UNITED STATES
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 September 26, 1998
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 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 .
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
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
November 9, 1998 was 41,503,954 shares.
Page 1 of 22, including exhibits
<PAGE>
ALLIANCE SEMICONDUCTOR CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements. 3
Consolidated Balance Sheets
September 30, 1998 and March 31, 1998 3
Consolidated Statements of Operations
Six months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities. Not Applicable
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 5. Other Information. 20
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 22
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item I. Consolidated Financial Statements.
<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
<CAPTION>
September 30, March 31,
1998 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (excluding restricted cash) $ 7,123 $ 3,010
Restricted cash and short term investments 5,750 6,512
Accounts receivable, net 6,063 15,716
Inventory 18,508 32,375
Deferred taxes -- 8,397
Income tax receivable 78 17,147
Other current assets 3,247 1,670
--------- ---------
Total current assets 40,769 84,827
Property and equipment, net 10,801 11,123
Investment in Chartered Semiconductor 51,596 51,596
Investment in United Semiconductor Corporation ("USC") 77,333 85,935
Investment in United Silicon, Inc. 16,799 13,701
Other assets 1,379 1,083
--------- ---------
Total assets $ 198,677 $ 248,265
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,238 $ 35,714
Accrued liabilities 7,498 7,771
Current portion of long term obligations 1,047 1,463
--------- ---------
Total current liabilities 14,783 44,948
Long term obligations 740 1,276
--------- ---------
Total liabilities 15,523 46,224
--------- ---------
Stockholders' equity
Common stock 415 404
Additional paid-in capital 184,749 183,099
Retained earnings (2,010) 18,538
--------- ---------
Total stockholders' equity 183,154 188,776
--------- ---------
$ 198,677 $ 248,265
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 10,472 $ 28,998 $ 20,622 $ 65,337
Cost of revenue 13,544 31,693 41,035 61,308
-------- -------- -------- --------
Gross profit (loss) (3,072) (2,695) (20,413) 4,029
-------- -------- -------- --------
Operating expenses:
Research and development 3,511 3,558 7,727 7,665
Selling, general and administrative 2,797 4,885 6,808 8,940
-------- -------- -------- --------
Total operating expenses 6,308 8,443 14,535 16,605
-------- -------- -------- --------
Income (loss) from operations (9,380) (11,138) (34,948) (12,576)
Other income, net (180) 54 15,560 243
-------- -------- -------- --------
Income (loss) before income taxes
and equity in income of USC (9,560) (11,084) (19,388) (12,333)
Provision (benefit) for income taxes -- (3,879) 8,397 (4,316)
-------- -------- -------- --------
Income (loss) before equity in income of USC (9,560) (7,205) (27,785) (8,017)
Equity in income of USC 3,691 2,654 7,237 4,574
-------- -------- -------- --------
Net income (loss) ($ 5,869) ($ 4,551) ($20,548) ($ 3,443)
======== ======== ======== ========
Basic and diluted net income (loss) per share ($ 0.14) ($ 0.12) ($ 0.50) ($ 0.09)
======== ======== ======== ========
Weighted average number of common shares
Basic 41,456 39,175 41,209 39,087
Diluted 41,456 39,175 41,209 39,087
======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
ALLIANCE SEMICONDUCTOR CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
September 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($20,548) ($ 3,443)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,900 1,686
Equity in income of USC (7,237) (4,574)
Gain on sale of USC shares (15,823) --
Changes in assets and liabilities:
Accounts receivable 9,653 1,621
Inventory 13,867 (3,998)
Other assets (258) 477
Accounts payable (29,476) 11,594
Accrued liabilities (273) 128
Deferred income taxes and tax receivable 25,466 13,381
-------- --------
Net cash provided by (used in) operating activities
(22,729) 16,872
-------- --------
Cash provided by (used in) investing activities:
Acquisition of equipment (1,578) (1,530)
Proceeds from sale of (investment in) USC shares 31,662 (17,611)
Investment in United Silicon, Inc. (3,098) --
-------- --------
Net cash provided by (used in) investing activities
26,986 (19,141)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 46 1,497
Repayments of long term obligations (952) (806)
Restricted cash 762 (137)
-------- --------
Net cash provided by (used in) financing activities
(144) 554
-------- --------
Net increase (decrease) in cash and cash equivalents 4,113 (1,715)
Cash and cash equivalents at beginning of the period 3,010 17,212
-------- --------
Cash and cash equivalents at end of the period $ 7,123 $ 15,497
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ALLIANCE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited 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.
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 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
years ended March 31, 1998 and 1997 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on June 26, 1998.
For purposes of presentation, the Company has indicated the first six
months of fiscal 1999 and 1998 as ending on September 30, respectively; whereas,
in fact, the Company's fiscal quarters ended on September 26, 1998 and September
27, 1997, respectively.
The results of operations for the three and six months ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ending March 31, 1999, and the Company makes no representations related
thereto.
Note 2. Balance Sheet Components
September 30, March 31,
1998 1998
------- -------
Inventory: (in thousands)
Work in process $8,700 $17,564
Finished goods 9,808 14,811
------- -------
$18,508 $32,375
======= =======
Note 3. Inventory Charge and Valuation Allowance
During the second quarter of fiscal 1999, the Company continued to experience a
significant deterioration in the average selling prices and a slowing in demand
for certain of its products. As a result of these factors, in the second quarter
of fiscal 1999 the Company recorded a pre-tax charge of approximately $2.9
million primarily to reflect a further decline in market value of the Company's
inventory. During the first quarter of fiscal 1999, the Company continued to
experience a significant deterioration in the average selling prices and a
slowing in demand for certain of its products. As a result of these factors, in
the first quarter of fiscal 1999 the Company recorded a pre-tax charge of
approximately $17.0 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 its products could result in additional material inventory valuation
adjustments and corresponding charges to operations. During the first quarter of
fiscal 1999, the Company also recorded a valuation allowance of $8.4 million
with respect to the Company's previously recorded deferred tax assets.
