SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[ x ] Annual report pursuant to section 13 or 15(d) of the securities exchange
act of 1934
For the fiscal year ended APRIL 1, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the securities
exchange act of 1934
For the transition period from __________ to __________.
Commission file number: 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0057842
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2575 AUGUSTINE DRIVE
SANTA CLARA, CALIFORNIA 95054-2914
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (408) 855-4900
Registrant's website address is HTTP://WWW.ALSC.COM
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.01 NASDAQ
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed under Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes X No
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As of June 19, 2000, there were 41,464,780 shares of Registrant's Common Stock
outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant on June 19, 2000, based upon the closing price
of the Common Stock on the NASDAQ National Market for such date, was
approximately $1,154,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its 2000 Annual Meeting
of Stockholders ("Proxy Statement") to be filed pursuant to Regulation 14A of
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, which is anticipated to be filed within 120 days after the end
of Registrant's fiscal year ended April 1, 2000, are incorporated by reference
into Part III hereof.
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PART I
FORWARD LOOKING STATEMENTS
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, are subject to risks and uncertainties and
include the following statements concerning the timing of new product
introductions; the functionality and availability of products under development;
trends in the personal computer, networking, telecommunications, instrumentation
and consumer 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; the availability and cost
of products from the Company's suppliers; changes in stock price of Broadcom
Corporation, Chartered Semiconductor, United Microelectronics Corporation,
Vitesse Semiconductor Corporation and PMC-Sierra, Inc.; adverse changes in value
of investments made by Alliance Venture Management, LLC; and the Company's
potential status as Investment Act of 1940 reporting company. These risks and
uncertainties include those set forth in Item 1 of Part I hereof (entitled
"Business") and in Item 7 of Part II hereof (entitled "Factors That May Affect
Future Results") and elsewhere in this Report. 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.
ITEM 1
BUSINESS
OVERVIEW
Alliance Semiconductor Corporation was incorporated in California on February 4,
1985 and reincorporated in Delaware on October 26, 1993. Unless the context
indicates otherwise, the terms "Alliance" and the "Company" refer to Alliance
Semiconductor Corporation, a Delaware corporation, and its direct and indirect
subsidiaries. The Company designs, develops and markets high performance memory
and memory intensive logic products to the personal computer, networking,
telecommunications, instrumentation and consumer markets.
Market trends, such an increased emphasis on high-throughput applications,
including networking, graphics, multimedia, computer, consumer, and
telecommunications products, have created opportunities for high performance
memory products. The Company addresses these opportunities with its families of
static random access memories ("SRAMs") and dynamic random access memories
("DRAMs"), characterized by high storage capacity (density), fast access times
and low power consumption.
The semiconductor industry is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity and undercapacity, and
accelerated erosion of selling prices. During much of fiscal 1999, 1998 and 1997
the market for certain of the Company's DRAM and SRAM devices continued to
experience excess supply relative to demand, which resulted in a significant
downward trend in average selling prices. Although the Company is unable to
predict future trends in average selling prices, historically the semiconductor
industry has experienced significant annual declines in average selling prices.
The average selling price that the Company is able to command for its products
is highly dependent on industry-wide production capacity and demand, and as a
consequence the Company could experience (as it did throughout much of fiscal
1999, 1998 and 1997) rapid erosion in product pricing which is not within the
control of the Company and which could have an adverse material effect on the
Company's results of operations. The Company is unable to predict the future
prices for its products.
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Throughout this report, the Company has indicated its fiscal years as ending on
March 31, whereas the Company's fiscal year actually ends on the Saturday
nearest the end of March. The fiscal year ended March 31, 2000 contained 52
weeks while the fiscal years ended March 31, 1999 and March 31, 1998 contained
53 weeks and 52 weeks, respectively.
INDUSTRY BACKGROUND
Traditionally, large manufacturing companies, such as Samsung, Hyundai, Micron,
NEC, Toshiba, Hitachi and Cypress Semiconductor, have dominated the markets for
SRAMs and DRAMs. The majority of the memory products from these manufacturers
have consisted of commodity products, which have relatively predictable,
multi-year product life cycles and thus require more focus on process technology
and production cost and less on design. In recent years, certain technology
trends dramatically increased the performance requirements for SRAMs and DRAMs,
creating new design challenges and market opportunities for emerging
semiconductor companies. The proliferation of more powerful personal computers
and workstations in recent years and the increasing emphasis on high-throughput
networking, graphics, multimedia and telecommunications products have created
mass market opportunities for high speed and low power SRAMs and high speed
DRAMs.
