U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1996
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 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0057842
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification no.)
3099 North First Street
San Jose, California 95134-2006
(Address of principal executive offices) (Zip code)
(408) 383-4900
(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 past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No .
--- ---
The number of shares outstanding of the Registrant's Common Stock on
January 31, 1997, was 38,638,945 shares.
Page 1 of 21, including exhibits
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
FORM 10-Q
INDEX
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
December 31, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations
Three months and nine months ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Nine months ended December 31, 1996 and 1995 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2(c). Changes in Securities 16
Item 3. Defaults upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not Applicable
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
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Part I. Financial Information
Item I. Consolidated Financial Statements
<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
December 31, March 31,
1996 1996
--------------------- ---------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,830 $ 80,566
Accounts receivable, net 11,196 4,724
Inventory 37,365 30,152
Deferred taxes 31,466 25,578
Other current assets 1,870 9,008
-------- --------
Total current assets 108,727 150,028
Property and equipment, net 10,975 11,231
Investment in Chartered Semiconductor 51,596 51,596
Investment in United Semiconductor Corp. 52,829 36,438
Investment in United Silicon, Inc. 13,701 13,888
Other Assets 109 57
-------- --------
$237,937 $263,238
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,708 $ 32,358
Accrued liabilities 6,374 11,499
-------- --------
Total current liabilities 31,082 43,857
-------- --------
Stockholders' equity
Preferred stock -- --
Common stock 386 383
Additional paid-in capital 179,354 178,052
Retained earnings 27,115 40,946
-------- --------
Total stockholders' equity 206,855 219,381
-------- --------
$237,937 $263,238
======== ========
<FN>
See accompanying notes to unaudited condensed consolidated
financial statements.
</FN>
</TABLE>
3
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 25,224 $ 46,372 $ 52,467 $180,414
Cost of revenue 21,833 35,944 57,192 98,661
-------- -------- -------- --------
Gross profit (loss) 3,391 10,428 (4,725) 81,753
-------- -------- -------- --------
Operating expenses:
Research and development 3,673 3,513 10,751 11,773
Selling, general and administrative 2,146 4,973 7,341 14,552
-------- -------- -------- --------
Total operating expenses 5,819 8,486 18,092 26,325
-------- -------- -------- --------
Income (loss) from operations (2,428) 1,942 (22,817) 55,428
Other income, net 369 1,600 1,540 5,428
-------- -------- -------- --------
Income (loss) before income taxes (2,059) 3,542 (21,277) 60,856
Provision (benefit) for income taxes (721) 1,381 (7,446) 23,733
-------- -------- -------- --------
Net income (loss) $ (1,338) $ 2,161 $(13,831) $ 37,123
======== ======== ======== ========
Net income (loss) per share $ (0.03) $ 0.05 $ (0.36) $ 0.89
======== ======== ======== ========
Weighted average common shares
and equivalents 38,513 41,246 38,471 41,711
======== ======== ======== ========
<FN>
See accompanying notes to unaudited condensed consolidated
financial statements.
</FN>
</TABLE>
4
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
December 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,831) $ 37,123
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,228 1,503
Changes in assets and liabilities:
Accounts receivable (6,472) 3,247
Inventory (7,213) (24,437)
Other assets 7,086 (10,172)
Accounts payable (7,650) 16,797
Accrued liabilities (5,125) 2,638
Income taxes including
deferred income taxes (5,888) (4,442)
--------- ---------
Net cash provided by (used in) operating activities
(36,865) 22,257
--------- ---------
Cash used in investing activities:
Acquisition of equipment (1,972) (7,769)
Investment in Chartered Semiconductor -- (28,153)
Investment in United Semiconductor (16,391) (36,438)
Investment in United Silicon, Inc. 187 --
--------- ---------
Net cash used in investing activities (18,176) (72,360)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,305 96,815
Repayment of loan - UMC -- 10,000
--------- ---------
Net cash provided by financing activities 1,305 106,815
--------- ---------
Net increase (decrease) in cash and cash equivalents (53,736) 56,712
Cash and cash equivalents at beginning of the period 80,566 75,557
--------- ---------
Cash and cash equivalents at end of the period $ 26,830 $ 132,269
========= =========
Supplemental disclosures:
Income taxes paid (refunded) $ (7,962) $ 10,207
========= =========
<FN>
See accompanying notes to unaudited condensed consolidated
financial statements.
</FN>
</TABLE>
5
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ALLIANCE SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Alliance Semiconductor Corporation (the "Company") in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and footnote disclosure,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted in accordance
with such rules and regulations. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position of the Company and its subsidiaries, and their
consolidated results of operations and cash flows. These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended March 31, 1996 included in the
Company's Annual Report on Form 10-K filed with the Commission on June 28, 1996.
For purposes of presentation, the Company has indicated the first nine
months of fiscal 1997 and 1996 as ending on December 31, respectively; whereas,
in fact the Company's fiscal quarters end on the Saturday nearest the end of the
calendar quarter.
