<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 _____________
Commission file number 0 - 18032
---------
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(503) 268-8000
(Registrant's telephone number, including area code)
--------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
At July 3, 1999 there were 23,740,175 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three Months Ended July 3, 1999 and June 27, 1998 3
Consolidated Balance Sheet - July 3, 1999
and April 3, 1999 4
Consolidated Statement of Cash Flows -
Three Months Ended July 3, 1999
and June 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
July 3, June 27,
1999 1998
-------------- --------------
<S> <C> <C>
Revenue $ 59,738 $ 48,028
Costs and expenses:
Cost of products sold 22,881 19,109
Research and development 9,889 7,895
Selling, general and administrative 10,845 9,005
In-Process research and development 89,003 --
Amortization of intangible assets 4,164 --
-------------- --------------
Total costs and expenses 136,782 36,009
-------------- --------------
(Loss) income from operations (77,044) 12,019
Other income, net 1,805 2,523
-------------- --------------
(Loss) income before provision for income taxes (75,239) 14,542
(Benefit) Provision for income taxes (24,076) 4,726
-------------- --------------
Net (loss) income $ (51,163) $ 9,816
-------------- --------------
-------------- --------------
Basic net (loss) income per share $ (2.16) $ 0.42
-------------- --------------
-------------- --------------
Diluted net (loss) income per share $ (2.16) $ 0.41
-------------- --------------
-------------- --------------
Shares used in per share calculations:
Basic net (loss) income 23,652 23,490
-------------- --------------
-------------- --------------
Diluted net (loss) income 23,652 23,858
-------------- --------------
-------------- --------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
- 3 -
<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
July 3, April 3,
1999 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 85,829 $ 79,301
Short-term investments 70,067 240,133
Accounts receivable 32,305 23,788
Inventories 24,422 17,683
Prepaid expenses and other current assets 6,298 6,061
Deferred income taxes 15,358 14,400
----------------- -----------------
Total current assets 234,279 381,366
Property and equipment, net 55,825 44,993
Foundry investments, advances and other assets 126,505 114,537
Intangible assets, net 418,369 --
Deferred income taxes 29,813 --
----------------- -----------------
$ 864,791 $ 540,896
----------------- -----------------
----------------- -----------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 119,735 $ 32,184
Bank borrowings 25,000 --
Deferred income on sales to
distributors 22,988 19,993
Income taxes payable 8,025 4,985
----------------- -----------------
Total current liabilities 175,748 57,162
Bank borrowings 227,999 --
Other long-term liabilities 1,250 --
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized, 23,740,175 and
23,597,236 shares issued and outstanding 237 236
Paid-in capital 250,512 223,290
Retained earnings 209,045 260,208
----------------- -----------------
Total stockholders' equity 459,794 483,734
----------------- -----------------
$ 864,791 $ 540,896
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
July 3, June 27,
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (51,163) $ 9,816
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 7,252 2,391
Acquisition of in-process research and development 89,003 --
Deferred income taxes pertaining to intangible assets (30,771) --
Changes in assets and liabilities:
Accounts receivable 3,168 8,349
Inventories 1,227 (351)
Prepaid expenses and other assets (1,267) 140
Deferred income taxes -- (925)
Accounts payable and accrued
expenses 2,639 (4,474)
Deferred income 2,051 (1,889)
Income taxes payable 2,397 (2,174)
Other liabilities 2,500 --
---------------- ---------------
Total adjustments 78,199 1,067
---------------- ---------------
Net cash provided by operating activities 27,036 10,883
---------------- ---------------
Cash flows from investing activities:
Proceeds from short-term investments, net 170,066 9,276
Acquisition of Vantis Corporation, net of cash acquired (439,258) --
Foundry investments (4,590) --
Capital expenditures (3,056) (6,040)
---------------- ---------------
Net cash (used) provided by investing activities (276,838) 3,236
---------------- ---------------
Cash flows from financing activities:
Proceeds from bank borrowings 252,999 --
Net proceeds from issuance of common stock 3,331 4,230
Repurchase of common stock -- (1,234)
---------------- ---------------
Net cash provided by financing activities 256,330 2,996
---------------- ---------------
Net increase in cash and cash equivalents 6,528 17,115
Beginning cash and cash equivalents 79,301 60,344
---------------- ---------------
Ending cash and cash equivalents $ 85,829 $ 77,459
---------------- ---------------
---------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 167 $ --
Cash paid for income taxes 1,726 7,116
Supplemental disclosures of non-cash investing and financing activities:
Conversion of Vantis Corporation stock options
to Lattice stock options (Note 4) 23,982 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
In our opinion, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments with
the exception of the in-process research and development charge discussed in
Note 4) necessary to present fairly the financial information included
therein. We believe disclosures are adequate to make the information not
misleading, however, we suggest that these financial statements be read in
conjunction with the audited consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-K/A for the year
ended April 3, 1999 and filed on July 27, 1999, and the report on Form 8-K
which was filed with the Securities Exchange Commission on June 25, 1999.
