<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 September 30, 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 September 30, 2000 there were 107,379,138 shares of the Registrant's common
stock, $.01 par value, outstanding.
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LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2000 and
September 30, 1999 3
Consolidated Balance Sheet - September 30, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and September
30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
------------ ----------- ---------- ----------
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C>
Revenue ....................................... $ 151,038 $ 94,973 $ 416,971 $208,499
Costs and expenses:
Cost of products sold ................. 57,437 39,771 160,660 83,395
Research and development .............. 19,923 17,864 57,572 36,630
Selling, general and administrative ... 20,706 20,393 60,157 40,714
In-Process research and development ... -- -- -- 89,003
Amortization of intangible assets ..... 20,141 21,127 61,210 25,291
------------ ----------- ---------- ----------
Total costs and expenses ......... 118,207 99,155 339,599 275,033
------------ ----------- ---------- ----------
Income (loss) from operations ................. 32,831 (4,182) 77,372 (66,534)
Gain on appreciation of foundry investments ... -- -- 149,960 --
Other income (expense), net ................... 1,336 (3,645) (816) 1,020
------------ ----------- ---------- ----------
Income (loss) before provision for income
taxes ..................................... 34,167 (7,827) 226,516 (65,514)
Provision (benefit) for income taxes .......... 11,466 (2,857) 82,252 (21,229)
------------ ----------- ---------- ----------
Net income (loss) ............................. $ 22,701 $ (4,970) $ 144,264 $(44,285)
============ =========== ========== ==========
Basic net income (loss) per share ............. $ 0.22 $ (0.05) $ 1.44 $ (0.47)
============ =========== ========== ==========
Diluted net income (loss) per share ........... $ 0.21 $ (0.05) $ 1.27 $ (0.47)
============ =========== ========== ==========
Shares used in per share calculations:
Basic ......................................... 103,170 95,428 99,960 94,742
============ =========== ========== ==========
Diluted ....................................... 121,926 95,428 119,032 94,742
============ =========== ========== ==========
</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>
Assets SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Current assets: (UNAUDITED)
Cash and cash equivalents ...................... $ 236,991 $113,824
Short-term investments ......................... 277,182 100,316
Accounts receivable, net ....................... 72,764 33,676
Inventories .................................... 42,852 26,036
Prepaid expenses and other current assets ...... 22,607 10,407
Deferred income taxes .......................... 48,591 29,727
------------- ------------
Total current assets ............... 700,987 313,986
Property and equipment, net ........................ 70,006 59,689
Foundry investments, advances and other assets ..... 237,054 130,274
Intangible assets, net ............................. 307,167 373,117
Deferred income taxes .............................. 11,753 39,089
------------- ------------
$1,326,967 $916,155
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .......... $ 102,023 $103,581
Deferred income on sales to
distributors ................................. 73,940 45,188
Income taxes payable ........................... 14,927 12,459
------------- ------------
Total current liabilities .......... 190,890 161,228
4 3/4% Convertible notes due in 2006 ............... 260,000 260,000
Other long-term liabilities ........................ 14,408 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,
200,000,000 shares authorized, 107,379,138 and
96,571,438 shares issued and outstanding ..... 1,074 966
Paid-in capital ................................ 523,491 269,745
Other comprehensive loss ....................... (19,222) --
Retained earnings .............................. 356,326 212,062
------------- ------------
Total stockholders' equity ................ 861,669 482,773
------------- ------------
$1,326,967 $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>
NINE MONTHS ENDED
-------------------------
SEPT. 30, SEPT. 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 144,264 $ (44,285)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ........................... 76,079 36,254
Acquisition of in-process research and development ...... -- 89,003
Deferred income taxes pertaining to intangible assets ... (18,200) (40,739)
Deferred income taxes ................................... 26,672 (5,456)
Gain on appreciation of foundry investments ............. (149,960) --
Tax benefit of option exercises......................... 21,789 8,213
Changes in assets and liabilities:
Accounts receivable ................................ (39,088) (9,937)
Inventories ........................................ (16,816) 3,734
Prepaid expenses and other assets .................. 13,611 (421)
Accounts payable and accrued
expenses ......................................... 1,176 75
Deferred income .................................... 28,752 15,485
Income taxes payable ............................... 2,468 3,438