6
<PAGE>
Note 4. Investments
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 ("USC"), for the
purpose of building and managing an 8-inch semiconductor manufacturing facility
in Taiwan. The Company paid approximately 1 billion New Taiwan Dollars ("NTD")
(approximately US$36.4 million) in September 1995, approximately NTD 450 million
(approximately US$16.4 million) in July 1996, and approximately NTD 492 million
(approximately US$17.6 million) in July 1997. After the last of these payments,
the Company owned approximately 201 million shares of USC, or approximately 15%
of the outstanding shares. In April 1998, the Company sold 35 million shares of
USC to an affiliate of UMC and received approximately US$31.7 million. In
connection with the sale of 35 million shares of USC, the Company additionally
has the right to receive up to another 665 million NTD (approximately US$19.3
million at the exchange rate prevailing on September 26, 1998, which rate is
subject to material change) upon the occurrence of certain potential future
events. After the April 1998 sale, the Company owned approximately 15.5% of the
outstanding shares of USC, and has the right to purchase up to approximately 25%
of the manufacturing capacity in this facility. The Company anticipates that as
a result of an upcoming issuance of shares to USC employees (which issuance has
been approved by USC's board of directors), the Company's ownership position
will be diluted to approximately 15.1%. To the extent USC experiences operating
income or losses, and the Company maintains its current ownership percentage of
outstanding shares, the Company will recognize its proportionate share of such
income or losses. During the first six months of fiscal 1999, the Company
recorded $7.2 million of equity in income of USC, as compared to $4.6 million
recorded during the first six months of fiscal 1998. In October 1998, USC issued
46 million shares to the Company by way of dividend distribution. As a result of
this distribution, the Company owns approximately 15.1% of the outstanding
shares.
In February 1995, the Company agreed to purchase shares of Chartered
Semiconductor ("chartered") for approximately US$10 million and entered into a
manufacturing agreement under which Chartered will provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2." In April
1995, the Company agreed to purchase additional shares in Chartered, bringing
the total agreed investment in Chartered to approximately US$51.6 million and
Chartered agreed to provide an increased minimum number of wafers to be provided
by Chartered from Fab2. The Company has paid all installments to Chartered.
Chartered is a private company based in Singapore that is controlled by entities
affiliated with the Singapore government. The Company does not own a material
percentage of the equity of Chartered.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon, Inc. ("USI"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. The facility has commenced volume production utilizing
advanced sub-micron semiconductor manufacturing processes. The contributions of
the Company and other parties shall be in the form of equity investments,
representing an initial ownership interest of approximately 5% for each US$30
million invested. The Company had originally committed to an investment of
approximately US$60 million or 10% ownership interest but subsequently requested
that its level of participation be reduced by 50%. The first installment of
approximately 50% of the revised investment was made in January 1996, and the
Company had, but did not exercise, the option to pay a second installment of
approximately 25% of the revised investment payable in December 1997. The
Company made a third installment payment of approximately 106 million NTD (or
approximately US$3.1 million) in July 1998. After the third installment, the
Company owns approximately 2.96% of the outstanding shares of USI and has the
right to purchase approximately 3.70% of the manufacturing capacity of the
facility.
7
<PAGE>
Note 5. Purchase Order Commitments
At September 30, 1998, the Company had approximately $3.7 million of
noncancelable purchase commitments with suppliers. The Company expects to sell
all products which it has committed to purchase from suppliers.
Note 6. Letters of Credit
As of September 30, 1998, $5.7 million of standby letters of credit were
outstanding and expire on or before September 1, 1999, secured by restricted
cash and short term investments.
Note 7. Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") during the third quarter of fiscal 1998.
SFAS 128 requires presentation of both basic EPS and diluted EPS on the face of
the income statement. Basic EPS, which replaces primary EPS, is computed by
dividing net income (loss) available to common stockholders (numerator) by the
weighted average number of common shares outstanding during the period
(denominator). Diluted EPS, which replaces fully diluted EPS, gives effect to
all dilutive potential common shares outstanding during the period. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive. As required, the Company has applied the new standard to all
periods presented.
<TABLE>
The computations for basic and diluted EPS are presented below (in
thousands, except per share data):
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ($ 5,869) ($ 4,551) ($20,548) ($ 3,443)
Shares calculation:
Weighted average shares outstanding 41,456 39,175 41,209 39,087
Effect of dilutive employee stock options -- -- -- --
-------- -------- -------- --------
Average shares outstanding assuming dilution 41,456 39,175 41,209 39,087
======== ======== ======== ========
Basic income (loss) per share ($ 0.14) ($ 0.12) ($ 0.50) ($ 0.09)
======== ======== ======== ========
Diluted income (loss) per share ($ 0.14) ($ 0.12) ($ 0.50) ($ 0.09)
======== ======== ======== ========
</TABLE>
The following are not included in the above calculation as they were
considered anti-dilutive (in thousands, except option price data):
Three months ended
September 30,
1998 1997
---- ----
Weighted employee stock options outstanding 2,345 4,662
Average exercise price $5.74 $4.83
8
<PAGE>
Note 8. Gain On Sale of USC Shares
In April 1998, the Company sold 35 million shares of USC (representing
approximately 18% of the Company's interest in USC) to an affiliate of UMC for
net proceeds of $31.7 million, plus the right to receive a contingent payment of
up to 665 million NTD (approximately US$19.3 million at the exchange rate
prevailing on September 26, 1998, which rate is subject to material change) upon
the occurrence of certain potential future events. The net gain on the sale,
after deducting the cost basis plus a share of the equity in income of those
shares disposed of totaling $15.8 million, was $15.8 million. The net gain does
not reflect any value that may be realized by the Company in connection with the
contingent payment described above.
