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 January 2, 1999
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 .
--- ---
The number of shares outstanding of the registrant's Common Stock on
February 10, 1999 was 41,528,518 shares.
Page 1 of 26, including exhibits
<PAGE>
<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, 1998 and March 31, 1998 3
Consolidated Statements of Operations
Three months and nine months ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine months ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 5. Other Information. 24
Item 6. Exhibits and Reports on Form 8-K. 25
SIGNATURES 26
</TABLE>
2
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Part I. FINANCIAL INFORMATION
Item I. Consolidated Financial Statements.
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
December 31, March 31,
1998 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents
(excluding restricted cash) $ 5,452 $ 3,010
Restricted cash and short term investments 5,525 6,512
Accounts receivable, net 6,711 15,716
Inventory 13,715 32,375
Deferred taxes -- 8,397
Income tax receivable 103 17,147
Other current assets 3,280 1,670
--------- ---------
Total current assets 34,786 84,827
Property and equipment, net 10,366 11,123
Investment in Chartered Semiconductor 51,596 51,596
Investment in United Semiconductor Corporation ("USC") 79,397 85,935
Investment in United Silicon, Inc. 16,799 13,701
Other assets 1,368 1,083
--------- ---------
Total assets $ 194,312 $ 248,265
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,987 $ 35,714
Accrued liabilities 5,610 7,771
Current portion of long term obligations 1,070 1,463
--------- ---------
Total current liabilities 12,667 44,948
Long term obligations 462 1,276
--------- ---------
Total liabilities 13,129 46,224
--------- ---------
Stockholders' equity
Common stock 415 404
Additional paid-in capital 184,831 183,099
Retained earnings (4,063) 18,538
--------- ---------
Total stockholders' equity 181,183 202,041
--------- ---------
$ 194,312 $ 248,265
========= =========
See accompanying notes to consolidated financial statements.
3
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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
-------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 13,282 $ 24,768 $ 33,904 $ 90,105
Cost of revenue 10,864 26,336 51,899 87,644
-------- -------- -------- --------
Gross profit (loss) 2,418 (1,568) (17,995) 2,461
-------- -------- -------- --------
Operating expenses:
Research and development 3,285 3,276 11,012 10,941
Selling, general and administrative 2,863 4,875 9,671 13,815
-------- -------- -------- --------
Total operating expenses 6,148 8,151 20,683 24,756
-------- -------- -------- --------
Loss from operations (3,730) (9,719) (38,678) (22,295)
Other income, net (387) 171 15,173 414
-------- -------- -------- --------
Loss before income taxes
and equity in income of USC (4,117) (9,548) (23,505) (21,881)
Provision (benefit) for income taxes -- (3,342) 8,397 (7,658)
-------- -------- -------- --------
Loss before equity in income of USC (4,117) (6,206) (31,902) (14,223)
Equity in income of USC 2,064 3,833 9,301 8,407
-------- -------- -------- --------
Net Loss ($ 2,053) ($ 2,373) ($22,601) ($ 5,816)
======== ======== ======== ========
Basic and diluted net loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15)
======== ======== ======== ========
Basic and diluted weighted average number
of common shares 41,512 39,439 41,315 39,204
======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($22,601) ($ 5,816)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,823 2,595
Equity in income of USC (9,301) (8,407)
Gain on sale of USC shares (15,823) --
Changes in assets and liabilities:
Accounts receivable 9,005 4,189
Inventory 18,660 (1,187)
Other assets (198) (2,531)
Accounts payable (29,727) 8,547
Accrued liabilities (2,161) 3,200
Deferred income taxes and tax receivable 25,441 10,010
-------- --------
Net cash provided by (used in) operating activities
(23,882) 10,600
-------- --------
Cash provided by (used in) investing activities:
Acquisition of equipment (2,066) (2,687)
Proceeds from sale of (investment in) USC shares 31,662 (17,631)
Investment in United Silicon, Inc. (3,098) --
-------- --------
Net cash provided by (used in) investing activities
26,498 (20,318)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 46 1,923
Repayments of long term obligations (1,207) (645)
Restricted cash 987 (734)
-------- --------
Net cash provided by (used in) financing activities
(174) 544
-------- --------
Net increase (decrease) in cash and cash equivalents 2,442 (9,174)
Cash and cash equivalents at beginning of the period 3,010 17,368
-------- --------
Cash and cash equivalents at end of the period $ 5,452 $ 8,194
======== ========
<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") 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, 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 nine
months of fiscal 1999 and 1998 as ending on December 31, respectively; whereas,
in fact, the Company's fiscal quarters ended on January 2, 1999 and December 27,
1997, respectively. The financial results for the third quarter of fiscal 1999
were reported on a 14-week quarter compared to a 13-week quarter for the third
quarter of fiscal 1998.