Other liabilities .................................. 2,254 5,177
----------- -----------
Total adjustments ....................................... (51,263) 104,826
----------- -----------
Net cash provided by operating activities .................... 93,001 60,541
----------- -----------
Cash flows from investing activities:
(Purchase of) proceeds from short-term investments, net ...... (176,866) 138,760
Acquisition of Vantis Corporation, net of cash acquired ...... -- (439,258)
Foundry investments .......................................... (575) (6,330)
Capital expenditures ......................................... (25,458) (12,875)
----------- -----------
Net cash used by investing activities ........................ (202,899) (319,703)
----------- -----------
Cash flows from financing activities:
Payments of long-term borrowings ............................. -- (33,000)
Proceeds from bank borrowings ................................ -- 252,999
Net proceeds from issuance of common stock ................... 233,065 14,032
----------- -----------
Net cash provided by financing activities .................... 233,065 234,031
----------- -----------
Net increase (decrease) in cash and cash equivalents ................... 123,167 (25,131)
Beginning cash and cash equivalents .................................... 113,824 54,744
----------- -----------
Ending cash and cash equivalents ....................................... $ 236,991 $ 29,613
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for income taxes ................................... $ 35,823 $ 10,118
Cash paid for interest payments .............................. 6,161 3,468
Supplemental disclosures of non-cash investing and financing activities:
Unrealized loss on appreciation of foundry investments
included in other comprehensive income ...................... (19,222) --
</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 nine-month
fiscal period ended December 31, 1999.
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 and September 30 have been utilized as the fiscal
period end date for all financial statement captions. Additionally, for purposes
of these consolidated financial statements, the three-month and nine-month
fiscal periods ended October 2, 1999 are referred to as "the third quarter of
1999" and "the first nine months of 1999," respectively. The three-month and
nine-month fiscal periods ended on September 30, 2000 are referred to as "the
third quarter of 2000" and "the first nine months of 2000," respectively. In the
consolidated financial statements, the first nine months of 1999 includes the
fourth quarter of the twelve-month fiscal year ending March 31, 1999, and the
first and second fiscal quarters of the nine-month fiscal period ended December
31, 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"). 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
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<PAGE>
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 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 December 31, 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.
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 total purchase price was allocated as follows (in
millions):
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<PAGE>
<TABLE>
<S> <C>
Current technology.............................................................................. $210.3
Excess of purchase price over net assets assumed................................................ 150.5
In-process research and development............................................................. 89.0
Fair value of other tangible net assets......................................................... 69.6
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 adjustment to the fair value of net assets in the
purchase price allocation. Accrued exit costs recorded at June 15, 1999
aggregated approximately $8.3 million with activity against these accruals as
discussed below.
We recorded $4.2 million in accrued costs related to Vantis office closures,
primarily for the planned closure of the main Vantis facilities in Sunnyvale,
California. These closures were consummated in accordance with plans in June
2000, with our employees now occupying leased properties in San Jose,
California. Substantially all of the former Vantis facilities have been
subleased.
We also recorded $2.5 million related to separation benefits for Vantis
employees. Separation benefits relate primarily to twenty Vantis senior
managers. Through June 30, 2000, seven employees from this group had terminated,
and 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. We reversed the remaining portion of this accrued liability
(approximately $1.1 million) during the June 2000 quarter, with an offsetting
credit to Intangible Assets (Goodwill).
Additionally, we recorded $1.6 million in other exit costs primarily relating to
the termination of Vantis foreign distributors and independent sales
representative firms. Approximately $1.2 million of such costs have been charged
to this accrued liability through September 30, 2000. We believe that the
original cost estimate is still appropriate and the remaining balance of
$400,000 is reflected as a liability in our consolidated balance sheet at
September 30, 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."