SRAMs and DRAMs are forms of "volatile" memory, meaning that such devices retain
their memory only when connected to a power supply. In contrast, flash memory is
a form of "non-volatile" memory, which retains its memory even when the power
supply is turned off. The demand for flash memory has increased in recent years.
In addition to being a preferred method of storing the basic input/output system
("BIOS") for computers, a variety of applications make use of flash memory (for
instance, cellular phone handsets often allow users to "store" frequently-dialed
numbers in flash memory; such memory is retained when the handset power is
turned off).
Embedded-memory applications are growing rapidly, as manufacturers of items from
cell phones to toasters are introducing "smart" machines that use integrated
circuits to improve performance. Embedding memory and logic on a single chip may
produce significant advantages in size and speed.
TECHNOLOGY
The Company has focused on using innovative design techniques to develop high
performance SRAMs and DRAMs that can be manufactured using a simple CMOS
manufacturing process. The Company combines both SRAM and DRAM design approaches
in creating its SRAM and DRAM products, and believes that merging these
techniques enables it to design SRAMs that feature some of the density
attributes of DRAMs and to design DRAMs that feature some of the speed
attributes of SRAMs. Since its inception in 1985, the Company has accumulated
substantial experience in designing SRAM and DRAM products.
The Company believes that the die sizes (the physical sizes of its complete,
unpackaged, memory circuits) of many of its products are smaller than those of
competing products, providing the Company with a key competitive advantage.
Because yields increase significantly as die size decreases, the Company
believes that its small die sizes have been a major contributor to its generally
high manufacturing yields. Small die sizes also generally result in additional
benefits, such as lower die cost, increased speed, greater reliability and lower
power consumption.
In addition to having small die sizes, many of the Company's products are
designed to be manufactured using a CMOS process with fewer steps than required
for competitive memory products. The Company's competitors often require a
greater number of mask steps and/or more complex manufacturing processes to
achieve similar performance of such products. Because yields typically decline
as manufacturing complexity and the number of process steps increase, the
simpler manufacturing process utilized by the Company has contributed to its
generally high manufacturing yields. The Company also believes that a simpler
manufacturing process leads to faster time to market and shorter manufacturing
cycle times.
The Company's development strategy is to leverage its proprietary design
modules, which have been created using its design philosophies. These modules,
which are scaleable in size, can be used by the Company as building blocks for
new products, resulting in shorter design cycles. The Company believes that this
design strategy also enables it to maximize the performance, yield and cost
advantages of its basic designs and sustain them over time in successive
generations of higher performance and higher density products.
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PRODUCTS
HIGH SPEED CMOS SRAMS
Sales of the Company's SRAM products accounted for 43% of the Company's net
revenues in fiscal 2000. During fiscal year's 1999 and 1998, SRAM products
contributed approximately 58% and 27%, respectively, of the Company's net
revenues. Focused on the telecommunications, networking and wireless markets,
the Company currently offers SRAM products in broad range densities, packages,
speed grades and low-power ranges from 64 Kbit to 4 Kbit with speeds as fast as
10ns and stand by power as low as 20uA. Currently the Company's volume SRAM
products are manufactured using 0.35 and 0.25 micron technology, with
development to 0.18 micron technology underway.
HIGH SPEED CMOS DRAMS
Sales of the Company's DRAM products accounted for 56% of the Company's net
revenues in fiscal 2000. During fiscal years 1999 and 1998, DRAM products
contributed 40% and 66%, respectively, of the Company's net revenues. During
fiscal year 2000, the Company continued to increase its volume of production of
4 Mbit and 16 Mbit DRAM products in the 256 Kbit x 16 and 1 Mbit x 16
configurations using technologies down to 0.25 micron.
HIGH SPEED CMOS FLASH MEMORIES
During fiscal 2000, the Company changed its focus from 5V to 3V flash memory
products (which use a single, nominal, 3-volt power supply for read and
programming functions). The Company has sampled the 8 Mbit product with access
times as fast as 80ns, and has achieved functional silicon on 4 Mbit product. To
date, the Company has not derived significant revenue from flash memory
products.