The results of operations for the three and nine months ended December 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending March 31, 1997, and the Company makes no representations related
thereto.
Note 2. Balance Sheet Components
December 31, March 31,
1996 1996
------- -------
Inventory: (in thousands)
Work in process $23,853 $10,823
Finished goods 13,512 19,329
------- -------
$37,365 $30,152
======= =======
Note 3. Inventory Charge
During the first quarter of fiscal 1997, the Company continued to
experience a significant deterioration in the average selling prices and a
slowing in demand for certain of its SRAM products. As a result of this
deterioration, during the first quarter of fiscal 1997 the Company recorded a
pre-tax charge of approximately $16.0 million primarily to reflect a further
decline in market value of the Company's inventory. The Company is unable to
predict when or if such decline in prices will stabilize. A continued decline in
average selling prices for SRAM products could result in additional material
inventory valuation adjustments and corresponding charges to operations.
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Note 4. Commitments
At December 31, 1996, the Company had approximately $8.7 million of
noncancelable purchase commitments with suppliers. The Company expects to sell
all products which it has committed to purchase from suppliers. During the first
quarter of fiscal 1997, the average selling prices of the Company's SRAM
products deteriorated significantly. As a result of this deterioration, in the
first quarter of fiscal 1997 the Company recorded a pre-tax charge of
approximately $2.3 million for adverse purchase commitments related to these
SRAM products, which is included in the $16.0 million charge recorded in the
first quarter of fiscal 1997 (see Note 3).
In July 1995, the Company entered into an agreement with United
Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a
separate Taiwanese company, United Semiconductor Corporation, for the purpose of
building and managing a semiconductor manufacturing facility in Taiwan.
Alliance's investment, which is payable in New Taiwan Dollars ("NTD"), will be
up to approximately US$70 million cash for an equity ownership of up to
approximately 19%. Alliance paid approximately NTD 1 billion (approximately
US$36.4 million) in September 1995 and approximately NTD 450 million
(approximately US$16.4 million) in July 1996, and has the option to pay, on or
before April 30, 1997, an additional NTD 450 million, plus interest at a rate of
8.5% on such amount from and after July 4, 1996. If the option is exercised,
Alliance will have an equity ownership of approximately 19% and will receive 25%
of the manufacturing capacity in this facility.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc., for the
purpose of building and managing a semiconductor manufacturing facility in
Taiwan. Alliance's investment, which is payable in New Taiwan Dollars, will be
approximately US$60 million cash payable in three installments, representing an
equity ownership of approximately 10%. The first installment of US$13.9 million
was made in January 1996, the second installment of US$30 million is due on or
before the start of clean room construction and the final installment of US$15
million is due on or before fab production ramp-up. In return for their
investment, Alliance and the other parties will receive a significant portion of
the manufacturing capacity in this facility.
As of December 31, 1996, $5.1 million of standby letters of credit were
outstanding and expire through September 1997.
Note 5. Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares include common stock options using the treasury stock
method.
Note 6. Litigation.
The Company and its President were served in February 1994 with a complaint
filed in the Superior Court of the State of California in and for the County of
Santa Clara by two individuals, James A. Kennedy and Robert S. Reid, alleging,
among other things, that, as a result of services allegedly rendered to the
Company, such individuals each were orally promised 750,000 shares (pre-split)
of Common Stock of the Company (the equivalent of 1,687,500 shares as a result
of the 3-for-2 stock splits effected in January 1995 and in July 1995,
respectively). In October 1996, the parties (together with PRO Associates, Inc.,
a California corporation ("PRO")) executed a Settlement Agreement and Release
(the "Settlement Agreement). Pursuant to the Settlement Agreement, the Company
issued 75,862 shares of Common Stock of the Company to each of Messrs. Reid and
Kennedy under the exemption provided by Section 3(a)(10) of the Securities Act
of 1933, as amended (the "Securities Act"), and plaintiffs dismissed the
Complaint. The Settlement Agreement contains releases by plaintiffs and by PRO
of defendants, and by defendants of
7
<PAGE>
plaintiffs and of PRO, of all claims, known or unknown, including but not
limited to all claims related to any fact or allegation contained in the
Complaint. The aggregate dollar value of the shares issued pursuant to the
Settlement Agreement did not exceed the reserve that had been historically
recorded for this matter.
In December 1996, an action captioned Advanced Micro Devices, Inc. v.
Alliance Semiconductor International Corporation, No. C-96 21037 (JW), United
States District Court for the Northern District of California was filed,
alleging that defendant has infringed two patents (the "AMD Patents") owned by
plaintiff and seeking injunctive relief and damages. In January 1997, defendant
filed an answer denying the allegations of the complaint and asserting a
counterclaim for declaration that each of the AMD Patents is invalid and not
infringed by defendant, and plaintiff filed a reply denying the allegations of
the counterclaim. The Company believes that the resolution of this matter will
not have a material adverse effect on the financial condition of the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for historical information contained herein, the following
discussion constitutes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Actual results could differ materially
from those projected in the forward looking statements as a result of the
factors set forth in this Report, particularly in the section below entitled,
"Factors That May Affect Future Results" and the factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996
filed with the Commission on June 28, 1996, particularly in Item 7 thereof
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations". These forward-looking statements speak only as of the
date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained in this Report to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances upon which any such statement is based, in whole or in part.