The results of operations for the three and nine months ended December 31,
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
December 31, March 31,
1998 1998
------- -------
Inventory: (in thousands)
Work in process $ 6,510 $17,564
Finished goods 7,205 14,811
------- -------
$13,715 $32,375
======= =======
Note 3. Inventory Charges and Valuation Allowance
During the third quarter of fiscal 1999, the Company continued to
experience a deterioration in the average selling prices for certain products
and a slowing in demand for certain products, compared to the third quarter of
fiscal 1998. As a result of these factors, in the third quarter of fiscal 1999,
the Company recorded a pre-tax charge of approximately $0.6 million primarily to
reflect a further decline in market value of certain inventory and to provide
additional reserves for obsolete and excess inventory. This compares to a
pre-tax inventory valuation charge of $6 million for the same period of fiscal
1998. During the first and second quarters of fiscal 1999, the Company continued
to experience a deterioration in the average selling prices for certain products
and a slowing in demand for certain products. As a result of these factors, in
the first and second quarters of fiscal 1999 respectively, the Company recorded
pre-tax charges of approximately $17.0 million and $2.9 million primarily to
reflect further declines in market value of the Company's inventory and to
provide additional reserves for obsolete and excess inventory. Such charges were
$6 million for the second quarter of fiscal 1998(no such charges for the first
quarter of fiscal 1998). The Company is unable to predict when or if such
decline in prices will stabilize. A continued decline in
6
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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 asset. The Company also did not recognize a deferred tax
asset (which would have been $2.8 million) with respect to the first fiscal
quarter's loss.
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 190 million shares of USC, or approximately 19%
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$20.4
million at the exchange rate prevailing on January 2, 1999, 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. 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. 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 nine months of fiscal 1999, the Company recorded $9.3 million of
equity in income of USC, as compared to $8.4 million recorded during the first
nine months of fiscal 1998.
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 owns approximately 2.1% 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
7
<PAGE>
outstanding shares of USI and has the right to purchase approximately 3.70% of
the manufacturing capacity of the facility.
Note 5. 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$20.4 million at the exchange rate
prevailing on January 2, 1999, 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, was $15.8 million.
Note 6. Purchase Order Commitments
At December 31, 1998, the Company had approximately $4.3 million of
noncancelable purchase commitments with suppliers. The Company expects to sell
all products which it has committed to purchase from suppliers.
Note 7. Letters of Credit
As of December 31, 1998, $5.5 million of standby letters of credit were
outstanding and expire on or before December 1, 1999, secured by restricted cash
and short term investments.
Note 8. Net Loss Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the third quarter of fiscal 1998. SFAS
128 requires presentation of both basic EPS and diluted EPS on the face of the
income statement. Basic EPS, which replaces primary EPS, is computed by dividing
net income (loss) available to common stockholders (numerator) by the weighted
average number of common shares outstanding during the period (denominator).
Diluted EPS, which replaces fully diluted EPS, gives effect to all dilutive
potential common shares outstanding during the period. Common equivalent shares
are excluded from the computation if their effect is anti-dilutive. As required,
the Company has applied the new standard to all periods presented.