NETWORK HARDWARE ACCELERATORS
In fiscal year 1999, the Company announced that it expected to introduce the
first product of an Internet Protocol Routing Processor ("IPRP") family that
will leverage the Company's logic and embedded memory technology, to enable
hardware accelerated wire speed routing of IP packets, in multi-ported Gigabit
and Terabit routers. These IPRP devices could become integral components in
mission critical and multimedia enhanced high-end routers, which are being
deployed to build the next generation Internet infrastructure. The Company
achieved working silicon of the first product of IPRP family during the quarter
ended April 3, 1999. However, these prototypes did not achieve all the
specifications necessary to introduce the product, including the desired speed.
The Company spent the entire fiscal year 2000 redesigning the product and has
not yet produced a marketable product. While the Company plans on continuing its
effort to produce an IPRP product, there can be no assurance that the Company
can or will do so.
PRODUCT DEVELOPMENT
Timely development and introduction of new products are essential to maintaining
the Company's competitive position. The Company currently develops all of its
products in-house and had on staff 79 development personnel (38 in the United
States and 41 in India) as of April 1, 2000. The Company uses a
workstation-based computer-aided design environment to design and prototype new
products. The Company's design process uses network computing, high-level design
methodologies, simulators, circuit synthesizers and other related tools. During
fiscal 2000, 1999 and 1998, the Company spent approximately $14.6 million, $14.1
million and $15.3 million respectively, on product development activities. The
Company plans to continue to invest substantial amounts in development to design
additional products.
The markets for the Company's products are characterized by rapid technological
change, evolving industry standards and product obsolescence. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive performance levels. The success of
new products depends on a variety of factors, including product selection,
successful and timely completion of product development, the Company's ability
to secure sufficient foundry capacity for volume manufacturing of wafers,
achievement of acceptable wafer fabrication yields (the proportion of good die
on a silicon wafer) by the Company's independent foundries and the Company's
ability to offer products at competitive prices. There can be no assurance that
the Company will be able to identify new product opportunities successfully, or
to develop and bring to market such new products in a timely and cost effective
manner, or that the Company will be able to
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respond effectively to new technological changes or new product announcements by
others. There also can be no assurance that the Company can secure adequate
foundry capacity for the production of such products, or obtain acceptable
manufacturing yields necessary to enable the Company to offer products at
competitive prices. Additionally, there can be no assurance that the Company's
products will gain or maintain market acceptance. Such inabilities could
materially and adversely affect the Company's results of operations.
The markets for SRAMs, DRAMs, and flash memory products are volatile and subject
to rapid technological and price change. Any inventory of products for those
markets may be subject to obsolescence and price erosion, which could materially
and adversely affect the Company's results of operations.
CUSTOMERS
The Company's primary customers are major domestic and international
manufacturers of personal computer and computer peripherals, consumer,
networking, telecommunications and wireless products, including; 3Com, Pace
Micro Technology, Lucent, Sony, IBM, Toshiba, Acer, Alcatel, Nokia, Solectron,
Jabil, Newbridge Networks, Efficient Networks, General Instruments, Seagate,
Brother and Pioneer. A decline in demand in these industries or lack of success
in developing new markets or new products could have a material adverse effect
on the Company's results of operations.
The Company believes that if its sales penetration into these markets increases,
its customer base will diversify not only by product application but also
geographically. There can be no assurance that such sales penetration into these
markets will, in fact, increase. 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. During fiscal year 2000, the Company moved
all of its SRAM production out of Taiwan. The Company intends to sell its
remaining SRAM inventory that was manufactured in Taiwan outside the United
States. See Note 13 of Notes to Consolidated Financial Statements.
Sales to the Company's customers are typically made pursuant to specific
purchase orders, which may be canceled by the customer without enforceable
penalties. For the fiscal year ended March 31, 2000, one customer accounted for
approximately 10% of the Company's net revenues. For the fiscal year ended March
31, 1999, two customers accounted for approximately 15% and 13% of the Company's
net revenues. For the fiscal year ended March 31, 1998, one customer accounted
for approximately 18% of the Company's net revenues. See Note 1 of Notes to
Consolidated Financial Statements.