On June 15, 1999, we completed the acquisition of all of the outstanding
capital stock of Vantis Corporation ("Vantis") from Advanced Micro Devices,
Inc. ("AMD"). The transaction was accounted for as a purchase, and
accordingly, the results of operations of Vantis and estimated fair value of
assets acquired and liabilities assumed were included in our consolidated
condensed financial statements beginning June 16, 1999. The acquisition of
Vantis is discussed further in Note 4. There are no significant differences
between our accounting policies and those of Vantis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates. For
financial reporting purposes, we report on a 13 or 14 week quarter with the
year ending April 1, 2000. The results of operations for the quarter ended
July 3, 1999 are not necessarily indicative of the results to be expected for
the full year.
This Quarterly Report on Form 10-Q contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. In particular, the assumptions set forth
in Note 4 and in the Management Discussion and Analysis section of this
Current Report on Form 10-Q regarding revenue growth and cost of capital
which underlie the Company's calculation of the in-process research and
development expenses contain forward-looking statements and are qualified by
the risks associated with overall semiconductor market conditions, market
acceptance and demand for our new products, our dependencies on our foundry
suppliers, the impact of competitive products and pricing, technological and
product development risks, as well as our ability to successfully integrate
Vantis into our operations, retain key employees of Vantis, retain key
customers and suppliers, successfully increase our combined revenue and
profitability, and other risks detailed in our Annual Report on Form 10-K for
the year ended April 3, 1999 and other reports filed from time to time with
the Securities Exchange Commission ("SEC"). Actual results could differ
materially from those projected in the forward-looking statements.
6
<PAGE>
Note 2 - Revenue Recognition:
Revenue from sales to OEM (original equipment manufacturer) customers is
recognized upon shipment. Certain of our sales are made to distributors under
agreements providing price protection and right of return on unsold
merchandise. Revenue and costs relating to such distributor sales are
deferred until the product is sold by such distributors and the related
revenue and costs are then reflected in income.
Note 3 - Net (Loss) 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. Net loss per
share is computed based on the weighted average number of shares of common
stock outstanding during the period.
Note 4 - Acquisition of Vantis:
As discussed in Note 1, we completed the acquisition of all of the
outstanding capital stock of Vantis from AMD on June 15, 1999. We paid
approximately $500.1 million in cash for all of the outstanding capital stock
of Vantis. Additionally, we paid approximately $10.8 million in direct
acquisition costs, we accrued an additional $5.4 million of pre-acquisition
contingencies, we accrued $8.3 million in exit costs and recorded normal
accruals of $34.5 million related to the Vantis business. This purchase was
financed using a combination of cash reserves and a new credit facility
bearing interest at adjustable rates (See Note 5). In addition, we exchanged
Company stock options for all of the options outstanding under the former
Vantis employee stock plans with a calculated Black-Scholes value of
approximately $24.0 million. The total purchase price of Vantis was $583.1
million. The purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on an independent appraisal and
management estimates. The purchase price and the related allocation are
subject to further refinement and change over the next year. The total
purchase price was allocated as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Current technology $210.3
Excess of purchase price over net assets assumed 158.8
In-process research and development 89.0
Fair value of other tangible net assets 61.3
Assembled workforce, customer list, patents and trademarks 53.5
Fair value of property, plant and equipment 10.2
--------
Total $583.1
--------
--------
</TABLE>
7
<PAGE>
Vantis Integration
We have taken certain actions to integrate the Vantis operations and, in
certain instances, to consolidate duplicative operations. Accrued exit costs
related to Vantis were recorded as an adjustment to the fair value of net
assets in the purchase price allocation. Accrued exit costs include $4.2
million related to Vantis office closures, $2.5 million related to separation
benefits for Vantis employees and $1.1 million in other exit costs primarily
relating to the termination of Vantis foreign distributors. These accruals
are based upon our current estimates and are in accordance with Emerging
Issue Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination". There was no activity against these
exit costs for the period June 16, 1999 to July 3, 1999.
In-Process Research and Development ("IPR&D")
The value assigned to IPR&D was determined by identifying individual research
projects for which technological feasibility had not been established. These
include semiconductor projects with a value after application of the SEC's
IPR&D valuation methodology of $ 77.2 million and a process technology
project with a value of $11.8 million. The value of each project was
determined by estimating the expected cash flows from the projects once
commercially viable, applying a factor based on the stage of completion of
each project so as to include only those cash flows that relate to
development efforts prior to the acquisition date, and discounting the
resulting net cash flows back to their present value. The percentage of
completion for each project was determined using proportionate cost incurred
and technical milestones achieved to date. The percentage of completion
varied by individual project ranging from 50% to 69% for semiconductors on
June 15, 1999. The process technology project was estimated to be 90%
complete on June 15, 1999.
