<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 April 1, 2000
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 April 1, 2000 there were 49,183,035 shares of the Registrant's common stock,
$.01 par value, outstanding.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -
Three Months Ended March 31, 2000 and
March 31, 1999 3
Consolidated Balance Sheet - March 31, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and
March 31, 1999 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 28
Signatures 29
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
2000 1999
--------- ---------
(Note 1)
<S> <C> <C>
Revenue $ 126,055 $ 53,788
Costs and expenses:
Cost of products sold 49,585 20,743
Research and development 18,243 8,877
Selling, general and administrative 19,514 9,476
Amortization of intangible assets 20,362 --
--------- ---------
Total costs and expenses 107,704 39,096
--------- ---------
Income from operations 18,351 14,692
Gain on appreciation of foundry investments 149,960 --
Other (expense) income, net (1,161) 2,860
--------- ---------
Income before provision for income taxes 167,150 17,552
Provision for income taxes 62,329 5,704
--------- ---------
Net income $ 104,821 $ 11,848
========= =========
Basic net income per share $ 2.15 $ 0.25
========= =========
Diluted net income per share $ 1.84 $ 0.24
========= =========
Shares used in per share calculations:
Basic net income 48,738 47,076
========= =========
Diluted net income 58,409 48,398
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share and par value data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 87,645 $ 113,824
Short-term investments 150,159 100,316
Accounts receivable, net 58,759 33,676
Inventories 30,662 26,036
Prepaid expenses and other current assets 16,005 10,407
Deferred income taxes 35,900 29,727
---------- ----------
Total current assets 379,130 313,986
Property and equipment, net 64,296 59,689
Foundry investments, advances and other assets 283,582 130,274
Intangible assets, net 351,600 373,117
Deferred income taxes -- 39,089
---------- ----------
$1,078,608 $ 916,155
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 107,288 $ 103,581
Deferred income on sales to
distributors 54,230 45,188
Income taxes payable 8,594 12,459
---------- ----------
Total current liabilities 170,112 161,228
4 3/4% Convertible notes due in 2006 260,000 260,000
Deferred income taxes 15,457 --
Other long-term liabilities 13,699 12,154
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, 49,183,035 and
48,285,719 shares issued and outstanding 492 483
Paid-in capital 297,290 270,228
Other comprehensive income 4,675 --
Retained earnings 316,883 212,062
---------- ----------
Total stockholders' equity 619,340 482,773
---------- ----------
$1,078,608 $ 916,155
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 104,821 $ 11,848
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 25,159 2,875
Gain on appreciation of foundry investments (149,960) --
Changes in assets and liabilities:
Accounts receivable (25,083) (5,286)
Inventories (4,626) 1,377
Prepaid expenses and other assets (3,932) (540)
Accounts payable and accrued
expenses 3,707 3,470
Deferred income 9,042 3,304
Income taxes payable (3,865) 256
Deferred income taxes 48,373 (1,154)
Other liabilities 1,545 --
--------- ---------
Total adjustments (99,640) 4,302
--------- ---------
Net cash provided by operating activities 5,181 16,150
--------- ---------
Cash flows from investing activities:
(Purchase of) proceeds from short-term investments, net (49,843) 4,288
Capital expenditures (8,590) (4,378)
--------- ---------
Net cash used by investing activities (58,433) (90)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 27,073 8,497
--------- ---------
Net cash provided by financing activities 27,073 8,497
--------- ---------
Net (decrease) increase in cash and cash equivalents (26,179) 24,557
Beginning cash and cash equivalents 113,824 54,744
--------- ---------
Ending cash and cash equivalents $ 87,645 $ 79,301
========= =========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 7,771 $ 3,712
Supplemental disclosures of non-cash investing and
financing activities:
Gain on appreciation of foundry investments included in
other comprehensive income 4,675 --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The accompanying consolidated financial statements are unaudited and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and in the opinion of management include all
adjustments, consisting only of normal recurring adjustments necessary for the
fair statement of results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in our annual report on Form 10-K for the fiscal
period ended January 1, 2000.
