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 27, 1997
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 __.
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
February 4, 1998 was 39,810,829 shares.
Page 1 of 18, including exhibits
The Exhibit Index is located on Page 17
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
FORM 10-Q
INDEX
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1997 and March 31, 1997 3
Consolidated Statements of Operations
Three months and nine months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
Nine months ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
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 Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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Part I. Financial Information
Item I. Consolidated Financial Statements
<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
<CAPTION>
December 31, March 31,
1997 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,049 $ 22,489
Accounts receivable, net 12,638 16,827
Inventory 30,722 29,535
Deferred taxes 22,474 17,851
Income tax receivable -- 14,633
Other current assets 4,083 1,636
-------- --------
Total current assets 83,966 102,971
Property and equipment, net 11,444 11,352
Investment in Chartered Semiconductor 51,596 51,596
Investment in United Semiconductor Corp. ("USC") 78,867 52,829
Investment in United Silicon, Inc. ("USI") 13,701 13,701
Other assets 204 120
-------- --------
$239,778 $232,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,313 $ 18,766
Accrued liabilities 7,784 4,584
Current portion of long term obligations 1,663 1,621
-------- --------
Total current liabilities 36,760 24,971
Long term obligations 1,532 2,219
Deferred tax liability 702 702
-------- --------
Total liabilities 38,994 27,892
-------- --------
Stockholders' equity
Common stock 397 390
Additional paid-in capital 181,928 180,012
Retained earnings 18,459 24,275
-------- --------
Total stockholders' equity 200,784 204,677
-------- --------
$239,778 $232,569
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 24,768 $ 25,224 $ 90,105 $ 52,467
Cost of revenue 26,336 21,833 87,644 57,192
-------- -------- -------- --------
Gross profit (loss) (1,568) 3,391 2,461 (4,725)
-------- -------- -------- --------
Operating expenses:
Research and development 3,276 3,673 10,941 10,751
Selling, general and administrative 4,875 2,146 13,815 7,341
-------- -------- -------- --------
Total operating expenses 8,151 5,819 24,756 18,092
-------- -------- -------- --------
Income (loss) from operations (9,719) (2,428) (22,295) (22,817)
Other income, net 171 369 414 1,540
-------- -------- -------- --------
Income (loss) before income taxes
and equity in income of USC (9,548) (2,059) (21,881) (21,277)
Provision (benefit) for income taxes (3,342) (721) (7,658) (7,446)
-------- -------- -------- --------
Income (loss) before equity in income of USC (6,206) (1,338) (14,223) (13,831)
Equity in income of USC 3,833 -- 8,407 --
-------- -------- -------- --------
Net income (loss) ($ 2,373) ($ 1,338) ($ 5,816) ($13,831)
======== ======== ======== ========
Basic earnings (loss) per share ($ 0.06) ($ 0.03) ($ 0.15) ($ 0.36)
======== ======== ======== ========
Diluted earnings (loss) per share ($ 0.06) ($ 0.03) ($ 0.15) ($ 0.36)
======== ======== ======== ========
Weighted average shares outstanding 39,439 38,783 39,204 38,572
======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 5,816) ($13,831)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,595 2,228
Equity in income of USC (8,407) --
Changes in assets and liabilities:
Accounts receivable 4,189 (6,472)
Inventory (1,187) (7,213)
Other assets (2,531) 7,086
Accounts payable 8,547 (7,650)
Accrued liabilities 3,200 (5,125)
Income taxes including
deferred income taxes 10,010 (5,888)
-------- --------
Net cash provided by (used in) operating activities
10,600 (36,865)
-------- --------
Cash used in investing activities:
Acquisition of equipment (2,687) (1,972)
Investment in USC (17,631) (16,391)
Investment in USI -- 187
-------- --------
Net cash used in investing activities (20,318) (18,176)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,923 1,305
Repayments of long term obligations (645) --
-------- --------
Net cash provided by financing activities 1,278 1,305
-------- --------
Net increase (decrease) in cash and cash equivalents (8,440) (53,736)
Cash and cash equivalents at beginning of the period 22,489 80,566
-------- --------
Cash and cash equivalents at end of the period $ 14,049 $ 26,830
======== ========
Supplemental disclosures:
Income taxes paid (refunded) ($17,783) ($ 7,962)
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
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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" or "Alliance") 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 year, ended March 31, 1997 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
June 27, 1997.
