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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
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FORM 10-K/A
AMENDMENT NO. 1
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 APRIL 3, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
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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) 268-8000
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 17, 1999, the aggregate market value of the shares of voting
stock of the Registrant held by non-affiliates was approximately $821 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 17, 1999, 23,711,652 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
April 3, 1999 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 1999 Annual Meeting of Stockholders to be
held on August 9, 1999 are incorporated by reference in Part III hereof.
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LATTICE SEMICONDUCTOR CORPORATION
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT
TABLE OF CONTENTS
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ITEM OF FORM 10-K PAGE
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PART I
Item 1 -- Business.................................................................. 1
Item 2 -- Properties................................................................ 14
Item 3 -- Legal Proceedings......................................................... 14
Item 4 -- Submission of Matters to a Vote of Security Holders....................... 15
Item 4(a) -- Executive Officers of the Registrant...................................... 15
PART II
Item 5 -- Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................. 17
Item 6 -- Selected Financial Data................................................... 17
Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Item 7(a) -- Quantitative and Qualitative Disclosures about Market Risk................ 17
Item 8 -- Financial Statements and Supplementary Data............................... 18
Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 18
PART III
Item 10 -- Directors and Executive Officers of the Registrant........................ 18
Item 11 -- Executive Compensation.................................................... 19
Item 12 -- Security Ownership of Certain Beneficial Owners and Management............ 19
Item 13 -- Certain Relationships and Related Transactions............................ 19
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 19
Signatures......................................................................................... 22
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 designs, develops and markets high
performance programmable logic devices ("PLDs") and related development system
software. We are the inventor and world's leading supplier of in-system
programmable ("ISP-TM-") PLDs. We introduced ISP devices to the industry in
1992. 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. Our products are sold worldwide through an
extensive network of independent sales representatives and distributors,
primarily to original equipment manufacturers ("OEMs") of communication,
computing, industrial and military systems. Lattice was founded in 1983 and is
based in Hillsboro, Oregon.
In June 1999, we acquired Vantis Corporation from Advanced Micro Devices
("AMD") for approximately $500 million in cash. The transaction is being
accounted for under the purchase method in our consolidated financial statements
beginning with the period ended July 3, 1999. We have also agreed with AMD to
sign a mutual election under the Internal Revenue Code that will allow us to
deduct the purchase price for tax purposes over a 15-year period. We expect the
primary benefits from this acquisition will be an acceleration of our ability to
develop new products and technologies and an improvement of our ability to reach
and service a greater number of customers.
While Vantis will remain a wholly-owned subsidiary, its business will be
integrated into our operations. See "Factors Affecting Future Results." The
business of Vantis is substantially similar to our business. Prior to the
acquisition, Vantis relied upon AMD for most manufacturing activities as well as
certain financial and administrative services. As a part of our acquisition
agreement, AMD has agreed to continue to perform many of these services for
specific time periods. See "Licenses and Agreements--AMD."
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 digital electronic
equipment including communication, computing, industrial and military systems.
According to WSTS, a semiconductor industry association, logic accounted for
approximately 28% of the estimated $109 billion worldwide digital integrated
circuit market in 1998. 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.
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Manufacturers of electronic equipment 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 our own, are reprogrammable, meaning
that the logic configuration can be modified, if needed, after the initial
programming. In-system programmable PLDs, first pioneered by us, 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.
The PLD market has two primary segments: 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 the complex PLD ("CPLD")
and field programmable gate array ("FPGA") architectures.
Products based on these alternative high-density PLD architectures are
generally optimal for different types of logic functions, although many logic
functions can be implemented using either architecture. CPLDs are characterized
by a regular building block structure of wide-input logic cells, called
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. We believe 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
We believe that electrically erasable CMOS ("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 our ISP products.
IN-SYSTEM PROGRAMMABLE (ISP) PRODUCTS AND TECHNOLOGY
We pioneered the development of ISP products which utilize 5-volt or
3.3-volt programming signals and, as a result, can be configured and
reconfigured by a system designer without being removed from the printed circuit
board. Standard E2CMOS programmable logic devices require a 12-volt programming
signal and therefore must be removed from the printed circuit board and
programmed using specialized hardware. ISP devices offer enhanced flexibility
versus standard PLDs and provide significant customer benefits. 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.
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PRODUCTS
ISP PRODUCTS
SILICON. We first entered the ISP market in 1992 and currently offer eleven
distinct families of ISP products, each consisting of multiple devices. We are
currently shipping over 300 performance, package and temperature range
combinations of ISP products.
ispLSI-Registered Trademark- 1000/E: Our 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 2000E/VE: Introduced in 1998, the SuperFAST-TM- 5-volt ispLSI 2000E
and 3.3-volt ispLSI 2000VE families utilize an architecture designed for
input/output ("I/O") intensive applications and are the industry's fastest
CPLDs. These families provides performance of up to 200 MHz (3.5 nanosecond
propagation delay), densities of 1,000 to 8,000 gates and are available in 44-to
208-pin standard surface mount packages.
ispLSI 3000/E: The ispLSI 3000/E family incorporates an enhanced CPLD
architecture to target higher density applications while retaining high
performance. This family provides densities of 7,000 to 20,000 gates,
performance of up to 125 MHz (7.5 nanosecond propagation delay), and is
available in 160- to 432-pin surface mount packages.
ispLSI 5000V: Introduced in 1998, the SuperWIDE-TM- 3.3-volt ispLSI 5000V
family is based on an entirely new CPLD architecture that incorporates a
68-input logic block. This innovative logic block architecture, the industry's
widest, makes the 5000V family an ideal solution for 32-bit and emerging 64-bit
control logic applications. This family provides densities of 12,000 to 24,000
gates, performance of up to 125 MHz (7.5 nanoseconds propagation delay), and is
available in 192- to 388-pin surface mount packages.
ispLSI 8000: Introduced in 1998, the SuperBIG-TM- 5-volt ispLSI 8000 family
utilizes an entirely new hierarchical CPLD architecture designed to efficiently
implement large, register intensive, logic applications. This family provides
densities of 25,000 to 50,000 gates, performance of up to 110 MHz (8.5
nanoseconds propagation delay), and is available in 272- to 492-pin surface
mount packages.
MACH-Registered Trademark- 1/2: The MACH 1 and MACH 2 product families
represent the first and second generation CPLD product architectures of Vantis
Corporation. These families provides performance of up to 180 MHz (5 nanosecond
propagation delay), densities of 1,000 to 5,000 gates and are available in
44- to 100-pin standard surface mount packages.
MACH 4/LV: First introduced in 1993 by Vantis Corporation, the MACH 4/LV
family incorporates an enhanced CPLD architecture and was designed for speed,
power, ease-of-use and pin-locking. This family provides performance of up to
110 MHz (7.5 nanosecond propagation delay), densities of 1,000 to 10,000 gates
and is available in 44- to 256-pin standard surface mount packages.
MACH 5/LV: First introduced in 1996 by Vantis Corporation, the MACH 5/LV
family incorporates an enhanced CPLD architecture combined with a hierarchical
interconnect scheme and was designed for speed, power and high density. This
family provides performance of up to 180 MHz (5 nanosecond propagation delay),
densities of 5,000 to 20,000 gates and is available in 100- to 352-pin standard
surface mount packages.
ispGAL-Registered Trademark-: This proprietary 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.
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ispGDX-TM-: This family extends in-system programmability to the circuit
board level using an innovative 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.
We plan to continue to introduce new families of ISP products, as well as
improve the performance and reduce the manufacturing cost of our existing
product families based on market needs.
SOFTWARE DEVELOPMENT TOOLS.
All Lattice ISP products are supported by ispEXPERT-TM-, our third
generation software development tool suite. Supporting both the PC and UNIX
platforms, ispEXPERT allows a customer to enter, verify and synthesize a design,
perform logic simulation and timing analysis, assign I/O pins and critical speed
paths, debug and floorplan a design, execute automatic place and route tasks and
download a program to an ISP device. Seamlessly integrated with third-party
electronic design automation ("EDA") environments, ispEXPERT leverages
customers' prior investments in products offered by Aldec, Cadence, Mentor
Graphics, OrCAD, Synopsys, Synplicity, Viewlogic and Veribest.
All ISP products originally introduced by Vantis Corporation are currently
supported by DesignDirect-TM-, a second generation software development tool
suite. Supporting the PC platform, DesignDirect allows a customer to enter,
verify and synthesize a design, perform logic simulation and timing analysis,
assign I/O pins and critical speed paths, debug a design, execute automatic
place and route tasks and download a program to an ISP device. Integrated with
third-party EDA environments, DesignDirect leverages customers' prior
investments in products offered by Cadence, Mentor Graphics, OrCAD, Synopsys,
Synplicity and Viewlogic.
In the future, we plan to integrate our software development tools while
continuing to enhance and expand their capabilities.
We also provide a variety of software algorithms that support in-system
programming of the Company's ISP devices via multiple formats and mechanisms.
These software products include ispCODE-TM-, Turbo ispDOWNLOAD-TM-,
ispREMOTE-TM-, ispATE-TM-, ispSVF-TM- and ispVM-TM-.
NON-ISP PRODUCTS
We offer the industry's broadest line of low-density CMOS PLDs based on our
20 families of GAL and PALCE-Registered Trademark- products offered in over 200
speed, power, package and temperature range combinations. PALCE products were
originally introduced by Vantis Corporation and are typically compatible with
GAL products. GAL and PALCE devices range in complexity from approximately 200
to 1,000 logic gates and are typically assembled in 20-, 24- and 28-pin standard
dual in-line packages and in 20- and 28-pin standard plastic leaded chip carrier
packages. The Company offers standard 610, 16V8, 20V8, 22V10, 20RA10, 20XV10 and
26V12 architectures in a variety of speed grades, with propagation delays as low
as 3.5 nanoseconds, the highest performance in the industry. In addition, we
offer several proprietary extension architectures, the 6001/2, 16VP8, 16V8Z,
18V10, 20VP8, 20V8Z, 22V10Z, 24V10 and 29M16, each of which is optimized for
specific applications. We also offer a full range of 3.3-volt standard
architectures, the 16LV8, 20LV8, 22LV10 and 26CLV12 in a variety of speed
grades, with propagation delays as low as 3.5 nanoseconds, the highest
performance in the industry.
Our non-ISP products are supported by industry standard software and
hardware development tools marketed by independent manufacturers specifically
for PLD applications.
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PRODUCT DEVELOPMENT
We place substantial emphasis on new product development and believe that
continued investment in this area is required to maintain our competitive
position. See "Factors Affecting Future Results." Our product development
activities emphasize new proprietary ISP products, enhancement of existing
products and process technologies and improvement of software development tools.
Product development activities occur in Hillsboro, Oregon; Silicon Valley,
California; Austin, Texas; Colorado Springs, Colorado; Corsham, England and
Shanghai, China.
Research and development expenses were $27.8 million, $32.0 million and
$33.2 million in fiscal years 1997, 1998 and 1999, respectively. We expect to
continue to make significant future investments in research and development.
OPERATIONS
We do not manufacture our own silicon wafers and have historically
maintained strategic relationships with large semiconductor manufacturers to
source our finished silicon wafers. This allows our internal resources to be
focused on product, process and market development. In addition, all of our
assembly operations are performed by outside suppliers. We do perform certain
test operations and reliability and quality assurance processes internally. We
have achieved ISO 9001 quality certification, an indication of our high internal
operational standards.
WAFER FABRICATION
The majority of our silicon wafer requirements have historically been
supplied by Seiko Epson Corporation ("Seiko Epson") in Japan pursuant to an
agreement with Epson Electronics America, Inc. ("EEA", formerly SMOS Systems,
Inc. "S MOS"), an affiliated U.S. distributor of Seiko Epson. See "Licenses and
Agreements--Seiko Epson/S MOS." We negotiate wafer volumes, prices and terms
with Seiko Epson and EEA on a periodic basis. We also receive silicon wafers
from the United Microelectronics Corporation Group of affiliated companies ("UMC
Group") 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 Group." Currently, the
substantial majority of the silicon wafers for Vantis Corporation products are
manufactured by AMD pursuant to an agreement first entered into in 1996 and
subsequently amended and restated at the time of our acquisition of Vantis. See
"Licenses and Agreements--AMD." A significant interruption or shortage in our
wafer supply from Seiko Epson through EEA, the UMC Group, or AMD would have a
material adverse effect on our business. A significant or unexpected
deterioration in the silicon wafer quality or yield levels achieved by Seiko
Epson, the UMC Group, or AMD could also have a material adverse effect on our
business. See "Factors Affecting Future Results."
ASSEMBLY
After wafer fabrication and initial testing, we ship wafers to independent
subcontractors for assembly. During assembly, wafers are separated into
individual die and encapsulated in plastic or ceramic packages. Presently, we
have qualified long-term assembly partners in Hong Kong, Malaysia, the
Philippines, South Korea, Taiwan and Thailand. See "Factors Affecting Future
Results."
TESTING
We electrically test 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, Taiwan, Thailand and the United States.
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MARKETING, SALES AND CUSTOMERS
We sell our products directly to end customers through a network of
independent manufacturers' representatives and indirectly through a network of
independent distributors. We also employ a direct sales management and field
applications engineering organization to support our end customers and indirect
sales resources. Our end customers are primarily original equipment
manufacturers in the fields of communication, computing, industrial and military
systems.
At April 3, 1999, we utilized 21 manufacturers' representatives and four
distributors in North America. Arrow Electronics, Inc., Avnet, Inc. and Marshall
Industries provide full distribution coverage, while Future Electronics provides
regional distribution coverage in Canada. We have also established export sales
channels in over 30 foreign countries through a network of over 30 sales
representatives and distributors. Approximately one-half of our North American
sales and the majority of our export sales are made through distributors.