Results of Operations
The following table sets forth, for the periods indicated, certain
operating data as a percentage of net revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------- --------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 86.6 77.5 109.0 54.7
----- ----- ----- -----
Gross profit (loss) 13.4 22.5 (9.0) 45.3
----- ----- ----- -----
Operating expenses:
Research and development 14.6 7.6 20.5 6.5
Selling, general and administrative 8.5 10.7 14.0 8.1
----- ----- ----- -----
Total operating expenses 23.1 18.3 34.5 14.6
----- ----- ----- -----
Income (loss) from operations (9.7) 4.2 (43.5) 30.7
Other income, net 1.5 3.5 2.9 3.0
----- ----- ----- -----
Income (loss) before income taxes (8.2) 7.7 (40.6) 33.7
Provision (benefit) for income taxes (2.9) 3.0 (14.2) 13.2
----- ----- ----- -----
Net income (loss) (5.3)% 4.7% (26.4)% 20.6%
===== ===== ===== =====
</TABLE>
Net Revenue
During the periods presented above, the Company's net revenue was derived
from the sale of SRAM, DRAM and MMUI accelerator products. Net revenue for the
third quarter of fiscal 1997 was $25.2 million, or 45.7% lower than the $46.4
million of revenue for the third quarter of fiscal 1996. Net revenue for the
first nine months of fiscal 1997 was $52.5 million, or 70.9% lower than the
$180.4 million of net revenue for the first nine months of fiscal 1996. During
the first nine months of fiscal 1997, no customer accounted for more than 10% of
net revenue. During the first nine months of fiscal 1996, one customer accounted
for 18% of net revenue. The decrease in net revenue for the three and nine
months ended December 31, 1996, as compared to the corresponding periods was due
to a number of factors, primarily continued decreases in the average selling
prices for the Company's SRAM products and a decrease in demand for certain of
the Company's SRAM products. The Company believes the decreases in average
selling prices and unit demand resulted from an oversupply situation which began
in the latter half of fiscal 1996 due to an increased supply from foreign and
domestic competitors and weakening unit demand for SRAM products. The Company is
unable to predict when or if
9
<PAGE>
such price and demand declines will stabilize. A continued decline in average
selling prices or unit demand could have a continuing material adverse effect on
the Company's operating results.
The markets for the Company's products are characterized by rapid
technological change and product obsolescence, conditions which could require
the Company to make significant shifts in its product mix in a relatively short
period of time. To diversify its product offerings, the Company began to
manufacture volume quantities of 4 megabit DRAM products in June 1996 and has
continued volume production through the third quarter of fiscal 1997. Revenues
from the sale of DRAM products contributed approximately 55% of net revenues for
the third quarter and 38% of net revenues for the first nine months of fiscal
1997. Average selling prices for 4 megabit DRAM products are subject to
significant volatility and have experienced significant declines in the last
nine months. The Company is unable to predict when or if such price declines
will stabilize. A continued decline in average selling prices could have a
material adverse effect on the Company's operating results.
In addition, the Company has recently introduced and manufactured volume
quantities of new MMUI accelerators and flash products. Revenues from the sale
of MMUI accelerators contributed approximately 18% of net revenues for the third
quarter and 14% of net revenues for the first nine months of fiscal 1997. The
introduction and volume manufacture of new products involve several risks,
including, among others, failure of the new products to obtain acceptance in the
market, constraints or delays in timely deliveries of products from the
Company's suppliers, lower than anticipated yields and lower than expected
throughput from assembly and test suppliers. The occurrence of any problems
resulting from these risks could have a material adverse effect on the Company's
operating results.
Gross Profit (Loss)
Gross profit was $3.4 million for the third quarter of fiscal 1997, or
13.4% of net revenue compared to gross profit of $10.4 million, or 22.5% of net
revenue for the same period of fiscal 1996. The Company experienced a gross loss
of $4.7 million for the first nine months of fiscal 1997, or (9.0)% of net
revenue compared to gross profit of $81.8 million, or 45.3% of net revenue for
the same period of fiscal 1996. The decrease in gross profit for the third
quarter of fiscal 1997 compared to the same period of fiscal 1996 resulted
primarily from decreases in the average selling prices for the Company's
products and decreases in demand for certain of the Company's SRAM products. The
loss and decrease in gross profit for the first nine months of fiscal 1997
compared to the same period of fiscal 1996 resulted primarily from product price
declines and pre-tax inventory and purchase commitment related charges of
approximately $16.0 million recorded in the first quarter of fiscal 1997 to
reflect declines in the market value for certain of the Company's products. As a
result of the significant deterioration in the average selling prices for its
SRAM products, the Company's gross margin declined significantly and became a
significant gross loss during the first quarter of fiscal 1997. The average
selling prices for the Company's SRAM and DRAM products continued to decline
during the third quarter of fiscal 1997. The Company is unable to predict when
or if such price declines will stabilize. A continued decline in average selling
prices could result in further adverse impacts on the Company's gross margins.