For purposes of presentation, the Company has indicated the first nine
months of fiscal 1998 and 1997 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,
1997 are not necessarily indicative of the results that may be expected for the
year ending March 31, 1998, and the Company makes no representations related
thereto.
Note 2. Balance Sheet Components
December 31, March 31,
1997 1997
------- -------
Inventory: (in thousands)
Work in process $16,699 $18,319
Finished goods 14,023 11,216
------- -------
$30,722 $29,535
======= =======
Note 3. Inventory Charges
During the third quarter of fiscal 1998, the Company experienced continued
deterioration in the average selling prices and demand for certain of its
dynamic random access memory ("DRAM"), static random access memory ("SRAM"),
flash and multimedia products. As a result of this deterioration, the Company
recorded a pre-tax charge of approximately $5.8 million to reflect a further
decline in market value of the Company's inventory. During the second quarter of
fiscal 1998, the Company experienced similar deterioration in the average
selling price of certain of its DRAM products and a decline in average selling
prices and demand for certain of its SRAM products. As a result of this
deterioration, the Company recorded a pre-tax charge of approximately $6.1
million to reflect a further decline in the value of the Company's inventory.
During the first quarter of fiscal 1997, the Company experienced 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, 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 and demand will stabilize. A continued
decline in average selling prices or
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demand for its products could result in additional material inventory valuation
adjustments and corresponding charges to operations.
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 a semiconductor manufacturing facility in
Taiwan. Alliance paid approximately NTD 1 billion (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. As a result of this last payment, Alliance has an equity
ownership of approximately 19% and the right to purchase up to approximately 25%
of the manufacturing capacity in this facility. The Company accounts for this
investment in USC using the equity method and as a result has recorded $8.4
million of equity in income of USC for the first nine months of fiscal 1998.
Note 5. Commitments
At December 31, 1997, the Company had approximately $6.0 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, 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 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 a semiconductor manufacturing facility in
Taiwan. The contributions of Alliance 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. Alliance's investment, which is payable in
New Taiwan Dollars, will be up to approximately US$30 million payable in up to
three installments. The first installment of approximately 50% of the total
investment was made in January 1996. The Company had the option to pay a second
installment of approximately 25% of the total investment in December 1997, plus
interest at a rate of 8.5% on such amount from and after July 7, 1997; the
Company requested an extension of its time to exercise such option until April
1998, but has not yet received such extension and might not receive such
extension. The final installment of approximately 25% of the total investment is
called for on or before fab production ramp-up. If the Company receives an
extension of the option to pay the second installment and exercises such option
and further pays the third installment, the Company will have an equity
ownership of approximately 5% and have the right to purchase up to approximately
6.25% of the manufacturing capacity in this facility. Currently, the Company
owns approximately 3.33% of the outstanding shares of USI and has the right to
purchase up to approximately 4.17% of the manufacturing capacity in the
facility. In the event the Company does not receive the requested extension of
the option to pay the second installment, the Company may not have the ability
to increase the levels set forth in the immediately preceding sentence.
As of December 31, 1997, $5.8 million of standby letters of credit were
outstanding which expire through September 1998.
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Note 6. Earnings (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the third quarter of fiscal 1998. SFAS
128 requires presentation of both basic EPS and diluted EPS on the face of the
income statement. Basic EPS, which replaces primary EPS, is computed by dividing
net income (loss) available to common stockholders (numerator) by the weighted
average number of common shares outstanding during the period (denominator).
Diluted EPS, which replaces fully diluted EPS, gives effect to all dilutive
potential common shares outstanding during the period. Common equivalent shares
are excluded from the computation if their effect is anti-dilutive. As required,
the Company has applied the new standard to all periods presented.