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 amount of revenues and expenses during the fiscal periods
presented. Actual results could differ from these estimates.
In the fourth quarter of calendar 1999, we changed our reporting period to a 52
or 53 week year ending on the Saturday closest to December 31 from a 52 or 53
week fiscal year ending on the Saturday closest to March 31. For ease of
presentation, December 31 or March 31 has been utilized as the fiscal period
date for all financial statement captions. Additionally, for purposes of these
consolidated financial statements, the three-month fiscal period ended April 3,
1999 is referred to as "the first quarter of 1999", and the three-month fiscal
period ended on April 1, 2000 is referred to as "the first quarter of 2000".
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"). See Note 3. 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
financial statements beginning June 16, 1999. There are no significant
differences between our accounting policies and those of Vantis. The
accompanying consolidated financial statements include the accounts of Lattice
Semiconductor Corporation and its wholly owned subsidiaries after the
elimination of all significant intercompany balances and transactions.
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 3 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
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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,
and other risks detailed in our Annual Report on Form 10-K for the fiscal period
ended January 1, 2000 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.
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 - Acquisition of Vantis:
On June 15, 1999, we paid approximately $500.1 million in cash to AMD for all of
the outstanding capital stock of Vantis Corporation. Additionally, we paid
approximately $10.8 million in direct acquisition costs, accrued an additional
$5.4 million of pre-acquisition contingencies, accrued $8.3 million in exit
costs and assumed certain liabilities 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 4). In
addition, we exchanged Lattice 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 during the first half of 2000. The total
purchase price was allocated as follows (in millions):
<TABLE>
<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>
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
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<PAGE>
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. Separation benefits relate primarily to twenty Vantis senior
managers. At March 31, 2000, seven employees from this group had terminated. As
of March 31, 2000, an additional 55 Vantis employees had terminated for other
merger-related reasons. Payments of approximately $1.4 million have been charged
to this accrued liability. If these employees had not terminated, substantially
all of the related costs would have been charged to selling, general and
administrative expenses. Charges to other exit cost accrued liabilities were not
significant for the period from June 15, 1999 through March 31, 2000. These
accruals are based upon our current estimates and are in accordance with
Emerging Issues Task Force ("EITF") No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination."
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. Since June 15, 1999, there have been no
significant changes in the assumptions underlying these valuations.
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 during 2000 and
continuing through 2001.
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<PAGE>
Estimated costs to complete all in-process semiconductor projects at June 15,
1999 totaled $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 was qualified for initial production in the first
quarter of 2000 with approximately $450,000 of costs incurred after June 15,
1999 out of a total of $4 million of estimated costs. This process technology,
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 at June 15, 1999 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 estimated as a percentage of
the total value of the in-process product which was attributable to existing
Vantis core technology.
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<PAGE>
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 Note 4) and
income tax benefits related to the aforementioned adjustments.
<TABLE>
<CAPTION>
MAR. 31,
1999
----
THREE MONTHS ENDED
------------------
PRO FORMA RESULTS
-----------------
(UNAUDITED)
-----------
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C>
Revenue......................................................................... $100,945
Net loss........................................................................ $(1,722)
Basic loss per share............................................................ $(0.04)
Diluted loss per share.......................................................... $(0.04)
</TABLE>
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Note 4 - Debt:
On October 28, 1999, we issued $260 million in 4 3/4% convertible
subordinated notes due on November 1, 2006. These notes pay interest
semi-annually on May 1 and November 1. Holders of these notes may convert
them into shares of our common stock at any time on or before November 1,
2006, at a conversion price of $41.44 per share, subject to adjustment in
certain events. Beginning on November 6, 2002 and ending on October 31, 2003,
we may redeem the notes in whole or in part at a redemption price of 102.71%
of the principal amount. In the subsequent three twelve-month periods, the
redemption price declines to 102.04%, 101.36% and 100.68% of principal,
respectively. The notes are subordinated in right of payment to all of our
senior indebtedness, and are subordinated by operation of law to all
liabilities of our subsidiaries. At March 31, 2000, we had no senior
indebtedness and our subsidiaries had $17.2 million of debt and other
liabilities outstanding. Issuance costs relative to the convertible
subordinated notes are included in other assets and aggregated approximately
$6.9 million and are being amortized to expense over the lives of the notes.