We protect each of our North American distributors and some of our foreign
distributors against reductions in published prices, and expect to continue this
policy in the foreseeable future. We also allow returns from these distributors
of unsold products under certain conditions. For these reasons, we do not
recognize revenue until products are resold by these distributors.
We provide technical and marketing support to our end customers with
engineering staff based at our headquarters, design centers and selected field
sales offices. We maintain numerous domestic and international field sales
offices in major metropolitan areas.
Export sales accounted for 49%, 51% and 50% of our total revenue in fiscal
1997, 1998 and 1999, respectively. Both export and domestic sales are
denominated in U.S. dollars, with the exception of sales to Japan, which are
dominated in yen. If our export sales decline significantly there would be a
material adverse impact on our business. See "Factors Affecting Future Results."
Our products are sold to a large and diverse group of customers. No
individual end customer accounted for more than 10% of total revenue in fiscal
1997, 1998 or 1999. No export sales to any individual country accounted for more
than 10% of total revenue in fiscal 1997, 1998 or 1999.
BACKLOG
Our backlog of scheduled and released orders as of April 3, 1999 was
approximately $30.4 million as compared to approximately $31.8 million as of
March 28, 1998. Our backlog consists of direct OEM and distributor orders
scheduled for delivery within the next 90 days. Distributor orders accounted for
the majority of the backlog in both periods. Direct OEM customer orders may be
changed, rescheduled or cancelled under certain circumstances without penalty
prior to shipment. Additionally, distributor orders generally may be changed,
rescheduled or cancelled without penalty prior to shipment. Furthermore,
distributor shipments are subject to rights of return and price adjustment.
Revenue associated with distributor shipments is not recognized until the
product is resold to an end customer. In recent periods, the majority of our
revenue has resulted from orders placed and filled within the same period
("turns orders"). By definition, turns orders are not captured in a backlog
measurement made at the beginning of a period. We do not anticipate a
significant change in this business pattern. For all these reasons, backlog as
of any particular date should not be used as a predictor of revenue for any
future period.
COMPETITION
The semiconductor industry is intensely competitive and characterized by
rapid rates of technological change, product obsolescence and price erosion. Our
current and potential competitors include a broad range of semiconductor
companies from large, established companies to emerging
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companies, many of which have greater financial, technical, manufacturing,
marketing and sales resources.
The principal competitive factors in the PLD market include 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 density, 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. We believe that we compete favorably with respect to
each of these factors. We intend to continue to address these competitive
factors by working to continually introduce product enhancements and new
products, by seeking to establish our products as industry standards in their
respective markets, and by working to reduce the manufacturing cost of our
products.
In the ISP PLD market, we primarily compete directly with Altera and Xilinx,
both of whom offer competing products. We also compete indirectly with other PLD
suppliers as well as other semiconductor companies who provide non-PLD based
logic solutions. Although to date we have not experienced significant
competition from companies located outside the United States, such companies may
become a more significant competitive factor in the future. Competition may also
increase as we and our current competitors seek to expand our markets. Any such
increases in competition could have a material adverse effect on our operating
results. See "Factors Affecting Future Results."
PATENTS
We seek to protect our 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 our intellectual property rights or that measures we
take to protect our technology will be effective. See "Factors Affecting Future
Results."
We hold numerous domestic, European and Japanese patents and have 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 we believe that our patents have value,
there can be no assurance that our patents, or any additional patents that may
be issued in the future, will provide meaningful protection from competition. We
believe our success will depend primarily upon the technical expertise,
experience, creativity and the sales and marketing abilities of our personnel.
Patent and other proprietary rights infringement claims are common in our
industry. There can be no assurance that, with respect to any claim made against
us, we could obtain a license on terms or under conditions that would not have a
material adverse effect on our business. See "Factors Affecting Future Results."
LICENSES AND AGREEMENTS
SEIKO EPSON/EPSON ELECTRONICS AMERICA, INC.
EEA, an affiliated U.S. distributor of Seiko Epson, has agreed to provide us
with manufactured wafers in quantities based on six-month rolling forecasts. We
have committed to buy certain minimum quantities of wafers per month. Wafers for
our products are manufactured in Japan at Seiko Epson's wafer fabrication
facilities and are delivered to us by EEA. Prices for the wafers obtained from
EEA are reviewed and adjusted periodically.
In July 1994, we entered into an advance production payment agreement with
Seiko Epson and EEA, under which we advanced to Seiko Epson $42 million during
fiscal 1995 to be used by Seiko
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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, we 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 EEA pursuant to a purchase agreement concluded with EEA. As of
April 3, 1999, all wafers pursuant to these agreements had been received.
In March 1997, we entered into a second advance production payment agreement
with Seiko Epson and EEA under which we agreed to advance approximately $85
million, payable upon completion of specific milestones, to Seiko Epson to
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 EEA
pursuant to purchase agreements concluded with EEA. We also have 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, we
made two additional payments aggregating approximately $34.2 million.
UMC GROUP
In September 1995, we entered into a series of agreements with UMC pursuant
to which we 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, we invested approximately $49.7 million between fiscal
1996 and fiscal 1998 for an approximate 10 percent equity interest in UICC and
the right to purchase a percentage of the facility's wafer production at market
prices.
In October 1996, we entered into an agreement with Utek Corporation, a
public Taiwanese company in the wafer foundry business that became affiliated
with the UMC Group in 1998, pursuant to which we agreed to make a series of
equity investments in Utek under specific terms. In exchange for these
investments we received the right to purchase a percentage of Utek's wafer
production. Under this agreement we have invested approximately $17.5 million in
three separate installments and currently own approximately 2.5 percent of the
outstanding equity of Utek.
In June 1999, the Board of Directors of UICC and the Board of Directors of
UMC voted in favor of merging UICC into UMC. Also in June 1999, the Board of
Directors of Utek and the Board of Directors of UMC voted in favor of merging
Utek into UMC. The matter is currently scheduled for a UMC shareholder vote in
July 1999. If the shareholder vote is successful and the merger is subsequently
approved by Taiwanese authorities we will receive approximately 60 million
shares of UMC stock in exchange for our equity interests in UICC and Utek. After
the merger, the Company expects to own less than one percent of UMC's common
stock. We have also received assurance from UMC management that our capacity
rights will be preserved after the merger. UMC shares trade on the Taiwanese
stock exchange. At the current UMC market price and NT$ exchange rate, our
prospective UMC equity ownership would have a market value of approximately $115
million. We have no plans to liquidate this investment.
AMD
In June 1999, as part of our acquisition of Vantis, we entered into a series
of agreements with AMD to support the continuing operations of Vantis.
8
<PAGE>
AMD has agreed to provide us with finished silicon wafers through September
2003 in quantities based either on a rolling six-month or an annual forecast. We
have committed to buy certain minimum quantities of wafers and AMD has committed
to supply certain quantities of wafers during this period. Wafers for our
products are manufactured in the Unites States at multiple AMD wafer fabrication
facilities. Prices for these wafers will be reviewed and adjusted periodically.
AMD has also agreed to provide us with certain administrative services
through September 2000. These services had been provided to Vantis prior to our
acquisition and include information technology, finance and accounting, and
certain engineering and quality support activities. These services may be
terminated, at our option, prior to September 2000 with one-month notice. Prices
for services are consistent with prices paid by Vantis immediately prior to our
acquisition.
We have also entered into an agreement with AMD pursuant to which we have
cross-licensed Vantis patents with AMD patents, having an effective filing date
of June 1999, related to PLD products. This cross-license was made on a
worldwide, non-exclusive and royalty-free basis.
FACTORS AFFECTING FUTURE RESULTS
Notwithstanding the objectives, projections, estimates and other
forward-looking statements in this Annual Report, our future operating results
will continue to be subject to quarterly variations based on a wide variety of
risks. These risks include, but are not limited to:
OUR WAFER SUPPLY COULD BE INTERRUPTED OR REDUCED AND RESULT IN A SHORTAGE OF
FINISHED PRODUCTS AVAILABLE FOR SALE.
We do not manufacture finished silicon wafers. Currently all our silicon
wafers are manufactured by Seiko Epson in Japan; the UMC Group, a group of
affiliated companies in Taiwan; and AMD in the United States. If Seiko Epson,
through its U.S. affiliate Epson Electronics America, the UMC Group or AMD
significantly interrupts or reduces our wafer supply, our operating results
would be adversely affected.
In the past, we have experienced delays in obtaining wafers and in securing
supply commitments from our foundries. At present, we anticipate that our supply
commitments are adequate. However, these existing supply commitments may not be
sufficient for us to satisfy customer demand in future periods. Additionally,
during times of capacity shortage, notwithstanding our supply commitments we may
still have difficulty in obtaining wafer deliveries consistent with the supply
commitments. We negotiate wafer prices and supply commitments on at least an
annual basis. If Seiko Epson, Epson Electronics America, the UMC Group or AMD
reduces our supply commitment or increases our wafer prices, and we cannot find
alternative sources of wafer supply, our operating results could be adversely
affected.
Many other factors that could disrupt our wafer supply are beyond our
control. Since worldwide manufacturing capacity for silicon wafers is limited
and inelastic, we could be adversely affected by significant industry wide
increases in overall wafer demand or interruptions in wafer supply.
Additionally, a disruption of Seiko Epson's, the UMC Group's or AMD's foundry
operations as a result of a fire, earthquake or other natural disaster would
disrupt our wafer supply and would have an adverse effect on our operating
results.
IF OUR FOUNDRY PARTNERS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE MAY FACE A
SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
We depend on our foundries to deliver reliable silicon wafers with
acceptable yields in a timely manner. As is common in our industry, we have
experienced wafer yield problems and delivery delays
9
<PAGE>
in the past. If our foundries are unable to produce silicon wafers that meet our
specifications, with acceptable yields, for a prolonged period, our operating
results could be adversely affected.
Substantially all of our revenues are derived from products based on a
specialized silicon wafer manufacturing process technology called E2CMOS-TM-.
The reliable manufacture of high performance E2CMOS semiconductor wafers is a
complicated and technically demanding process requiring:
- a high degree of technical skill;
- state-of-the-art equipment;
- the absence of defects in the masks used to print circuits on a wafer;
- the elimination of minute impurities and errors in each step of the
fabrication process; and
- effective cooperation between the wafer supplier and the circuit designer.
As a result, our foundries may experience difficulties in achieving
acceptable quality and yield levels when manufacturing our silicon wafers.
OUR PRODUCTS MAY NOT BE COMPETITIVE IF WE ARE UNSUCCESSFUL IN MIGRATING OUR
MANUACTURING PROCESSES TO MORE ADVANCED TECHNOLOGIES.
In order to develop new products and maintain the competitiveness of
existing products, we need to migrate to more advanced wafer manufacturing
processes that utilize larger wafer sizes and smaller device geometries. We may
also utilize additional foundries. Since we depend upon foundries to provide
their facilities and support for our process technology development, we may
experience delays in the availability of advanced wafer manufacturing process
technologies at existing or new wafer fabrication facilities. As a result,
volume production of our advanced E2CMOS-TM- process technologies at the new
fabs of Seiko Epson, the UMC Group or future foundries may not be achieved. This
could have an adverse effect on our operating results.
WE MAY BE UNSUCCESSFUL IN DEFINING AND DEVELOPING NEW PRODUCTS REQUIRED TO
MAINTAIN OR GROW OUR BUSINESS.
As a semiconductor company, we operate in a dynamic environment marked by
rapid product obsolescence. Our future success depends on our ability to
introduce new or improved products that meet customer needs while achieving
acceptable margins. If we fail to introduce these new products in a timely
manner or these products fail to achieve market acceptance, our business and
financial condition will be adversely affected.
The introduction of new products in a dynamic market environment presents
significant business challenges. Product development commitments and
expenditures must be made well in advance of product sales. The success of a new
product depends on accurate forecasts of long-term market demand and future
technology developments.
Our future revenue growth is dependent on market acceptance of our new
proprietary ISP-TM- product families and the continued market acceptance of our
proprietary software development tools. The success of these products is
dependent on a variety of specific technical factors including:
- successful product definition;
- timely and efficient completion of product design;
- timely and efficient implementation of wafer manufacturing and assembly
processes;
- product performance; and
- the quality and reliability of the product.
10
<PAGE>
If, due to these or other factors, our new products do not achieve market
acceptance, our business and financial condition will be adversely affected.
WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES INTEGRATING VANTIS CORPORATION.
Integration of Vantis has begun. If integration is unsuccessful, more
difficult or more time consuming than originally planned, we may incur
unexpected disruptions to our ongoing business. These disruptions may have an
adverse effect on our operations and financial results. Further, the following
specific factors may adversely affect our ability to integrate the business of
Vantis:
- We may experience unexpected losses of key employees or customers;
- We may experience difficulties or delays in conforming the standards,
processes, procedures and controls of our two businesses;
- We may experience unexpected costs and discover unexpected liabilities;
- We may not receive manufacturing support and administrative services from
Vantis' former parent corporation, AMD, at a level of quality and
timeliness consistent with the historical delivery of this support;
- We may not achieve expected levels of revenue growth, cost reduction and
profitability improvement; and
- We may not be able to coordinate our new product and process development
in a way which permits us to bring new technologies to the market in a
timely manner.
DETERIORATION OF CONDITIONS IN ASIA MAY DISRUPT OUR EXISTING SUPPLY ARRANGEMENTS
AND RESULT IN A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
Two of our three silicon wafer suppliers operate fabs located in Asia. Our
finished silicon wafers are assembled and tested by independent subcontractors
located in Hong Kong, Malaysia, the Philippines, South Korea, Taiwan and
Thailand. A prolonged interruption in our supply from any of these
subcontractors could have an adverse effect on our operating results.
Although we have yet not experienced significant supply interruptions, the
economic, financial, social and political situation in Asia has recently been
volatile. Financial difficulties, governmental actions or restrictions,
prolonged work stoppages or any other difficulties experienced by these
suppliers may disrupt our supply and could have an adverse effect on our
operating results.