<TABLE>
The computations for basic and diluted EPS are presented below (in
thousands, execpt per share data):
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) ($ 2,373) ($ 1,338) ($ 5,816) ($13,831)
Shares calculation:
Weighted average shares outstanding 39,439 38,783 39,204 38,572
Effect of dilutive securities:
Common stock equivalents (employee stock options) -- -- -- --
-------- -------- -------- --------
Average shares outstanding assuming dilution 39,439 38,783 39,204 38,572
======== ======== ======== ========
Basic earnings (loss) per share ($ 0.06) ($ 0.03) ($ 0.15) ($ 0.36)
======== ======== ======== ========
Diluted earnings (loss) per share ($ 0.06) ($ 0.03) ($ 0.15) ($ 0.36)
======== ======== ======== ========
</TABLE>
<TABLE>
The following are not included in the above calculation as they were
considered anti-dilutive (in thousands, except option price data):
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1997 1996 1997 1996
-------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted employee stock options outstanding 3,121 3,462 4,443 3,105
Option price range $1.33-7.34 $0.45-7.25 $1.33-8.81 $0.45-7.88
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this Report, the words "expects," anticipates,"
"believes," "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
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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, 1997 filed with
the Securities and Exchange Commission on June 27, 1997. 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 Nine months ended
December 31, December 31,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenue 106.3 86.6 97.3 109.0
----- ----- ----- -----
Gross profit (loss) (6.3) 13.4 2.7 (9.0)
----- ----- ----- -----
Operating expenses:
Research and development 13.2 14.6 12.2 20.5
Selling, general and administrative 19.7 8.5 15.3 14.0
----- ----- ----- -----
Total operating expenses 32.9 23.1 27.5 34.5
----- ----- ----- -----
Income (loss) from operations (39.2) (9.7) (24.8) (43.5)
Other income, net 0.7 1.5 0.5 2.9
----- ----- ----- -----
Income (loss) before income taxes (38.5) (8.2) (24.3) (40.6)
Provision (benefit) for income taxes (13.5) (2.9) (8.5) (14.2)
----- ----- ----- -----
Income (loss) before equity in income of USC (25.0)% (5.3)% (15.8)% (26.4)%
===== ==== ===== =====
Equity income of USC 15.5 -- 9.3 --
----- ---- ----- -----
Net income (loss) (9.5)% (5.3)% (6.5)% (26.4)%
===== ==== ===== =====
</TABLE>
Net Revenue
During the first three quarters of fiscal 1998 and fiscal 1997, the
Company's net revenue was principally derived from the sale of DRAM and SRAM
products. Net revenue for the third quarter of fiscal 1998 was $24.8 million, or
2% lower than the $25.2 million of revenue for the third quarter of fiscal 1997.
Net revenue for the first nine months of fiscal 1998 was $90.1 million, or 72%
higher than the $52.5 million of net revenue for the first nine months of fiscal
1997. During the first nine months of fiscal 1998, one customer accounted for
16% of net revenue. During the first nine months of fiscal 1997, no customer
accounted for more than 10% of net revenue. The decrease in net revenue for the
three months ended December 31, 1997, was due to decreases in average selling
prices for certain of the Company's SRAM and DRAM products and a decrease in
demand for certain of the Company's SRAM products. The increase in net revenue
for nine months ended December 31, 1997, was due to increased production of DRAM
products and an overall increase in units shipped, offset by continued decreases
in the average selling prices for certain of the
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Company's SRAM and DRAM products and a decrease in demand for certain of the
Company's SRAM products. The Company is unable to predict when or if such price
and demand declines will stabilize. 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 SRAM products contributed approximately 36% of
the Company's net revenues for the third quarter of fiscal 1998 and
approximately 30% of the Company's net revenues for the first nine months of
fiscal 1998. To increase demand and the average selling price for the Company's
SRAM products, the Company has added to its SRAM product offerings and begun to
ship volume quantities of enhanced versions of 1 megabit SRAMs and a 4 megabit
SRAMs.