Historically, the semiconductor industry in general, and the semiconductor
memory business in particular, has experienced cyclical downturns in business
that happen every few years. The industry experienced such a downturn in the mid
1990's and has been recovering over the last few years, as has the Company. The
Company fully expects that another downturn will occur in the next few years.
And while the Company is trying to take precautions so that it will not be
carrying significant inventory (as happened in the last downturn) when the next
downturn occurs, it is difficult to predict when the downturn will occur and
customers start canceling orders. There can be no assurance that the Company
will be able to manage its business in a manner so as to prepare for the next
downturn, when it occurs. Additionally, even if the Company is able to prepare
for the downturn, any such downturn will none-the-less have a significant and
material negative impact on the Company's ability to sell products and results
of operations and such a negative impact on the Company may last several years.
SALES AND MARKETING
The Company markets and distributes its products through a network of
manufacturers' representatives and distributors throughout North America,
Europe, Asia and the rest of the world.
The Company uses manufacturers' representatives and distributors who are not
subject to minimum purchase requirements and who can discontinue marketing the
Company's products at any time. Many of the Company's distributors are permitted
to return a limited amount of product purchased in exchange for future orders.
The loss of one or more manufacturers' representatives or distributors could
have a material adverse effect on the Company's results of operations. The
Company believes that its relations with its manufacturers' representatives and
distributors generally are good.
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The Company believes that customer service and technical support are important
competitive factors in selling to major customers. The Company provides
technical support to its customers worldwide. Distributors and manufacturers'
representatives supplement the Company's efforts by providing additional
customer service at a local level. The Company also works closely with its
customers in qualification of its products and providing the needed quality and
reliability data. The Company believes that close contact with its customers not
only improves the customers' level of satisfaction but also provides important
insights into future market directions.
International revenues accounted for approximately 59%, 50% and 41% of net
revenues in fiscal 2000, 1999 and 1998, respectively. The Company expects that
international sales will continue to represent a significant portion of net
revenues. In addition, the Company's products are manufactured, assembled and
tested by independent third parties primarily located in Asia and North America,
and the Company has in the past, and intends in the future, to make investments
in certain foundries in Asia or elsewhere in order to secure production
capacity. Due to its international sales and independent third party
manufacturing, assembly and testing operations, the Company is subject to the
risks of conducting business internationally. These risks include unexpected
changes in regulatory requirements, delay resulting from difficulty in obtaining
export licenses of certain technology, tariffs and other barriers and
restrictions, and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks in connection with its
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. In addition, because the Company's
international sales generally are denominated in U.S. dollars, fluctuations in
the U.S. dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies.
Although the Company to date has not experienced any material adverse effect on
its results of operations as a result of such regulatory, geopolitical and other
factors, there can be no assurance that such factors will not adversely impact
the Company's results of operations in the future or require the Company to
modify its current business practices. See Note 15 of Notes to Consolidated
Financial Statements.
MANUFACTURING
The Company subcontracts its manufacturing to independent foundries, which
allows the Company to avoid the significant capital investment required for
wafer fabrication facilities. The Company, however, has entered into agreements
providing for the investment of significant sums for the formation of companies
to build and operate manufacturing facilities or to obtain guaranteed capacity,
as described below. As a result, the Company focuses its resources on product
design and development, quality assurance, marketing and sales, and customer
support. The Company designs its products using proprietary circuit modules and
standard fabrication processes in order to operate within the process parameters
of its contract manufacturers.
The Company's major foundries are United Microelectronics Corporation ("UMC") in
Taiwan and Japan, Chartered Semiconductor Manufacturing Ltd. ("Chartered") in
Singapore and National Semiconductor Corporation in the United States. The
Company has entered into foundry production agreements with all of its major
foundries. Although the Company believes it currently has adequate capacity to
address market requirements, there can be no assurance that in the future the
Company's current foundries, together with any additional sources, would be
willing or able to satisfy all of the Company's requirements on a timely basis.