Our 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 and may
not remain stable in the future. Future substantial deterioration of dollar-yen
exchange rates could have an adverse effect on our operating results.
EXPORT SALES ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES AND MAY DECLINE
IN THE FUTURE DUE TO ECONOMIC AND GOVERNMENTAL UNCERTAINTIES.
Our export sales are affected by unique risks frequently associated with
foreign economies including:
- changes in local economic conditions;
- exchange rate volatility;
- governmental controls and trade restrictions;
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<PAGE>
- export license requirements and restrictions on the export of technology;
- political instability;
- changes in tax rates, tariffs or freight rates;
- interruptions in air transportation; and
- difficulties in staffing and managing foreign sales offices.
For example, our export sales have recently been affected by the Asian
economic crisis. Significant changes in the economic climate in the foreign
countries where we derive our export sales could have an adverse effect on our
operating results.
IF OUR ASSEMBLY AND TEST SUBCONTRACTORS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE
MAY FACE A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
We rely on subcontractors to assemble and test our devices with acceptable
quality and yield levels. As is common in our industry, we have experienced
quality and yield problems in the past. If we experience prolonged quality or
yield problems in the future, there could be an adverse affect on our operating
results.
The majority of our revenue is derived from semiconductor devices assembled
in advanced packages. The assembly of advanced packages is a complex process
requiring:
- a high degree of technical skill;
- state-of-the-art equipment;
- the absence of defects in lead frames used to attach semiconductor devices
to the package;
- the elimination of raw material impurities and errors in each step of the
process; and
- effective cooperation between the assembly subcontractor and the device
manufacturer.
As a result, our subcontractors may experience difficulties in achieving
acceptable quality and yield levels when assembling and testing our
semiconductor devices.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINAIN OR GROW REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS.
The semiconductor industry is highly cyclical, to a greater extent than
other less dynamic or less technology-driven industries. In the past, our
financial performance has been negatively affected by significant downturns in
the semiconductor industry as a result of:
- the cyclical nature of the demand for the products of semiconductor
customers;
- general reductions in inventory levels by customers;
- excess production capacity; and
- accelerated declines in average selling prices.
If these or other conditions in the semiconductor industry occur in the
future, there could be an adverse effect on our operating results.
12
<PAGE>
OUR STOCK PRICE MAY CONTINUE TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS WHICH
MAY RESULT IN INVESTORS LOSING ALL OR PART OF THEIR INVESTMENT.
In recent years, the price of our common stock has fluctuated greatly. These
price fluctuations have been rapid and severe and have left investors little
time to react. The price of our common stock may continue to fluctuate greatly
in the future due to a variety of company specific factors, including:
- quarter to quarter variations in our operating results;
- shortfalls in revenues or earnings from levels expected by securities
analysts;
- announcements of technological innovations or new products by other
companies.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY.
The semiconductor industry is intensely competitive and many of our direct
and indirect competitors have substantially greater financial, technological,
manufacturing, marketing and sales resources. If we are unable to compete
successfully in this environment, our future results will be adversely affected.
The current level of competition in the programmable logic market is high
and may increase as our market expands. We currently compete directly with
companies that have licensed our products and technology or have developed
similar products. We also compete indirectly with numerous semiconductor
companies that offer products and solutions based on alternative technologies.
These direct and indirect competitors are established multinational
semiconductor companies as well as emerging companies. We also may experience
significant competition from foreign companies in the future.
WE MAY FAIL TO RETAIN OR ATTRACT THE SPECIALIZED TECHNICAL AND MANAGEMENT
PERSONNEL REQUIRED TO SUCCESSFULLY OPERATE OUR BUSINESS.
To a greater degree than most non-technology companies or larger technology
companies, our future success depends on our ability to attract and retain
highly qualified technical and management personnel. As a mid-sized company, we
are particularly dependent on a relatively small group of key employees.
Competition for skilled technical and management employees is intense within our
industry. As a result, we may not be able to retain our existing key technical
and management personnel. In addition, we may not be able to attract additional
qualified employees in the future. If we are unable to retain existing key
employees or are unable to hire new qualified employees, our operating results
could be adversely affected.
IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUR
FINANCIAL RESULTS AND COMPETITIVE POSITION MAY SUFFER.
Our success depends in part on our proprietary technology. However, we may
fail to adequately protect this technology. As a result, we may lose our
competitive position or face significant expense to protect or enforce our
intellectual property rights.
We intend to continue to protect our proprietary technology through patents,
copyrights and trade secrets. Despite this intention, we may not be successful
in achieving adequate protection. Claims allowed on any of our patents may not
be sufficiently broad to protect our technology. Patents issued to us also may
be challenged, invalidated or circumvented. Finally, our competitors may develop
similar technology independently.
Companies in the semiconductor industry vigorously pursue their intellectual
property rights. If we become involved in protracted intellectual property
disputes or litigation we may utilize substantial
13
<PAGE>
financial and management resources, which could have an adverse effect on our
operating results. We may also be subject to future intellectual property claims
or judgements. If these were to occur, we may not be able to obtain a license on
favorable terms or without our operating results being adversely affected.
YEAR 2000 COMPLIANCE
We are currently working to address the potential impact of the Year 2000 on
the processing of information by our computerized systems, including interfaces
to our business partners.
In June 1999, we completed our planned Year 2000 compliance activities with
respect to our products and internal systems, software, equipment and
facilities. Based solely on these activities, management believes that all
products and material internal systems, software, equipment and facilities are
currently Year 2000 compliant. We do not anticipate that potential Year 2000
issues will have a material adverse impact on our financial position or
operating results. In aggregate, approximately $2 million in expenses were
incurred to fund Year 2000 compliance activities.
However, we could be adversely impacted if any of our critical business
partners were to experience a severe business interruption due to a failure to
address their internal Year 2000 issues in a timely manner. The most reasonably
likely worst case Year 2000 scenario is a temporary disruption in supplier
deliveries or customer shipments. If a severe disruption occurs in either of
these two areas and is not corrected in a timely manner, a revenue or profit
shortfall may result in the first half of calendar year 2000. Based solely on
responses received to date from our business partners, we have no reason to
believe that there will be such a material adverse impact. However, if the
responses received from our business partners are inaccurate or happen to
change, then there could be such a material adverse impact. Management is
evaluating Year 2000 business interruption scenarios and developing appropriate
contingency plans.
EMPLOYEES
As of April 3, 1999 we had 546 full-time employees. We believe that our
future success will depend, in part, on our ability to continue to attract and
retain highly skilled technical and management personnel. See "Factors Affecting
Future Results." None of our employees is subject to a collective bargaining
agreement. We have never experienced a work stoppage and consider our employee
relations good.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in three connected buildings we own
in Hillsboro, Oregon, comprising a total of approximately 200,000 square feet.
We also own a 13,000 square foot research and development facility and
approximately 6,000 square feet of dormitory facilities in Shanghai, China. We
lease, through 2001, a 41,000 square foot product development facility in
Milpitas, California. We recently opened a design center in Corsham, England in
a facility leased on a short-term basis. We also lease, on a short-term basis,
office facilities for our domestic and international sales offices.
Vantis Corporation leases, on a long-term basis, product development
facilities in Sunnyvale, California; Austin, Texas and Colorado Springs,
Colorado. Vantis also leases, on a short-term basis, office facilities for
domestic and international sales offices.
ITEM 3. LEGAL PROCEEDINGS.
ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE NO. C-94-20567-RMW,
N.D. CAL.). This litigation, which began in 1994, involves multiple claims and
counterclaims for patent
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<PAGE>
infringement relating to Vantis and Altera programmable logic devices. We
assumed this litigation as part of our acquisition of Vantis.
In April 1999, the Federal Court of Appeal reversed earlier jury and Court
decisions and held that Altera is not licensed to the eight AMD patents-in-suit.
These eight AMD patents were subsequently assigned to Vantis. Also in April
1999, following the decision of the Federal Court of appeal, Altera filed a
petition for rehearing. In June 1999, the Federal Court of Appeal denied
Altera's petition for rehearing.
In connection with our acquisition of Vantis, we have agreed to assume both
the claims against Altera and the claims by Altera against AMD. Although there
can be no assurance as to the results of such litigation, based upon information
presently known to management, we do not believe that the ultimate resolution of
this lawsuit will have a material adverse effect on our business. The foregoing
statement constitutes a forward-looking statement and the actual results may
differ materially depending on a number of factors, including new court
decisions and additional counterclaims made by other parties to such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT.
As of June 14, 1999, the executive officers of Lattice Semiconductor are as
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Cyrus Y. Tsui............................. 53 President, Chief Executive Officer and Chairman of the Board
Steven A. Laub............................ 40 Senior Vice President and Chief Operating Officer
Stephen A. Skaggs......................... 36 Senior Vice President, Chief Financial Officer and Secretary
Stephen M. Donovan........................ 48 Corporate Vice President, Sales
Jonathan K. Yu............................ 58 Corporate Vice President, Business Development
Martin R. Baker........................... 43 Vice President and General Counsel
Randy D. Baker............................ 40 Vice President, Manufacturing
Albert L. Chan............................ 49 Vice President and General Manager, Lattice Silicon Valley
Thomas J. Kingzett........................ 52 Vice President, Reliability and Quality Assurance
Stanley J. Kopec.......................... 48 Vice President, Corporate Marketing
Rodney F. Sloss........................... 55 Vice President, Finance
Kenneth K. Yu............................. 51 Vice President and Managing Director, Lattice Asia
</TABLE>
Our executive officers 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 Lattice 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, 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 Divisions of Monolithic Memories Incorporated
from 1983 until the merger with AMD in 1987. Mr. Tsui has held technical and
15
<PAGE>
managerial positions in the semiconductor industry for over 30 years. He has
worked in the programmable logic industry since its inception.
Steven A. Laub joined Lattice 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 Lattice 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 Lattice 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 Lattice 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 Lattice in January 1997 as Vice President and General
Counsel. From 1991 until he joined, Mr. Baker held legal positions with Altera
Corporation.
Randy D. Baker joined Lattice in April 1985 as Manager, Manufacturing and
was promoted in 1988 to Director, Manufacturing. He was elected Vice President,
Manufacturing in August 1996.
Albert L. Chan joined Lattice 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 Lattice 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 Lattice 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 Lattice in May 1994 as Vice President, Finance. Prior
to joining, Mr. Sloss served as Chief Financial Officer of The Alexander Haagen
Company, a real estate developer.
Kenneth K. Yu joined Lattice 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 25
years.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Our 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 our common stock for the last
two fiscal years and for the period since April 3, 1999. On June 17, 1999, the
last reported sale price of our common stock was $57 3/4. As of June 17, 1999,
we had approximately 311 stockholders of record.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
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.............................. $54 5/8 $25 5/8
Second Quarter............................. 36 5/8 23 1/4
Third Quarter.............................. 46 1/2 18 7/8
Fourth Quarter............................. 56 5/16 37 3/4
Fiscal 2000:
First Quarter (through June 28, 1999)...... $61 7/8 $38 1/16
</TABLE>
The payment of dividends on the common stock is within the discretion of our
Board of Directors. Currently, we intend to retain earnings to finance the
growth of our business. We have not paid cash dividends on our 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 our 1999 Annual Report
to Stockholders at page 15 under the caption "Selected Financial Data", which
information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth in our 1999 Annual Report
to Stockholders at pages 10 through 14 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of April 3, 1999 and March 28, 1998, our investment portfolio consisted
of fixed income securities of $293.4 million and $245.5 million respectively. As
with all fixed income instruments, these securities are subject to interest rate
risk and will decline in value if market interest rates increase. If market
rates were to increase immediately and uniformly by 10% from levels as of April
3, 1999 and March 28, 1998, the decline in the fair value of the portfolio would
not be material. Further, we have the ability to hold its fixed income
investments until maturity and, therefore, we would not expect to recognize such
an adverse impact in income or cash flows.
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<PAGE>
We have international subsidiary and branch operations. Additionally, a
large portion of our silicon wafer purchases are denominated in Japanese yen. We
are therefore subject to foreign currency rate exposure. To mitigate rate
exposure with respect to yen-denominated wafer purchases, we maintain
yen-denominated bank accounts and bill our Japanese customers in yen. The yen
bank deposits are utilized to hedge yen-denominated wafer purchases against
specific and firm wafer purchases. If foreign currency rates fluctuate by 10%
from rates at April 3, 1999 and March 28, 1998, the effect on our consolidated
financial statements would not be material. However, there can be no assurance
that there will not be a material impact in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS
The information required by this Item is set forth in our 1999 Annual Report
to Stockholders, at pages 16 through 27, 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,
our Annual Report to Stockholders is not to be deemed filed as part of this
Report.
PART III
Certain information required by Part III is omitted from this Report in that
we will file its definitive proxy statement for the Annual Meeting of
Stockholders to be held on August 9, 1999, 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, our 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 our Directors is
included under "Proposal 1: Election of Directors" in our Proxy Statement, which
information is incorporated herein by reference. Information with respect to our
executive officers is included under Item 4(a) of Part I of this Report and is
incorporated herein by reference.
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<PAGE>
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 our
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 our 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 our Proxy Statement,
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<C> <S>
(a)(1) and FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(2)
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).
10.7 Form of Distributor Agreement (Incorporated by reference to Exhibit 10.6,
File No. 33-31231).
</TABLE>
19
<PAGE>
<TABLE>
<C> <S>
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).
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).
10.19 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).
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).
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.25 Form of North America Sales Representative Agreement. (Incorporated by
reference to Exhibit 10.25 filed with the Company's Annual Report on Form
10-K for the fiscal year ended March 28, 1998).