<TABLE>
The computations for basic and diluted EPS are presented below (in
thousands, except per share data):
<CAPTION>
Three months ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ($ 2,053) ($ 2,373) ($22,601) ($ 5,816)
Shares calculation:
Weighted average shares outstanding 41,512 39,439 41,315 39,204
Effect of dilutive employee stock options -- -- -- --
Average shares outstanding assuming dilution 41,512 39,439 41,315 39,204
======== ======== ======== ========
Basic loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15)
======== ======== ======== ========
Diluted loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15)
======== ======== ======== ========
</TABLE>
8
<PAGE>
The following are not included in the above calculation as they were
considered anti-dilutive (in thousands, except option price data):
Three months ended December 31,
1998 1997
---- ----
Weighted employee stock options outstanding 2,336 3,121
Average exercise price $ 5.53 $ 4.34
Note 9. Legal Matters
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. In November
1998, the parties agreed to stay the filing of an appeal brief pending the
decision of the Appellate Court in a case which might have bearing on this case.
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. In January 1999, the Company reached a settlement and the
case against the Company has been dismissed.
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. In
February 1999, the court set aside the default judgment against the Company. The
plaintiffs may renew the writ and/or may appeal this judgment.
9
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As previously reported, in February 1997, Micron Technology, Inc. filed an
antidumping petition with the United States International Trade Commission
("ITC") and United States Department of Commerce ("DOC"), alleging that static
random access memories ("SRAMs") fabricated in Taiwan were being sold in the
United States at less than fair value, and that the United States industry
producing SRAMs was materially injured or threatened with material injury by
reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC
determination of dumping and a final affirmative ITC determination of injury,
DOC issued an antidumping duty order in April 1998. Under that order, the
Company's imports into the United States on or after approximately April 16,1998
of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of
50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The
Company posted a bond in the amount of 59.06% (the preliminary margin) with
respect to its importation, between approximately October 1997 and April 1998,
of SRAMs fabricated in Taiwan.) In May 1998, the Company and others appealed the
determination by the ITC that imports of Taiwan-fabricated SRAMs were causing
material injury to the U.S. industry. If the appeal is successful, the
antidumping order will be terminated and cash deposits will be refunded with
interest. 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 amount of antidumping
duties, if any, owed on imports from October 1997 through March 1999 will remain
undetermined 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 paid 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 fabricated in Taiwan, and the cash deposit requirement and
possibility of assessment 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 October 1998, Micron Technology, Inc. filed an antidumping petition
with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs")
fabricated 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 fabricated 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 received preliminary producer and importer questionnaires
from the ITC, and submitted responses to such questionnaires in November 1998.
In December 1998, the ITC preliminarily determined that there is a reasonable
indication that the imports of the products under investigation are injuring the
United States industry. The Company received a questionnaire from the DOC, and
responded to such questionnaire in accordance with the deadlines established by
the DOC. The DOC is currently scheduled to complete its investigation 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
antidumping duties will not be imposed on the Company's imports of
Taiwan-fabricated DRAM products into the United States, which duties could
materially adversely affect the Company's ability to sell such products in the
United States.
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Note 10. Maverick Networks Investment
On January 25, 1999, the Company agreed to approve a proposed merger
between Maverick Networks ("Maverick"), a startup company funded by the Company,
Broadcom Corporation ("Broadcom") and a wholly-owned subsidiary of Broadcom. At
the signing of the merger agreement, the Company owned approximately 28.4% of
the total outstanding shares of Maverick. In February 1998, the Company entered
into investment and technology license agreements with Maverick intended to
assist Maverick in developing integrated semiconductors for multi-layer network
switches.
Broadcom is expected to issue 864,200 shares of its Class B Common Stock in
exchange for all shares of Maverick's Preferred and Common Stock, including
shares issuable upon exercise of employee stock options and other rights. The
agreement has been approved by the Board of Directors of both companies and,
according to Broadcom, is expected to close in approximately ninety (90) days.
The transaction is subject to the approval of Maverick's shareholders and
satisfaction of regulatory requirements and other closing conditions, and there
can be no assurance that the Company will receive any shares of Broadcom stock
in connection with its investment in Maverick. On January 25, 1999, the Company
filed a Form 8-K regarding this matter.
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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.