The Company is subject to a number of factors which may have an adverse
impact on gross margins, including increased competition and related decreases
in average unit selling prices, the availability and cost of products from the
Company's suppliers, changes in the mix of products sold and the timing of new
product introductions and volume shipments. In addition, the Company may seek to
add additional foundry suppliers and transfer existing and newly developed
products to more advanced manufacturing processes. The commencement of
manufacturing at a new foundry or using new processes is often characterized by
lower yields as the manufacturing process is refined. There can be no assurance
that one or more of the factors set forth in this paragraph will not have a
material adverse effect on the Company's gross margins in future periods.
10
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Research and Development
Research and development expenses were $3.7 million, or 14.6% of net
revenue in the third quarter of fiscal 1997 compared to $3.5 million, or 7.6% of
net revenue for the same period of fiscal 1996. Research and development
expenses were $10.8 million, or 20.5% of net revenue in the first nine months of
fiscal 1997 compared to $11.8 million, or 6.5% of net revenue in the same period
of the prior year. The decrease in research and development expenses for the
first nine months of fiscal 1997 was due to decreased expenditures for materials
utilized in the Company's development activities which are dependent on the
timing of new product development and introduction, offset in part by increases
in personnel related costs. Research and development expenses are expected to
increase in absolute dollars and may also increase as a percentage of net
revenue.
Selling, General and Administrative
Selling, general and administrative expenses were $2.1 million, or 8.5% of
net revenue in the third quarter of fiscal 1997 compared to $5.0 million, or
10.7% of net revenue for the same period of fiscal 1996. Selling, general and
administrative expenses were $7.3 million, or 14.0% of net revenue in the first
nine months of fiscal 1997 compared to $14.6 million, or 8.1% of net revenue for
the same period of fiscal 1996. The decrease in selling, general and
administrative expenses was primarily the result of decreased sales commissions
due to decreased revenue, utilization of reserves for legal fees in connection
with certain legal proceedings which reserves were provided for during the first
nine months of fiscal 1996 and bad debt reserves provided during the first nine
months of fiscal 1996, offset in part by higher personnel-related costs.
Selling, general and administrative expenses are expected to increase in
absolute dollars and may also increase as a percentage of net revenue.
Other Income, Net
Net other income was $0.4 million for the third quarter of fiscal 1997
compared to $1.6 million for the same period of fiscal 1996. Net other income
was $1.5 million for the first nine months of fiscal 1997 compared to $5.4
million for the same period of fiscal 1996. Net other income for the three and
nine months ended December 31, 1996 primarily represents interest and dividend
income from investments.
Provision (Benefit) for Income Taxes
The Company's effective tax rate was 35% for the first, second and third
quarters of fiscal 1997 and 39% for the first, second and third quarters of
fiscal 1996. The effective tax rate for the first, second and third quarters of
fiscal 1997 represents amounts which may be carried back to offset taxes paid in
prior years, resulting in a tax refund to the Company. The effective tax rate
for the first, second and third quarters of fiscal 1996 represents taxes accrued
at applicable statutory rates, partially offset by the effect of research and
development tax credits.
Factors That May Affect Future Results
The Company's quarterly and annual operating results have historically
been, and will continue to be, subject to quarterly and other fluctuations due
to a variety of factors, including anticipated and unanticipated decreases in
average selling prices of or demand for the Company's products, changes in
pricing policies by the Company, its competitors or its suppliers, fluctuations
in manufacturing yields, availability and cost of products from the Company's
suppliers, the timing of new product announcements and introductions by the
Company or its competitors, changes in the product mix of products sold, the
cyclical nature of the semiconductor industry, the gain or loss of significant
customers, increased research and development expenses associated with new
product introductions, market acceptance of new or enhanced versions of the
Company's products, seasonal customer demand, the timing of significant orders
and general economic conditions. Operating
11
<PAGE>
results could be adversely affected by economic conditions generally or in
various geographic areas, other conditions affecting the timing of customer
orders and capital spending, a downturn in the market for personal computers, or
order cancellations or rescheduling.