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<PAGE>
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 had 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 have begun to be released to market during the
first half of 2000 and will continue through 2001. 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
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<PAGE>
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.
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%,
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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
period 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>
NINE MONTHS
ENDED SEPT. 30, 1999
PRO FORMA RESULTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C>
Revenue .................................................................... $ 300,351
Net loss ................................................................... $ (6,996)
Basic net loss per share ................................................... $ (0.07)
Diluted net loss per share ................................................. $ (0.07)
</TABLE>
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.
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<PAGE>
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 $20.72 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 September 30,
2000, we had no senior indebtedness and our subsidiaries had $9.5 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 using the
interest method over the lives of the notes. Accumulated amortization
amounted to approximately $1.7 million at September 30, 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
$0.02 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 31, 2000 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. The stock dividends
were paid on October 11, 2000 to stockholders of record as of September 20,
2000.
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.
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All share and per share amounts presented in the accompanying consolidated
financial statements and notes thereto have been adjusted retroactively to
reflect these two-for-one splits.
In July 2000, we completed a follow-on public stock offering, consisting of
8,000,000 shares of our common stock at a price of $27.44 per share. Our net
proceeds were approximately $210 million after deducting underwriting discounts
and offering expenses.
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 Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic and diluted net income (loss) ................... $ 22,701 $ (4,970) $ 144,264 $ (44,285)
========= ========= ========= =========
Shares used in basic net income (loss) per
share calculations ................................. 103,170 95,428 99,960 94,742
Dilutive effect of convertible notes,
options and warrants ................................ 18,756 -- 19,072 --
--------- --------- --------- ---------
Shares used in diluted net income (loss) per share
calculations ........................................ 121,926 95,428 119,032 94,742
========= ========= ========= =========
Basic net income (loss) per share ..................... $ 0.22 $ (0.05) $ 1.44 $ (0.47)
========= ========= ========= =========
Diluted net income (loss) per share ................... $ 0.21 $ (0.05) $ 1.27 $ (0.47)
========= ========= ========= =========
</TABLE>
For the third quarter and first nine months 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 and $7.1 million in the three and nine months ended
September 30, 2000. Diluted weighted-average shares outstanding include the
dilutive effect of stock options and approximately 12.5 million shares issuable
on the assumed conversion of the notes.
Note 6 - Inventories (in thousands):
<TABLE>
<CAPTION>
Sept. 30, Dec.31,
2000 1999
---- ----
<S> <C> <C>
Work in progress .................................... $25,375 $14,009
Finished goods ...................................... 17,477 12,027
------- -------
$42,852 $26,036
======= =======
</TABLE>
-13-
<PAGE>
Note 7 - Changes in Stockholders' Equity (in thousands):
<TABLE>
<CAPTION>
Unrealized loss
on appreciation
Common Paid-in of Foundry Retained
Stock Capital Investments Earnings Total
----- ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Balances, Dec. 31, 1999 ..................................... $ 966 $ 269,745 -- $ 212,062 $482,773
Common stock issued (Note 5)................................. 108 231,959 -- 232,067
Tax benefit of option exercises ............................. -- 21,789 -- 21,789
Unrealized loss on
foundry investments (Note 10) .............................. -- -- (19,222) -- (19,222)
Other ....................................................... -- (2) -- -- (2)
Net income for the
nine-month period .......................................... -- -- -- 144,264 144,264
-------- --------- -------- --------- ---------
Balances, Sept. 30, 2000 .................................... $ 1,074 $ 523,491 $ (19,222) $ 356,326 $861,669
======== ========= ======== ========== =========
</TABLE>
Total comprehensive income for the first nine-month period of 2000 aggregates
approximately $125.0 million and is comprised of net income of $144.3 million
and unrealized loss on market depreciation of foundry investments of $19.2
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. This pronouncement will be effective in
the fourth quarter of 2000, and management believes that the impact of SAB 101
will not have a material effect on our financial position or results of
operations .