<TABLE>
Results of Operations
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,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 81.8 106.3 153.1 97.3
----- ----- ----- -----
Gross profit (loss) 18.2 (6.3) (53.1) 2.7
----- ----- ----- -----
Operating expenses:
Research and development 24.7 13.2 32.5 12.2
Selling, general and administrative 21.6 19.7 28.5 15.3
----- ----- ----- -----
Total operating expenses 46.3 32.9 61.0 27.5
----- ----- ----- -----
Loss from operations (28.1) (39.2) (114.1) (24.8)
Other income, net (2.9) 0.7 44.8 0.5
----- ----- ----- -----
Loss before income taxes and
equity in income of United Semiconductor
Corporation ("USC") (31.0) (38.5) (69.3) (24.3)
Provision (benefit) for income taxes -- (13.5) 24.8 (8.5)
----- ----- ----- -----
Loss before equity in income of USC (31.0) (25.0) (94.1) (15.8)
Equity in income of USC 15.5 15.5 27.4 9.3
----- ----- ----- -----
Net loss (15.5)% (9.5)% (66.7)% (6.5)%
===== ===== ===== =====
</TABLE>
12
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Net Revenues
Third quarter of fiscal 1999(December 1998 quarter) compared to third quarter of
fiscal 1998 (December 1997 quarter)
Net revenues decreased by 46% to $13.3 million in the December 1998 quarter
from $24.8 million in the December 1997 quarter. The decrease in revenues was
mainly due to the decline in unit shipments of dynamic random access memory
("DRAM") and graphics products combined with a decline in the average selling
prices of the Company's products. The Company experienced revenue decline of 66%
in DRAM and 96% in graphics product lines for the December 1998 quarter compared
to the December 1997 quarter. In July 1998, the Company decided to exit from the
mainstream graphics accelerator business. The revenues for the December 1998
quarter include a $1.5 million adjustment related to the reversal of accruals
established in prior periods to cover potential sales returns which are no
longer required. One customer accounted for 44% of revenues for the December
1998 quarter. One customer accounted for 22% of revenues for the December 1997
quarter.
The net revenues of $13.3 million for the third quarter of fiscal 1999
increased by 27% from the second quarter of fiscal 1999(September 1998 quarter).
The increase was due to some improvement in the unit shipments and higher
average selling prices for static random access memory ("SRAM") and DRAM and
reversal of $1.5 million of reserves. Excluding the reversal of the adjustment
the net revenue increase would have been 12%.
Revenues from the Company's SRAM products contributed approximately 66% of
the Company's net revenues for the December 1998 quarter and approximately 33%
of the Company's net revenues for the December 1997 quarter. The net revenues
increased by 7% to $8.8 million for the December 1998 quarter from $8.2 million
for the December 1997 quarter. The net increase was due to an improvement in the
average selling prices of some of the SRAM products partially offset by the drop
in the unit shipments of SRAM products.
Revenues from the Company's DRAM products contributed approximately 33% of
the Company's net revenues for the December 1998 quarter and approximately 52%
of the Company's net revenues for the December 1997 quarter. The net revenues
decreased by 66% to $4.4 million for the December 1998 quarter from $13 million
for the December 1997 quarter. The net decrease was due to a combination of
lower average selling prices of some of the DRAM products and the drop in the
unit shipments of DRAM products.
Revenues from the Company's graphics products contributed approximately 1%
of the Company's net revenues for the December 1998 quarter and approximately
14% of the Company's net revenues for the December 1997 quarter. The net
decrease was due to a combination of significantly lower average selling prices
of the graphics products and a drop in the unit shipments of graphics products.
As mentioned above, in July, 1998, the Company decided to exit from the
mainstream graphics accelerator business.
Nine months of fiscal 1999(April to December 1998) compared to nine months of
fiscal 1998 (April to December 1997)
Net revenues decreased by 62% to $33.9 million for the nine months of
fiscal 1999 from $90.1 million in the nine months of fiscal 1998. The decrease
in revenues was mainly due to the decline in unit shipments of SRAM, DRAM and
graphics products combined with a decline in the average selling prices of the
Company's products. The Company experienced revenue decline of 20% in SRAM, 77%
in DRAM and 94% in graphics product lines for the nine months of fiscal 1999
compared to the nine months of fiscal 1998.