10.26 Stock Purchase Agreement dated as of April 21, 1999 by and between Lattice
Semiconductor Corporation and Advanced Micro Devices, Inc. (Incorporated by
reference to Exhibit 2.1 filed with the Company's Current Report on Form 8-K
dated April 21, 1999).
10.27 First Amendment to Stock Purchase Agreement dated as of June 7, 1999 entered
into by and between Lattice Semiconductor Corporation and Advanced Micro
Devices, Inc.
10.28 Second Amendment to Stock Purchase Agreement dated as of June 15, 1999
entered into by and between Lattice Semiconductor Corporation and Advanced
Micro Devices, Inc.
10.29 Form 8-K for Lattice Semiconductor Corporation regarding June 15, 1999
acquisition of Vantis Corporation (Incorporated by reference to Company's
Current Report on Form 8-K dated June 15, 1999 and filed June 25, 1999).
11.1 Computation of Net Income Per Share(2).
13.1 1999 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see pages 27-28).
27.1 Financial Data Schedule for Year Ended April 3, 1999.
</TABLE>
- ------------------------
(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 our Annual Report to Stockholders for the fiscal year ended April 3,
1999.
* 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
1999.
(c) See (a)(3) above.
(d) See (a)(1) and (2) above.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant, Lattice Semiconductor
Corporation, a corporation organized and existing under the laws of the State of
Delaware, has duly cause this Amendment No. 1 to Form 10-K to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Hillsboro,
State of Oregon, on July 26, 1999.
LATTICE SEMICONDUCTOR CORPORATION
By: /s/ CYRUS Y. TSUI
-----------------------------------------
Cyrus Y. Tsui
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Amendment No. 1 to Form 10-K has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ CYRUS Y. TSUI Officer (Principal
- ------------------------------ Executive Officer) and July 26, 1999
Cyrus Y. Tsui Chairman of the Board of
Directors
Senior Vice President,
/s/ STEPHEN A. SKAGGS Chief Financial Officer
- ------------------------------ (Principal Financial July 26, 1999
Stephen A. Skaggs Officer) and Secretary
*
- ------------------------------ Director July 26, 1999
Mark O. Hatfield
*
- ------------------------------ Director July 26, 1999
Daniel S. Hauer
*
- ------------------------------ Director July 26, 1999
Harry A. Merlo
*
- ------------------------------ Director July 26, 1999
Larry W. Sonsini
*
- ------------------------------ Director July 26, 1999
Douglas C. Strain
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN A. SKAGGS
-------------------------
Stephen A. Skaggs,
ATTORNEY-IN-FACT
</TABLE>
22
<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 21, 1999, except as to Note 13, which is as of June 15, 1999
appearing in the 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.
PricewaterhouseCoopers LLP
Portland, Oregon
April 21, 1999
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
- ------------------------------ --------------- --------------- --------------- ----------------- -----------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS NET OF BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS CLASSIFICATION END OF
PERIOD EXPENSES (DESCRIBE) RECOVERIES PERIOD
--------------- --------------- --------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
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
------ ----- ----- --- -----------
------ ----- ----- --- -----------
Year ended April 3, 1999:
Allowance for deferred tax
asset..................... $ 1,791 $ (136) -- -- $ 1,655
Allowance for doubtful
accounts.................. 797 70 -- 14 881
------ ----- ----- --- -----------
$ 2,588 $ (66) $ -- $ 14 $ 2,536
------ ----- ----- --- -----------
------ ----- ----- --- -----------
</TABLE>
S-2
<PAGE>
Exhibit 10.27
FIRST AMENDMENT TO
STOCK PURCHASE AGREEMENT
This FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT dated as of June 7,
1999 is entered into by and between Lattice Semiconductor Corporation, a
Delaware corporation ("Buyer"), and Advanced Micro Devices, Inc., a Delaware
corporation ("Seller"). Unless otherwise defined herein, capitalized terms used
herein shall have the respective meanings assigned to them in the Stock Purchase
Agreement, dated as of April 21, 1999, by and between Buyer and Seller (the
"Stock Purchase Agreement").
RECITALS
A. Seller and Buyer entered into the Stock Purchase Agreement,
whereby Seller has agreed to sell, and Buyer has agreed to purchase, all of the
issued and outstanding capital stock of Vantis Corporation ("Vantis").
B. Seller and Buyer desire to amend certain terms of the Stock
Purchase Agreement.
AGREEMENT
Now, therefore, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. AMENDMENT
Section 1.3 of the Stock Purchase Agreement shall be deleted in its
entirety and replaced with the following:
"1.3 The Closing. The Closing shall take place at the offices of
Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304-1050 on June 14, 1999, or as soon as practicable after all
conditions specified in Articles VI, VII and VIII have been satisfied or
waived in accordance with this Agreement, but not later than the fifth
business day following the date that all conditions specified in Articles
VI, VII and VIII have been satisfied or waived in accordance with this
Agreement, or at such other place or on such other date as Seller and Buyer
may mutually agree."
2. MISCELLANEOUS
a. STOCK PURCHASE AGREEMENT OTHERWISE NOT AFFECTED. Except as
expressly amended pursuant hereto, the Stock Purchase Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects.
b. AMENDMENT AND WAIVERS. This Amendment may be amended only by an
agreement in writing executed on behalf of both Buyer and Seller. No waiver of
any provision nor consent to any exception to the terms of the Amendment shall
be effective unless in writing and signed by the party to be bound and then only
to the specific purpose, extent and instance so provided.
<PAGE>
c. INTEGRATION. This Amendment constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements and understandings of the parties in connection therewith.
d. NO ASSIGNMENT. Neither this Amendment nor any rights or
obligations under it are assignable, except that Buyer may assign its rights,
but not its obligations, hereunder to any wholly owned subsidiary of Buyer.
Subject to the foregoing sentence, this Amendment is binding upon and inures to
the benefit of and is enforceable by the parties hereto and their respective
successors and permitted assigns.
e. COUNTERPARTS. This Amendment and any amendment hereto or any
other agreement or document delivered pursuant hereto may be executed in one or
more counterparts and by different parties in separate counterparts. All of such
counterparts shall constitute one and the same agreement or other document and
shall become effective unless otherwise provided therein when one or more
counterparts have been signed by each party and delivered to the other party.
f. SEVERABILITY. If any provision of this Amendment is determined to
be invalid, illegal or unenforceable by any Governmental Entity, the remaining
provisions of this Amendment shall remain in full force and effect provided that
the essential terms and conditions of this Amendment for both parties remain
valid, binding and enforceable. To the extent permitted by Law, the parties
hereby to the same extent waive any provision of Law that renders any provision
hereof prohibited or unenforceable in any respect.
g. PARTIES IN INTEREST. Except as set forth in Article 10 of the
Stock Purchase Agreement with respect to Indemnified Parties, nothing in this
Amendment, express of implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Amendment.
h. GOVERNING LAW. This Amendment, the legal relations between the
parties and any Action, whether contractual or non-contractual, instituted by
any party with respect to matters arising under or growing out of or in
connection with or in respect of this Amendment shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and performed in such State and without regard to conflicts of
law doctrines.
<PAGE>
IN WITNESS WHEREOF, each of Buyer and Seller has caused this Amendment
to be executed by its duly authorized representation as of the date first above
written.
BUYER:
LATTICE SEMICONDUCTOR CORPORATION,
a Delaware corporation
By:
--------------------------------------
Name: Steven A. Laub
Title: Chief Operating Officer
SELLER:
ADVANCED MICRO DEVICES, INC.
a Delaware corporation
By:
--------------------------------------
Name: Thomas M. McCoy, Esq
Title: Senior Vice President, General
Counsel and Secretary
<PAGE>
Exhibit 10.28
SECOND AMENDMENT TO
STOCK PURCHASE AGREEMENT
This SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT dated as of June 15, 1999
is entered into by and between Lattice Semiconductor Corporation, a Delaware
corporation ("Buyer"), and Advanced Micro Devices, Inc., a Delaware corporation
("Seller"). Unless otherwise defined herein, capitalized terms used herein shall
have the respective meanings assigned to them in the Stock Purchase Agreement,
dated as of April 21, 1999, by and between Buyer and Seller, as amended by the
First Amendment to Stock Purchase Agreement dated as of June 7, 1999 (as
amended, the "Stock Purchase Agreement").
RECITALS
A. Seller and Buyer entered into the Stock Purchase Agreement, whereby
Seller has agreed to sell, and Buyer has agreed to purchase, all of the issued
and outstanding capital stock of Vantis Corporation ("Vantis").
B. Seller and Buyer desire to amend certain terms of the Stock Purchase
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. AMENDMENTS
a. The fifth sentence of Section 1.2 of the Stock Purchase
Agreement, describing the calculation of the Company Per Share Value, is
hereby amended and restated as follows:
"The Company Per Share Value shall equal the quotient determined
by dividing the Estimated Purchase Price (as defined in Section
1.4) by the fully diluted number of shares of Company common
stock outstanding immediately prior to the close of this
transaction (reflecting all shares subject to Company Options
(but excluding any shares subject to Company Options granted
after April 21, 1999)), without applying the treasury method."
b. The final sentence of Section 1.2 of the Stock Purchase Agreement
is hereby amended and restated as follows:
"As soon as reasonably practicable, but in no event more than 90
days after the Closing Date, Buyer will issue to each person who
immediately
1
<PAGE>
prior to the Closing Date was a holder of Company Options a
document evidencing the foregoing assumption of such option by
Buyer."
c. Section 1.3 of the Stock Purchase Agreement is hereby amended by
deleting Section 1.3 in its entirety and replacing it with the following:
"THE CLOSING. The Closing shall take place at the offices of
Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94304-1050 on June 15, 1999, or as soon as
practicable after all conditions specified in Articles VI, VII
and VIII have been satisfied or waived in accordance with this
Agreement, but not later than the fifth business day following
the date that all conditions specified in Articles VI, VII and
VIII have been satisfied or waived in accordance with this
Agreement, or at such other place or on such other date as Seller
and Buyer may mutually agree."
d. The heading of Section 5.2 of the Stock Purchase Agreement is
hereby amended to read "No Rights to Seller Intellectual Property and
Limited Trademark License."
e. Section 5.2 of the Stock Purchase Agreement is hereby amended to
insert an "(a)" immediately prior to the text thereof.
f. Section 5.2 of the Stock Purchase Agreement is hereby amended to
add new Section 5.2(b) as follows:
"(b) Seller hereby grants to Company and Buyer, for the period
beginning on the Closing Date and ending on the last day of the
fifteenth month following the Closing Date, a worldwide,
non-exclusive, non-transferable license under the Transition
Trademarks (as defined below) to use such trademarks in
connection with documentation, collateral materials, packaging
and sale of Transition Products (as defined below) in
substantially the same manner that such trademarks were used by
the Seller or Company prior to the Closing; provided, however,
that no Transition Trademark shall be used in public advertising
of any product, service or entity. Company shall maintain the
quality of the goods with which such trademarks are used at the
level maintained by Company or Seller prior to Closing. Without
limiting the foregoing, neither Buyer nor Company shall use the
Transition Trademarks in a manner that detracts from the goodwill
associated with the use of such trademarks or in a manner
contrary to the reasonable instructions of Seller. All goodwill
associated with the use of such Transition Trademarks shall inure
to the benefit of Seller. Buyer and Company agree to use
commercially reasonable efforts to obtain or to effect customer
qualifications of the Transition Products to remove the
Transition Trademarks. For the purposes of this Section 5.2(b),
(A) "Transition Products" means all products sold, offered for
sale, or provided by Company prior to the
2
<PAGE>
Closing including all such products in the Company's inventory
as of the Closing Date, and (B) "Transition Trademarks" means
all trademarks, logos, graphics, and trade dress of Seller used
by Company prior to the Closing Date in connection with the
marketing, sale, promotion and packaging of the Transition
Products, other than those which are transferred to Company.
Buyer shall indemnify and hold harmless Seller against any Loss
arising out of any warranty or product liability claims asserted
against Seller with respect to Transition Products sold by
Company or Buyer after the Closing Date resulting from Buyers or
Company's use of the Transition Marks, except to the extent that
such claim arises from a breach by Seller or Company of any
representation or warranty hereunder. The indemnity provided in
this Section 5.2 shall be subject to Sections 10.3 and 10.4 of
this Agreement but not the other provisions of Article X."
g. Section 5.8 of the Stock Purchase Agreement is hereby amended by
adding a new sentence at the end of such Section, which shall read as
follows:
"Notwithstanding any provision of this Agreement to the contrary,
985/995 Stewart Drive, Sunnyvale, California") shall be assigned
immediately following the Closing Date pursuant to the Lease
Assignment and Assumption Agreement in the form attached hereto
as Exhibit 5.8(a)."
h. Section 5.14 of the Stock Purchase Agreement is hereby amended by
deleting clause (a) of Section 5.14 and replacing it with the following:
"(a) Seller shall continue to use its best efforts to obtain such
Approval from and after the Closing, subject (in the case of
software licenses) to the Limit, as set forth in Section
5.16(c)."
i. Section 5.16 of the Stock Purchase Agreement is hereby amended by
deleting Section 5.16(a) in its entirety and replacing it with the
following:
"(a) This Section 5.16 does not apply to Intellectual Property or
trade secrets, except that this Section 5.16 does apply to the
Intellectual Property of the type described in clause (i)(B) or
(i)(C) of Section 2.8(b) (the "Applicable Intellectual Property")
identified on the Schedule to clause (i) of Section 2.8(b) and
the Applicable Intellectual Property referred to in the board
resolutions identified in Section 5.16(b)(i) (or the attachments
thereto) and the unregistered trademarks listed on the Schedule
to clause (i) of Section 2.8(b).