-14-
<PAGE>
Note 9 - Legal matters:
ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE NO. C-94-20567-RMW,
N.D. CAL.).
In connection with our acquisition of Vantis, we have agreed to assume both the
claims against Altera and the claims by Altera against AMD in the case captioned
ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE NO. C-94-20567-RMW)
proceeding in the United States District Court for the Northern District of
California. This litigation, which began in 1994, involves multiple claims and
counterclaims for patent infringement relating to Vantis and Altera programmable
logic devices and both parties are seeking damages and injunctive relief.
In April 1999, the United States Court of Appeals for the Federal Circuit
reversed earlier jury and District 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 Court of Appeals, Altera filed a petition for rehearing. In June 1999, the
Court of Appeals denied Altera's petition for rehearing.
On May 31, 2000, Altera Corporation filed a complaint against us in U.S.
District Court in the Northern District of California, alleging infringement of
certain Altera patents by unspecified Lattice products. On June 22, 2000, we
answered Altera's complaint denying any infringement by Lattice, and
simultaneously brought a series of counterclaims alleging infringement by Altera
of certain Lattice patents.
Although there can be no assurance as to the results of litigation, based upon
information presently known to management, we do not believe that the ultimate
resolution of the lawsuits will have a material adverse effect on our business.
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. On January 3, 2000, UICC and Utek merged
into UMC, a public Taiwanese company. We own approximately 73 million shares of
UMC common stock and have retained our capacity rights. Due to contractual and
regulatory restrictions, the majority of our UMC shares may not be sold until
July 2000, or later. 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 nine months of 2000, we recorded an approximate $31.3 million
unrealized loss ($19.2 million after-tax) due to market depreciation of
non-restricted
-15-
<PAGE>
UMC shares owned by the Company. This net unrealized loss through September
30, 2000 is reflected as Other Comprehensive Loss in changes in Stockholders'
Equity (see Note 7).
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>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States ................. $ 65,551 $ 42,387 $180,334 $101,063
Export sales:
France ............... 15,739 6,201 45,694 8,595
Other Europe ......... 25,126 19,918 74,507 45,533
Asia ................. 33,909 16,152 83,873 38,761
Other ................ 10,713 10,315 32,563 14,547
-------- -------- -------- --------
85,487 52,586 236,637 107,436
-------- -------- -------- --------
$151,038 $ 94,973 $416,971 $208,499
======== ======== ======== ========
</TABLE>
Resale of product through two distributors accounted for approximately 23% and
19% of revenue in the first nine months of 2000, and 21% and 13%,
respectively, for the first nine months of 1999. Revenue from one customer, a
contract manufacturer, accounted for approximately 10% of total revenues for the
first nine months 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).
-16-
<PAGE>
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 Nine Months Ended
------------------ -----------------
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT.30, 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue .................................................. 100.0% 100.0 % 100.0% 100.0 %
Gross margin ............................................. 62.0% 58.1 % 61.5% 60.0 %
Research and development expenses ........................ 13.2% 18.8 % 13.8% 17.6 %
Selling, general and administrative expenses ............. 13.7% 21.5 % 14.4% 19.5 %
Income (loss) from operations ............................ 21.7% (4.4)% 18.6% (31.9)%
</TABLE>
REVENUE:
Revenue for the third quarter of 2000 increased $56.1 million, or 59%, as
compared to the third quarter of 1999. This revenue increase is attributable
to increased sales of high density products, including our new 3.3-volt high
density products, in all geographies. For the third quarter of 2000, revenue
from the sale of high density products increased $52.6 million, or 82%, as
compared to the third quarter of 1999, and now comprises 77% of total revenue.