The nature of the efforts to develop the in-process research and development
into commercially viable products for semiconductors principally relate to
the completion of design, simulation, verification, documentation, test
program development, prototyping, reliability testing and qualification,
hardware and software integration as well as customer system-level testing
and acceptance. For the process technology, the nature of the efforts
required to establish the commercial viability of the in-process research and
development project principally relate to transistor design, lithography and
metalization process development, process integration, transistor size
reduction plans, development of packaging integration technology, achievement
of manufacturability goals, satisfaction of reliability standards and
completion of qualification testing.
The semiconductor projects are related to new PLD products (requiring new
architectures and process technologies) and have the attendant risks
associated with development of advanced semiconductor circuit designs such as
achievement of speed, power, density, reliability and cost goals. All of the
semiconductor projects have remaining risks related to achievement of these
design goals and effective software integration. In addition, certain
projects have basic circuit design and layout activities which had not been
completed as of June 15, 1999. These semiconductor projects are scheduled for
market release beginning in November 1999 and
8
<PAGE>
continuing through 2001. Estimated costs to complete all in-process
semiconductor projects total $19.0 million and range from $0.2 million to
$16.5 million.
The process technology project is related to the development of a new
advanced manufacturing process to reduce transistor size, improve speed and
lower power consumption. Through June 15, 1999, transistor design,
lithography and metalization process development, process integration and
certain transistor size reduction plans had been achieved. Development of
packaging integration technology, achievement of manufacturability yield
objectives, satisfaction of reliability standards and qualification testing
had not been accomplished at June 15, 1999. The process is expected to be
qualified for initial production in fourth quarter of 1999 with approximately
$450,000 of costs to be incurred after June 15, 1999 out of a total of $4
million of estimated costs. This process technology, once qualified, is
expected to remain in production through 2004.
If the projects discussed above are not successfully developed, the future
sales and profitability of the combined company may be adversely affected.
Additionally, the value of other intangible assets acquired may become
impaired. Management believes that the IPR&D charge of $89 million is valued
consistently with the SEC staff's current views regarding valuation
methodologies. There can be no assurances, however, that the SEC staff will
not take issue with any assumptions used in our valuation model and require a
revision in the amount allocated to IPR&D.
The estimated costs to develop the in-process research and development into
commercially viable products are approximately $19.4 million in aggregate
- --$4.7 million in 1999 subsequent to the transaction date, $10.0 million in
2000, and $4.7 million in 2001.
The net cash flows from each project are based on management's estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from such projects. These estimates
are based on the below mentioned assumptions.
The estimated revenues are based on projected average compounded annual
revenue growth rates for semiconductor products that are in line with
industry analysts' forecasts of growth in the markets in which Vantis
competes. Estimated total revenues from the in-process research and
development product areas are expected to peak in the year 2005 and decline
rapidly thereafter as replacement products are expected to enter the market.
These projections are based on management estimates of market size and
growth, expected trends in technology, and the nature and expected timing of
new product introductions by Vantis and its competitors.
In developing cash flow estimates, gross margins, research and development
costs and selling general and administrative expenses were consistent with
Vantis historical experience adjusted for expected changes in its stand-alone
performance.
Vantis' management estimated a profit split from the in-process projects to
the current products to account for the fact that Vantis' in-process projects
are partially dependent on technology that has already established its
feasibility. The profit split from each in-process product was
9
<PAGE>
estimated as a percentage of the total value of the in-process product which
was attributable to existing Vantis core technology.
The net cash flows were discounted back to their present value based on the
weighted average cost of capital (WACC). The WACC calculation estimates the
rate of return required on an investment in an operating enterprise and
considers the rates of return required from investments in various areas of
that enterprise. The WACC assumed for Vantis, as a corporate business
enterprise, is approximately 16%. The discount rate used in discounting the
net cash flows from in-process research and development is 20% to 22%, which
is 4% to 6% higher than the discount rate used in discounting the net cash
flows from current technology. This discount rate is higher than the WACC due
to the inherent uncertainties in the estimates described above including
uncertainty surrounding the successful development of the in-process research
and development projects, the useful life of such technology, the
profitability levels of such technology and the uncertainty of technological
advances that are unknown at this time.
Useful lives of intangible assets
The estimated weighted average useful life of the intangible assets for
current technology, assembled workforce, customer lists, trademarks, patents
and residual goodwill, created as a result of the acquisition, is
approximately five years.