The Company has encountered delays in the qualification process and production
ramp-up in the past, and qualification of or production ramp-up at any
additional foundries could take longer than anticipated. The Company has entered
into equity arrangements in order to obtain an adequate supply of wafers;
especially wafers manufactured using advanced process technologies. The Company
will continue to consider various possible transactions, including but not
limited to equity investments in independent wafer manufacturers, in exchange
for guaranteed production; the formation with others of new companies to own and
operate foundries; the usage of "take or pay" contracts that commit the Company
to purchase specified quantities of wafers over extended periods; and the
licensing of certain of the Company's designs, in order to obtain an adequate
supply of wafers using advanced process technologies. There can be no assurance,
however, that the Company would be able to consummate any such transaction in a
timely manner, or at all, or on terms commercially acceptable to the Company.
In February and April 1995, the Company purchased shares of Chartered for
approximately $51.6 million and entered into a manufacturing agreement under
which Chartered would provide a minimum number of wafers from its 8-inch wafer
fabrication facility known as "Fab2", if Alliance so chooses.
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
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purpose of building and managing an 8-inch semiconductor manufacturing facility
in Taiwan. Between September 1995 and July 1997 the Company invested
approximately $70.4 million in USC in exchange for 190 million shares or 19.0%
of the outstanding shares and 25% of the total wafer capacity.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and acquired approximately 3.2% of the outstanding
shares of USIC. The Company has the right to purchase approximately 3.7% of the
manufacturing capacity of the facility.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Through its representation on USC's board,
the Company had the right to choose whether to consent to the merger and
concluded it to be in the Company's best interest to do so. Alliance received
247.7 million shares of UMC stock for its 247.7 million shares, or 14.8%
ownership of USC, and approximately 35.6 million shares of UMC stock for its
48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at
March 31, 2000 Alliance owned approximately 283.3 million shares, or
approximately 3.2%, of UMC, and maintained its 25% and 3.7% wafer capacity
allocation rights in the former USC and USIC foundries, respectively.
There can be no assurance that the Company's current foundries, together with
any additional sources, will be able or willing to satisfy all of the Company's
requirements on a timely basis. The Company has encountered delays in
qualification and production ramp-up in the past and the production ramp-up at
any additional foundries could take longer than anticipated. In the event that
the Company's foundries are unable or unwilling to satisfy the Company's
requirements in a timely manner, the Company's results of operations could be
materially adversely affected. In addition, some of UMC's foundries are located
in the Science-Based Industrial Park in Hsin-Chu City, Taiwan. The Company
currently expects these foundries to supply the substantial portion of the
Company's products in fiscal 2001. Disruption of operations at the Company's
foundries for any reason, including work stoppages, fire, earthquakes as was the
case in September 1999, or other natural disasters, could cause delays in
shipments of the Company's products, and could have a material adverse effect on
the Company's results of operations. In or about October 1997, a fire caused
extensive damage to one of UMC's foundries, not used by the Company, which is
located in the Hsin-Chu Science-Based Industrial Park. 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 effect on UMC in the future. In
addition, as a result of the rapid growth of the semiconductor industry based in
the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed
on the water and electricity supply in that region. Any shortages of water or
electricity could adversely affect the Company's foundries' ability to supply
the Company's products, which could have a material adverse effect on the
Company's results of operations.
The Company is using multiple sources for certain of its products, which may
require the Company's customers to perform separate product qualifications. The
Company has not, however, developed alternate sources of supply for certain
other products, and its newly introduced products are typically produced
initially by a single foundry until alternate sources can be qualified. The
requirement that a customer perform separate product qualifications or a
customer's inability to obtain a sufficient supply of products from the Company
may cause that customer to satisfy its product requirements from the Company's
competitors, which would adversely affect the Company's results of operations.
The Company purchases semiconductor wafers from these foundries pursuant to
various agreements. The Company believes that its relationship with each of
these foundries is good. However, UMC and Chartered manufacture similar products
which are sold to the Company's competitors.
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, costs and loss of production due to
seismic activity, weather conditions and other factors. Although the Company
continuously evaluates sources of supply and may seek to add additional foundry
capacity, there can be no assurance that such additional capacity can be
obtained at acceptable prices, if at all. The occurrence of any supply or other
problem resulting from these risks could have a material adverse effect on the
Company's results of operations. There can be no assurance that problems
affecting manufacturing yields of the Company's products will not occur in the
future such as occurred during late in fiscal 1996.