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, rapid product obsolescence
and significant price competition and, as a result, are subject to decreases in
average selling prices. The Company has recently experienced, and expects it
will continue to experience, significant deterioration in average selling prices
and decreased demand for its SRAM products. In addition, the Company began to
manufacture volume quantities of 4 megabit DRAM products in June 1996 and has
continued volume production through the third quarter of fiscal 1997. Revenues
from the sale of DRAM products contributed approximately 55% of net revenues for
the third quarter and 38% of net revenues for the first nine months of fiscal
1997. Average selling prices for 4 megabit DRAM products are subject to
significant volatility and have experienced significant declines in the last
nine months. Accordingly, the Company's ability to maintain or increase revenues
will be highly dependent on its ability to increase unit sales volume of
existing products and to successfully develop, introduce and sell new products.
Declining average selling prices could also adversely affect the Company's gross
margins unless the Company is able to reduce its cost per unit in an amount
sufficient to offset the declines in average selling prices. There can be no
assurance the Company will be able to increase unit sales volumes of existing
products, develop, introduce and sell new products or sufficiently reduce its
cost per unit to offset declines in average selling prices. There also can be no
assurance that even if the Company were to increase unit sales volumes and
sufficiently reduce its cost per unit, the Company would be able to maintain or
increase revenues or gross margins.
The Company has recently introduced and manufactured volume quantities of
new DRAM, MMUI accelerators and flash products. The introduction and volume
manufacture of new products involves several risks, including, among others,
failure of the new products to obtain acceptance in the market, constraints or
delays in timely deliveries of products from the Company's suppliers, lower than
anticipated yields and lower than expected throughput from assembly and test
suppliers. The occurrence of any problems resulting from these risks could have
material adverse effect on the Company's operating results.
The cyclical nature of the semiconductor industry periodically results in
shortages of advanced process wafer fabrication capacity such as the Company has
experienced from time to time (although currenty the Company believes it has
sufficient advanced process wafer fabrication capacity available to it). The
Company's ability to maintain adequate levels of inventory is primarily
dependent upon the Company obtaining sufficient supply of products to meet
future demand, and any inability of the Company to maintain adequate inventory
levels may adversely affect its relations with its customers. In addition,
because the Company must order products and build inventory substantially in
advance of product shipments, there is a risk that the Company will forecast
incorrectly and produce excess or insufficient inventories of particular
products because demand for the Company's products is volatile and subject to
rapid technology and price changes. This inventory risk is heightened because
certain of the Company's key customers place orders with short lead times. The
Company's customers' ability to reschedule or cancel orders without significant
penalty could adversely affect the Company's liquidity, as the Company may be
unable to adjust its purchases from its independent foundries to match such
customer changes and cancellations. The Company has in the past produced excess
quantities of certain products which has had a material adverse effect on the
Company's operating results. There can be no assurance that the Company in the
future will not produce excess quantities of any of its products. To the extent
the Company produces excess or insufficient inventories of particular products,
the Company's operating results could be materially adversely affected, as was
the case during the last half of fiscal 1996 and the first quarter of fiscal
1997, during which periods the Company took significant pre-tax charges largely
to reflect a decline in the value of inventory.
The Company currently relies on outside foundries and joint venture
manufacturing facilities to manufacture all of the Company's products. Reliance
on foundries involves several risks, including constraints or delays in timely
delivery of the Company's products, reduced control over delivery schedules,
quality assurance, costs and loss of
12
<PAGE>
production due to seismic activity, weather conditions and other factors.
Although the Company continuously evaluates sources of supply and may seek to
add additional foundry capacity, there can be no assurance that such additional
capacity can be obtained at acceptable prices, if at all. The occurrence of any
supply or other problem resulting from these risks could have a material adverse
effect on the Company's operating results, as was the case during the third
quarter of fiscal 1996, during which period manufacturing yields of one of the
Company's products were materially adversely affected by manufacturing problems
at one of the Company's foundry suppliers.
Additionally, other factors may materially adversely affect the Company's
operating results. The Company conducts a significant portion of its business
internationally and is subject to a number of risks resulting from such
operations, including political and economic instability and changes in
diplomatic and trade relationships, foreign currency fluctuations, unexpected
changes in regulatory requirements, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs and other barriers and
restrictions, and the burdens of complying with a variety of foreign laws. The
Company relies on domestic and offshore subcontractors for die assembly and
testing of products, and is subject to risks of disruption in adequate supply of
such services and quality problems with such services. The Company is party to
certain legal proceedings, and is subject to the risk of adverse developments in
such proceedings. The semiconductor industry is characterized by frequent claims
and litigation regarding patent and other intellectual property rights. The
Company currently is involded in patent litigation, and also has from time to
time received, and believes that it likely will in the future receive, notices
alleging that the Company's products, or the processes used to manufacture the
Company's products, infringe the intellectual property rights of third parties,
and the Company is subject to the risk that it may become party to litigation
involving such claims. The Company is subject to the risks of shortages of goods
or services and increases in the cost of raw materials used in the manufacture
or assembly of the Company's products. The Company faces intense competition,
and many of its principal competitors and potential competitors have
substantially greater financial, technical, marketing, distribution and other
resources, broader product lines and longer-standing relationships with
customers than does the Company, any of which factors may place such competitors
and potential competitors in a stronger competitive position than the Company.