Accumulated amortization amounted to approximately $770,000 at March 31, 2000.
On June 15, 1999, we entered into a credit agreement with a group of lenders and
ABN AMRO Bank N.V. ("ABN AMRO") as administrative agent for the lender group.
The credit agreement consisted of two credit facilities: a $60 million unsecured
revolving credit facility ("Revolver"), and a $220 million unsecured reducing
term loan ("Term Loan"), both expiring and due on June 30, 2002. On June 15,
1999, we borrowed $220 million under the Term Loan and approximately $33 million
under the Revolver. The credit facilities allowed for borrowings at adjustable
rates with interest payments due quarterly. The $33 million Revolver was repaid
in full during the third quarter of 1999.
In conjunction with the issuance of the convertible subordinated notes, we
repaid the $220 million Term Loan in full during the fourth quarter of 1999.
Remaining unamortized loan fees at the time of repayment, aggregating
approximately $2.6 million ($1.7 million net of income taxes or a charge of
$0.04 for basic and diluted earnings per share), were written off in the fourth
quarter of 1999 and charged in the Consolidated Statement of Operations as an
Extraordinary Item, Net of Income Taxes.
Note 5 - 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. The convertible notes
issued in October 1999 (see Note 4) are potentially dilutive securities.
On August 11, 1999 our Board of Directors approved a two-for-one stock split
of our 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. All
share and per share amounts presented in the accompanying consolidated
financial statements and notes thereto have been adjusted retroactively to
reflect the two-for-one split.
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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 convertible notes, options and warrants as outstanding. A
reconciliation of the numerators and denominators of basic and diluted net
income per share is presented below (in thousands, except for per share data):
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Basic and diluted net income $104,821 $ 11,848
======== ========
Shares used in basic net income
per share calculations 48,738 47,076
Dilutive effect of convertible notes,
options and warrants 9,671 1,322
-------- --------
Shares used in diluted
net income per share
calculations 58,409 48,398
======== ========
Basic net income per share $ 2.15 $ 0.25
======== ========
Diluted net income per share $ 1.84 $ 0.24
======== ========
</TABLE>
For the first quarter of 2000, the computation of diluted net income per share
includes the effect of stock options and the $260 million of convertible notes
(see Note 4). Diluted net income per share is adjusted to exclude interest
expense and debt issuance cost amortization (net of tax) of approximately $2.4
million. Diluted weighted-average shares outstanding include the dilutive effect
of stock options and approximately 6.3 million shares issuable on the assumed
conversion of the notes.
Note 6 - Inventories (in thousands):
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
2000 1999
------- -------
<S> <C> <C>
Work in progress $18,905 $14,009
Finished goods 11,757 12,027
------- -------
$30,662 $26,036
======= =======
</TABLE>
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Note 7 - Changes in Stockholders' Equity (in thousands):
<TABLE>
<CAPTION>
Unrealized gain
on appreciation
Common Paid-in of Foundry Retained
Stock Capital Investments Earnings Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances, Dec. 31, 1999 $ 483 $ 270,228 -- $ 212,062 $ 482,773
Common stock issued 9 14,160 -- -- 14,169
Tax benefit of option exercises -- 12,904 -- -- 12,904
Unrealized gain on appreciation of
foundry investments (Note 10) -- -- 4,675 -- 4,675
Other -- (2) -- -- (2)
Net income for the
three-month period -- -- -- 104,821 104,821
--------- --------- --------- --------- ---------
Balances, March 31, 2000 $ 492 $ 297,290 $ 4,675 $ 316,883 $ 619,340
========= ========= ========= ========= =========
</TABLE>
Total comprehensive income for the first quarter of 2000 aggregates
approximately $109.5 million and is comprised of net income of $104.821
million and unrealized gain on appreciation of foundry investments of $4.675
million.