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Revenues from the Company's SRAM products contributed approximately 59% of
the Company's net revenues for the nine months of fiscal 1999 and approximately
28% of the Company's net revenues for the nine months of fiscal 1998. The net
revenues decreased by 20% to $20 million for the nine months of fiscal 1999 from
$25.1 million for the nine months of fiscal 1998. The net decrease was due to a
combination of lower average selling prices of some of the SRAM products and the
drop in the unit shipments of SRAM products.
To attempt to increase demand and average selling prices for the Company's
SRAM products, the Company has added to its SRAM product offerings, including
the announcement of its Intelliwatt line of SRAM products. The Company is unable
to predict when or if such price and demand fluctuations will stabilize or if
the introduction of new product offerings will offset future price and demand
declines. Any future 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 40% of
the Company's net revenues for the nine months of fiscal 1999 and approximately
65% of the Company's net revenues for the nine months of fiscal 1998. The net
revenues decreased by 77% to $13.5 million for the nine months of fiscal 1999
from $58.3 million for the nine months of fiscal 1998. The net decrease was due
to a combination of lower average selling prices of some of the DRAM products
and the drop in the unit shipments of DRAM products.
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 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.
Revenues from the Company's graphics products contributed approximately 1%
of the Company's net revenues for the nine months of fiscal 1999 and
approximately 7% of the Company's net revenues for the nine months of fiscal
1998. The net decrease was due to a combination of lower average selling prices
of some of the graphics products and the drop in the unit shipments of graphics
products.
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.
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.
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Gross Profit (Loss)
The Company experienced a gross profit of $2.4 million for the third
quarter of fiscal 1999, or 18% of net revenues compared to a gross loss of $1.6
million, or (6%) of net revenues for the same period of fiscal 1998. The third
quarter of fiscal 1999 included pre-tax inventory charge of $0.6 million
compared to $6 million for the same period of fiscal 1998. The reversal of the
$1.5 million reserve for estimated sales returns had a favorable impact on gross
margin. In the absence of the reversal, the gross margin would have been 7% of
net revenues. In the third quarter of fiscal 1999, the Company reported a
positive gross profit for the first time since the first quarter of fiscal 1998.
Gross loss was $18 million for the nine months of fiscal 1999, or (53%) of
net revenues compared to gross profit of $2.5 million for the nine months of
fiscal 1998. The decrease in gross profit for the nine months of fiscal 1999
primarily resulted from the $20.3 million pre-tax inventory charge taken in the
first, second and third quarters together with the decline in the unit shipments
and the average selling prices for the Company's DRAM, SRAM and graphics
products due to competitive market conditions. Although a majority of the
product unit costs were lower for the nine months of fiscal 1999 compared to the
nine months of fiscal 1998, such reductions did not offset the decline in the
average selling prices of the Company's products. 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 $3.3 million, or 25% of net revenue
in the third quarter of fiscal 1999 compared to $3.3 million, or 13% of net
revenue in the same period of the prior fiscal year. Research and development
expenses were $11.0 million, or 33% of net revenue in the first nine months of
fiscal 1999 compared to $10.9 million, or 12% of net revenue in the same period
of the prior fiscal year. One percent increase in research and development
expenses for the first nine months of fiscal 1999 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 patent related legal expenses and increases in personnel related
costs. This was partially offset by the reduction of the personnel and
development activities of the graphics products. In July 1998, the Company
announced its plan to exit from the graphics accelerator business. Research and
development expenses may 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 $2.9 million, or 22% of
net revenue in the third quarter of fiscal 1999 compared to $4.9 million, or 20%
of net revenue in the same period of the prior fiscal year. Selling, general and
administrative expenses were $9.7 million, or 29% of net revenue in the first
nine months of fiscal 1999 compared to $13.8 million, or 15% 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 personnel-related costs.
Selling, general and administrative expenses may increase in absolute dollars
and may also increase as a percentage of net revenue in future periods.
