successful or is not completed on
a timely basis, Year 2000 issues could have a material adverse impact on the
Company's operating results.
BUSINESS PARTNER NON-COMPLIANCE: The Company has identified its critical
suppliers and is in the process of contacting them to ascertain the extent of
their Year 2000 readiness. At present, all critical suppliers have informally
assured the Company that they will be compliant prior to the Year 2000. In the
event that any of the Company's critical suppliers fail to adequately address
their Year 2000 exposure on a timely basis, and this exposure results in a
significant disruption in the operations of that supplier, there could be a
material adverse impact on the Company's operating results. The Company plans to
request formal compliance statements from critical suppliers prior to July 1999.
Based on the responses to this request, the Company will develop supplier
specific contingency plans at that time. Additionally, there can be no assurance
that the Company's customers, distributors, financial service and utility
providers will completely address all their Year 2000 issues on a timely basis.
In the event that Year 2000 issues create significant disruption in the
operations of any of the Company's major customers, distributors, financial
service or utility providers, there could be a material adverse impact on the
Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 1999, the Company's principal source of liquidity was
-16-
<PAGE>
$299.2 million of cash and short-term investments, an increase of
approximately $32.1 million from the balance of $267.1 million at March 28,
1998. This increase was primarily the result of cash generated from
operations. The Company also has available an unsecured $10 million demand
bank credit facility with interest due on outstanding balances at a money
market rate. This facility has not been used.
Accounts receivable decreased by approximately $9.7 million, or 34%, versus
amounts recorded at March 28, 1998, reflecting decreased shipments associated
with lower revenue levels in the third quarter of fiscal 1999. Inventories
decreased by $3.6 million, or 16%, versus amounts recorded at March 28, 1998,
due to decreased production in response to lower revenue levels in the first
nine months of fiscal 1999. Property and equipment, net, increased by
approximately $6.8 million, or 19%, versus amounts recorded at March 28,
1998, primarily due to construction in progress of additional corporate
facilities. Accounts payable and accrued expenses remained approximately flat
versus balances recorded at March 28, 1998, as decreased inventory
expenditures were offset by the timing of payments for other expenses.
Deferred income on sales to distributors decreased approximately $4.1
million, or 20%, associated with decreased inventory and resale levels at the
distributors. Income taxes payable increased by $0.5 million, or 12%, as
compared to the balance at March 28, 1998, primarily due to the timing of tax
deductions and payments.
The majority of the Company's silicon wafer purchases are currently denominated
in Japanese yen. The Company maintains yen-denominated bank accounts and bills
its Japanese customers in yen. The yen bank deposits utilized to hedge
yen-denominated wafer purchases are accounted for as identifiable hedges against
specific and firm wafer purchases.
The Company entered into a series of agreements with 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 October 1997, the UICC foundry
was substantially destroyed by fire. UMC, the majority owner of UICC, has
informed the Company that this loss has been fully covered by an insurance
settlement and additional investment income. Presently, an evaluation is under
way which, when finished, will determine the estimated completion date of the
new foundry. Further, alternative foundry capacity arrangements have been made
available to the Company. Based on these assurances from UMC, management
believes the Company will not be materially adversely effected by this event.
In March 1997, the Company entered into an advance payment production agreement
with Seiko Epson and its affiliated U.S. distributor, Epson Electronics America,
Inc., under which it agreed to advance approximately $86 million, payable upon
completion of specific milestones, to Seiko Epson to finance construction of an
eight-inch sub-micron 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 Epson Electronics America, Inc. pursuant to purchase agreements with
Epson Electronics America, Inc.
-17-
<PAGE>
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 fiscal 1997. During fiscal 1998, the Company made two additional
payments aggregating approximately $34.2 million. The balance of the advance
payment is currently anticipated to be made in two installments during fiscal
2000.
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 January
2, 1999, the Company had repurchased 337,500 shares at an aggregate cost of
approximately $9.2 million.
The Company currently anticipates capital expenditures of approximately $20
million for the fiscal year ending April 3, 1999.
The Company believes its existing sources of liquidity and expected future cash
generated from operations will provide adequate funding for the Company's
anticipated cash needs for the next twelve months, including the anticipated
required payments to Seiko Epson.
In an effort to secure additional wafer or assembly 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 or assembly manufacturers in exchange for committed
capacity. To the extent the Company pursues any such financial additional
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.
-18-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of Net Income Per Share (1)
27 Financial Data Schedule for Nine Months Ended
January 2, 1999
(b) No reports on Form 8-K were filed during the three months
ended January 2, 1999.
(1) Incorporated by reference to Note 3 to the
Consolidated Financial Statements in the
Company's quarterly report on Form 10-Q for the
three months ended January 2, 1999.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION
Date: February 16, 1999 /s/ Stephen A. Skaggs
------------------ -----------------------------------
By: Stephen A. Skaggs, Senior Vice
President, Chief Financial Officer and
Secretary
-20-
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