Note 9. Legal Matters
As previously reported, in February 1997, Micron Technology, Inc. filed an
anti-dumping petition (the "Petition") with the United States International
Trade Commission ("ITC") (Investigation Nos. 731-TA-761-762) and United States
Department of Commerce ("DOC") (Investigations No. A-583-827), alleging that
static random access memories ("SRAMs") produced in South Korea and Taiwan are
being sold in the United States at less than fair value, and that the United
States industry producing SRAMs is materially injured or threatened with
material injury by reason of imports of SRAMs manufactured in South Korea and
Taiwan. In April 1998, the amended final order concerning the Petition was
published. As a result of the Petition, the Company, in order to import into the
United States, on or after approximately April 1998, SRAMs manufactured in
Taiwan, must pay a cash deposit in the amount of 50.15% (the "Antidumping
Margin") of the cost of such SRAMs. (The Company has posted a bond in the amount
of 59.06% (the preliminary margin) with respect to its importation, between
approximately October 1997 and March 1998, of SRAMs manufactured in Taiwan.) In
May 1998, the Company and others appealed the determination by the ITC that
imports of SRAMs manufactured in Taiwan were causing material injury to the U.S.
industry. If the appeal is successful, the antidumping order would be terminated
and cash deposits made would be refunded. The Company cannot predict either the
timing or the eventual results of the appeal. The Company may, in 1999, request
a review of its sales of Taiwan-fabricated SRAMs from approximately October 1997
through March 1999 (the "Review Period"). If the Company makes such a request,
the cash deposits made by the Company shall not be "assessed" or "liquidated"
until the conclusion of the review, in early 2000. If the DOC found, based upon
analysis of the Company's sales during the Review Period, that antidumping
duties either should not be imposed or should be imposed at a lower rate than
the Antidumping Margin, the difference between the cash deposits made by the
Company, and the deposits that would have been made had the lower rate (or no
rate, as the case may be) been in effect, would be returned to the Company, plus
interest. If, on the other hand, the DOC found that higher margins were
appropriate, the Company would have to pay difference between the cash deposits
made by the Company, and the deposits that would have been made had the higher
rate been in effect. (In either case, the Company also would be responsible to
pay antidumping duties in the amount of the revised margin with respect to its
imports, between approximately October 1997 and March 1998, of SRAMs
manufactured in Taiwan.) A material portion of the SRAMs designed and sold by
the Company are manufactured in Taiwan, and the cash deposit requirement and
possibility of assessment (liquidation) of antidumping duties could materially
adversely affect the Company's ability to sell Taiwan-fabricated SRAMs in the
United States and have a material adverse effect on the Company's operating
results and financial condition.
In July 1998, the Company learned that a default judgment might soon be
entered against the Company in Canada, in the amount of approximately US$170
million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and Trit
Tek Research Ltd. v. Fitch Research Corporation, et al., British Columbia
Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously
not participated in the case, believes that it never was properly served with
process in this action, and that the Canadian court lacks jurisdiction over the
Company in this matter. In addition to jurisdictional and procedural arguments,
the Company also believes it may have grounds to argue that the claims against
the Company should be deemed discharged by the Company's bankruptcy in 1991. The
Company is vigorously defending itself. The Company has motioned the court to
vacate the default judgment. A hearing on this motion is set for December 1998.
Due to the inherent uncertainty of litigation, the Company is not able to
reasonably estimate the potential losses, if any, that may be incurred in
relation to this litigation.
In July 1998, a complaint naming the Company and twenty-five other
semiconductor companies was filed in the United States District Court for the
District of Arizona (captioned Lemelson Medical, Education & Research
Foundation, Ltd. Partnership v. Intel Corp. et al., Civ. 98-1413 PHX PGR),
alleging that each defendant manufactures or has manufactured on its behalf
integrated circuits using manufacturing processes that violate sixteen patents
owned by plaintiff. The Company has not yet been served with the complaint. The
litigation is in its initial stages, and the Company is not able to reasonably
estimate the potential losses, if any, that may be incurred in relation to this
litigation.
In October 1998, Micron Technology, Inc. filed an anti-dumping petition
(the "Petition") with the United States Department of Commerce ("DOC") and the
United States International Trade Commission ("ITC"), alleging that Dynamic
Random Access Memories ("DRAMs") produced in Taiwan are being sold in the United
States at less than fair value, and that the United States industry producing
DRAMs is materially injured or threatened with material injury by reason of
imports of DRAMS manufactured in Taiwan. The Petition requests the United States
government to impose antidumping duties on imports into the United States of
DRAMs fabricated in Taiwan. A material portion of the DRAMs designed and sold by
the Company are fabricated in Taiwan. The Company anticipates that the DOC and
ITC will complete their investigations by mid-1999. The Company vigorously is
seeking, and intends to continue vigorously to seek, to ensure that dumping
duties are not imposed on imports of its DRAM products fabricated in Taiwan.