PRO FORMA RESULTS
The following pro forma results of operations information is provided for
illustrative purposes only and do not purport to be indicative of the
consolidated results of operations for future periods or that actually would
have been realized had Lattice and Vantis been a consolidated entity during
the periods presented. These pro forma results do not include the effect of
non-recurring purchase accounting adjustments. The pro forma results combine
the results of operations as if Vantis had been acquired as of the beginning
of the periods presented. The results include the impact of certain
adjustments such as goodwill amortization, estimated changes in interest
income (expense) related to cash outlays and borrowings associated with the
transaction (see discussion in Note 5) and income tax benefits related to the
aforementioned adjustments. Additionally, an in-process research and
development charge of $89 million discussed above has been excluded from the
periods presented due to its non-recurring nature.
<TABLE>
<CAPTION>
(in thousands, except per-share amounts)
Pro Forma Results
-------------------------
Three Months Ended July 3, June 27,
(Unaudited) 1999 1998
--------- --------
<S> <C> <C>
Revenue $104,433 $100,143
Net loss $ (4,697) $ (6,132)
Basic net loss per share $ (0.20) $ (0.26)
Diluted net loss per share $ (0.20) $ (0.26)
</TABLE>
10
<PAGE>
Note 5 - Debt:
On June 15, 1999, we entered into a credit agreement by and among the
Company, a group of lenders and ABN AMRO Bank N.V. ("ABN AMRO") as
administrative agent for the lender group. The credit agreement consists of
two credit facilities: a $60 million unsecured revolving credit facility
("Revolver"), and a $220 million unsecured reducing term loan ("Term Loan").
On June 15, 1999, the Company borrowed $220 million under the Term Loan and
approximately $33 million under the Revolver. The credit facilities allow for
borrowings at adjustable rates. Interest payments are due quarterly. The
Revolver and Term Loan expire on June 30, 2002 at which time outstanding
borrowings are payable in full. The Term Loan has mandatory redemptions of
$12.5 million per quarter beginning March 31, 2000 through September 30,
2001, increasing to $25 million per quarter for the two quarters ending
December 31, 2001 and March 31, 2002, with the remaining balance due at
maturity. We, in accordance with the credit agreement, must comply with
certain financial covenants related to profitability, tangible net worth,
working capital, and debt leverage. At July 3, 1999, we were in compliance
with these covenants. Both the Revolver and the Term Loan may be prepaid in
part or in full without penalty.
Note 6 - Reconciliation of basic and diluted net income (loss) per share (in
thousands, except per share data):
The following is a reconciliation of the basic and diluted per share
computations as required by SFAS No. 128, "Earnings Per Share ("EPS")."
<TABLE>
<CAPTION>
Three Months
Ended
------------------------
July 3, June 27,
1999 1998
--------- --------
<S> <C> <C>
Basic and diluted
net (loss) income $(51,163) $9,816
--------- ------
--------- ------
Shares used in basic net (loss) income per
share calculations 23,652 23,490
Dilutive effect of
options and warrants -- 368
Shares used in diluted
net income per share calculations 23,652 23,858
--------- ------
--------- ------
Basic net (loss) income per share $ (2.16) $ 0.42
--------- ------
--------- ------
Diluted net (loss) income per share $ (2.16) $ 0.41
--------- ------
--------- ------
</TABLE>
For the three months ended July 3, 1999, 705 thousand common equivalent
shares were excluded from the computation of diluted shares as a result of
their anti-dilutive effect on loss per share.
11
<PAGE>
Note 7 - Inventories (in thousands):
<TABLE>
<CAPTION>
July 3, April 3,
1999 1998
------- -------
<S> <C> <C>
Work in progress $13,141 $10,956
Finished goods 11,281 6,727
------- -------
$24,422 $17,683
------- -------
------- -------
</TABLE>
The July 3, 1999 inventory increased as a result of the acquisition of Vantis
on June 15, 1999. Vantis inventory at July 3, 1999 was $8.0 million,
consisting of $4.9 million in work-in-process and $3.1 million in finished
goods inventories.
Note 8 - Changes in Stockholders' Equity (in thousands):
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings Total
------ --------- -------- --------
<S> <C> <C> <C> <C>
Balances, April 3, 1999 $ 236 $ 223,290 $260,208 $483,734
Fair value of options issued to
Vantis employees (Note 4) -- 23,982 -- 23,982
Common stock issued 1 1,433 -- 1,434
Tax benefit of option exercises -- 1,897 -- 1,897
Other comprehensive income -- (90) -- (90)
Loss for the
three-month period -- -- (51,163) (51,163)
------ --------- -------- --------
Balances, July 3, 1999 $ 237 $ 250,512 $209,045 $459,794
------ --------- -------- --------
------ --------- -------- --------
</TABLE>
Note 9 - New Accounting Pronouncements:
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes new accounting treatment for
derivatives and hedging activities and supercedes and amends a number of
existing accounting standards. For the
12
<PAGE>
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 10 - Legal matters:
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 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.