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The Company uses offshore subcontractors, which are located primarily in Taiwan
and Singapore for die assembly and testing. In the assembly process, the silicon
wafers are separated into individual dies that are then assembled into packages
and tested in accordance with procedures developed by the Company. Following
assembly, the packaged devices are further tested and inspected pursuant to the
Company's quality assurance program before shipment to customers. While the
timeliness, yield and quality of product deliveries from the Company's suppliers
of assembly and test services have been acceptable to date, there can be no
assurance that problems will not occur in the future. Any significant disruption
in adequate supplies from these subcontractors, or any other circumstances that
would require the Company to qualify alternative sources of supply, could delay
shipment and result in the loss of customers, limitations or reductions in the
Company's revenue, and other adverse effects on the Company's results of
operations. Most of the Company's wafer foundries, assembly and testing
facilities comply with the requirements of ISO 9000.
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 by such suppliers. The occurrence
of such price increases could have a material adverse effect on the Company's
results of operations.
The Company also is subject to the risks of shortages and increases in the cost
of raw materials used in the manufacture or assembly of the Company's products.
Shortages of raw materials or disruptions in the provision of services by the
Company's assembly or testing houses or other circumstances that would require
the Company to seek alternative sources of supply, assembly or testing could
lead to constraints or delays in timely delivery of the Company's products. Such
constraints or delays may result in the loss of customers, limitations or
reductions in the Company's revenue or other adverse effects on the Company's
results of operations. The Company's reliance on outside foundries and
independent assembly and testing houses involves several other risks, including
reduced control over delivery schedules, quality assurance and costs.
Interruptions in supply at the Company's foundries or assembly or testing houses
may cause delays in delivery of the Company's products. The occurrence of any
supply or other problem resulting from the risks described above could have a
material adverse effect on the Company's results of operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, product obsolescence and heightened
international competition in many markets. Many of the Company's customers may
be purchasing products from both the Company and the Company's competitors. The
Company's principal competitors include Cypress Semiconductor Corporation;
Integrated Device Technology, Inc.; Integrated Silicon Solutions, Inc.; Micron
Technology, Inc.; AMD; NEC; Samsung; Toshiba; and other U.S., Japanese, Korean,
and Taiwanese manufacturers. Most of the Company's competitors and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer-standing
relationships with customers than the Company. During an industry recession such
as occurred in 1998, 1997 and 1996 in the SRAM and DRAM markets, companies that
have broader product lines and longer-standing customer relationships may be in
a stronger competitive position than the Company. In addition, as the Company
enters new markets, the Company may face additional competition. Markets for
most of the Company's products are characterized by intense price competition.
The Company's future success will be highly dependent upon the successful
development and timely introduction of new products that meet the needs of the
market at a competitive price. There can be no assurance that the Company will
be able to develop or market any such products successfully. The Company
believes that its ability to compete successfully depends on a number of factors
both within and outside of its control, including price, product quality,
performance, success in developing new products, adequate foundry capacity,
sources of raw materials, efficiency of production, timing of new product
introductions by competitors, protection of Company products by effective
utilization of intellectual property laws and general market and economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future.
LICENSES, PATENTS AND MASKWORK PROTECTION
The Company seeks to protect its proprietary technology by filing patent
applications in the United States and registering its circuit designs pursuant
to the Semiconductor Chip Protection Act of 1984. As of June 21, 2000, the
Company holds 54 United States patents covering certain aspects of its product
designs or manufacturing technology, which patents expire between 2009 and 2018.
The Company also has 24 pending United States
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<PAGE>
patent applications, six of which have been allowed and are expected to be
issued as patents. No assurance can be given that the claims allowed on any
patents held by the Company will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any patents issued to
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
The loss of patent protection on the Company's technology or the circumvention
of its patent protection by competitors could have a material adverse effect on
the Company's ability to compete successfully in its products business. There
can be no assurance that any existing or future patent applications by the
Company will result in issued patents with the scope of the claims sought by the
Company, or at all, that any current or future issued or licensed patents, trade
secrets or know-how will afford sufficient protection against competitors with
similar technologies or processes, or that any patents issued will not be
infringed upon or designed around by others. In addition, there can be no
assurance that others will not independently develop proprietary technologies
and processes, which are the same as or substantially, equivalent or superior to
those of the Company.