There can be no assurance, however, that the government will not impose duties
on the Company's imports of DRAM products into the United States, which duties
could materially adversely affect the Company's ability to sell such products in
the United States.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
When used in this Report, the words "expects," anticipates," "believes,"
"approximates," "estimates" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements, which include statements concerning
the timing of new product introductions; the functionality and availability of
products under development; trends in the personal computer, networking,
telecommunications and instrumentation markets, in particular as they may affect
demand for or pricing of the Company's products; the percentage of export sales
and sales to strategic customers; the percentage of revenue by product line; and
the availability and cost of products from the Company's suppliers; are subject
to risks and uncertainties. These risks and uncertainties include those set
forth in Item 2 (entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations") of this Report, and in Item 1 (entitled
"Business") of Part I and in Item 7 (entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations") of Part II of the
Company's Annual Report on Form 10-K for the fiscal year ended March 30, 1998
filed with the Securities and Exchange Commission on June 26, 1998. These risks
and uncertainties, or the occurrence of other events, could cause actual results
to differ materially from those projected in the forward-looking statements.
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 statements contained herein to
reflect any change in the Company's expectations with regard thereto or to
reflect any change in events, conditions or circumstances on which any such
forward-looking statement is based, in whole or in part.
Results of Operations
<TABLE>
The following table sets forth, for the periods indicated, certain
operating data as a percentage of net revenue:
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 129.3 109.2 198.9 93.8
------ ------ ------ ------
Gross profit (loss) (29.3) (9.2) (98.9) 6.2
------ ------ ------ ------
Operating expenses:
Research and development 33.5 12.3 37.5 11.7
Selling, general and administrative 26.7 16.8 33.0 13.7
------ ------ ------ ------
Total operating expenses 60.2 29.1 70.5 25.4
------ ------ ------ ------
Income (loss) from operations (89.5) (38.3) (169.4) (19.2)
Other income, net (1.7) 0.1 75.4 0.4
------ ------ ------ ------
Income (loss) before income taxes and
equity in income of United Semiconductor
Corporation ("USC") (91.2) (38.2) (94.0) (18.8)
Provision (benefit) for income taxes -- (13.3) 40.7 (6.6)
------ ------ ------ ------
Income (loss) before equity in income of USC (91.2)% (24.9)% 134.7% (12.2)%
====== ====== ====== ======
</TABLE>
Net revenues
During the first two quarters of fiscal 1999 and the first two quarters of
fiscal 1998, the Company's net revenues were principally derived from the sale
of dynamic access memory ("DRAM") and static access memory ("SRAM") products.
Net revenue for the second
10
<PAGE>
quarter of fiscal 1999 was $10.5 million, or 64% lower than the $29.0 million of
revenues for the second quarter of fiscal 1998. Net revenue for the first six
months of fiscal 1999 was $20.6 million, or 69% lower than the $65.3 million of
net revenue for the first six months of fiscal 1998. During the first six months
of fiscal 1999, one customer accounted for 12% of net revenue. During the first
six months of fiscal 1998, one customer accounted for more than 14% of net
revenue. The decrease in net revenue for the three and six months ended
September 30, 1998, as compared with the three and six months ended September
1997 was primarily due to the decreased sales of DRAM products and decreases in
the average selling prices for certain of the Company's SRAM and DRAM products.
Revenues from the Company's SRAM products contributed approximately 58% of
the Company's net revenues for the second quarter of fiscal 1999 and
approximately 30% of the Company's net revenues for the first six months of
fiscal 1999. To attempt to increase demand and the average selling price for the
Company's SRAM products, the Company has added to its SRAM product offerings,
including the announcement of its Intelliwatt(TM) line of SRAM products. The
Company is unable to predict when or if such price and demand declines will
stabilize or if the introduction of new product offerings will offset future
price and demand declines. A continued decline in average selling prices or unit
demand could have a material adverse effect on the Company's operating results.
Revenues from the Company's DRAM products contributed approximately 41% of
the Company's net revenues for the second quarter of fiscal 1999 compared to
approximately 48% of the Company's net revenues for the second quarter of fiscal
1998. The DRAM market is characterized by volatile supply and demand conditions,
fluctuating pricing and rapid technology changes to higher density products.
During the first six months of fiscal 1999, average selling prices for the
Company's DRAM products declined compared to same period of the prior year. The
Company is unable to predict when or if such price declines will stabilize. A
continued decline in average selling prices of DRAMs due to competitive
conditions, including overall supply and demand in the market, could have a
material adverse effect on the Company's operating results.
Sales of the Company's MMUI product line did not contribute to the
Company's net revenues for the second quarter of fiscal 1999 compared to
approximately 6% of the Company's net revenues for the second quarter of fiscal
1998. The graphics and video accelerator market is characterized by a large and
growing number of competitors providing a steady stream of new products with
enhanced features. In July 1998, the Company determined that it should exit the
mainstream graphics accelerator business, and announced a workforce reduction of
approximately 45 full-time positions, including substantially all of the
Company's graphics personnel. The Company does not believe that its MMUI
products will contribute material net revenues in future quarters.
Generally, the markets for the Company's products are characterized by
volatile supply and demand conditions, numerous competitors, rapid technological
change and product obsolescence. These conditions could require the Company to
make significant shifts in its product mix in a relatively short period of time.
These changes involve several risks, including, among others, constraints or
delays in timely deliveries of products from the Company's suppliers; lower than
anticipated wafer manufacturing yields; lower than expected throughput from
assembly and test suppliers; and less than anticipated demand and selling
prices. The occurrence of any problems resulting from these risks could have a
material adverse effect on the Company's operating results.