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Other Income, Net
Net other income was ($0.4) million for the third quarter of fiscal 1999
compared to $0.2 million for the same period of fiscal 1998. Net other income
was $15.2 million for the first nine months of fiscal 1999 compared to $0.4
million for the same period of fiscal 1998. Net other income for the first nine
months of fiscal 1999 primarily represents the net gain of $15.8 million on the
sale of shares of USC (as discussed in Note 5) and interest income from
short-term investments, partially offset by an adjustment in carrying value of
the Company's investments.
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 third quarter of
fiscal 1999, the Company reported its share in the income of USC in the amount
of $2.1 million, as compared to $3.8 million reported in the same quarter of
fiscal 1998. The 44% decrease in income is primarily due to a drop in the
ownership percentage from 18% to 15%, unfavorable foreign exchange rates used in
translation, and a higher effective tax rate in 1999.
Equity income from USC for the first nine months of fiscal 1999 was $9.3
million, or 11% higher as compared to $8.4 million reported for the same period
last year. The increase was due primarily to increased operating profit, due to
higher sales and higher gross margins, as well as higher net realized and
unrealized foreign currency transaction gains related to U.S. dollar denominated
accounts receivable and Japanese yen denominated liabilities.
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
(such as Asian and Latin America), 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 during the past three
years. 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
remain unstable through the third 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
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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 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, second and third 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 and to allow for excess
and obsolete reserves.
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
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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 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.
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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 by June 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 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
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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.
The Company is also subject to an antidumping investigation commenced in
October 1998 on imports into the United States of DRAMs for which wafer
fabrication occurred in Taiwan. Currently, a majority of the DRAMs designed and
sold by the Company are fabricated in Taiwan. The Company cannot predict the
outcome of the investigation. If, however, the U.S. Department of Commerce
reaches an affirmative determination of dumping in its preliminary
determination, currently scheduled to be issued in April 1999, the Company will
have to post a bond in the amount of a percentage (the "antidumping margin") of
the value of its subsequent imports of Taiwan-fabricated DRAMs, and if the final
outcome of the investigation is an antidumping duty order, the Company will have
to pay cash deposits in the amount of a percentage (the "final antidumping
margin") of the value of its imports of Taiwan-fabricated DRAMs beginning
approximately August 1999. Although, if an antidumping duty order is issued, the
Company may be entitled to full or partial release of the bond and refunds of
its cash deposits with interest in late 2001, the bonding and deposit
requirement and the potential that final antidumping duties will be assessed in
2001 may materially adversely affect the Company's ability to sell
Taiwan-fabricated DRAMs in the United States. If an antidumping duty order is
issued, the Company may be able to secure non-Taiwan wafer fabrication capacity
for its DRAM products in order to support its U.S. customers with DRAMs not
subject to antidumping duties, but there can be no assurance 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 $23.9 million in first
nine months of fiscal 1999 and provided cash of $10.6 million in the first nine
months of fiscal 1998. Cash utilized in operating activities in the first nine
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 nine 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.
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Net cash provided by investing activities was $26.5 million for the first
nine months of fiscal 1999 and net cash used in investing activities was $20.3
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
$2.1 million and $3.1 million investment in United Silicon, Inc.
The Company's financing activities used cash of $0.2 million in the first
nine months of fiscal 1999 and provided cash of $1.5 million in the first
quarter of fiscal 1998. Net cash provided by financing activities in the first
nine 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, and a
reduction of restricted cash of $1.0 million, partially offset by repayment of
long term obligations of $1.2 million. Net cash provided in financing activities
in the first nine months of fiscal 1998 reflects net proceeds of $1.9 million
and an increase of restricted cash of $0.7 million offset by the repayment of
long-term obligations of $0.6 million from the sales of common stock in
connection with the exercise of stock options.
At December 31, 1998, the Company had $5.5 million in cash, an increase of
$2.4 million from March 31, 1998, and working capital of $22.1 million, a
decrease of $3.9 million from September 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 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 190 million shares of USC, or approximately 19%
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$20.4
million at the exchange rate prevailing on January 2, 1999, 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. 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. 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 nine months of fiscal 1999, the Company recorded $9.3 million of
equity in income of USC, as compared to $8.4 million recorded during the first
nine months of fiscal 1998.