From time to time, the Company is contacted by companies who hold patents which
they claim the Company infringes. As of June 19, 2000, the Company is in
discussions with two companies who have made such claims. If the Company
determines that the Company possibly infringes a patent and the patent appears
valid, the Company will negotiate a license, if possible. There can be no
assurance that the Company has not or will not infringe prior or future patents
owned by others, that the Company will not need to acquire licenses under
patents belonging to others for technology potentially useful or necessary to
the Company, or that such licenses will be available to the Company, if at all,
on terms acceptable to the Company.
Copyrights and maskwork protection are also key elements in the conduct of the
Company's business. The Company also relies on trade secrets and proprietary
know-how, which it seeks to protect by confidentiality agreements with its
employees and consultants, and with third parties. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that its trade secrets and proprietary know-how will
not otherwise become known or be independently discovered by others.
The semiconductor industry is characterized by frequent claims and litigation
regarding patent and other intellectual property rights. The Company has from
time to time received, and believes that it likely will receive in the future,
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. The ultimate conclusion with respect to any alleged infringement
must be determined by a court or administrative agency in the event of
litigation, and there can be no assurance that a court or administrative agency
would determine that the Company's products do not infringe the patents in
question. Patent litigation is inherently uncertain and the Company cannot
predict the result of any such litigation or the level of damages that could be
imposed if it were determined that certain of the Company's products or
processes infringe any of the patents in question. The Company currently is in
litigation with Advanced Micro Devices, Inc. ("AMD") concerning claims by AMD
that the Company's flash memory devices infringe two AMD patents. See Item 3 -
Legal Proceedings, below.
There can be no assurance that other third parties will not assert claims
against the Company with respect to existing or future products or that, in the
case of the existing or potential allegations described above or any new
dispute, licenses to disputed third-party technology will be available on
reasonable commercial terms, if at all. In the event of litigation to determine
the validity of any third-party claims (or claims against the Company for
indemnification related to such third-party claims), including the claims and
potential claims referred to in the preceding paragraph, 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, and
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 results of operations could be materially adversely
affected. In addition, the laws of certain territories in which the Company's
products are or may be developed, manufactured or sold, including Asia, Europe
or Latin America, may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
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<PAGE>
BACKLOG
Sales of the Company's products are made pursuant to standard purchase orders.
Purchase orders are subject to changes in quantities of products and delivery
schedules in order to reflect changes in the customers' requirements and to
price renegotiations. In addition, orders typically may be canceled at the
discretion of the buyer without enforceable penalty. The Company's business, in
line with that of much of the semiconductor industry is characterized by short
lead-time orders and quick delivery schedules. Also, the Company's actual
shipments depend on the manufacturing capacity of the Company's foundries.
Finally, capacity constraints or unexpected manufacturing delays may prevent the
Company from meeting the demand for certain of its products. Therefore backlog
is not necessarily indicative of future sales.
INVESTMENTS
CHARTERED SEMICONDUCTOR CORPORATION
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2.", if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States. At March 31, 2000, the Company
owned approximately 21.4 million ordinary shares or approximately 2.14 million
American Depository Shares or "ADSs." These shares were subject to a six-month
"lock-up", or no trade period, which expired in April 2000. In May 2000,
Chartered completed a secondary public offering, in which the Company decided
not to participate. The Companies shares are now subject to an additional
three-month "lock-up" which expires in August 2000. In June 2000, the
underwriter of the secondary offering released the Company from the lockup, and
the Company started selling some of its shares. The Company does not own a
material percentage of the equity of Chartered.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more that 50% of its original holdings of Chartered, the Company will start to
lose a proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Since Chartered is in the semiconductor business, as is the Company, it will be
subject to the same fluctuations in market value as is the Company, and may
experience downturns in value at the same time the Company is experiencing such
downturns. All of the risks that the Company may experience as a semiconductor
company are also applicable to Chartered. In addition, because Chartered is a
semiconductor manufacturer, it is subject to additional risks, such at fires and
other disasters, excess fabrication capacity, and other risks known to
semiconductor manufacturers. There can be no assurances that the Company's
investment in Chartered will increase in value or even maintain its value.