Note 8 - 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 Company, this pronouncement, as amended
by SFAS 137, will be effective in 2001 and is not anticipated to have a material
effect on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 does not have a material effect on our financial position or results of
operations.
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Note 9 - 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 consolidated results of
operations, financial position, or cash flows.
Note 10 - Gain on appreciation of Foundry Investments:
During the first quarter of 2000, we recognized a $150.0 million gain ($92.1
million after-tax) representing the appreciation of foundry investments made in
two Taiwanese companies, UICC and Utek. Effective January 3, 2000, UICC and Utek
merged with UMC, a publicly traded Taiwanese company. As a result of this
merger, we now own approximately 61 million shares of UMC common stock. Due to
regulatory restrictions, the majority of our UMC shares may not be sold until
July 2000. These regulatory restrictions will gradually expire between July 2000
and January 2004. As the regulatory restrictions expire and if we liquidate our
UMC shares, it is likely that the amount of any future realized gain will be
different from the accounting gain reported. In conjunction with the gain, we
recorded a deferred tax liability of approximately $57.9 million.
During the first quarter of 2000, we recorded an additional approximate $7.6
million unrealized gain ($4.7 million after-tax) subsequent to the UICC and Utek
merger on appreciation of non-restricted UMC shares owned by the Company. The
$4.7 million net unrealized gain is reflected as Other Comprehensive Income in
changes in Stockholders' Equity (see Note 7).
-14-
<PAGE>
Note 11 - 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>
Mar. 31, Mar. 31,
2000 1999
-------- --------
<S> <C> <C>
United States $ 53,275 $ 27,800
Export sales:
France 12,964 1,285
Other Europe 24,873 12,144
Asia 23,997 10,371
Other 10,946 2,188
-------- --------
72,780 25,988
-------- --------
$126,055 $ 53,788
======== ========
</TABLE>
Resale of product through two distributors accounted for approximately 20% and
17% in the first quarter of 2000, and 25% and 10%, respectively, for the first
quarter of 1999. Revenue from one customer accounted for approximately 10% of
total revenues for the first quarter of 2000. More than 90% of our property and
equipment is located in the United States. Other long-lived assets located
outside the United States consist primarily of foundry investments and advances
(see Note 10).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Key elements of the statements of operations, expressed as a percentage of
revenues, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Revenue 100.0% 100.0%
Gross margin 60.7% 61.4%
Research and development expenses 14.5% 16.5%
Selling, general and administrative expenses 15.5% 17.6%
Income from operations 14.6% 27.3%
</TABLE>
-15-
<PAGE>
REVENUE:
Revenue for the first quarter of 2000 increased $72.3 million or 134% as
compared to the first quarter of 1999. In addition to our acquisition of Vantis,
the revenue increase was attributable to increased sales of high density
products in all geographies and recovering demand from Asia.
Overall average selling prices increased slightly in the first quarter of 2000
as compared to the first quarter of 1999. Fluctuations in overall average
selling prices were due primarily to product mix changes and increased demand.
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 60.7% in the first quarter of 2000
as compared to 61.4% in the first quarter of 1999. The gross margin decline in
the first quarter of 2000 as compared to the first quarter of 1999 is
attributable to our acquisition of Vantis on June 15, 1999. The decline was
partially offset by 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 ("R&D") expenses increased by approximately $9.4
million, or 106%, in the first quarter of 2000 when compared to the first
quarter of 1999. In addition to the acquisition of Vantis, spending increases
resulted primarily from the 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 to provide
innovative new product offerings, and therefore we 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 $10.0 million,
or 106%, in the first quarter of 2000 when compared to the first quarter of
1999. This increase was primarily due to our Vantis acquisition, and to a lesser
extent, increased variable costs associated with higher revenue levels.