Gross Profit (Loss)
The Company experienced a gross loss of $3.1 million for the second
quarter of fiscal 1999, or (30)% of net revenues compared to a gross loss of
$2.7 million, or (9)% of net revenues for the same period of fiscal 1998. Gross
loss was $20.4 million for the first six months of fiscal 1999, or (99)% of net
revenue compared to gross profit of $4.0 million, or 6% of net revenue for the
same period of fiscal 1998. The decrease in
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gross margin in the second quarter of fiscal 1999 primarily resulted from the
pre-tax inventory related charges of approximately $2.9 million recorded to
reflect recent declines in the market value for certain of the Company's
products. The decrease in gross margin for the first six months of fiscal 1999
primarily resulted from the $20.0 million pre-tax inventory charge taken in the
first and second quarters, together with the decline in average selling prices
for the Company's DRAM and SRAM products due to competitive conditions. The
Company is unable to predict when or if such price declines will stabilize. A
continued decline in average selling prices could result in material 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 the availability and cost of products from
the Company's suppliers; increased competition and related decreases in average
unit selling prices; 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 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.
Research and Development
Research and development expenses were $3.5 million, or 33% of net revenue
in the second quarter of fiscal 1999 compared to $3.6 million, or 12% of net
revenue in the same period of the prior fiscal year. Research and development
expenses were $7.7 million, or 37% of net revenue in the first six months of
fiscal 1999 compared to $7.7 million, or 12% of net revenue in the same period
of the prior fiscal year. The increase in research and development expenses for
the first six months of fiscal 1998 was due to increased expenditures for
materials utilized in the Company's development activities which are dependent
on the timing of new product development and introduction, increased legal
expenses related to legal reserves for certain patent-related items and
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 in future periods.
Selling, General and Administrative
Selling, general and administrative expenses were $2.8 million, or 27% of
net revenue in the second quarter of fiscal 1999 compared to $4.9 million, or
17% of net revenue in the same period of the prior fiscal year. Selling, general
and administrative expenses were $6.8 million, or 33% of net revenue in the
first six months of fiscal 1999 compared to $8.9 million, or 14% of net revenue
in the same period of the prior fiscal year. The decrease in selling, general
and administrative expenses was primarily the result of decreased sales
commissions due to decreased revenue, offset in part by higher legal expenses in
connection with certain legal proceedings, bad debt reserves and 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 in future periods.
Other Income, Net
Net other income was ($0.2) million for the second quarter of fiscal 1999
compared to $0.1 million for the same period of fiscal 1998. Net other income
was $15.6 million for the first six months of fiscal 1999 compared to $0.2
million for the same period of fiscal 1998. Net other income for the first three
and six months of fiscal 1998 primarily represents the net gain of $15.8 million
on the sale of shares of USC and interest dividend income from investments,
partially offset by a loss recorded in connection with another of the Company's
investments.
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Equity in Income of USC
As discussed in the section below entitled "Liquidity and Capital
Resources," the Company entered into an agreement with other parties to form a
separate Taiwanese company, USC. This investment is accounted for under the
equity method of accounting with a ninety-day lag in reporting the Company's
share of results for the entity. Equity in income of USC reflects the Company's
share of income earned by USC for the previous quarter. In the second quarter of
fiscal 1999, the Company reported equity in income of USC in the amount of $3.6
million, as compared to $2.7 million reported in the second quarter of fiscal
1998. Equity in income of USC in the first six months of fiscal 1999 were $7.2
million, as compared to $4.6 million in the same period of the prior fiscal
year.
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: general economic conditions; changes in
pricing policies by the Company, its competitors or its suppliers; anticipated
and unanticipated decreases in unit average selling prices of the Company's
products; 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 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 or lack thereof of
new or enhanced versions of the Company's products; seasonal customer demand;
access to wafer fabrication, wafer sort, assembly and test services; and the
timing of significant orders. Operating results could also be adversely affected
by such factors as economic conditions generally or in various geographic areas,
other conditions affecting the timing of customer orders and capital spending, a
downturn in the markets for personal computers, networking, telecommunications
or instrumentation products, 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 experienced significant deterioration in
the average selling prices for its SRAM and DRAM products. The Company is unable
to predict when or if such decline in prices will stabilize. Average selling
prices for DRAM products, in particular, continued to weaken significantly
through the second quarter of fiscal 1999. Historically, average selling prices
for semiconductor memory products have declined and the Company expects that
average selling prices will decline in the future. 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 will 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 that the Company will be able
to increase unit sales volumes of existing products, develop, introduce and sell
new products or 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 costs per unit, the Company would
be able to maintain or increase revenues or gross margins.
The Company usually ships more product in the third month of each quarter
than in either of the first two months of the quarter, with shipments in the
third month higher at the end of the month. This pattern, which is common in the
semiconductor industry, is likely to continue. The concentration of sales in the
last month of the quarter may cause the Company's quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Company's production or shipping near the end of a quarter could materially
reduce the Company's net sales for that quarter. The Company's reliance on
outside foundries and
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independent assembly and testing houses reduces the Company's ability to
control, among other things, delivery schedules.
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. 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, the Company must order products and build inventory substantially
in advance of product shipments, and there is a risk that because demand for the
Company's products is volatile and subject to rapid technology and price change,
the Company will forecast incorrectly and produce excess or insufficient
inventories of particular products. 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 first and second quarters of fiscal 1999, when the Company
recorded pre-tax charges of approximately $20 million, primarily to reflect a
decline in market value of certain inventory.
The Company currently relies on independent and joint venture foundries to
manufacture all of the Company's products. Reliance on these foundries involves
several risks, including constraints or delays in timely delivery of the
Company's products, reduced control over delivery schedules, quality assurance
and costs and loss of production due to fires, seismic activity, weather
conditions and other factors. In or about October 1997, a fire caused extensive
damage to United Integrated Circuits Corporation ("UICC"), a foundry joint
venture between United Microelectronics Corporation ("UMC") and various
companies. UICC is located next to United Silicon, Inc. ("USI") and near USC and
UMC in the Science-Based Industrial Park in Hsin-Chu, Taiwan. (The Company has
products manufactured at UMC and USC, and owns equity stakes in USC and USI.)