In addition to existing DRAM product offerings, the Company has recently
begun to ship volume quantities of 4 megabit DRAM, in a 256Kbitx16
configuration, and a 16 megabit DRAM. Revenues from the Company's DRAM products
contributed approximately 50% of the Company's net revenues for the third
quarter and 61% of the Company's net revenues for the first nine months 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 nine months of fiscal 1998, average selling prices
for the Company's DRAM products have experienced declines. The Company is unable
to predict when or if such price declines will stabilize. A continued decline in
average selling prices of DRAMs could have a material adverse effect on the
Company's operating results.
The Company has also recently begun to ship in limited quantities the new
ProMotion(R)-AT3D, the latest enhancement to the Company's multi-media user
interface ("MMUI") accelerator product family. Sales of the Company's MMUI
product line contributed approximately 14% to the Company's net revenues for the
third quarter of fiscal 1998 and approximately 8% of the Company's net revenues
for the first nine months 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. A significant decline in
average selling prices due to competitive conditions, including overall supply
and demand in the market, could have a material adverse effect on the Company's
operating results.
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 lower 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 $1.6 million for the third quarter
of fiscal 1998, or (6.3)% of net revenue compared to gross profit of $3.4
million, or 13.4% of net revenue for the same period of fiscal 1997. Gross
profit was $2.5 million for the first nine months of fiscal 1998, or 2.7% of net
revenue compared to gross loss of $4.7 million, or (9.0)% of net revenue for the
same period of fiscal 1997. The decrease in gross margin for the third quarter
of fiscal 1998 resulted primarily from pre-tax inventory related charges of
approximately $5.8 million recorded in the quarter to reflect recent declines in
the market value and demand for certain of the Company's products. The increase
in gross margin for the first nine months of fiscal 1998 resulted primarily from
increased revenues from certain of the Company's new products and a decrease in
pre-tax inventory related charges recorded to reflect declines in the market
value and demand for certain of the Company's products. The Company is unable to
predict when or if such declines in price and demand will stabilize. A
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continued decline in average selling prices or demand 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 the availability and cost of products from
the Company's suppliers; increased competition or decreased demand, 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 or on a new process 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 $3.3 million, or 13.2% of net
revenue in the third quarter of fiscal 1998 compared to $3.7 million, or 14.6%
of net revenue in the same period of the prior fiscal year. Research and
development expenses were $10.9 million, or 12.2% of net revenue in the first
nine months of fiscal 1998 compared to $10.8 million, or 20.5% of net revenue in
the same period of the prior fiscal year. The changes in research and
development expenses for the three and nine months ended December 31, 1998 were
due to timing of expenditures for materials utilized in the Company's
development activities which are dependent on the timing of new product
development and introduction, 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 $4.9 million, or 19.7% of
net revenue in the third quarter of fiscal 1998 compared to $2.1 million, or
8.5% of net revenue in the same period of the prior fiscal year. Selling,
general and administrative expenses were $13.8 million, or 15.3% of net revenue
in the first nine months of fiscal 1998 compared to $7.3 million, or 14.0% of
net revenue in the same period of the prior fiscal year. The increase in
selling, general and administrative expenses was primarily the result of
increased sales commissions associated with higher revenue, increased legal
expenses in connection with certain legal proceedings, bad debt reserves and
higher personnel-related expenses. 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 third quarter of fiscal 1998
compared to $0.4 million for the same period of fiscal 1997. Net other income
was $0.4 million for the first nine months of fiscal 1998 compared to $1.5
million for the same period of fiscal 1997. Net other income for the first three
and nine months of fiscal 1998 primarily represents interest and dividend income
from investments, offset by interest expense for long term obligations.
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Provision (Benefit) for Income Taxes
The Company's effective tax rate was 35.0% for the first three quarters of
fiscal 1998 and 1997. The tax benefit for the first three quarters of fiscal
1998 and 1997 represents amounts which may be carried back to offset taxes paid
in prior years, resulting in tax refunds to the Company.