For the first nine months of 2000, revenue increased $208.5 million, or 100%,
when compared to the first nine months of 1999. This increase was due to our
acquisition of Vantis and increased sales of high density products. For the
first nine months of 2000, revenue from the sale of high density products
increased $170.7 million, or 120%, as compared to the first nine months of 1999,
and represented 75% of total revenue as compared to 68% for the 1999 period.
As a percentage of total revenue, export sales to Asia increased during the
third quarter of 2000 when compared to the third quarter of 1999, rising to
22.5% from 17.0%. U.S. sales decreased to 43.4% for the third quarter of 2000 as
compared to 44.6% for the third quarter of 1999, while export sales to Europe
decreased slightly to 27.1% from 27.5% for the same periods.
For the first nine months of 2000, export sales to Europe increased to 28.8%
of total revenue from 26.0% of total revenue in the 1999 period. Export sales
to Asia increased to 20.1% of total revenue for the first nine months of 2000
from 18.6% in the comparable 1999 period. U.S. sales decreased to 43.2% of
total revenue for the first nine months of 2000 as compared to 48.5% of total
revenue for the comparable 1999 period.
-17-
<PAGE>
Overall average selling prices increased in the third quarter and first nine
months of 2000 as compared to the same calendar periods of 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 62.0% and 61.5% in the third quarter
and first nine months of 2000 as compared to 58.1% and 60.0% in the same
calendar periods of 1999, respectively. This gross margin improvement is
primarily due to continued reductions in our manufacturing costs and
improvements in our product mix. 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 12% and
57%, in the third quarter and first nine months of 2000 when compared to the
same calendar periods in 1999, respectively. 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 2% and 48%, in
the third quarter and first nine months of 2000 when compared to the same
calendar periods of 1999, respectively. The increase between the 2000 and 1999
nine-month periods was primarily due to our Vantis acquisition. The increase
between the third quarter of 2000 and the third quarter of 1999 was due
primarily to increased variable costs associated with higher revenue levels.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS:
In-process research and development costs of approximately $89.0 million were
incurred on June 15, 1999 in connection with the acquisition of Vantis, and are
further described in Note 3.
-18-
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS:
Amortization of intangible assets acquired in the Vantis acquisition were
$20.1 million and $61.2 million for third quarter and first nine months of
2000, respectively, compared to $21.1 million and $25.3 million for the
comparable calendar periods of calendar 1999, respectively, due to the
acquisition of Vantis on June 15, 1999. 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.
GAIN ON APPRECIATION OF FOUNDRY INVESTMENTS:
The gain on appreciation of foundry investments in the first nine months of 2000
was recorded on January 3, 2000 and represents appreciation of foundry
investments made in two Taiwanese companies, UICC and Utek (see Note 10).
OTHER INCOME (EXPENSE), NET:
Other income (expense), net increased by approximately $5.0 million in the
third quarter of 2000 as compared to the same period of calendar 1999, but
decreased by $1.8 million for the first nine months of 2000 as compared to
the same calendar period of 1999. The increase in the third quarter of 2000
as compared to the third quarter of 1999 is due primarily to increased
investment income from cash generated from our follow-on public stock
offering completed in July 2000 (see Note 5). The decrease in the first nine
months of 2000 when compared to the first nine months of 1999 is due to
higher interest expense and amortization costs in the 2000 period as a result
of Vantis acquisition-related debt, which more than offset increased
investment income related to the follow-on public stock offering.
Acquisition-related debt was outstanding for all of the 2000 period, but was
only outstanding in the 1999 period presented for the three and one-half
months subsequent to the Vantis acquisition.
PROVISION FOR INCOME TAXES:
The provision (benefit) for income taxes for the third quarter and first nine
months of 2000 results in an effective tax rate of 33.6% and 36.3% of pretax
income, as compared to (36.5%) and (32.4%) for the same calendar periods of
1999, respectively. The tax benefit in the third quarter and first nine months
of calendar 1999 is attributable to the tax effect of the In-process research
and development cost recognized on June 15, 1999 resulting from the Vantis
acquisition. The declining tax rate in the third quarter as compared to the
first nine months of 2000 is attributable to the application of our marginal tax
rate on the unrealized gain on appreciation of foundry investments on January 3,
2000. The effective rate for the third quarter of 2000 of 33.6% is lower than
the statutory rate primarily because of tax exempt investment income and tax
credits.