j. Section 5.16 of the Stock Purchase Agreement is hereby amended by
deleting Section 5.16(c) in its entirety and replacing it with the
following:
"(c) To the extent any Other Business Assets have not been
assigned and transferred prior to Closing, Seller shall take such
additionally
3
<PAGE>
commercially reasonable actions after the Closing to effect such
assignments and transfers as are reasonably requested by Buyer
(or, in the case of any third party software licenses, replace
such license); provided, however, that with respect to the
transfer and assignment of any third party software licenses
contemplated by this Section 5.16 or Section 5.14(a), or
otherwise necessary or used to conduct the Business (unless only
necessary or used to conduct the bi-polar programmable logic
device business) as conducted prior to the Closing (but without
reliance on the rights of Seller or any of its Affiliates, other
than the Company) (collectively, "Third Party Licenses"), Seller
shall use commercially reasonable actions after the Closing to
effect such assignments and transfers (or replace the licenses
with substantially similar licenses). Buyer may make arrangements
for the transfer or assignment of Third Party Licenses (or the
replacement thereof with substantially similar licenses) and
Seller shall reimburse Buyer any sums paid to third party
licensors for such transfers, assignments and replacements;
provided that this sentence shall not apply to the EDA Software
licenses from Cadence Design Systems, Inc. (the "Cadence
Licenses"). Notwithstanding the foregoing, Seller shall not be
obligated to pay to third party licensors and/or reimburse Buyer
amounts (other than amounts in respect of the Cadence Licenses)
in excess of $800,000 in the aggregate for all such assignments,
transfers, replacements or reimbursements (the "Limit"). In
addition, Seller's obligations to expend sums for the assignment,
transfer or replacement of Third Party Licenses shall terminate
on the first anniversary of the Closing Date. Payments made by
Seller to licensors for the assignment, transfer or replacement
of Third Party Licenses, which are subject to the Limit, shall
not be made without the consent of Buyer, which consent shall not
be unreasonably withheld."
k. Section 5.16(d) of the Stock Purchase Agreement is hereby amended
by deleting Section 5.16(d) in its entirety and replacing it with the
following:
"(d) Subject to the limitations set forth in Section 5.16(c), the
assignments and transfers pursuant to this Section 5.16 shall be
at no cost to Buyer, Company or their respective subsidiaries and
Affiliates; provided, however, that the transfer by Seller and
purchase by Company of certain leasehold improvements at Stewart
Drive, Sunnyvale, California at or prior to the Closing shall
take place for $3,768,000."
l. Section 5.16 of the Stock Purchase Agreement is hereby amended by
adding a new Section 5.16(e) immediately after Section 15.16(d), which
shall read in its entirety as follows:
"(e) Seller will execute or cause its controlled Affiliates to
execute, if applicable, all such further assignments and other
documents as are reasonably requested by Buyer to give effect to,
record and evidence any assignments and transfers required to be
made pursuant hereto or
4
<PAGE>
Section 5.15 at no cost to Buyer, Company or their respective
subsidiaries and Affiliates."
m. Section 13.2 of the Stock Purchase Agreement is hereby amended by
deleting the penultimate sentence of the definition of "Agreed Accounting
Principles" and inserting in lieu thereof the following:
"Except for the purchase of certain leasehold improvements
contemplated by the proviso of Section 5.16(d), which shall be
valued at $3,768,000, assets contributed to Company or any
Subsidiary by Seller or any of its controlled Affiliates after
the date hereof will be valued at zero."
n. Section 13.2 of the Stock Purchase Agreement is hereby amended by
deleting the first sentence of the definition of "Business" which reads "
`Business' means the business of Company and the Subsidiaries taken as a
whole, and shall be deemed to include the following incidents of such
business: income, cash flow, operations, condition (financial or other),
assets, properties, revenues and liabilities" and replacing it with the
following:
" `Business' means the business of Company and the Subsidiaries
taken as a whole (including the bi-polar programmable logic
device business of Seller, whether or not previously included in
the business of the Company and the Subsidiaries), and shall be
deemed to include the following incidents of such business:
income, cash flow, operations, condition (financial or other),
assets, properties, revenues and liabilities."
o. Section 1.4 of the Stock Purchase Agreement is hereby amended by
deleting the second sentence of such Section which reads "Not later than
five business days prior to the Closing Date, Seller shall deliver to Buyer
a written notice setting forth Seller's good faith estimate (applying the
Agreed Accounting Principles) as of the Closing Date of the Closing Equity
Adjustment Amount (the "Estimated Closing Equity Adjustment Amount") and,
based thereon, Seller's calculation of the Estimated Purchase Price, which
shall be binding on Buyer and Seller as the Estimated Purchase Price
hereunder absent manifest error" and replacing it with the following:
"Not later than five business days prior to the Closing Date,
Seller shall deliver to Buyer a written notice setting forth
Seller's good faith estimate (applying the Agreed Accounting
Principles), which estimate shall be based upon a balance sheet
prepared as of a date no earlier than five days prior to the
Closing Date, of the Closing Equity Adjustment Amount (the
"Estimated Closing Equity Adjustment Amount") and, based thereon,
Seller's calculation of the Estimated Purchase Price, which shall
be binding on Buyer and Seller as the Estimated Purchase Price
hereunder absent manifest error."
5
<PAGE>
2. MISCELLANEOUS
a. STOCK PURCHASE AGREEMENT OTHERWISE NOT AFFECTED. Except as
expressly amended pursuant hereto, the Stock Purchase Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects.
b. AMENDMENT AND WAIVERS. This Amendment may be amended only by an
agreement in writing executed on behalf of both Buyer and Seller. No waiver of
any provision nor consent to any exception to the terms of the Amendment shall
be effective unless in writing and signed by the party to be bound and then only
to the specific purpose, extent and instance so provided.
c. INTEGRATION. This Amendment constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements and understandings of the parties in connection therewith.
d. NO ASSIGNMENT. Neither this Amendment nor any rights or
obligations under it are assignable, except that Buyer may assign its rights,
but not its obligations, hereunder to any wholly owned subsidiary of Buyer.
Subject to the foregoing sentence, this Amendment is binding upon and inures to
the benefit of and is enforceable by the parties hereto and their respective
successors and permitted assigns.
e. COUNTERPARTS. This Amendment and any amendment hereto or any
other agreement or document delivered pursuant hereto may be executed in one or
more counterparts and by different parties in separate counterparts. All of such
counterparts shall constitute one and the same agreement or other document and
shall become effective unless otherwise provided therein when one or more
counterparts have been signed by each party and delivered to the other party.
f. SEVERABILITY. If any provision of this Amendment is determined to
be invalid, illegal or unenforceable by any Governmental Entity, the remaining
provisions of this Amendment shall remain in full force and effect provided that
the essential terms and conditions of this Amendment for both parties remain
valid, binding and enforceable. To the extent permitted by Law, the parties
hereby to the same extent waive any provision of Law that renders any provision
hereof prohibited or unenforceable in any respect.
g. PARTIES IN INTEREST. Except as set forth in Article 10 of the
Stock Purchase Agreement with respect to Indemnified Parties, nothing in this
Amendment, express of implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Amendment.
h. GOVERNING LAW. This Amendment, the legal relations between the
parties and any Action, whether contractual or non-contractual, instituted by
any party with respect to matters arising under or growing out of or in
connection with or in respect of this Amendment shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and performed in such State and without regard to conflicts of
law doctrines.
6
<PAGE>
IN WITNESS WHEREOF, each of Buyer and Seller has caused this Amendment to
be executed by its duly authorized representation as of the date first above
written.
BUYER:
LATTICE SEMICONDUCTOR CORPORATION,
a Delaware corporation
By:
--------------------------------------
Name: Steven A. Laub
Title: Chief Operating Officer
SELLER:
ADVANCED MICRO DEVICES, INC.,
a Delaware corporation
By:
--------------------------------------
Name: Thomas M. McCoy, Esq.
Title: Senior Vice President, General Counsel and
Secretary
7
<PAGE>
Exhibit 13.1
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
April 3, March 28, March 29,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $200,072 $245,894 $204,089
Net income $ 42,046 $ 56,567 $ 45,005
Basic net income per share $ 1.79 $ 2.43 $ 2.00
Diluted net income per share $ 1.77 $ 2.37 $ 1.96
Cash and short-term investments $319,434 $267,110 $228,647
Total assets $540,896 $489,066 $403,462
Stockholders' equity $483,734 $434,686 $360,491
- ----------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
CORPORATE PROFILE
- ------------------------------------------------------------------------------
Lattice Semiconductor Corporation designs, develops and markets high performance
programmable logic devices ("PLDs") and related development system software.
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. We are the inventor and world's leading supplier of
in-system programmable ("ISP-TM-") PLDs. We introduced ISP devices to the
industry in 1992. In June 1999, we acquired Vantis, the Corporation that
invented the PLD. With double the engineering and sales resources, the combined
Company will focus on developing and delivering innovative programmable products
to a complementary customer base. Our products are sold worldwide through an
extensive network of independent sales representatives and distributors,
primarily to original equipment manufacturers ("OEMs") of communication,
computing, industrial and military systems. Lattice was founded in 1983 and is
based in Hillsboro, Oregon.
<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 designs, develops and markets high
performance programmable logic devices ("PLDs") and related development
system software. 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. We are the inventor and
world's leading supplier of in-system programmable ("ISP-TM-") PLDs. We
introduced ISP devices to the industry in 1992. In June 1999, we acquired
Vantis, the Corporation that invented the PLD. With double the engineering
and sales resources, the combined Company will focus on developing and
delivering innovative programmable products to a complementary customer base.
Our products are sold worldwide through an extensive network of independent
sales representatives and distributors, primarily to original equipment
manufacturers ("OEMs") of communication, computing, industrial and military
systems. Lattice 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
-------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100% 100% 100%
Costs and expenses:
Cost of products sold 39 40 41
Research and development 17 13 14
Selling, general and administrative 18 16 16
-------------------------------
74 69 71
-------------------------------
Income from operations 26 31 29
Interest and other income (net) 5 4 4
-------------------------------
Income before provision for income taxes 31 35 33
Provision for income taxes 10 12 11
-------------------------------
Net income 21% 23% 22%
</TABLE>
REVENUE Revenue was $200.1 million in fiscal 1999, a decrease of 19% from fiscal
1998. Fiscal 1998 revenue of $245.9 million represented an increase of 20% from
the $204.1 million recorded in fiscal 1997.
Fiscal 1999 revenue as compared to fiscal 1998 was negatively impacted by a
decline in demand from Asia due to the economic crisis in that region.
Furthermore, revenue in all geographies was negatively impacted by a decline in
demand for our non-ISP product families. Our revenue growth in fiscal 1998 was
the result of sales increases of ISP products. Revenue from ISP products was
approximately 72%, 65% and 48% of total revenue for fiscal 1999, 1998 and 1997,
respectively. The remainder of our revenue was derived from non-ISP product
families.
Our sales by geographic area were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
United States $100,778 $120,278 $104,249
Export sales
Europe 53,649 61,243 39,863
Asia 34,680 55,853 52,624
Other 10,965 8,520 7,353
----------------------------------------
$200,072 $245,894 $204,089
</TABLE>
Revenue from export sales was approximately 50%, 51% and 49% of total revenue
for fiscal 1999, 1998 and 1997, respectively. We expect export sales to
continue to represent a significant portion of revenue. See "Factors
Affecting Future Results."
The average selling price of our products was flat in fiscal 1999 as compared
to fiscal 1998. The average selling price increased in fiscal 1998 as
compared to fiscal 1997. This change was due primarily to an increased
proportion of ISP products in our 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. Our ability to maintain or increase
the level of our average selling price is dependent on the continued
development, introduction and market acceptance of new products. See "Factors
Affecting Future Results."
GROSS MARGIN Our gross margin as a percentage of revenue was 61%, 60% and 59%
for fiscal years 1999, 1998 and 1997, respectively. The improvement was
primarily due to an improvement in product mix and reductions in our
manufacturing costs. Reductions in manufacturing costs resulted primarily
from yield improvements, migration of products to more advanced technologies
and smaller die sizes, and wafer price reductions.
RESEARCH AND DEVELOPMENT Research and development expense was $33.2 million,
$32.0 million and $27.8 million in fiscal 1999, 1998 and 1997, respectively.
Spending increases resulted primarily from the development of new products,
including our ISP families and related software development tools. We believe
that a continued commitment to research and development is essential in order
to maintain product leadership in our existing product families and to
provide innovative new product offerings, and therefore expect to continue to
make significant future investments in research and development.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
expense was $36.8 million, $39.9 million and $33.6 million in fiscal 1999,
1998 and 1997, respectively. The decrease in fiscal 1999 expense as compared
to fiscal 1998 was primarily due to decreased sales commissions associated
with lower revenue levels. The increase in fiscal 1998 expenses as compared
to fiscal 1997 was primarily due to expansion of our sales force and
increased sales commissions associated with higher revenue levels.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME FROM OPERATIONS Income from operations decreased 31%, from $75.1
million to $51.6 million, from fiscal 1998 to fiscal 1999, and increased 27%,
from $59.0 million, between fiscal 1997 and fiscal 1998. Income from
operations as a percentage of revenue decreased to 26% in fiscal 1999 from
31% and 29% in fiscal 1998 and fiscal 1997 respectively.
INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (net of
expense) was approximately flat between fiscal 1998 and fiscal 1999 but
increased by approximately $1.9 million from fiscal 1997 to fiscal 1998. The
increase was primarily due to higher cash and investment balances resulting
from cash generated from operations and common stock issuance from employee
stock option exercises. In fiscal 1999, these higher cash and investment
balances were offset by lower interest rates for invested balances,
particularly in the second half of the fiscal year.
PROVISION FOR INCOME TAXES Our effective tax rate was 32.5%, 34.0% and 33.5%
for fiscal 1999, 1998 and 1997, respectively. The fiscal 1999 and 1998 rate
changes were due primarily to changes in the proportion of tax-exempt
interest income included in our overall net income. The fiscal 1999 rate was
also favorably impacted by reduced state taxes resulting from the increased
realization of tax credits.