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets acquired in the Vantis acquisition was $20.4
million for first quarter of 2000. 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.
-16-
<PAGE>
GAIN ON APPRECIATION OF FOUNDRY INVESTMENTS:
The gain on appreciation of foundry investments in the first quarter of 2000
represents appreciation of foundry investments made in two Taiwanese companies,
UICC and Utek (see Note 10).
OTHER INCOME (EXPENSE), NET:
Other income (expense), net decreased by approximately $4.0 million in the first
quarter of fiscal 2000 as compared to the first quarter of 1999. This was
primarily due to interest expense of approximately $3.0 million from acquisition
related debt and reduced interest income resulting from lower cash and
investment balances related to our acquisition of Vantis.
PROVISION FOR INCOME TAXES:
The provision for income taxes for the first quarter of 2000 is 37.3% of pretax
income, as compared to 32.5% for the first quarter of 1999. The rate change for
the first quarter of 2000 as compared to the first quarter of 1999 was due
primarily to a decrease in the proportion of tax-exempt interest income
included in our overall net income as a result of application of our marginal
tax rate on the unrealized gain on appreciation of foundry investments.
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 of our silicon
wafers are manufactured by Seiko Epson in Japan, AMD in the United States and
UMC in Taiwan. If Seiko Epson, through its U.S. affiliate Epson Electronics
America, AMD or UMC 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,
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 from our suppliers on at least an annual basis. If
Seiko Epson, Epson Electronics America, AMD or UMC 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.
-17-
<PAGE>
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 future
disruption of Seiko Epson's, AMD's or UMC's foundry operations as a result of a
fire, earthquake or other natural disaster could disrupt our wafer supply and
could 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 revenue is derived from products based on a
specialized silicon wafer manufacturing process technology called E(2)CMOS.
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.
WE MAY BE UNSUCCESSFUL IN DEFINING, DEVELOPING OR SELLING NEW PRODUCTS REQUIRED
TO MAINTAIN OR EXPAND 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
-18-
<PAGE>
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 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.
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 process technologies at the new
fabs of Seiko Epson, UMC or future foundries may not be achieved. This 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 effect 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:
-19-
<PAGE>
- 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.
WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES DUE TO THE INTEGRATION OF VANTIS
We acquired Vantis on June 15, 1999, and at present have completed the
integration of this business with our other operations. As a result of this
acquisition and subsequent integration, 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 successfully operate the business of Vantis:
- we may experience unexpected losses of key employees or
customers;
- we may experience unexpected costs and discover unexpected
liabilities;
- we may not achieve historical 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 enables 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 certain manufacturing
support and 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 successfully operate
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
-20-
<PAGE>
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 not experienced significant supply interruptions, the economic,
financial, social and political situation in Asia has in the past been volatile.
Financial difficulties, governmental actions or restrictions, prolonged work
stoppages or any other difficulties experienced by our 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 in the past been affected by regional
economic crises. 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.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINTAIN OR INCREASE REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS
-21-
<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 FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND THEREFORE MAY FAIL TO
MEET EXPECTATIONS
Our quarterly operating results have fluctuated in the past and may continue to
fluctuate in the future. Consequently, our operating results may fail to meet
the expectations of analysts and investors. As a result of industry conditions
and the following specific factors, our quarterly operating results are more
likely to fluctuate and are more difficult to predict than a typical
non-technology company of our size and maturity:
- general economic conditions in the countries where we sell our
products;
- the timing of our and our competitors' new product introductions;
- product obsolescence;
- the scheduling, rescheduling and cancellation of large orders by
our customers;
- the cyclical nature of demand for our customers' products;
- our ability to develop new process technologies and achieve
volume production at the new fabs of Seiko Epson, UMC or at other
foundries;
- changes in manufacturing yields;
- adverse movements in exchange rates, interest rates or tax rates;
and
- the availability of adequate supply commitments from our wafer
foundries and assembly and test subcontractors.