Note 11 - Subsequent event:
On August 11, 1999 our Board of Directors approved a two-for-one split of its
common stock to be effected in the form of a stock dividend of one share of
common stock for each share of our outstanding common stock.
The stock dividends will be payable on September 16, 1999 to stockholders of
record as of August 26, 1999. A cash payout will be made in lieu of issuing
any fractional shares.
13
<PAGE>
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 (in
thousands):
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
------- -------
<S> <C> <C>
United States $30,954 $24,464
Export sales:
Europe 14,559 13,640
Asia 12,181 7,078
Other 2,044 2,846
------- -------
28,784 23,564
------- -------
$59,738 $48,028
------- -------
------- -------
</TABLE>
Resale of product through two distributors accounted for approximately 12%
and 10% of revenues, respectively, in the first quarter of fiscal 2000. No
individual customer accounted for more than 10% of revenue in the first
quarter of fiscal 1999. No export sales to customers or distributors of any
individual country accounted for more than 10% of revenue in the first
quarters of fiscal 2000 and fiscal 1999, respectively.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The results of operations for the three month period ended July 3, 1999
presented include the effect of the acquisition of Vantis from June 16, 1999,
which is discussed in Note 4 to the Unaudited Consolidated Financial
Statements contained herein.
Key elements of the statements of operations, expressed as a percentage of
revenues, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Revenue 100.0% 100.0%
Gross margin 61.7% 60.2%
Research and development expenses 16.6% 16.4%
Selling, general and administrative expenses 18.2% 18.7%
(Loss) income from operations (129.0)% 25.0%
</TABLE>
REVENUE:
Revenue for the first quarter of fiscal 2000 increased $11.7 million or 24%
as compared to the first quarter of fiscal 1999. In addition to Vantis, the
revenue increase was attributable to increased sales of ISP products and
recovering demand from Asia.
Overall average selling prices decreased slightly in the first quarter of
fiscal 2000 as compared to the first quarter of fiscal 1999. Fluctuations in
overall average selling prices were due primarily to product mix changes.
Although selling prices of mature products generally decline over time, this
decline is at times offset by higher selling prices of new products. Our
ability to achieve revenue growth is in large part dependent on the continued
development, introduction and market acceptance of new products. See "Factors
Affecting Future Results".
GROSS MARGIN:
Gross margin as a percentage of revenue was 61.7% in the first quarter of
fiscal 2000 as compared to 60.2% in the first quarter of fiscal 1999. The
increase was primarily related 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.
15
<PAGE>
RESEARCH AND DEVELOPMENT:
Research and development ("R&D") expenses increased by approximately $2.0
million, or 25.3%, in the first quarter of fiscal 2000 when compared to the
first quarter of fiscal 1999. In addition to the acquisition of Vantis,
spending increases resulted primarily from the increased development of new
products. We believe that a continued commitment to research and development
is essential in order to maintain product leadership of our existing product
families and provide innovative new product offerings, and therefore expect
to continue to make significant future investments in research and
development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
Selling, general and administrative ("SG&A") expenses increased $1.8 million,
or 20%, in the first quarter of fiscal 2000 when compared to the first
quarter of fiscal 1999. This increase was primarily due to the Vantis
acquisition.
OTHER INCOME, NET:
Interest and other income (net of expense) decreased by approximately $0.7
million in the first quarter of fiscal 2000 as compared to the first quarter
of fiscal 1999. This was primarily due to interest expense of approximately
$0.9 million from acquisition-related debt as discussed in Note 5 offsetting
increased interest income on higher cash balances prior to the acquisition.
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangibles increased by $4.2 million for the first quarter
of fiscal 2000 as compared to the first quarter of fiscal 1999 due to the
inclusion of amortization of intangible assets arising from the Vantis
acquisition on June 15, 1999. In-process research and development expenses of
$89.0 million in the first quarter of FY 2000 are further described in Note 4
to the Unaudited Consolidated Financial Statements.
(BENEFIT) PROVISION FOR INCOME TAXES:
The benefit for income taxes for the three months ended July 3, 1999 is 32%
of the loss before provision for income taxes. This reflects the estimated
rate at which income taxes would be recoverable if a loss tax return were
filed. The loss before provision for income taxes is attributable to the
In-Process research and development charge during the period of approximately
$89 million. If this charge were not present, the Company would have taxable
income and an income tax rate of approximately 36.5%. For the three month
period ended June 27, 1998, the income tax rate was 32.5%. The principal
reason for the increase from 32.5% to 36.5% is that there is less tax exempt
and tax favored interest income in the current period (due to cash invested
in the Vantis acquisition) than the same period last year.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE - METHODOLOGY
The value assigned to IPR&D was determined by identifying individual research
projects for which technological feasibility had not been established. These
include semiconductor projects with a value after application of the SEC's
IPR&D valuation methodology of $77.2 million and a process technology project
with a value of $11.8 million. The value of each project was determined by
estimating the expected cash flows from the projects once commercially
viable, applying a factor based on the stage of completion of each project so
as to include only those cash flows that relate to development efforts prior
to the acquisition date, and discounting the resulting net cash flows back to
their present value. The percentage of completion for each project was
determined using proportionate cost incurred and technical milestones
achieved to date. The percentage of completion varied by individual project
ranging from 50% to 69% for semiconductors on June 16, 1999. The process
technology project was estimated to be 90% complete on June 16, 1999.