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. We established the valuation allowances because we cannot determine if
it is more likely than not that such income will be earned.
NET INCOME Net income decreased 26%, from $56.6 million to $42.0 million,
from fiscal 1998 to fiscal 1999, and increased 26%, from $45.0 million,
between fiscal 1997 and fiscal 1998. Net income as a percentage of revenue
was 21%, 23% and 22% for fiscal years 1999, 1998 and 1997, respectively.
FACTORS AFFECTING FUTURE RESULTS
Notwithstanding the objectives, projections, estimates and other
forward-looking statements in this Annual Report, our future operating
results will continue to be subject to quarterly variations based on a wide
variety of risks. These risks include, but are not limited to:
OUR WAFER SUPPLY COULD BE INTERRUPTED OR REDUCED AND RESULT IN A SHORTAGE OF
FINISHED PRODUCTS AVAILABLE FOR SALE.
We do not manufacture finished silicon wafers. Currently all our silicon
wafers are manufactured by Seiko Epson in Japan; the UMC Group, a group of
affiliated companies in Taiwan; and AMD in the United States. If Seiko Epson,
through its U.S. affiliate Epson Electronics America, the UMC Group or AMD
significantly interrupts or reduces our wafer supply, our operating results
would be adversely affected.
In the past, we have experienced delays in obtaining wafers and in securing
supply commitments from our foundries. At present, we anticipate that our
supply commitments are adequate. However, these existing supply commitments
may not be sufficient for us to satisfy customer demand in future periods.
Additionally, during times of capacity shortage, notwithstanding our supply
commitments we may still have difficulty in obtaining wafer deliveries
consistent with the supply commitments. We negotiate wafer prices and supply
commitments on at least an annual basis. If Seiko Epson, Epson Electronics
America, the UMC Group or AMD reduces our supply commitment or increases our
wafer prices, and we cannot find alternative sources of wafer supply, our
operating results could be adversely affected.
Many other factors that could disrupt our wafer supply are beyond our
control. Since worldwide manufacturing capacity for silicon wafers is limited
and inelastic, we could be adversely affected by significant industry wide
increases in overall wafer demand or interruptions in wafer supply.
Additionally, a disruption of Seiko Epson's, the UMC Group's or AMD's foundry
operations as a result of a fire, earthquake or other natural disaster would
disrupt our wafer supply and would have an adverse effect on our operating
results.
IF OUR FOUNDRY PARTNERS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE MAY FACE A
SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
We depend on our foundries to deliver reliable silicon wafers with acceptable
yields in a timely manner. As is common in our industry, we have experienced
wafer yield problems and delivery delays in the past. If our foundries are
unable to produce silicon wafers that meet our specifications, with
acceptable yields, for a prolonged period, our operating results could be
adversely affected.
Substantially all of our revenues are derived from products based on a
specialized silicon wafer manufacturing process technology called
E2CMOS-Registered Trademark-. The reliable manufacture of high performance
E2CMOS semiconductor wafers is a complicated and technically demanding process
requiring:
- - a high degree of technical skill;
- - state-of-the-art equipment;
- - the absence of defects in the masks used to print circuits on a wafer;
- - the elimination of minute impurities and errors in each step of the
fabrication process; and
- - effective cooperation between the wafer supplier and the circuit designer.
As a result, our foundries may experience difficulties in achieving acceptable
quality and yield levels when manufacturing our silicon wafers.
OUR PRODUCTS MAY NOT BE COMPETITIVE IF WE ARE UNSUCCESSFUL IN MIGRATING OUR
MANUFACTURING PROCESSES TO MORE ADVANCED TECHNOLOGIES.
In order to develop new products and maintain the competitiveness of existing
products, we need to migrate to more advanced wafer manufacturing processes
that utilize larger wafer sizes and smaller device geometries. We may also
utilize additional foundries. Since we depend upon foundries to provide their
facilities and support for our process technology development, we may
experience delays in the availability of advanced wafer manufacturing process
technologies at existing or new wafer fabrication facilities. As a result,
volume production of our advanced E2CMOS-Registered Trademark- process
technologies at the new fabs of Seiko Epson, the UMC Group or future
foundries may not be achieved. This could have an adverse effect on our
operating results.
<PAGE>
WE MAY BE UNSUCCESSFUL IN DEFINING AND DEVELOPING NEW PRODUCTS REQUIRED TO
MAINTAIN OR GROW OUR BUSINESS.
As a semiconductor company, we operate in a dynamic environment marked by rapid
product obsolescence. Our future success depends on our ability to introduce new
or improved products that meet customer needs while achieving acceptable
margins. If we fail to introduce these new products in a timely manner or these
products fail to achieve market acceptance, our business and financial condition
will be adversely affected.
The introduction of new products in a dynamic market environment presents
significant business challenges. Product development commitments and
expenditures must be made well in advance of product sales. The success of a new
product depends on accurate forecasts of long-term market demand and future
technology developments.
Our future revenue growth is dependent on market acceptance of our new
proprietary ISP-TM- product families and the continued market acceptance of our
proprietary software development tools. The success of these products is
dependent on a variety of specific technical factors including:
- - successful product definition;
- - timely and efficient completion of product design;
- - timely and efficient implementation of wafer manufacturing and assembly
processes;
- - product performance; and
- - the quality and reliability of the product.
If, due to these or other factors, our new products do not achieve market
acceptance, our business and financial condition will be adversely affected.
WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES INTEGRATING VANTIS CORPORATION.
Integration of Vantis has begun (see note 13 of Notes to Consolidated
Financial Statements). If integration is unsuccessful, more difficult or more
time consuming than originally planned, we may incur unexpected disruptions
to our ongoing business. These disruptions may have an adverse effect on our
operations and financial results. Further, the following specific factors may
adversely affect our ability to integrate the business of Vantis:
- - We may experience unexpected losses of key employees or customers;
- - We may experience difficulties or delays in conforming the standards,
processes, procedures and controls of our two businesses;
- - We may experience unexpected costs and discover unexpected liabilities;
- - We may not receive manufacturing support and administrative services from
Vantis' former parent corporation, AMD, at a level of quality and
timeliness consistent with the historical delivery of this support;
- - We may not achieve expected levels of revenue growth, cost reduction and
profitability improvement; and
- - We may not be able to coordinate our new product and process development in
a way which permits us to bring new technologies to the market in a timely
manner.
DETERIORATION OF CONDITIONS IN ASIA MAY DISRUPT OUR EXISTING SUPPLY ARRANGEMENTS
AND RESULT IN A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
Two of our three silicon wafer suppliers operate fabs located in Asia. Our
finished silicon wafers are assembled and tested by independent subcontractors
located in Hong Kong, Malaysia, the Philippines, South Korea, Taiwan and
Thailand. A prolonged interruption in our supply from any of these
subcontractors could have an adverse effect on our operating results.
Although we have yet not experienced significant supply interruptions, the
economic, financial, social and political situation in Asia has recently been
volatile. Financial difficulties, governmental actions or restrictions,
prolonged work stoppages or any other difficulties experienced by these
suppliers may disrupt our supply and could have an adverse effect on our
operating results.
Our 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 and
may not remain stable in the future. Future substantial deterioration of
dollar-yen exchange rates could have an adverse effect on our operating
results.
EXPORT SALES ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES AND MAY DECLINE
IN THE FUTURE DUE TO ECONOMIC AND GOVERNMENTAL UNCERTAINTIES.
Our export sales are affected by unique risks frequently associated with foreign
economies including:
- - changes in local economic conditions;
- - exchange rate volatility;
- - governmental controls and trade restrictions;
- - export license requirements and restrictions on the export of technology;
- - political instability;
- - changes in tax rates, tariffs or freight rates;
- - interruptions in air transportation; and
- - difficulties in staffing and managing foreign sales offices.
For example, our export sales have recently been affected by the Asian economic
crisis. Significant changes in the economic climate in the foreign countries
where we derive our export sales could have an adverse effect on our operating
results.
IF OUR ASSEMBLY AND TEST SUBCONTRACTORS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE
MAY FACE A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE.
We rely on subcontractors to assemble and test our devices with acceptable
quality and yield levels. As is common in our industry, we have experienced
quality and yield problems in the past. If we experience prolonged quality or
yield problems in the future, there could be an adverse affect on our operating
results.
The majority of our revenue is derived from semiconductor devices assembled in
advanced packages. The assembly of advanced packages is a complex process
requiring:
- - a high degree of technical skill;
- - state-of-the-art equipment;
- - the absence of defects in lead frames used to attach semiconductor devices
to the package;
- - the elimination of raw material impurities and errors in each step of the
process; and
- - effective cooperation between the assembly subcontractor and the device
manufacturer.
As a result, our subcontractors may experience difficulties in achieving
acceptable quality and yield levels when assembling and testing our
semiconductor devices.
<PAGE>
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINTAIN OR GROW REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS.
The semiconductor industry is highly cyclical, to a greater extent than other
less dynamic or less technology-driven industries. In the past, our financial
performance has been negatively affected by significant downturns in the
semiconductor industry as a result of:
- - the cyclical nature of the demand for the products of semiconductor
customers;
- - general reductions in inventory levels by customers;
- - excess production capacity; and
- - accelerated declines in average selling prices.
If these or other conditions in the semiconductor industry occur in the future,
there could be an adverse effect on our operating results.
OUR STOCK PRICE MAY CONTINUE TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS WHICH
MAY RESULT IN INVESTORS LOSING ALL OR PART OF THEIR INVESTMENT.
In recent years, the price of our common stock has fluctuated greatly. These
price fluctuations have been rapid and severe and have left investors little
time to react. The price of our common stock may continue to fluctuate greatly
in the future due to a variety of company specific factors, including:
- - quarter to quarter variations in our operating results;
- - shortfalls in revenues or earnings from levels expected by securities
analysts;
- - announcements of technological innovations or new products by other
companies.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY.
The semiconductor industry is intensely competitive and many of our direct and
indirect competitors have substantially greater financial, technological,
manufacturing, marketing and sales resources. If we are unable to compete
successfully in this environment, our future results will be adversely affected.
The current level of competition in the programmable logic market is high and
may increase as our market expands. We currently compete directly with companies
that have licensed our products and technology or have developed similar
products. We also compete indirectly with numerous semiconductor companies that
offer products and solutions based on alternative technologies. These direct and
indirect competitors are established multinational semiconductor companies as
well as emerging companies. We also may experience significant competition from
foreign companies in the future.
WE MAY FAIL TO RETAIN OR ATTRACT THE SPECIALIZED TECHNICAL AND MANAGEMENT
PERSONNEL REQUIRED TO SUCCESSFULLY OPERATE OUR BUSINESS.
To a greater degree than most non-technology companies or larger technology
companies, our future success depends on our ability to attract and retain
highly qualified technical and management personnel. As a mid-sized company, we
are particularly dependent on a relatively small group of key employees.
Competition for skilled technical and management employees is intense within our
industry. As a result, we may not be able to retain our existing key technical
and management personnel. In addition, we may not be able to attract additional
qualified employees in the future. If we are unable to retain existing key
employees or are unable to hire new qualified employees, our operating results
could be adversely affected.
IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUR
FINANCIAL RESULTS AND COMPETITIVE POSITION MAY SUFFER.
Our success depends in part on our proprietary technology. However, we may fail
to adequately protect this technology. As a result, we may lose our competitive
position or face significant expense to protect or enforce our intellectual
property rights.
We intend to continue to protect our proprietary technology through patents,
copyrights and trade secrets. Despite this intention, we may not be successful
in achieving adequate protection. Claims allowed on any of our patents may not
be sufficiently broad to protect our technology. Patents issued to us also may
be challenged, invalidated or circumvented. Finally, our competitors may develop
similar technology independently.
Companies in the semiconductor industry vigorously pursue their intellectual
property rights. If we become involved in protracted intellectual property
disputes or litigation we may utilize substantial financial and management
resources, which could have an adverse effect on our operating results. We may
also be subject to future intellectual property claims or judgements. If these
were to occur, we may not be able to obtain a license on favorable terms or
without our operating results being adversely affected.
YEAR 2000 COMPLIANCE
We are currently working to address the potential impact of the Year 2000 on the
processing of information by our computerized systems, including interfaces to
our business partners.
In June 1999, we completed our planned Year 2000 compliance activities with
respect to our products and internal systems, software, equipment and
facilities. Based solely on these activities, management believes that all
products and material internal systems, software, equipment and facilities are
currently Year 2000 compliant. We do not anticipate that potential Year 2000
issues will have a material adverse impact on our financial position or
operating results. In aggregate, approximately $2 million in expenses were
incurred to fund Year 2000 compliance activities.
However, we could be adversely impacted if any of our critical business partners
were to experience a severe business interruption due to a failure to address
their internal Year 2000 issues in a timely manner. The most reasonably likely
worst case Year 2000 scenario is a temporary disruption in supplier deliveries
or customer shipments. If a severe disruption occurs in either of these two
areas and is not corrected in a timely manner, a revenue or profit shortfall may
result in the first half of calendar year 2000. Based solely on responses
received to date from our business partners, we have no reason to believe that
there will be such a material adverse impact. However, if the responses received
from our business partners are inaccurate or happen to change, then there could
be such a material adverse impact. Management is evaluating Year 2000 business
interruption scenarios and developing appropriate contingency plans.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of April 3, 1999 and March 28, 1998, our investment portfolio consisted of
fixed income securities of $293.4 million and $245.5 million respectively. As
with all fixed income instruments, these securities are subject to interest rate
risk and will decline in value if market interest rates increase. If market
rates were to increase immediately and uniformly by 10% from levels as of April
3, 1999 and March 28, 1998, the decline in the fair value of the portfolio would
not be material. Further, we have the ability to hold our fixed income
investments until maturity and, therefore, we would not expect to recognize such
an adverse impact in income or cash flows.