As a result of these factors, our past financial results are not necessarily a
good predictor of our future results.
-22-
<PAGE>
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 UNABLE 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.
-23-
<PAGE>
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.
OUR STOCK PRICE MAY CONTINUE TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS
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 revenue or earnings from levels expected by
securities analysts; and
- announcements of technological innovations or new products by
other companies.
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2000 and December 31, 1999 the Company's investment portfolio
consisted of fixed income securities of $213.7 million and $182.1 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 March 31, 2000 and December 31, 1999, the decline in
the fair value of the portfolio would not be material. Further, the Company
has the ability to hold its fixed income investments until maturity and,
therefore, the Company would not expect to recognize such an adverse impact
in income or cash flows.
The Company has international subsidiary and branch operations. Additionally,
the majority of the Company's silicon wafer purchases are denominated in
Japanese yen. The Company is therefore subject to foreign currency rate
exposure. To mitigate rate exposure with respect to yen-denominated wafer
purchases, the Company maintains yen-denominated bank accounts and bills its
Japanese customers in yen. The yen bank deposits are utilized to hedge
yen-denominated wafer purchases against specific and firm wafer purchases. If
the foreign currency rates fluctuate by 10% from rates at March 31, 2000 and
December 31, 1999, the effect on the company's 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 March 31, 2000, our principal source of liquidity was $237.8 million of
cash and short-term investments, an increase of $23.7 million from the balance
of $214.1 million at December 31, 1999. The increase was due primarily to use of
cash generated from operations and exercises of stock options. During the first
quarter of 2000, we generated approximately $5.2 million of cash
-24-
<PAGE>
and cash equivalents from our operating activities as compared with $16.1
million during the first quarter of 1999. This change is attributable to
non-cash working capital accounts as further described below.
Accounts receivable at March 31, 2000 increased by $25.1 million, or 74%, as
compared to the balance at December 31, 1999. This increase was primarily due
to the timing of shipments within the quarter and increased revenue levels.
Inventories increased by $4.6 million, or 18%, as compared to the balance at
December 31, 1999 primarily due to increased production in response to higher
revenue levels. Prepaid expenses and other current assets increased by $5.6
million, or 54% as compared to the balance at December 31, 1999 primarily due
to an increase in the current portion of wafer supply advances. Current
deferred income tax assets increased $6.2 million, or 21%, as compared to the
balance at December 31, 1999 primarily due to the increase in deferred income
for sales to distributors which is recognized currently for income tax
purposes, and to a lesser extent the timing of deductions for certain
expenses and allowances. Intangible assets, net, decreased by $21.5 million,
or 6% as compared to the balance at December 31, 1999, primarily due to
goodwill and other intangibles amortization.
The $3.9 million, or 31% decrease in income taxes payable as compared to the
balance at December 31, 1999 is primarily attributable to the timing of tax
deductions and payments. Deferred income increased by $9.0 million, or 20%, as
compared to the balance at December 31, 1999, due primarily to increased
billings to distributors associated with higher revenue levels. Deferred income
tax liabilities at March 31, 2000 principally comprise the $57.9 million in
taxes provided for the $150.0 million pre-tax gain on appreciation of foundry
investments in Taiwan recorded on January 3, 2000 (see Note 10) and $2.9 million
provided for the subsequent appreciation of non-restricted foundry shares (see
Note 10), offset by $45.4 million in non-current deferred tax assets relating
primarily to intangible asset charges. Such deferred tax assets increased by
approximately $6.3 million, or 16% as compared to the balance at December 31,
1999, due primarily to the increased cumulative temporary differences for book
and tax deduction of intangible assets.