-19-
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS
OUR WAFER SUPPLY MAY BE INTERRUPTED OR REDUCED, WHICH MAY 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 could be harmed.
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
any of Seiko Epson, Epson Electronics America, AMD or UMC were to reduce its
supply commitment or increases its wafer prices, and we cannot find alternative
sources of wafer supply, our operating results could be harmed.
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 harmed 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
harm our operating results.
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 operating results would be
harmed.
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 product
families and the continued market acceptance of our software development tools.
The success of these products is dependent on a variety of specific technical
factors including:
-20-
<PAGE>
- 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 operating results would be harmed.
OUR PRODUCTS MAY NOT BE COMPETITIVE IF WE ARE UNSUCCESSFUL IN MIGRATING OUR
MANUFACTURING PROCESSES TO MORE ADVANCED TECHNOLOGIES.
To develop new products and maintain the competitiveness of existing products,
we need to migrate to more advanced wafer manufacturing processes that use
larger wafer sizes and smaller device geometries. We also may need to use
additional foundries. Because we depend upon foundries to provide their
facilities and support for our process technology development, we may experience
delays in the availability of advanced wafer manufacturing process technologies
at existing or new wafer fabrication facilities. As a result, volume production
of our advanced E2CMOS process technologies at the new fabs of Seiko Epson, UMC
or future foundries may not be achieved. This could harm our operating results.
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 harm our operating results.
Economic, financial, social and political conditions in Asia have 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 harm our operating results.
Our wafer purchases from Seiko Epson are denominated in Japanese yen. The value
of the dollar with respect to the yen fluctuates. Substantial deterioration of
dollar-yen exchange rates could harm our operating results.
-21-
<PAGE>
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. 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 harmed.
Substantially all of our revenue is derived from products based on a
specialized silicon wafer manufacturing process technology called
E2CMOS-Registered Trademark-. The reliable manufacture of high performance
E2CMOS semiconductor wafers is a complicated and technically demanding
process requiring:
- a high degree of technical skill;
- state-of-the-art equipment;
- the absence of defects in the masks used to print circuits on
a wafer;
- the elimination of minute impurities and errors in each step
of the fabrication process; and
- effective cooperation between the wafer supplier and the
circuit designer.
As a result, our foundries may experience difficulties in achieving acceptable
quality and yield levels when manufacturing our silicon wafers.
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, our operating results could be harmed.
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;
-22-
<PAGE>
- 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.
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 been affected by regional economic crises.
Significant changes in the economic climate in the foreign countries where we
derive our export sales could harm our operating results.
OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND THEREFORE MAY FAIL TO
MEET EXPECTATIONS.
Our quarterly operating results have fluctuated and may continue to fluctuate.
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;
-23-
<PAGE>
- 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.
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.
-24-
<PAGE>
RISKS RELATED TO OUR INDUSTRY
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINTAIN OR INCREASE REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS.
The semiconductor industry is cyclical. 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, our operating
results could be harmed.
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 operating results could be harmed.
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 be unable to retain our existing key technical and
management personnel or attract additional qualified
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<PAGE>
employees. If we are unable to retain existing key employees or hire new
qualified employees, our operating results could be harmed.
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 use substantial financial and management
resources, which could harm 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 harmed.
-26-
<PAGE>
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000 and December 31, 1999 the Company's investment
portfolio consisted of fixed income securities of $492.8 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 September 30, 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, a
portion 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 September 30, 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.