UICC suffered an additional fire in January 1998, and since October 1996, there
have been at least two other fires at semiconductor manufacturing facilities in
the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires
or other disasters will not have a material adverse affect on UMC, USC or USI in
the future. In addition, as a result of the rapid growth of the semiconductor
industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity could adversely affect the Company's
foundries' ability to supply the Company's products, which could have a material
adverse effect on the Company's results of operations or financial condition.
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. There can be no assurance that other
problems affecting manufacturing yields of the Company's products will not occur
in the future.
There is an ongoing risk that the suppliers of wafer fabrication, wafer
sort, assembly and test services to the Company may increase the price charged
to the Company for the services they provide, to the point that the Company may
not be able to profitably have its products produced at such suppliers. The
occurrence of such price increases could have a material adverse affect on 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. Such risks
include political and economic instability and changes in
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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.
Because the Company conducts most of its manufacturing operations in Asia, and
receives a significant amount of its net revenues from sales to Asian customers,
the foregoing risks are heightened in light of the recent financial and economic
crisis in Asia. Current or potential customers of the Company in Asia, for
instance, may become unwilling or unable to purchase the Company's products, and
the Company's Asian competitors may be able to become more price-competitive
relative to the Company due to declining values of their national currencies.
Moreover, decreased global demand for the Company's products, and excess supply
of competitive products, may lead to accelerated declines in the average selling
prices of the Company's products. There can be no assurance that such factors
will not adversely impact the Company's operating results in the future or
require the Company to modify its current business practices.
Additionally, other factors may materially adversely affect the Company's
operating results. 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 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.
The Company uses a number of computer software programs and operating systems
and intelligent hardware devices in its internal operations, including
information technology (IT) and non-IT systems used in the design, manufacture
and marketing of Company products. These items are considered to be Year 2000
"objects" and to the extent that these objects are unable to correctly recognize
and process date dependent information beyond the year 1999, some level of
modification or replacement is necessary. Most computer programs were designed
to perform data computations on the last two digits of the numerical value of a
year. When a computation referencing the year 2000 is performed, these systems
may interpret "00" as the year 1900 and could either stop processing
date-related computations or could process them incorrectly. Computations
referencing the year 2000 might be invoked at any time, but are likely to begin
occurring in the year 1999.
The Company is currently conducting a company-wide year 2000 readiness
assessment and is in the process of implementing new information systems which
the Company believes will be year 2000 compliant. Aside from the expenses
associated with implementing the new information systems, the Company does not
anticipate that it will incur material expenditures for the resolution of any
year 2000 issues relating to its IT or non-IT systems. The Company expects that
the implementation of its new systems will be completed by March 1999. However,
there can be no assurance that there will not be a delay in the implementation
of such systems.
The Company could possibly be materially adversely impacted by the year
2000 issues faced by major distributors, suppliers, subcontractors, customers,
vendors, and financial service organizations with which the Company interacts.
The Company is in the process of determining the impact of the Company's
operations as a result of the year 2000 readiness of these third parties. Their
failure to address year 2000 issues could have an impact on the Company's
operations and financial results. However, the extent of this impact, if any, is
not known at this time. The Company does not yet have a contingency plan to
address the year 2000 problem, but it is in the process of assessing various
scenarios and is in the process of developing a contingency plan. The Company
plans to have developed a contingency plan by March 1999.
Year 2000 compliance issues could have a significant impact on the
Company's operations and its financial results if the new information systems
are not implemented in a timely manner; unforeseen needs or problems arise; or,
if the systems operated by the Company's customers, vendors or subcontractors
are not year 2000 compliant. The dates on which the Company believes its year
2000 readiness will be completed are based on the Company's management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of year 2000 compliant
solutions. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and
cost-effectively resolve problems associated with the year 2000 issue that may
affect its operations and business, or expose it to third-party liability.
The Company also 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 involved 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
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it may become party to litigation involving such claims. In the event of
litigation to determine the validity of any third-party claims (such as the
current patent litigation), or claims against the Company for indemnification
related to such third-party claims, such litigation, whether or not determined
in favor of the Company, could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel from
other matters. In the event of an adverse ruling in such litigation, the Company
might be required to cease the manufacture, use and sale of infringing products,
discontinue the use of certain processes, expend significant resources to
develop non-infringing technology or obtain licenses to the infringing
technology. In addition, depending upon the number of infringing products and
the extent of sales of such products, the Company could suffer significant
monetary damages. In the event of a successful claim against the Company and the
Company's failure to develop or license a substitute technology, the Company's
operating results could be materially adversely affected. There can be no
assurance that adverse developments in current or future legal proceedings,
including without limitation the patent litigation identified above and the
antidumping proceedings described below, will not have a material adverse effect
on the Company's operating results or financial condition.
The Company also, as a result of an antidumping proceeding commenced in
February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs
manufactured (wafer fabrication) in Taiwan, in order to import such goods into
the U.S. Although the Company may be refunded such deposits in early 2000 (see
Item 3 - Legal Proceedings, in the Company's Form 10-K for the fiscal year ended
March 28, 1998, which may be obtained from the Company at the address set forth
above, or through the Company's web site (www.alsc.com) or through the
Securities and Exchange Commission's EDGAR website (www.sec.gov)), the deposit
requirement, and the potential that antidumping duties will be liquidated in
early 2000, may materially adversely affect the Company's ability to sell in the
United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company
manufactures (wafer fabrication) SRAMs in Singapore (and has manufactured SRAMs
in Japan as well), and may be able to support its U.S. customers with such
products, which are not subject to antidumping duties. There can be no
assurance, however, that the Company will be able to do so.