Equity in Income of United Semiconductor Corporation ("USC")
As discussed in "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 one
quarter 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. The Company reported $3.8 million of equity in income of USC
for the third quarter and $8.4 million of equity in income of USC for the first
nine months of fiscal 1998. No amounts were reported for the same periods of the
prior year as the Company's share of USC's net income was not material.
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 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 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; and the timing of significant
orders. Operating results could 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
market for personal computers, or order cancellations or rescheduling.
Additionally, because the Company is continuing to increase its operating
expenses for personnel and new product development, the Company's operating
results could be adversely affected if increased revenue and gross margin levels
are not achieved.
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 significant
deterioration in average selling prices for its SRAM and DRAM products. The
Company is unable to predict when or if such decline in prices will stabilize.
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 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.
12
<PAGE>
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 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
experiences 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 at an acceptable cost 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 change. 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 fiscal 1996,
fiscal 1997 and fiscal 1998, during which periods the Company recorded pre-tax
charges of $55 million, $17 million and $12 million, respectively, primarily to
reflect a decline in the market value of certain inventory and certain
manufacturing issues.
The Company currently relies on outside 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 Science-Based Industrial
Park, 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 fire or other disaster 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
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 foundry capacity and may seek to add additional foundry capacity,
there can be no assurance that 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.
13
<PAGE>
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 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 recent financial and economic
crises in Asia have heightened the aforementioned risks and have raised the risk
that current or potential customers of the Company may be unwilling or unable to
purchase the Company's products. Although the Company to date has not
experienced any material adverse effect on its operations as a result of such
factors, there can be no assurance that such factors will not adversely impact
the Company's operations in the future or require the Company to modify its
current business practice.
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 it
may become party to litigation involving such claims. As previously disclosed,
the Company currently is party to an anti-dumping proceeding and a preliminary
determination has been made that estimated antidumping duties of 59.06% should
be imposed on the Company's importation into the United States of
Taiwan-fabricated SRAMs. The Company anticipates that in early 1998, a final
determination will be made as to whether antidumping duties should be imposed on
such imports, and if so, at what level. If such duties are imposed, the Company
will be required to pay a cash deposit in the amount of the duty in order to
import Taiwan-fabricated SRAMs into the United States. Such deposits would not
be "assessed" or "liquidated" until a later date, and could be refunded in whole
or in part, with interest, or the Company could be required to pay additional
amounts, as previously disclosed. The possibility that such duties will be
assessed could materially adversely affect the Company's ability to sell
Taiwan-fabricated SRAMs in the United States. There can be no assurance that
adverse developments in current or future legal proceedings, including without
limitation the above-identified patent litigation and antidumping proceedings,
will not have a material adverse effect on the Company's operating results or
financial condition.
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 "Year 2000 issue" or "Y2K issue" arises because most computer systems
and programs were designed to handle only a two-digit year, not a four-digit
year. When the Year 2000 begins, these computer systems and programs may
interpret "00" as the year 1900 and could either stop processing date-related
computations or could process them incorrectly. The Company has recently
implemented new information systems and is in the process of implementing
additional information systems, and accordingly does not anticipate any internal
Year 2000 issues from its own information systems, databases or programs.
However, the Company could be materially adversely impacted by Year 2000 issues
faced by major distributors, suppliers, customers, vendors and financial service
organizations with which the Company interacts.
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.
14
<PAGE>
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 generated cash of $10.6 million in the
first nine months of fiscal 1998 and used cash of $36.9 million in the first
nine months of fiscal 1997. Cash generated from operations in the first nine
months of fiscal 1998 was the result of taxes refunded and changes in working
capital accounts, offset by the net loss generated during the period. Cash used
in operations in the first nine months of fiscal 1997 was primarily a result of
net loss generated during the period, payment of a significant portion of the
Company's liabilities and increases in receivables and inventories.
Net cash used in investing activities was $20.3 million for the first nine
months of fiscal 1998 and $18.2 million for the same period of fiscal 1997. Net
cash used in investing activities in the first nine months of fiscal 1998
reflects an investment of $17.6 million in USC and equipment purchases of $2.7
million. Net cash used in investing activities in the first nine months of
fiscal 1997 reflects an investment of $16.4 million in USC, equipment purchases
of $2.0 million, partially offset by a reduction in the investment in USI of
$0.2 million.