We are exposed to equity price risk due to our equity investment in UMC (see
Note 10). Neither a 10% increase nor a 10% decrease in equity price related
to this investment would have a material effect on the Company's financial
position, results of operations or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, our principal source of liquidity was $514.2
million of cash and short-term investments, an increase of $300.0 million
from the balance of $214.1 million at December 31, 1999. The increase was due
primarily to our follow-on public offering completed in July 2000, which
generated approximately $210 million in net proceeds, as well as cash
generated from operations and exercises of stock options. During the first
nine months of 2000, we generated approximately $93.0 million of cash and
cash equivalents from our operating activities as compared with $60.5 million
during the first nine months of 1999.
Accounts receivable at September 30, 2000 increased by $39.1 million, or 116%,
as compared to the balance at December 31, 1999. This increase was primarily due
to increased revenue levels and the timing of shipments and collections within
the quarter. Inventories at September 30, 2000 increased by $16.8 million, or
65%, 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 at September 30, 2000 increased by $12.2 million, or 117% 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 at
September 30, 2000 increased $18.9 million, or 63%, as compared to the balance
at December 31, 1999 primarily due to the increase in deferred income on sales
to distributors which is recognized currently for income tax purposes, and to a
lesser extent
-27-
<PAGE>
the timing of deductions for certain expenses and allowances. Foundry
Investments, Advances and Other Assets increased by $106.8 million, or 82% as
compared to December 31, 1999 primarily due to the gain on appreciation of
foundry investments as discussed in Note 10 to the Consolidated Financial
Statements. The decrease in non current deferred income taxes of $27.3
million at September 30, 2000 as compared to December 31, 1999 is due to a
decrease in the deferred tax balance arising from the UMC gain (see Note 10)
offset by the net tax effect of intangible asset amortization (see Note 5).
Intangible assets, net, decreased by $66.0 million, or 18% as compared to the
balance at December 31, 1999, primarily due to goodwill and other intangibles
amortization.
Deferred income at September 30, 2000 increased by $28.8 million, or 64%, as
compared to the balance at December 31, 1999, due primarily to increased
billings to distributors associated with higher revenue levels. The $2.5
million, or 20% increase in income taxes payable at September 30, 2000 as
compared to the balance at December 31, 1999 is primarily attributable to the
timing of tax deductions and payments.
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 $20.72 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 September 30, 2000, we had no senior
indebtedness and our subsidiaries had $9.5 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 $1.7 million at September 30, 2000.
Capital expenditures were approximately $25 million in the first nine months of
2000. We expect to spend approximately $30 million to $35 million for the fiscal
year ending December 31, 2000.
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
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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.
On January 3, 2000, UICC and Utek merged into UMC (see note 10). We own
approximately 73 million shares of UMC common stock and have retained our
capacity rights. Due to contractual and regulatory restrictions, the majority of
our UMC shares may not be sold until July 2000, or later. 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 cash and cash equivalents, 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 at least the next 12 months.
In an effort to secure additional wafer supply, we may from time to time
consider various financial arrangements including joint ventures, equity
investments, advance purchase payments, loans, or similar arrangements with
independent wafer manufacturers in exchange for committed wafer capacity. To the
extent that we pursue any such additional 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.
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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 nine months of 2000
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on January 4, 2000 related to
the gain on appreciation of Foundry Investments as described in Note 10
to the consolidated financial statements in this report on Form 10-Q.
A Current Report on Form 8-K was filed on July 11, 2000 related to the
registration statement filed on Form S-3 described in Note 5 to the
consolidated financial statements in this report on Form 10-Q.
A Current Report on Form 8-K was filed on August 4, 2000 related to a
vote by our Board of Directors to increase the size of the Board of
Directors to six members and the election of Soo Boon Koh as a Class II
Director.
(*) Incorporated by reference to Note 5 to the Consolidated
Financial Statements in the Company's quarterly report on Form 10-Q for
the first nine months of 2000.
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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: November 13, 2000
By: /s/ STEPHEN A. SKAGGS
----------------------------------------
Stephen A. Skaggs
Senior Vice President Finance, Chief Financial Officer
and Secretary
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