16
<PAGE>
The nature of the efforts to develop the in-process research and development
into commercially viable products for semiconductors principally relate to
the completion of design, simulation, verification, documentation, test
program development, prototyping, reliability testing and qualification,
hardware and software integration as well as customer system-level testing
and acceptance. For the process technology, the nature of the efforts
required to establish the commercial viability of the in-process research and
development project principally relate to transistor design, lithography and
metalization process development, process integration, transistor size
reduction plans, development of packaging integration technology, achievement
of manufacturability goals, satisfaction of reliability standards and
completion of qualification testing.
The semiconductor projects are related to new PLD products (requiring new
architectures and process technologies) and have the attendant risks
associated with development of advanced semiconductor circuit designs such as
achievement of speed, power, density, reliability and cost goals. All of the
semiconductor projects have remaining risks related to achievement of these
design goals and effective software integration. In addition, certain
projects have basic circuit design and layout activities which had not been
completed as of June 15, 1999. These semiconductor projects are scheduled for
market release beginning in November 1999 and continuing through 2001.
Estimated costs to complete all in-process semiconductor projects total $19.0
million and range from $0.2 million to $16.5 million.
The process technology project is related to the development of a new
advanced manufacturing process to reduce transistor size, improve speed and
lower power consumption. Through June 16, 1999, transistor design,
lithography and metalization process development, process integration and
certain transistor size reduction plans had been achieved. Development of
packaging integration technology, achievement of manufacturability yield
objectives, satisfaction of reliability standards and qualification testing
had not been accomplished at June 16, 1999. The process is expected to be
qualified for initial production in fourth quarter of 1999 with approximately
$450,000 of costs to be incurred after June 15, 1999 out of a total of $4
million of estimated costs. This process technology, once qualified, is
expected to remain in production through 2004.
If the projects discussed above are not successfully developed, the future
sales and profitability of the combined company may be adversely affected.
Additionally, the value of other intangible assets acquired may become
impaired. Management believes that the IPR&D charge of $89 million is valued
consistently with the SEC staff's current views regarding valuation
methodologies. There can be no assurances, however, that the SEC staff will
not take issue with any assumptions used in our valuation model and require a
revision in the amount allocated to IPR&D.
The estimated costs to develop the in-process research and development into
commercially viable products are approximately $19.4 million in
aggregate--$4.7 million in 1999 subsequent to the transaction date, $10.0
million in 2000, and $4.7 million in 2001.
17
<PAGE>
The net cash flows from each project are based on management's estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from such projects. These estimates
are based on the below mentioned assumptions.
The estimated revenues are based on projected average compounded annual
revenue growth rates for semiconductor products that are in line with
industry analysts' forecasts of growth in the markets in which Vantis
competes. Estimated total revenues from the in-process research and
development product areas are expected to peak in the year 2005 and decline
rapidly thereafter as replacement products are expected to enter the market.
These projections are based on management estimates of market size and
growth, expected trends in technology, and the nature and expected timing of
new product introductions by Vantis and its competitors.
In developing cash flow estimates, gross margins, research and development
costs and selling general and administrative expenses were consistent with
Vantis historical experience adjusted for expected changes in its stand-alone
performance.
Vantis' management estimated a profit split from the in-process projects to
the current products to account for the fact that Vantis' in-process projects
are partially dependent on technology that has already established its
feasibility. The profit split from each in-process product was estimated as a
percentage of the total value of the in-process product which was
attributable to existing Vantis core technology.
The net cash flows were discounted back to their present value based on the
weighted average cost of capital (WACC). The WACC calculation estimates the
rate of return required on an investment in an operating enterprise and
considers the rates of return required from investments in various areas of
that enterprise. The WACC assumed for Vantis, as a corporate business
enterprise, is approximately 16%. The discount rate used in discounting the
net cash flows from in-process research and development is 20% to 22%, which
is 4% to 6% higher than the discount rate used in discounting the net cash
flows from current technology. This discount rate is higher than the WACC due
to the inherent uncertainties in the estimates described above including
uncertainty surrounding the successful development of the in-process research
and development projects, the useful life of such technology, the
profitability levels of such technology and the uncertainty of technological
advances that are unknown at this time.
Useful lives of intangible assets
The estimated weighted average useful life of the intangible assets for
current technology, assembled workforce, customer lists, trademarks, patents
and residual goodwill, created as a result of the acquisition, is
approximately five years.