21
<PAGE>
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 owns approximately 2.1% 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.
On January 25, 1999, the Company agreed to approve a proposed merger
between Maverick Networks ("Maverick"), a startup company funded by the Company,
Broadcom Corporation ("Broadcom") and a wholly-owned subsidiary of Broadcom. At
the signing of the merger agreement, the Company owned approximately 28.4% of
the total outstanding shares of Maverick. In February 1998, the Company entered
into investment and technology license agreements with Maverick intended to
assist Maverick in developing integrated semiconductors for multi-layer network
switches.
Broadcom is expected to issue 864,200 shares of its Class B Common Stock in
exchange for all shares of Maverick's Preferred and Common Stock, including
shares issuable upon exercise of employee stock options and other rights. The
agreement has been approved by the Board of Directors of both companies and,
according to Broadcom, is expected to close in approximately ninety (90) days.
The transaction is subject to the approval of Maverick's shareholders and
satisfaction of regulatory requirements and other closing conditions, and there
can be no assurance that the Company will receive any shares of Broadcom stock
in connection with its investment in Maverick. On January 25, 1999, the Company
filed a Form 8-K regarding this matter.
22
<PAGE>
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. In November
1998, the parties agreed to stay the filing of an appeal brief pending the
decision of the Appellate Court in a case which might have bearing on this case.
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. In January 1999, the Company reached a settlement and the
case against the Company has been dismissed.
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. In
February 1999, the court set aside the default judgment against the Company. The
plaintiffs may renew the writ and/or may appeal this judgment.
23
<PAGE>
Item 5. Other Information.
As previously reported, in February 1997, Micron Technology, Inc. filed an
antidumping petition with the United States International Trade Commission
("ITC") and United States Department of Commerce ("DOC"), alleging that static
random access memories ("SRAMs") fabricated in Taiwan were being sold in the
United States at less than fair value, and that the United States industry
producing SRAMs was materially injured or threatened with material injury by
reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC
determination of dumping and a final affirmative ITC determination of injury,
DOC issued an antidumping duty order in April 1998. Under that order, the
Company's imports into the United States on or after approximately April 16,1998
of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of
50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The
Company posted a bond in the amount of 59.06% (the preliminary margin) with
respect to its importation, between approximately October 1997 and April 1998,
of SRAMs fabricated in Taiwan.) In May 1998, the Company and others appealed the
determination by the ITC that imports of Taiwan-fabricated SRAMs were causing
material injury to the U.S. industry. If the appeal is successful, the
antidumping order will be terminated and cash deposits will be refunded with
interest. 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 amount of antidumping
duties, if any, owed on imports from October 1997 through March 1999 will remain
undetermined 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 paid 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 fabricated in Taiwan, and the cash deposit requirement and
possibility of assessment 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 October 1998, Micron Technology, Inc. filed an antidumping petition
with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs")
fabricated 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 fabricated 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 received preliminary producer and importer questionnaires
from the ITC, and submitted responses to such questionnaires in November 1998.
In December 1998, the ITC preliminarily determined that there is a reasonable
indication that the imports of the products under investigation are injuring the
United States industry. The Company received a questionnaire from the DOC, and
responded to such questionnaire in accordance with the deadlines established by
the DOC. The DOC is currently scheduled to complete its investigation 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
antidumping duties will not be imposed on the Company's imports of
Taiwan-fabricated DRAM products into the United States, which duties could
materially adversely affect the Company's ability to sell such products in the
United States.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Title
27.01 Financial Data Schedule (filed only with the electronic
submission of Form 10-Q in accordance with the EDGAR
requirements)
25
<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 12, 1999 /s/ N. Damodar Reddy
----------------------------------------------
N. Damodar Reddy
President and Chief Executive Officer
(President and Principal Executive Officer)
Date: February 12, 1999 /s/ David P. Eichler
----------------------------------------------
David P. Eichler
Vice President of Finance and Administration
And Chief Financial Officer
(Principal Financial and Accounting Officer)
26
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