The Company's corporate headquarters are located near major earthquake faults,
and the Company is subject to the risk of damage or disruption in the event of
seismic activity. There can be no assurance that any of the foregoing factors
will not materially adversely affect the Company's operating results.
As a result of the foregoing factors, as well as other factors affecting
the Company's operating results, past performance should not be considered to be
a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, stock prices for many technology companies are subject to significant
volatility, particularly on a quarterly basis. If revenues or earnings fail to
meet expectations of the investment community, there could be an immediate and
significant impact on the market price of the Company's common stock.
Liquidity and Capital Resources
The Company's operating activities used cash of $36.9 million in the first
nine months of fiscal 1997 and generated cash of $22.3 million in the first nine
months of fiscal 1996. Cash used in operations in the first nine months of
fiscal 1997 was the result of net loss generated during the period and payment
of a significant portion of the Company's liabilities. Cash generated from
operations in the first nine months of fiscal 1996 was primarily a result of net
income generated during the period partially offset by a net increase in certain
working capital components.
Net cash used in investing activities was $18.2 million for the first nine
months of fiscal 1997 and $72.4 million in the first nine months of fiscal 1996.
Net cash used in investing activities in the first nine months of fiscal 1997
reflects an investment of $16.4 million in United Semiconductor Corporation
("USC"),
13
<PAGE>
equipment purchases of $2.0 million, partially offset by reimbursement of an
overpayment with respect to the investment in United Silicon, Inc. ("USI") of
$0.2 million. Net cash used in investing activities in the first nine months of
fiscal 1996 reflects equipment purchases of $7.8 million, an investment in USC
of $36.4 million, and investments in Chartered Semiconductor Manufacturing Pte
Ltd ("Chartered") of $28.2 million.
Net cash provided by financing activities was $1.3 million in the first
nine months of fiscal 1997 and $106.8 million in the first nine months of fiscal
1996. Net cash provided by financing activities in the first nine months of
fiscal 1997 reflects net proceeds from the sales of common stock in connection
with the exercise of stock options. Net cash provided by financing activities in
the first nine months of fiscal 1996 reflects net proceeds from the sales of
common stock in connection with the Company's public offering completed in April
1995, repayment of a $10.0 million loan extended to United Microelectronics
Corporation ("UMC") and the exercise of stock options.
At December 31, 1996, the Company had $26.8 million in cash and cash
equivalents, a decrease of $53.7 million from March 31, 1996 and working capital
of $77.8 million, a decrease of $28.5 million from March 31, 1996. The Company
believes that these sources of liquidity, together with anticipated equipment
financings, will be sufficient to meet its projected working capital and other
cash requirements for the foreseeable future.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has considered and
will continue to consider various possible transactions, including equity
investments in or loans to foundries in exchange for guaranteed production, the
formation of joint ventures to own and operate foundries, or the usage of "take
or pay" contracts that commit the Company to purchase specified quantities of
wafers over extended periods. Manufacturing arrangements such as these may
require substantial capital investments, which may require the Company to seek
additional debt or equity financing. There can be no assurance that such
additional financing, if required, will be available when needed or, if
available, will be on satisfactory terms. Additionally, the Company has entered
into and will continue to enter into various transactions, including the
licensing of its integrated circuit designs in exchange for royalties, fees or
guarantees of manufacturing capacity.
In July 1995, the Company entered into an agreement with UMC and S3
Incorporated ("S3") to form a separate Taiwanese company, USC, for the purpose
of building and managing an 8-inch semiconductor manufacturing facility in the
Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of China. The
facility commenced volume production utilizing advanced submicron semiconductor
processes in the second quarter of fiscal 1997. Alliance's investment, which is
payable in New Taiwan Dollars ("NTD"), will be up to approximately US$70 million
cash for an equity ownership of up to approximately 19%. Alliance paid
approximately NTD 1 billion (approximately US$36.4 million) in September 1995
and approximately NTD 450 million (approximately US$16.4 million) in July 1996,
and has the option to pay, on or before April 30, 1997, an additional NTD 450
million, plus interest at a rate of 8.5% on such amount from and after July 4,
1996. If the option is exercised, Alliance will have an equity ownership of
approximately 19% and will receive 25% of the manufacturing capacity in this
facility.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, USI, for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in the Science Based
Industrial Park in Hsin Chu City, Taiwan, Republic of China. The facility is not
expected to commence production utilizing advanced submicron semiconductor
manufacturing processes prior to late 1997, although there can be no assurance
that production will begin on schedule. The contributions of Alliance and other
parties shall be in the form of equity investments, representing an initial
ownership interest of approximately 10% for each US$60 million invested. The
Alliance investment, which is payable in NTD, will be approximately US$60
million cash payable in three installments. The first installment of US$13.9
million was made in January 1996, the second installment of
14
<PAGE>
approximately US$30 million is due on or before the start of clean room
construction and the final installment of approximately US$15 million is due on
or before fab production ramp-up. In return for their investment, Alliance and
the other parties will receive a significant portion of the manufacturing
capacity in this facility.