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:
18
<PAGE>
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 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 would 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 would be
adversely affected.
Substantially all of our revenues are derived from products based on a
specialized silicon wafer manufacturing process technology called
E(2)CMOS-REGISTERED TRADEMARK-. The reliable manufacture of high performance
E(2)CMOS 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.
19
<PAGE>
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 E(2)CMOS-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.
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.
20
<PAGE>
WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES INTEGRATING VANTIS CORPORATION.
We acquired Vantis on June 15, 1999, and are currently in the process of
integrating Vantis with our other operations. 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 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.
In addition, as part of our acquisition of Vantis, we entered into
arrangements with Vantis' former parent, AMD, for AMD to provide Vantis with
certain manufacturing support and administrative services. In the event AMD
fails to provide these services, or provides such services at a level of
quality and timeliness inconsistent with the historical delivery of such
services, our ability to integrate Vantis will be severely hampered and our
business may suffer.
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.
21
<PAGE>
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.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINTAIN OR GROW REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS.
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our outstanding debt and our
investment portfolio.
A 70 basis-point move in interest rates, 10% of our weighted-average interest
expense rate on the floating rate debt issued on June 15, 1999 (see Note 5 to
the Unaudited Consolidated Financial Statements), would have an insignificant
effect on our pretax earnings, debt compliance ratios, cash flow and
financial condition over the next fiscal year. A 35 basis-point move in
interest rates (10% of our weighted-average interest income rate on our cash,
cash equivalent and short term investment income) would have an insignificant
effect on our pretax earnings, debt compliance ratios, cash flow and
financial condition over the next fiscal year. Similarly, a 35 basis-point
move in interest income rates would have had an insignificant effect on
pretax earnings, cash flow and financial condition in the fiscal year
completed on April 3, 1999.
We manage our interest rate risk on borrowings by keeping cash reserves
adequate to cover unexpected changes in interest rates. Another alternative
is refinancing. Although there is no assurance that a refinancing could be
accomplished, the terms of existing borrowing agreements do not preclude this
solution.
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 fluctuated by 10%
from rates at July 3, 1999 and June 27, 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:
Our cash, cash equivalents and short-term investments decreased $163.5
million to $155.9 million during the first quarter of fiscal 2000 from $319.4
million at April 3, 1999. The decrease was due to utilization of cash for the
Vantis acquisition. Working capital decreased $265.7 million to $58.5 million
at July 3, 1999 from $324.2 million at April 3, 1999. This decrease in
working capital was primarily a result of utilization of cash for the Vantis
acquisition and higher current liabilities as a result of the short-term
portion of the new debt facility we entered in order to purchase Vantis (see
below). During the first quarter of fiscal 2000, we generated approximately
$27.0 million of cash and cash equivalents from our operating activities
compared with $10.9 million during the same period in 1999. This increase in
cash and cash equivalents was primarily attributable to the liquidation of
short-term investments in contemplation of the Vantis acquisition coupled
with the changes in assets and liabilities described below.
Accounts receivable increased by $8.5 million, or 36%, as compared to the
balance at April 3, 1999. This increase was primarily due to the inclusion of
approximately $11.7 million of Vantis
25
<PAGE>
receivables, offset by decreases due primarily to the timing of collections.
Inventories increased by $6.7 million, or 38%, as compared to the balance at
April 3, 1999 due to the inclusion of approximately $8.0 million of Vantis
inventories. Net property and equipment increased by $10.8 million, or 24%,
as compared to the balance at April 3, 1999 primarily due to the inclusion of
Vantis assets. Long-term deferred income taxes increased $29.8 million versus
the balance at April 3, 1999 and represents future income tax benefits to be
derived from the amortization for income tax purposes of in-process research
and development charges as described in Note 4 to the Unaudited Consolidated
Financial Statements which were written off in the first quarter of fiscal
2000 for financial reporting purposes. Accounts payable and accrued expenses
increased by $87.6 million, or 272%, due primarily to the inclusion of Vantis
liabilities (see Note 4 to the Unaudited Consolidated Financial Statements).
The $3.0 million, or 61% increase in income taxes payable as compared to the
balance at April 3, 1999 is primarily attributable to the timing of tax
deductions and payments. Deferred income increased by $3.0 million, or 15%,
as compared to the balance at April 3, 1999, due primarily to increased
billings to distributors associated with higher revenue levels.
On June 15, 1999, we entered into a credit agreement by and among the
Company, a group of lenders and ABN AMRO Bank N.V. ("ABN AMRO") as
administrative agent for the lender group. The credit agreement consists of
two credit facilities: a $60 million unsecured revolving credit facility
("Revolver"), and a $220 million unsecured reducing term loan ("Term Loan").