Net cash provided by financing activities was $1.3 million in the first
nine months of fiscal 1998 and $1.3 million in the first nine months of fiscal
1997. Net cash provided by financing activities in the first nine months of
fiscal 1998 reflects net proceeds from the sales of common stock in connection
with the exercise of stock options, offset by repayments of long term
obligations. 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.
At December 31, 1997, the Company had $14.0 million in cash, a decrease of
$8.4 million from March 31, 1997 and working capital of $47.2 million, a
decrease of $30.8 million from March 31, 1997. The Company believes that these
sources of liquidity, together with potential financings and expected tax
refunds, 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 to form
a separate Taiwanese company, USC, for the purpose of building and managing a
semiconductor manufacturing facility in Taiwan. Alliance paid approximately NTD
1 billion (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. As a result of this
last payment, Alliance has an equity ownership of approximately 19% and the
right to purchase up to approximately 25% of the manufacturing capacity in this
facility.
15
<PAGE>
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 a semiconductor manufacturing facility in Taiwan. The contributions
of Alliance 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. Alliance's investment, which is payable in New Taiwan Dollars,
will be up to approximately US$30 million payable in up to three installments.
The first installment of approximately 50% of the total investment was made in
January 1996. The Company had the option to pay a second installment of
approximately 25% of the total investment in December 1997, plus interest at a
rate of 8.5% on such amount from and after July 7, 1997; the Company requested
an extension of its time to exercise such option until April 1998, but has not
yet received such extension and might not receive such extension. The final
installment of approximately 25% of the total investment is called for on or
before fab production ramp-up. If the Company receives an extension of the
option to pay the second installment and exercises such option and further pays
the third installment, the Company will have an equity ownership of
approximately 5% and have the right to purchase up to approximately 6.25% of the
manufacturing capacity in this facility. Currently, the Company owns
approximately 3.33% of the outstanding shares of USI and has the right to
purchase up to approximately 4.17% of the manufacturing capacity in the
facility. In the event the Company does not receive the requested extension of
the option to pay the second installment, the Company may not have the ability
to increase the levels set forth in the immediately preceding sentence.
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.
16
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits
<CAPTION>
Number Title Filing Status
------ ----- -------------
<S> <C> <C>
3.01 Registrant's Certificate of Incorporation (A)
3.02 Registrant's Bylaws (A)
3.03 Registrant's Certificate of Elimination of Series A Preferred Stock (A)
3.04 Registrant's Certificate of Amendment of Certificate of (B)
Incorporation
4.01 Specimen of Common Stock Certificate of Registrant (A)
27.01 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with the EDGAR
requirements) (C)
</TABLE>
(b) Reports on Form 8-K
None.
(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.
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
(Registrant)
Date: February 10, 1998 /s/ N. D. Reddy
---------------
N. Damodar Reddy
President and Principal Executive Officer
Date: February 10, 1998 /s/ Charles Alvarez
-------------------
Charles Alvarez
Vice President - Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 27, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-30-1998
<PERIOD-END> DEC-27-1997
<CASH> 18,049
<SECURITIES> 0
<RECEIVABLES> 12,638
<ALLOWANCES> 0
<INVENTORY> 30,722
<CURRENT-ASSETS> 83,966
<PP&E> 19,596
<DEPRECIATION> 8,152
<TOTAL-ASSETS> 239,778
<CURRENT-LIABILITIES> 36,760
<BONDS> 1,532
0
0
<COMMON> 397
<OTHER-SE> 200,387
<TOTAL-LIABILITY-AND-EQUITY> 239,778
<SALES> 90,105
<TOTAL-REVENUES> 90,105
<CGS> 87,644
<TOTAL-COSTS> 87,644
<OTHER-EXPENSES> 10,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,881)
<INCOME-TAX> (7,658)
<INCOME-CONTINUING> (14,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,816)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