The Company believes that success in its industry requires substantial
capital and liquidity. In addition to capital needs for its ongoing business
operations, the Company also may desire, from time to time, as market and
business conditions warrant, to invest in or acquire complementary businesses,
products or technologies. As a result, the Company may seek additional equity or
debt financings to fund its activities or to otherwise take advantage of
financing opportunities. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that such additional financing, if required, can be
obtained on terms acceptable to the Company, if at all.
Part II. Other Information
Item 1. Legal Proceedings
As previously reported on the Company's Quarterly Reports on Form 10-Q for
the fiscal quarters ended June 29, 1996 and September 28, 1996, respectively,
the Company and its President were served in February 1994 with a complaint
filed in the Superior Court of the State of California in and for the County of
Santa Clara by two individuals, James A. Kennedy and Robert S. Reid, alleging,
among other things, that, as a result of services allegedly rendered to the
Company, such individuals each were orally promised 750,000 shares (pre-split)
of Common Stock of the Company (the equivalent of 1,687,500 shares as a result
of the 3-for-2 stock splits effected in January 1995 and in July 1995,
respectively). In October 1996, the parties (together with PRO Associates, Inc.,
a California corporation ("PRO")) executed a Settlement Agreement and Release
(the "Settlement Agreement"). Pursuant to the Settlement Agreement, the Company
issued 75,862 shares of Common Stock of the Company to each of Messrs. Reid and
Kennedy under the exemption provided by Section 3(a)(10) of the Securities Act,
and plaintiffs dismissed the Complaint. The Settlement Agreement contains
releases by plaintiffs and by PRO of defendants, and by defendants of plaintiffs
and of PRO, of all claims, known or unknown, including but not limited to all
claims related to any fact or allegation contained in the Complaint. The
aggregate dollar value of the shares issued pursuant to the Settlement Agreement
did not exceed the reserve that had been historically recorded for this matter.
15
<PAGE>
In December 1996, an action captioned Advanced Micro Devices, Inc. v.
Alliance Semiconductor International Corporation, No. C-96 21037 (JW), United
States District Court for the Northern District of California was filed,
alleging that defendant has infringed two patents (the "AMD Patents") owned by
plaintiff and seeking injunctive relief and damages. In January 1997, defendant
filed an answer denying the allegations of the complaint and asserting a
counterclaim for declaration that each of the AMD Patents is invalid and not
infringed by defendant, and plaintiff filed a reply denying the allegations of
the counterclaim. The Company believes that the resolution of this matter will
not have a material adverse effect on the financial condition of the Company.
Item 2(c). Changes in Securities
The information set forth in the first paragraph of Item 1, Legal
Proceedings, above, is incorporated herein by reference.
Item 5. Other Information
Effective January 1997, one of the Company's Section 16(b) reporting
persons, Sid Agrawal, Vice President - Marketing, resigned.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Number Title Filing Status
-------- ------- ---------------
<S> <C> <C>
3.01 Company's Certificate of Incorporation (A)
3.02 Company's Bylaws (A)
3.03 Company's Certificate of Elimination of Series A Preferred Stock (A)
3.04 Company's Certificate of Amendment of Certificate of (B)
Incorporation
4.01 Specimen of Common Stock Certificate of Company (A)
10.34 1996 Employee Stock Purchase Plan (C)
10.35 Stock Purchase Agreement dated as of June 30, 1996 by and among (D)
the Company, S3 Incorporated ("S3"), United Microelectronics
Corporation ("UMC") and United Semiconductor Corporation
("USC").
10.36* Amendment to FabCo Foundry Capacity Agreement dated as of (D)
July 3, 1996 by and among the Company, S3, UMC and USC
10.37 Side letter dated July 11, 1996 by and among the Company, S3, (D)
UMC and USC.
10.38 Letter Agreement dated December 23, 1996 by and among the
Company, S3, UMC and USC
11.01 Statement re: Computation of Net Income (Loss) Per Share and
Common Equivalent Shares
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
- -------------------------
<FN>
* Confidential treatment has been requested with respect to certain
portions of this document.
(A) The document referred to is hereby incorporated by reference from the
Company's Registration Statement on Form SB-2 (File No. 33-69956-LA)
declared effective by the Commission on November 30, 1993.
(B) The document referred to is hereby incorporated by reference from the
Company's Quarterly Report on Form 10-Q (File No. 0-22594) filed with the
Commission on November 14, 1995.
(C) The document referred to is hereby incorporated by reference from the
Company's Registration Statement on Form S-8 (File No. 333-13461) filed
with the Commission on October 4, 1996.
(D) The document referred to is hereby incorporated by reference from the
Company's Quarterly Report on Form 10-Q (File No. 0-22594) filed with the
Commission on November 12, 1996.