On June 15, 1999, the Company borrowed $220 million under the Term Loan and
approximately $33 million under the Revolver. The credit facilities allow for
borrowings at adjustable rates. Interest payments are due quarterly. The
Revolver and Term Loan expire on June 30, 2002 at which time outstanding
borrowings are payable in full. The Term Loan has mandatory redemptions of
$12.5 million per quarter beginning March 31, 2000 through September 30,
2001, increasing to $25 million per quarter for the two quarters ending
December 31, 2001 and March 31, 2002, with the remaining balance due at
maturity. We, in accordance with the credit agreement, must comply with
certain financial covenants related to profitability, tangible net worth,
working capital, and debt leverage. At July 3, 1999, we were in compliance
with these covenants. Both the Revolver and the Term Loan may be prepaid in
part or in full without penalty.
Capital additions were $3.1 million, net of retirements, during the first
fiscal quarter of 2000. We expect to spend approximately $25 to $30 million
for the fiscal year ending April 1, 2000. The primary financing activities
during the first quarter of fiscal 2000 are attributable to the new debt
facility entered into to fund the Vantis acquisition (see Note 5 to the
Unaudited Consolidated Financial Statements).
In March 1997, we entered into an advance payment production agreement with
Seiko Epson and its affiliated U.S. distributor, Epson Electronics America,
Inc., 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 wafer manufacturing facility. Under
the terms of the agreement, the advance is to be repaid with semiconductor
wafers over a multi-year period. The agreement calls for wafers to be
supplied by Seiko Epson through Epson Electronics America, Inc. pursuant to
purchase agreements with Epson Electronics America, Inc. We also have an
option under this agreement to advance Seiko Epson an additional $60 million
26
<PAGE>
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. The balance of the advance payment is currently anticipated to
be made in two installments during fiscal 2000.
We entered entered into a series of agreements with United Microelectronics
Corporation ("UMC") in September 1995 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 for an approximate 10% equity interest
in UICC and the right to receive a percentage of the facility's wafer
production at market prices.
In October 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% of the outstanding
equity of Utek.
In June 1999, the Board of Directors of UICC and 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. This matter was scheduled for a 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, we expect to own less than one percent of UMC's common stock. We have
no plans to liquidate this investment. We have also received assurance from
UMC management that our capacity rights will be preserved after the merger.
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. 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.
We believe that our existing liquid resources, expected cash generated from
operations and existing credit facilities combined with our ability to borrow
additional funds will be adequate to meet our operating and capital
requirements and obligations for the next twelve months.
In an effort to secure additional wafer supply, the Company may from time to
time consider various financial arrangements including joint ventures, equity
investments, advance purchase payments, loans, or similar arrangements with
independent wafer manufacturers in exchange for committed wafer capacity. To the
extent that the Company pursues any such additional financing
27
<PAGE>
arrangements, additional debt or equity financing may be required. We may in
the future seek new or additional sources of funding. There can be no
assurance that such additional financing will be available when needed or, if
available, will be on favorable terms. Any future equity financing will
decrease existing stockholders' equity percentage ownership and may,
depending on the price at which the equity is sold, result in dilution.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of Net Income Per Share (*)
27 Financial Data Schedule for Three Months Ended July 3, 1999
(b) Reports on Form 8-K
(1) On May 7, 1999, the Company filed a Current Report on Form
8-K representing a Stock Purchase Agreement dated April 21, 1999
between Lattice Semiconductor Corporation and Advanced Micro
Devices, Inc.
(2) On June 25, 1999, the Company filed a Current Report on Form 8-K
dated June 15, 1999 regarding the June 15, 1999 acquisition of Vantis
Corporation.
(*) Incorporated by reference to Note 6 to the Unaudited
Consolidated Financial Statements in the Company's report
on Form 10-Q for the three months ended July 3, 1999.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION (Registrant)
Date: August 16, 1999
By /s/ STEPHEN A. SKAGGS
---------------------
Stephen A. Skaggs
Senior Vice President Finance, Chief Financial Officer
and Secretary
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-2000
<CASH> 85,829
<SECURITIES> 70,067
<RECEIVABLES> 32,305
<ALLOWANCES> (1,488)
<INVENTORY> 24,422
<CURRENT-ASSETS> 234,279
<PP&E> 114,284
<DEPRECIATION> (58,459)
<TOTAL-ASSETS> 864,791
<CURRENT-LIABILITIES> 175,748
<BONDS> 229,249
0
0
<COMMON> 237
<OTHER-SE> 459,557
<TOTAL-LIABILITY-AND-EQUITY> 864,791
<SALES> 59,738
<TOTAL-REVENUES> 59,738
<CGS> 22,881
<TOTAL-COSTS> 136,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 908
<INCOME-PRETAX> (75,239)
<INCOME-TAX> (24,076)
<INCOME-CONTINUING> (51,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,163)
<EPS-BASIC> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