We have international subsidiary and branch operations. Additionally, a large
portion of our silicon wafer purchases are denominated in Japanese yen. We are
therefore subject to foreign currency rate exposure. To mitigate rate exposure
with respect to yen-denominated wafer purchases, we maintain yen-denominated
bank accounts and bill our Japanese customers in yen. The yen bank deposits are
utilized to hedge yen-denominated wafer purchases against specific and firm
wafer purchases. If foreign currency rates fluctuate by 10% from rates at April
3, 1999 and March 28, 1998, the effect on our consolidated financial statements
would not be material. However, there can be no assurance that there will not be
a material impact in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of April 3, 1999, our principal source of liquidity was $319.4 million of
cash and short-term investments, an increase of $52.3 million from the balance
of $267.1 million at March 28, 1998. This increase was primarily the result of
cash generated from operations and common stock issuance.
Accounts receivable decreased $4.4 million, or 16%, as compared to the
balance at March 28, 1998. This decrease was primarily due to lower revenue
levels. Inventories decreased by $5.0 million, or 22%, versus amounts recorded
at March 28, 1998 due to decreased production in response to lower revenue
levels. Accounts payable and other accrued expenses remained approximately flat
versus balances recorded at March 28, 1998, as decreased inventory expenditures
were offset by the timing of payments of other expenses. Accrued payroll
obligations increased $2.3 million, or 21%, as compared to the balance at March
28, 1998 due to timing of payments. Income taxes payable increased $0.8 million,
or 18%, as compared to the balance at March 28, 1998 due to the timing of tax
deductions and payments.
Stockholders' equity increased by approximately $49.0 million, primarily
due to net income of approximately $42.0 million for fiscal 1999 and net
proceeds from common stock issuance. These combined net proceeds were partially
offset by stock repurchases aggregating approximately $9.2 million.
Capital expenditures were approximately $18.4 million, $18.8 million and
$10.6 million for fiscal years 1999, 1998 and 1997, respectively. These
consisted primarily of manufacturing test equipment, engineering equipment,
buildings and building improvements. The increase in fiscal 1999 and 1998
capital expenditures as compared to fiscal 1997 was associated with construction
in process of an additional corporate headquarters building and increased
investment in manufacturing test equipment to support the unit volume growth of
our products.
We currently anticipate capital expenditures of approximately $20 to $25
million for the fiscal year ending April 1, 2000.
In September 1995, we entered into a series of agreements with UMC pursuant to
which we 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, we invested approximately $49.7 million between fiscal
1996 and fiscal 1998 for an approximate 10 percent equity interest in UICC and
the right to purchase a percentage of the facility's wafer production at market
prices.
In October 1996, we entered into an agreement with Utek Corporation, a
public Taiwanese company in the wafer foundry business that became affiliated
with the UMC Group in 1998, pursuant to which we agreed to make a series of
equity investments in Utek under specific terms. In exchange for these
investments we received the right to purchase a percentage of Utek's wafer
production. Under this agreement we have invested approximately $17.5 million
in three separate installments and currently own approximately 2.5 percent of
the outstanding equity of Utek.
In March 1997, we entered into an advance payment production agreement with
Seiko Epson Corporation ("Seiko Epson") and its affiliated U.S. distributor,
Epson Electronics America, Inc. ("EEA") under which we agreed to advance
approximately $85 million, payable upon completion of specific milestones, 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 EEA pursuant to purchase
agreements with EEA. We also have 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, we made two additional
payments aggregating approximately $34.2 million. As a result of anticipated
future payments to Seiko Epson, we expect that our working capital will be
reduced by approximately $34 million during fiscal 2000.
On April 21, 1999, we announced a definitive agreement to acquire Vantis
Corporation, a wholly owned subsidiary of Advanced Micro Devices, Inc. ("AMD"),
for approximately $500 million in cash, including the acquisition of
approximately $70 million in net tangible assets. This acquisition was completed
June 15, 1999 and was financed with approximately $250 million in existing cash
and $250 million in bank borrowings. Vantis Corporation designs, develops and
markets programmable logic devices. The acquisition will be accounted for as a
purchase.
In June 1999, the Board of Directors of UICC and the Board of Directors of
UMC voted in favor of merging UICC into UMC. Also in June 1999, the Board of
Directors of Utek and the Board of Directors of UMC voted in favor of merging
Utek into UMC. The matter is currently scheduled for a UMC shareholder vote
in July 1999. If the shareholder vote is successful and the merger is
subsequently approved by Taiwanese authorities we will receive approximately
60 million shares of UMC stock in exchange for our equity interests in UICC
and Utek. After the merger, the Company expects to own less than one percent
of UMC's common stock. We have also received assurance from UMC management
that our capacity rights will be preserved after the merger. UMC shares trade
on the Taiwanese stock exchange. At the current UMC market price and NT$
exchange rate, our prospective UMC equity ownership would have a market value
of approximately $115 million. We have no plans to liquidate this investment.
We believe that our existing sources of liquidity and expected cash
generated from operations, along with the debt financing for the Vantis
acquisition, will be adequate to fund our anticipated cash needs for the next
twelve months.
In an effort to secure additional wafer supply, we 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 we pursue 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
acceptable terms.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------
APRIL 3, MARCH 28, MARCH 29, MARCH 30, APRIL 1,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $200,072 $245,894 $204,089 $198,167 $144,083
Costs and expenses:
Cost of products sold 78,440 98,883 83,736 82,216 58,936
Research and development 33,190 32,012 27,829 26,825 22,859
Selling, general and administrative 36,818 39,934 33,558 31,323 25,020
------------------------------------------------------------------------
148,448 170,829 145,123 140,364 106,815
------------------------------------------------------------------------
Income from operations 51,624 75,065 58,966 57,803 37,268
Interest and other income, net 10,668 10,643 8,712 5,442 3,349
------------------------------------------------------------------------
Income before provision for income taxes 62,292 85,708 67,678 63,245 40,617
Provision for income taxes 20,246 29,141 22,673 21,461 13,651
------------------------------------------------------------------------
Net income $ 42,046 $ 56,567 $ 45,005 $ 41,784 $ 26,966
- ------------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.79 $ 2.43 $ 2.00 $ 2.06 $ 1.45
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.77 $ 2.37 $ 1.96 $ 1.99 $ 1.41
- ------------------------------------------------------------------------------------------------------------------------
Shares used in per share calculations:
Basic net income 23,487 23,239 22,460 20,327 18,627
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income 23,819 23,894 22,973 20,979 19,164
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $324,204 $283,678 $267,669 $244,649 $106,021
Total assets 540,896 489,066 403,462 342,935 192,917
Stockholders' equity 483,734 434,686 360,491 298,768 157,797
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 3, 1999 YEAR ENDED MARCH 28, 1998
------------------------------------------------------------------------------------
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 $53,788 $50,168 $48,088 $48,028 $60,168 $60,038 $64,068 $61,620
Gross profit $33,045 $30,623 $29,045 $28,919 $36,071 $36,183 $38,165 $36,592
Net income $11,848 $10,513 $ 9,870 $ 9,816 $13,818 $13,651 $14,930 $14,168
Basic net income per share $ 0.50 $ 0.45 $ 0.42 $ 0.42 $ 0.59 $ 0.58 $ 0.64 $ 0.62
Diluted net income per share $ 0.49 $ 0.45 $ 0.42 $ 0.41 $ 0.58 $ 0.57 $ 0.62 $ 0.60
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 79,301 $ 60,344
Short-term investments 240,133 206,766
Accounts receivable, net 23,788 28,229
Inventories (note 2) 17,683 22,647
Prepaid expenses and other current assets 6,061 5,572
Deferred income taxes (note 6) 14,400 14,500
--------------------
Total current assets 381,366 338,058
Foundry investments, advances and other
assets (notes 4 and 8) 114,537 114,338
Property and equipment, less accumulated
depreciation (note 3) 44,993 36,670
--------------------
$540,896 $489,066
- -----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses (note 8) $ 18,611 $ 18,196
Accrued payroll obligations 13,573 11,231
Income taxes payable (note 6) 4,985 4,210
Deferred income 19,993 20,743
--------------------
Total current liabilities 57,162 54,380
--------------------
Commitments and contingencies (notes 4, 5, 8, 9 and 10) -- --
Stockholders' equity (note 7):
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized;
23,597,236 and 23,428,072 shares issued and outstanding 236 234
Paid-in capital 223,290 216,290
Retained earnings 260,208 218,162
--------------------
483,734 434,686
--------------------
$540,896 $489,066
- -----------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 200,072 $ 245,894 $ 204,089
Costs and expenses:
Cost of products sold (note 8) 78,440 98,883 83,736
Research and development 33,190 32,012 27,829
Selling, general and administrative (note 11) 36,818 39,934 33,558
------------------------------------
148,448 170,829 145,123
------------------------------------
Income from operations 51,624 75,065 58,966
Other income (expense):
Interest income 11,279 10,277 8,886
Other income (expense), net (611) 366 (174)
------------------------------------
Income before provision for income taxes 62,292 85,708 67,678
Provision for income taxes (note 6) 20,246 29,141 22,673
------------------------------------
Net income $ 42,046 $ 56,567 $ 45,005
- ----------------------------------------------------------------------------------------------
Basic net income per share $ 1.79 $ 2.43 $ 2.00
- ----------------------------------------------------------------------------------------------
Diluted net income per share $ 1.77 $ 2.37 $ 1.96
- ----------------------------------------------------------------------------------------------
Shares used in per share calculations:
Basic net income 23,487 23,239 22,460
- ----------------------------------------------------------------------------------------------
Diluted net income 23,819 23,894 22,973
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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, 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 comprehensive income -- -- 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 comprehensive income (loss) -- -- (148) -- (148)
Net income for fiscal 1998 -- -- -- 56,567 56,567
-------------------------------------------------------------
Balances, March 28, 1998 23,428 234 216,290 218,162 434,686
Common stock issued 507 5 11,207 -- 11,212
Repurchase of common stock (338) (3) (9,155) -- (9,158)
Tax benefit of option exercises -- -- 4,888 -- 4,888
Other comprehensive income -- -- 60 -- 60
Net income for fiscal 1999 -- -- -- 42,046 42,046
-------------------------------------------------------------
Balances, April 3, 1999 23,597 $ 236 $ 223,290 $ 260,208 $ 483,734
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 42,046 $ 56,567 $ 45,005
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 10,064 9,558 8,629
Deferred income taxes 100 (2,775) (2,025)
Changes in assets and liabilities:
Accounts receivable 4,441 (2,289) (3,056)
Inventories 4,964 5,162 (6,048)
Prepaid expenses and other current assets (489) (2,654) (750)
Foundry investments, advances and other assets (199) (25,154) (7,439)
Accounts payable and accrued expenses 415 3,920 (739)
Accrued payroll obligations 2,342 1,583 2,192
Income taxes payable 775 3,428 (4,018)
Deferred income (750) 2,478 1,369
----------------------------------
Net cash provided by operating activities 63,709 49,824 33,120
----------------------------------
Cash flow from investing activities:
Purchase of short-term investments, net (33,367) (32,068) (14,128)
Foundry investments -- (10,164) (25,800)
Capital expenditures (18,387) (18,825) (10,561)
----------------------------------
Net cash used by investing activities (51,754) (61,057) (50,489)
----------------------------------
Cash flow from financing activities:
Repurchase of common stock, net (9,158) -- --
Net proceeds from issuance of common stock 16,160 17,628 16,718
----------------------------------
Net cash provided by financing activities 7,002 17,628 16,718
----------------------------------
Net increase (decrease) in cash and cash equivalents 18,957 6,395 (651)
Beginning cash and cash equivalents 60,344 53,949 54,600
----------------------------------
Ending cash and cash equivalents $ 79,301 $ 60,344 $ 53,949
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Lattice Semiconductor Corporation, (the "Company"),
founded in 1983 and based in Hillsboro, Oregon, 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 export sales, mainly to Europe and Asia.
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 fiscal year ended April 3, 1999 was a 53 week fiscal year. 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 are relatively less liquid and have maturities of less
than one year, are composed of corporate auction preferred stocks ($131.4
million), municipal and local government obligations ($64.8 million), Federal
agency obligations ($16.9 million), time deposits ($16.9 million) and
commercial paper ($10.1 million) at April 3, 1999.
The Company accounts for 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 April 3, 1999.
FINANCIAL INSTRUMENTS All of the Company's significant financial assets and
liabilities are recognized in the Consolidated Balance Sheet as of April 3,
1999 and March 28, 1998. 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 April 3, 1999, 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
utilized to hedge yen-denominated wafer purchases 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 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $881,000 and $797,000 at April 3,
1999 and March 28, 1998, 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 software 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 7 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.
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
-------------------------------
(IN THOUSANDS, APRIL 3, MARCH 28, MARCH 29,
EXCEPT FOR PER SHARE DATA) 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted net income $42,046 $56,567 $45,005
- -------------------------------------------------------------------
Shares used in basic net income
per share calculations 23,487 23,239 22,460
Dilutive effect of stock options
and warrants 332 655 513
- -------------------------------------------------------------------
Shares used in diluted net income
per share calculations 23,819 23,894 22,973
- -------------------------------------------------------------------
Basic net income per share $ 1.79 $ 2.43 $ 2.00
- -------------------------------------------------------------------
Diluted net income per share $ 1.77 $ 2.37 $ 1.96
- -------------------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS Income taxes paid approximated $16.4 million, $23.1
million and $22.6 million in fiscal 1999, 1998, and 1997, respectively.