</FN>
</TABLE>
17
<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.
Alliance Semiconductor Corporation
(Company)
Date: February 11, 1997 /s/ N. D. Reddy
---------------
N. Damodar Reddy
President and Principal
Executive Officer
Date: February 11, 1997 /s/ N. D. Reddy
---------------
N. Damodar Reddy
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
[COMPANY LETTERHEAD]
N. DAMODAR REDDY
December 23, 1996
Mr. Robert H. C. Tsao
Chairman, United Microelectronics Corporation
No. 13, Innovation Rd. 1
Science-Based Industrial Park
Hsin-Chu City, Taiwan, R.O.C.
Mr. Gary Johnson
President, S3 Incorporated
2770 San Thomas Expressway
Santa Clara, California 95051
U.S.A.
Mr. Peter Chang
President, United Semiconductor Corporation
No. 3, Li-Hsin Rd.
Science-Based Industrial Park
Hsin-Chu City, Taiwan, R.O.C.
Dear Bob, Gary and Peter:
Thank you for agreeing to extend the time by which Alliance
Semiconductor Corporation ("Alliance") may exercise the option to purchase from
United Microelectronics Corporation ("UMC") up to 45 million shares of United
Semiconductor Corporation ("USC"). I would like to confirm the agreement we
reached.
UMC, S3 Incorporated ("S3") and USC agree to extend Alliance
an option to purchase from UMC up to 45 million shares of USC as follows:
(i) The purchase price under these options will be at a per
share price, with the price per share being equal to NTD 10 plus
interest calculated at a cumulative rate of 8.5% per annum (with
interest accruing from July 4, 1996 to the closing date of the purchase
of the shares subject to the options). Alliance shall pay the purchase
price in U.S. dollars, with the exchange rate calculated as of the day
of payment.
(ii) Alliance may exercise these options with at least fifteen
days advance written notice to UMC and S3 given on or before April 15,
1997, but all unexercised options will expire if not fully exercised
(including full payment to UMC for the shares involved) on or before
midnight April 30, 1997 (Taiwan, R.O.C. time).
(iii) Subject to the terms of this letter agreement (the
"Agreement"), Alliance can exercise its option all at once, or in
installments, and thus, with at least fifteen days' advance written
notice to UMC and S3, can select its closing date(s) at times it finds
convenient, so long as the last such date occurs on or before April 30,
1997.
19
<PAGE>
UMC, S3 and USC also agree that through at least April 30,
1997, Alliance may retain its production capacity percentage of 25%.
UMC, S3 and USC further agree that (a) this Agreement may be
executed in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument; and (b) the terms
of Article 9 of the Foundry Venture Agreement dated as of July 8, 1995 by and
among Alliance, UMC and S3 are incorporated by reference as if set forth fully
herein, in each case with this Agreement deemed to be one of the Venture
Agreements.
We are quite pleased with the history of cooperation in these
matters shown by the parties, and request that each of you confirm the above
agreement in the space provided below.
Very truly yours,
/s/ N. Damodar Reddy
-------------------
N. Damodar Reddy
President
Agreed on behalf of United Microelectronics Agreed on behalf of S3
Corporation Incorporated
/s/ R. Tsao /s/ Gary Johnson
- ----------- -----------------
Robert H. C. Tsao, Chairman Gary Johnson, President
Agreed on behalf of United Semiconductor
Corporation
/s/ Peter Chang
- ----------------
Peter Chang, President
20
<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
AND COMMON EQUIVALENT SHARES
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ............................ $ (1,338) $ 2,161 $(13,831) $ 37,123
======== ======== ======== ========
Weighted average number of common shares
outstanding during the period ............ 38,513 37,968 38,471 37,777
Weighted-average common stock
equivalents (calculating using the
"treasury stock" method) representing
shares issuable upon exercise stock
options
-- 3,278 -- 3,934
-------- -------- -------- --------
Weighted-average common shares and equivalents
38,513 41,246 38,471 41,711
======== ======== ======== ========
Net income (loss) per share .................. $ (0.03) $ 0.05 $ (0.36) $ 0.89
======== ======== ======== ========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER
28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> DEC-28-1996
<CASH> 26,830
<SECURITIES> 0
<RECEIVABLES> 11,196
<ALLOWANCES> 0
<INVENTORY> 37,365
<CURRENT-ASSETS> 108,727
<PP&E> 15,785
<DEPRECIATION> 4,810
<TOTAL-ASSETS> 237,937
<CURRENT-LIABILITIES> 31,082
<BONDS> 0
<COMMON> 386
0
0
<OTHER-SE> 206,469
<TOTAL-LIABILITY-AND-EQUITY> 237,937
<SALES> 52,467
<TOTAL-REVENUES> 52,467
<CGS> 57,192
<TOTAL-COSTS> 57,192
<OTHER-EXPENSES> 10,751
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,277)
<INCOME-TAX> (7,446)
<INCOME-CONTINUING> (13,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,831)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