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.
Due to the foregoing factors, it is likely that in some future quarter or
quarters the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
Liquidity and Capital Resources
The Company's operating activities utilized cash of $22.7 million in first
six months of fiscal 1999 and provided cash of $16.9 million in the first six
months of fiscal 1998. Cash utilized in operating activities in the first six
months of fiscal 1999 was the result of a loss from operations and changes in
working capital accounts during the quarter. Cash provided in operations in the
first six months of fiscal 1998 was primarily a result of net income generated
during the period combined with a net increase in certain working capital
components.
Net cash provided by investing activities was $27.0 million for the first
six months of fiscal 1999 and net cash used in investing activities was $19.1
million for the same period of fiscal 1998. Net cash provided by investing
activities in the first quarter of fiscal 1999 reflects the proceeds from the
sale of USC shares of $31.7 million, partially offset by equipment purchases of
$1.0 million and $3.1 million investment in United Silicon, Inc.
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The Company's financing activities used cash of $0.1 million in the first
six months of fiscal 1999 and provided cash of $0.6 million in the first quarter
of fiscal 1998. Net cash provided by financing activities in the first six
months of fiscal 1999 reflects net proceeds of $0.1 million from the sales of
common stock in connection with the exercise of stock options, partially offset
by repayment of long term obligations of $1.0 million. Net cash provided in
financing activities in the first six months of fiscal 1998 reflects net
proceeds of $1.5 million offset by the repayment of long-term obligations of
$0.8 million from the sales of common stock in connection with the exercise of
stock options.
At September 30, 1998, the Company had $7.1 million in cash, an increase of
$4.1 million from March 31, 1998, and working capital of $26.8 million, a
decrease of $13.9 million from June 30, 1998. The Company believes that these
sources of liquidity, and financing opportunities the Company believes will be
available to it, 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
Taiwan. The facility is in full production utilizing advanced sub-micron
semiconductor manufacturing processes. The Company's initial contribution of
approximately $70 million was paid in three installments between September 1995
and July 1997, representing an initial equity ownership of approximately 19.0%.
In April 1998, the Company sold 3.5% of the outstanding shares of USC to an
affiliate of UMC, for gross proceeds of approximately $32 million and the right
to receive contingent payment of up to approximately 665 million New Taiwan
Dollars (approximately US$19.3 million at the exchange rate prevailing on
September 26, 1998, which rate is subject to material change) upon the
occurrence of certain potential future events. As a result of that sale, the
Company currently owns approximately 15.5% of the outstanding shares of USC, and
has the right to purchase up to approximately 25% of the manufacturing capacity
in this facility. The Company anticipates that as a result of an upcoming
issuance of shares to USC employees (which issuance has been approved by USC's
board of directors), the Company's ownership position will be diluted to
approximately 15.1%. A portion of UMC's equity contribution was paid through the
grant by UMC to USC of royalty-free licenses to certain UMC sub-micron process
technologies. To the extent USC experiences operating income or losses, and the
Company maintains its current ownership percentage of outstanding shares, the
Company will recognize its proportionate share of such income or losses.
Throughout fiscal 1998, the Company reported income of approximately $15.5
million related to its share of USC's income. The Company believes that a number
of manufacturers are expanding or planning to expand their fabrication capacity
over the next several years, which could lead to overcapacity in the market and
resulting decreases in costs of finished wafers. If the wafers produced by USC
cannot be produced at competitive prices, or if there is not sufficient demand
of USC's wafers, USC could sustain operating losses. There can be no assurance
that such operating losses will not have a material adverse effect on the
Company's consolidated results of operations. In October 1998, USC issued 46
million shares to the Company by way of dividend distribution. As a result of
this distribution, the Company owns approximately 15.1% of the outstanding
shares.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon, Inc. ("USI"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. The facility has commenced volume production
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utilizing advanced sub-micron semiconductor manufacturing processes. The
contributions of the Company and other parties shall be in the form of equity
investments, representing an initial ownership interest of approximately 5% for
each US$30 million invested. The Company had originally committed to an
investment of approximately US$60 million or 10% ownership interest but
subsequently requested that its level of participation be reduced by 50%. The
first installment of approximately 50% of the revised investment was made in
January 1996, and the Company had, but did not exercise, the option to pay a
second installment of approximately 25% of the revised investment payable in
December 1997. The Company made a third installment payment of approximately 106
million NTD (or approximately US$3.1 million) in July 1998. After the third
installment, the Company owns approximately 2.96% of the outstanding shares of
USI and has the right to purchase approximately 3.70% of the manufacturing
capacity of the facility.
In addition, 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 such activities or to otherwise
take advantage of favorable 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.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in March 1996, a putative class action lawsuit was
filed against the Company and certain of its officers and directors and others
in the United States District Court for the Northern District of California,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder. (The complaint alleged
that the Company, N.D. Reddy and C.N. Reddy also had liability under Section
20(a) of the Exchange Act.) The complaint, brought by an individual who claimed
to have purchased 100 shares of the Company's common stock on November 2, 1995,
was putatively brought on behalf of a class of persons who purchased the
Company's common stock between July 11, 1995 and December 29, 1995. In April
1997, the Court dismissed the complaint, with leave to file an amended
complaint. In June 1997, plaintiff filed an amended complaint against the
Company and certain of its officers and directors alleging violations of
Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to
dismiss the amended complaint. In March 1998, the court ruled in defendants'
favor as to all claims but one, and dismissed all but one claim with prejudice.