Interest paid does not differ materially from interest expense, which
aggregated approximately $273,000, $83,000 and $152,000 in fiscal 1999, 1998
and 1997, 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 the
accompanying Consolidated Statement of Changes in Stockholders' Equity as
"Other comprehensive income." The Company adopted this pronouncement in the
first quarter of fiscal 1999.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About Segments
of an Enterprise and Related Information." This pronouncement, which
supercedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise", 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 adopted this
pronouncement in fiscal 1999.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". In addition to prescribing accounting treatment for these
costs, the SOP also provides guidance related to the accounting for costs
incurred for software upgrades and enhancements. This pronouncement was
adopted during fiscal 1999 and did not have a significant impact on the
consolidated financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivatives
Instruments and Hedging Activities." SFAS 133 establishes new accounting
treatment for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. For the Company, this pronouncement
will be effective in fiscal year 2002, and is not anticipated to have a
material effect on the consolidated financial statements.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
(IN THOUSANDS) 1999 1998
- ----------------------------------------
<S> <C> <C>
Work in progress $10,956 $12,675
Finished goods 6,727 9,972
------------------
$17,683 $22,647
- ----------------------------------------
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Land $ 2,099 $ 2,098
Buildings 7,135 7,135
Construction in progress 18,768 6,750
Computer and test equipment 68,017 62,863
Office furniture and equipment 3,116 3,054
Leasehold and building improvements 2,643 2,547
---------------------
101,778 84,447
Accumulated depreciation and amortization (56,785) (47,777)
---------------------
$ 44,993 $ 36,670
- ------------------------------------------------------------------
</TABLE>
NOTE 4. FOUNDRY INVESTMENTS, ADVANCES AND OTHER ASSETS
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Foundry investments and other assets $ 63,275 $ 63,076
Wafer supply advances 51,262 51,262
---------------------
$114,537 $114,338
- ------------------------------------------------------------------
</TABLE>
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
corporation, ("UICC"), for the purpose of building and operating an advanced
semiconductor manufacturing facility in Taiwan, Republic of China. Under the
terms of the agreements, the Company invested approximately $49.7 million
between fiscal 1996 and fiscal 1998 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.
In October 1997, the above joint venture foundry was substantially
destroyed by fire. UMC, the majority owner of UICC, has informed the Company
that this loss has been substantially recovered by an insurance settlement
and additional investment income. Presently, the Board of UICC is considering
options ranging from rebuilding the foundry to dissolving UICC. Management
believes that UMC will continue to make alternative foundry capacity
available to the Company. Considering these circumstances, management
believes the UICC investment is not impaired. See note 13.
In July 1994, the Company signed an agreement with Seiko Epson
Corporation ("Seiko Epson") and its affiliated U.S. distributor, Epson
Electronics America, Inc. ("EEA"), under which it advanced $44 million to be
used to finance additional sub-micron wafer manufacturing capacity and
technological development. The advance was completely repaid in the form of
semiconductor wafers over a multi-year period ending in fiscal 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1997, the Company entered into a second advance payment
production agreement with Seiko Epson and EEA under which it agreed to
advance approximately $85 million, payable upon completion of specific
milestones, 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 EEA pursuant to purchase
agreements with EEA. 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. 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 $1,200,000, $1,026,000 and
$984,000 for fiscal 1999, 1998 and 1997, respectively. Future minimum lease
commitments at April 3, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year (in thousands)
- --------------------------------
<S> <C>
2000 $ 1,203
2001 947
-------
$ 2,150
- --------------------------------
</TABLE>
NOTE 6. INCOME TAXES
The components of the provision for income taxes for fiscal 1999, 1998 and 1997
are presented in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 18,678 $ 29,204 $ 22,308
State 1,468 2,712 2,390
----------------------------------
20,146 31,916 24,698
----------------------------------
Deferred:
Federal 93 (2,539) (1,829)
State 7 (236) (196)
----------------------------------
100 (2,775) (2,025)
----------------------------------
$ 20,246 $ 29,141 $ 22,673
- ----------------------------------------------------------
</TABLE>
Foreign income taxes were not significant for the fiscal years presented
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
-----------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Computed income tax expense
at the statutory rate $ 21,802 $ 29,998 $ 23,687
Adjustments for tax effects of:
State taxes, net 1,478 2,402 2,048
Research and development credits (270) (154) (62)
Nontaxable investment income (3,037) (3,009) (2,579)
Other 273 (96) (421)
-----------------------------------
$ 20,246 $ 29,141 $ 22,673
- --------------------------------------------------------------------------
</TABLE>
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
APRIL 3, MARCH 28,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Deferred income $ 7,547 $ 7,934
Expenses and allowances not currently
deductible 8,508 8,357
---------------------
Total deferred tax assets 16,055 16,291
Valuation allowance (1,655) (1,791)
---------------------
$14,400 $14,500
- ----------------------------------------------------------------
</TABLE>
The valuation allowance is recorded to reduce deferred tax assets which can
only be realized by earning taxable income in distant future years.
Management established the valuation allowance because it cannot determine if
it is more likely than not that such income will be earned.
NOTE 7. STOCKHOLDERS' EQUITY
COMMON STOCK 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 April 3, 1999, the Company had repurchased 337,500 shares at an
aggregate cost of approximately $9.2 million.
STOCK WARRANTS As of April 3, 1999, the Company has issued to a vendor
warrants to purchase 633,192 shares of common stock. Of this amount, 464,125
warrants were issued and 340,500 exercised prior to fiscal 1997. 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. During fiscal 1999, a warrant was issued to purchase 50,098
shares of common stock, earned ratably from March 1998 to February 1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLANS As of April 3, 1999, 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 Option Plan and 1988 Stock Option 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 are 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.
The following table summarizes the Company's stock option activity and
related information for the past three years:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
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 2,756 $40.38 2,290 $27.50 2,330 $22.20
Options granted 1,688 31.96 983 63.13 827 30.82
Options canceled (1,068) 58.82 (134) 39.78 (176) 28.31
Options exercised (439) 23.08 (383) 21.76 (691) 13.31
----------------------------------------------------------------------------
Options outstanding at end of fiscal year 2,937 $31.42 2,756 $40.38 2,290 $27.50
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
April 3, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
(NUMBER OF SHARES IN THOUSANDS) 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>
$16.38 - $28.13 729 1.03 $25.77 513 $24.81
$31.00 - $31.49 919 3.61 31.00 39 31.00
$31.50 - $32.88 911 2.35 31.56 333 31.63
$33.56 - $37.00 274 1.20 35.76 172 36.28
$51.88 - $66.25 104 2.46 62.05 36 62.66
--------------------------------------------------------------------
2,937 2.31 $31.42 1,093 $30.16
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Effective November 10, 1998, the Company offered employees the choice of
exchanging certain previously granted stock options for new stock options.
The new stock options have an exercise price of $31.00, the fair value of the
Company's common stock on the effective date, and vest over four years from
the effective date. As a result, approximately 941,970 options were
exchanged. The exchanged stock options had a weighted average exercise price
of $61.46.
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, 64,009, 34,945 and 57,421 shares were issued during
fiscal 1999, 1998 and 1997, respectively, and 208,855 shares were available
for issuance at April 3, 1999.
PRO FORMA DISCLOSURES The Company accounts for its stock options and employee
stock purchase plan in conformity with APB 25 and has
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
------------------------------------------------
APRIL 3, MARCH 28, MARCH 29,
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock options:
Expected volatility 43.9% 48.6% 46.4.%
Risk-free interest rate 4.7% 5.6% 6.1%
Expected life from vesting date 1.3 years 1.2 years 0.9 years
Dividend yield 0% 0% 0%
Stock purchase rights:
Expected volatility 43.6% 36.0% 36.7%
Risk-free interest rate 4.8% 5.9% 5.3%
Expected life 6 months 6 months 6 months
Dividend yield 0% 0% 0%
- -----------------------------------------------------------------------------------------
</TABLE>
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 $10.37, $25.20 and $11.54, and for stock purchase rights
$9.53, $12.30 and $6.80, for fiscal 1999, 1998 and 1997, 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
-------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $32,425 $48,777 $40,681
Pro forma basic earnings per share $ 1.38 $ 2.10 $ 1.81
Pro forma diluted earnings per share $ 1.37 $ 2.05 $ 1.78
- ------------------------------------------------------------------------
</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 8. 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, EEA. In connection with the series of agreements
entered into with UMC as described in note 4 of notes to consolidated
financial statements, the Company currently receives production wafers. A
significant interruption in supply from Seiko Epson through EEA, 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 EEA, 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 $20.8
million, $20.9 million and $22.8 million for fiscal 1999, 1998 and 1997,
respectively. Accounts payable and accrued expenses at April 3, 1999 and
March 28, 1998 include $3.4 and $4.5 million, respectively, due this vendor.
Open purchase commitments to this vendor approximated $9.2 million at April
3, 1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. 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 1999, 1998 and 1997, approximately $2.1 million, $3.0
million and $2.4 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 10. 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
potential claims made against the Company, the Company could obtain a license
on terms or under conditions that would not have a material adverse effect to
the Company.
NOTE 11. 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 $61,000,
$51,000 and $61,000, respectively, for fiscal 1999, 1998 and 1997. Amounts
payable to the law firm were not significant at April 3, 1999 or March 28,
1998.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment comprising the design,
development, manufacture and marketing of high performance programmable logic
devices. The Company's sales by major geographic area were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
APRIL 3, MARCH 28, MARCH 29,
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
United States $100,778 $120,278 $104,249
Export sales:
Europe 53,649 61,243 39,863
Asia 34,680 55,853 52,624
Other 10,965 8,520 7,353
-------- -------- --------
99,294 125,616 99,840
-------- -------- --------
$200,072 $245,894 $204,089
- -----------------------------------------------------------
</TABLE>
More than 90% of the Company's property and equipment is located in the
United States. Other long-lived assets located outside the United States
consist primarily of the foundry investments and advances described in note 4
of notes to consolidated financial statements.
No individual customer accounted for more than 10% of revenue in fiscal 1999,
1998 or 1997. No export sales to customers or distributors of any individual
country accounted for more than 10% of revenue in fiscal 1999, 1998 or 1997.
NOTE 13. SUBSEQUENT EVENTS
On April 21, 1999, the Company announced a definitive agreement to acquire
Vantis Corporation, a wholly owned subsidiary of Advanced Micro Devices, Inc.
("AMD"), for $500 million in cash, including the acquisition of an estimated
$70 million in net tangible assets. This acquisition was completed June 15,
1999 and was financed with approximately $250 million in existing cash and
$250 million in bank borrowings. Vantis Corporation designs, develops and
markets programmable logic devices. The acquisition will be accounted for as
a purchase.
In June 1999, the Boards of UMC and UICC (see note 4) voted to merge UICC
into UMC. The matter is scheduled for a shareholder vote in July 1999. The
Company is assured by UMC that capacity rights will be preserved after the
proposed merger.
<PAGE>
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 April 3, 1999 and
March 28, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended April 3, 1999, 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.
/s/ PricewaterhouseCoopers LLP
Portland Oregon,
April 21, 1999, except as to Note 13, which is as of June 15, 1999
<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)
Consultant to EEA
Electronics America, 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
Randy D. Baker
Vice President, Manufacturing
Martin R. Baker
Vice President and General Counsel
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) 268-8000
Facsimile: (503) 268-8347
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, California
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Portland, Oregon
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations
P.O. Box 3315
South Hackensack, NJ 07606
or
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 522-6645
TDD for Hearing Impaired:
(800) 231-5469
Foreign Shareholders: (201) 329-8660
TDD Foreign Shareholders
(201) 329-8354
Website Address:
www.chasemellon.com
ANNUAL MEETING
The annual meeting of stockholders for Lattice Semiconductor Corporation will be
held at the Embassy Suites Hotel, 9000 S.W. Washington Square Road, Tigard,
Oregon 99223 on Monday, August 9, 1999, at 1:00 PM.
FORM 10-K
Financial information, including the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission, and on quarterly operating
results is available by accessing our investor relations web site located at
http://www.lscc.com or on request by telephoning the Lattice 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 Company's common stock is traded on the over-the-counter market and prices
are quoted on the NASDAQ National Market System under the symbol "LSCC." The
following table sets forth the high and low sale prices for the last two fiscal
years.
<TABLE>
<CAPTION>
Low High
- -------------------------------------------
<S> <C> <C>
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
Fiscal 1999:
First Quarter 25 5/8 54 5/8
Second Quarter 23 1/4 36 5/8
Third Quarter 18 7/8 46 1/2
Fourth Quarter 37 3/4 56 5/16
</TABLE>
<PAGE>
EXHIBIT 21.1
LATTICE SEMICONDUCTOR CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME 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, No. 333-40031, No. 333-69467, and
333-81035) 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 21, 1999 except as to Note 13, which is as of June 15, 1999 which
appears in the Annual Report to Stockholders, which is incorporated by reference
in this Annual Report on Form 10-K/A. We also consent to the incorporation by
reference of our report dated April 21, 1999 relating to the financial statement
schedule, which appears in this Form 10-K/A.
PricewaterhouseCoopers LLP
Portland, Oregon
July 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> APR-03-1999
<CASH> 79,301
<SECURITIES> 240,133
<RECEIVABLES> 23,788
<ALLOWANCES> (881)
<INVENTORY> 17,683
<CURRENT-ASSETS> 381,366
<PP&E> 101,778
<DEPRECIATION> (56,785)
<TOTAL-ASSETS> 540,896
<CURRENT-LIABILITIES> 57,162
<BONDS> 0
0
0
<COMMON> 236
<OTHER-SE> 483,498
<TOTAL-LIABILITY-AND-EQUITY> 540,896
<SALES> 200,072
<TOTAL-REVENUES> 200,072
<CGS> 78,440
<TOTAL-COSTS> 148,448
<OTHER-EXPENSES> 611
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> (11,279)
<INCOME-PRETAX> 62,292
<INCOME-TAX> 20,246
<INCOME-CONTINUING> 42,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,046
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.77
</TABLE>