On October 28, 1999, we issued $260 million in 4 3/4% convertible
subordinated notes due on November 1, 2006. These notes require that we pay
interest semi-annually on May 1 and November 1. Holders of these notes may
convert them into shares of our common stock at any time on or before
November 1, 2006, at a conversion price of $41.44 per share, subject to
adjustment in certain events. Beginning on November 6, 2002 and ending on
October 31, 2003, we may redeem the notes in whole or in part at a redemption
price of 102.71% of the principal amount. In the subsequent three
twelve-month periods, the redemption price declines to 102.04%, 101.36% and
100.68% of principal, respectively. The notes are subordinated in right of
payment to all of our senior indebtedness, and are subordinated to all
liabilities of our subsidiaries. At March 31, 2000, we had no senior
indebtedness and our subsidiaries had $17.2 million of other liabilities.
Issuance costs relative to the convertible subordinated notes are included in
Other Assets and aggregated approximately $6.9 million and are being
amortized to expense over the lives of the notes. Accumulated amortization
amounted to approximately $770,000 at March 31, 2000.
Capital expenditures were approximately $8.6 million in the first quarter of
2000. We expect to spend approximately $30 million to $40 million for the fiscal
year ending December 31, 2000.
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<PAGE>
In March 1997, we entered into an advance payment production agreement with
Seiko Epson and its affiliated U.S. distributor, Epson Electronics America,
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, pursuant to purchase agreements with Epson
Electronics America. 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. The balance of the advance
payment is currently anticipated to be made in future installments.
We entered into a series of agreements with 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. 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, 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 invested approximately $17.5 million in three separate installments.
In June 1999, the board of directors of UICC and board of directors of UMC voted
in favor of merging UICC and Utek into UMC. These mergers became effective on
January 3, 2000 (see note 10). After the mergers we own approximately 61 million
shares of UMC common stock and have retained our capacity rights. Due to
regulatory restrictions, the majority of our UMC shares may not be sold until
July 2000. These regulatory restrictions will gradually expire between July 2000
and January 2004.
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 United 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 generation 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 12 months.
-26-
<PAGE>
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 financing 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.
YEAR 2000 COMPLIANCE
During 1999 we completed our planned Year 2000 compliance activities with
respect to our products, internal systems, software, equipment and facilities.
In aggregate we spent approximately $2.0 million to fund Year 2000 compliance
activities and related system and software upgrades. To date, we have not
encountered any material Year 2000 problems with respect to our products,
internal systems, software, equipment and facilities nor have we encountered any
vendor supply disruptions related to Year 2000 problems.
-27-
<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 the first quarter of 2000
(b) No reports on Form 8-K were filed during the first quarter of 2000.
(*) Incorporated by reference to Note 5 to the Consolidated
Financial Statements in the Company's quarterly report on Form
10-Q for the first quarter of 2000.
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<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: May 15, 2000
By: /s/ Stephen A. Skaggs
---------------------
Stephen A. Skaggs
Senior Vice President Finance, Chief Financial Officer
and Secretary
-29-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 87,645
<SECURITIES> 150,159
<RECEIVABLES> 58,759
<ALLOWANCES> (1,620)
<INVENTORY> 30,662
<CURRENT-ASSETS> 379,130
<PP&E> 134,824
<DEPRECIATION> (70,528)
<TOTAL-ASSETS> 1,078,608
<CURRENT-LIABILITIES> 170,112
<BONDS> 260,000
0
0
<COMMON> 492
<OTHER-SE> 618,848
<TOTAL-LIABILITY-AND-EQUITY> 1,078,608
<SALES> 126,055
<TOTAL-REVENUES> 126,055
<CGS> 49,585
<TOTAL-COSTS> 107,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 3,462
<INCOME-PRETAX> 167,150
<INCOME-TAX> 62,329
<INCOME-CONTINUING> 104,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,821
<EPS-BASIC> 2.15
<EPS-DILUTED> 1.84
</TABLE>