In April 1998, defendants requested reconsideration of the ruling as to the one
claim not dismissed. In June 1998, the parties stipulated to dismiss the
remaining claim without prejudice, on the condition that in the event the
dismissal with prejudice of the other claims is affirmed in its entirety, such
remaining claim shall be deemed dismissed with prejudice. In June 1998, the
court entered judgment dismissing the case pursuant to the parties' stipulation.
In July 1998, plaintiff filed a notice of appeal of the dismissal. The Company
intends to continue to defend vigorously against any claims asserted against it,
and believes it has meritorious defenses. Due to the inherent uncertainty of
litigation, the Company is not able to reasonably estimate the potential losses,
if any, that may be incurred in relation to this litigation.
In July 1998, a complaint naming the Company and twenty-five other
semiconductor companies was filed in the United States District Court for the
District of Arizona (captioned Lemelson Medical, Education & Research
Foundation, Ltd. Partnership v. Intel Corp. et al., Civ. 98-1413 PHX PGR),
alleging that each defendant manufactures or has manufactured on its behalf
integrated circuits using manufacturing processes that violate sixteen patents
owned by plaintiff. The Company has not yet been served with the complaint. The
litigation is in its initial stages, and the Company is not able to reasonably
estimate the potential losses, if any, that may be incurred in relation to this
litigation.
In July 1998, the Company learned that a default judgment might soon be
entered against the Company in Canada, in the amount of approximately US$170
million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and Trit
Tek Research Ltd. v. Fitch Research Corporation, et al., British Columbia
Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously
not participated in the case, believes that it never was properly served with
process in this action, and that the Canadian court lacks jurisdiction over the
Company in this matter. In addition to jurisdictional and procedural arguments,
the Company also believes it may have grounds to argue that the claims against
the Company should be deemed discharged by the Company's bankruptcy in 1991. The
Company is vigorously defending itself. The Company has motioned the court to
vacate the default judgment. A hearing on this motion is set for December 1998.
Due to the inherent uncertainty of litigation, the Company is not able to
reasonably estimate the potential losses, if any, that may be incurred in
relation to this litigation.
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requirement and possibility of assessment (liquidation) of antidumping duties
could materially adversely affect the Company's ability to sell
Taiwan-fabricated SRAMs in the United States and have a material adverse effect
on the Company's operating results and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 3, 1998, at the annual meeting of the stockholders of the
Company, the stockholders voted to: (1) elect as directors, until the 1999
annual meeting of the stockholders or until their respective successors are
elected and qualified, N. Damodar Reddy (37,068,556 votes in favor and 304,613
votes withheld), C.N. Reddy (37,069,656 votes in favor and 303,513 votes
withheld), Sanford L. Kane (37,070,106 votes in favor and 303,063 votes
withheld) and Jon B. Minnis (37,070,106 votes in favor and 303,063 votes
withheld); and (2) ratify and approve the appointment of PriceWaterhouseCoopers
LLP as the Company's independent accountants for the current fiscal year
(37,217,098 votes in favor, 82,422 votes against and 73,649 votes abstained).
Item 5. Other Information.
In October 1998, Micron Technology, Inc. filed an anti-dumping petition
(the "Petition") with the United States Department of Commerce ("DOC") and the
United States International Trade Commission ("ITC"), alleging that Dynamic
Random Access Memories ("DRAMs") produced in Taiwan are being sold in the United
States at less than fair value, and that the United States industry producing
DRAMs is materially injured or threatened with material injury by reason of
imports of DRAMS manufactured in Taiwan. The Petition requests the United States
government to impose antidumping duties on imports into the United States of
DRAMs fabricated in Taiwan. A material portion of the DRAMs designed and sold by
the Company are fabricated in Taiwan. The Company anticipates that the DOC and
ITC will complete their investigations by mid-1999. The Company vigorously is
seeking, and intends to continue vigorously to seek, to ensure that dumping
duties are not imposed on imports of its DRAM products fabricated in Taiwan.
There can be no assurance, however, that the government will not impose duties
on the Company's imports of DRAM products into the United States, which duties
could materially adversely affect the Company's ability to sell such products in
the United States.
20
<PAGE>
<TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<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)
27.01 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with the EDGAR
requirements) (C)
<FN>
- -----------------------
(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 filed herewith.
</FN>
</TABLE>
21
<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
(Registrant)
Date: November 10, 1998 /s/ N. D. Reddy
----------------------------
N. Damodar Reddy
President and Principal Executive Officer
Date: November 10, 1998 /s/ N. D. Reddy
----------------------------
N. Damodar Reddy
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-26-1998
<CASH> 7,123
<SECURITIES> 5,750
<RECEIVABLES> 6,063
<ALLOWANCES> 0
<INVENTORY> 18,508
<CURRENT-ASSETS> 40,769
<PP&E> 21,797
<DEPRECIATION> (10,996)
<TOTAL-ASSETS> 198,677
<CURRENT-LIABILITIES> 14,783
<BONDS> 0
0
0
<COMMON> 415
<OTHER-SE> 182,739
<TOTAL-LIABILITY-AND-EQUITY> 198,677
<SALES> 20,622
<TOTAL-REVENUES> 20,622
<CGS> 41,035
<TOTAL-COSTS> 41,035
<OTHER-EXPENSES> 14,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> (19,388)
<INCOME-TAX> 8,397
<INCOME-CONTINUING> (27,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7,237
<NET-INCOME> (20,548)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.50)
</TABLE>