Because of the cyclical nature of the semiconductor industry, it is very likely
that Chartered, like the Company, will experience a significant business
downturn in the future, which will significantly depress the value of Chartered
stock. Additionally, because of the loss of its wafer production capacity rights
if the Company sells more than 50% of its original holdings in Chartered, there
can be no assurance that the Company can sell sufficient stock to realize its
value on its investment in Chartered.
UNITED MICROELECTRONICS CORPORATION
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. Between
September 1995 and July 1997 the Company invested approximately $70.4 million in
USC in exchange for 190 million shares or 19% of the outstanding shares and 25%
of the total wafer capacity.
In April 1998, the Company received approximately US$31.7 million In connection
with the sale of 35 million shares of USC, and the Company had the right to
receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence
of certain potential future events, including the sale or transfer of USC shares
by USC in an arms length transaction, or by a public offering of USC stock, or
by the sale of all or substantially all of the assets of USC. In March 2000,
this right resulted in Alliance's receipt of approximately NTD 665 million (US$
21.5 million) as a result of the merger between USC and UMC.
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<PAGE>
Following the April 1998 USC stock sale, the Company owned approximately 15.5%
of the outstanding shares of USC. In October 1998, USC issued 46 million shares
to the Company by way of a dividend distribution. Additionally, USC made a stock
distribution to its employees, thereby the Company's ownership in USC was
reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million
shares to the Company by way of dividend distribution as well as distributions
to other entities. As a result of these distributions, the Company owned
approximately 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was
entitled to 25% of the output capacity of the wafer fabrication facility
operated by USC as well as a seat on the board of directors of USC. As a result
of the capacity rights, the board seat, and certain contractual rights, Alliance
had participated in both strategic and operating decisions of USC on a routine
basis, had rights of approval with respect to major business decisions and
concluded that it had significant influence on financial and operating decisions
of USC. Accordingly, the Company accounted for its investment in USC using the
equity method with a ninety-day lag in reporting the Company's share of results
for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its
proportionate share of equity income of USC of $9.5 million, $10.9 million, and
$15.5 million, net of tax, respectively.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and owned approximately 3.2% of the outstanding
shares of USIC has the right to purchase approximately 3.7% of the manufacturing
capacity of the facility. The Company accounted for its investment in USIC using
the cost method of accounting prior to the merger with UMC in January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Through its representation on USC's board,
the Company had the right to choose whether to consent to the merger and
concluded it to be in the Company's best interest to do so. The Company received
247.7 million shares of UMC stock for its 247.7 million shares, or 14.8%
ownership of USC, and approximately 35.6 million shares of UMC stock for its
48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at
March 31, 2000, the Company owned approximately 283.3 million shares, or
approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity
allocation rights in the former USC and USIC foundries, respectively. As the
Company no longer has an ability to exercise significant influence over UMC's
operations, the investment in UMC is accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax, non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US
$3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued $3.0 million
for the Taiwan securities transaction tax in connection with the shares received
by the Company. This transaction tax will be paid, on a per share basis, when
the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up
period expires in July 2000. Of the remaining 50%, or 141.6 million shares,
approximately 28.3 million shares will become eligible for sale two years from
the closing date of the transaction (i.e. January 2002), with approximately 28.3
million shares available for sale every six months thereafter, during years
three and four (i.e.2002-2004). In May 2000, the Company received an additional
20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger, the Company accounts for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which becomes
unrestricted within twelve months as an available-for-sale marketable security
in accordance with SFAS 115. At March 31, 2000, the Company has recorded an
unrealized gain of approximately $25.7 million, which is net of deferred tax of
$17.6 million, as part of accumulated other comprehensive income in the
stockholders' equity section of the balance sheet with respect to the short term
portion of the investments. The portion of the investment in UMC, which is
restricted beyond twelve months (approximately 50% of the Company's holdings at
March 31, 2000), is accounted for as a cost method investment and is presented
as a long-term investment. As this long-term portion becomes current over time,
the investment
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<PAGE>
will be transferred to short-term investments and will be accounted for as an
available-for-sale marketable security in accordance with SFAS 115. The
long-term portion of the investments become unrestricted securities between 2002
and 2004.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more that 50% of its original holdings of UMC, the Company will start to lose a
proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Since UMC is in the semiconductor business, as is the Company, it will be
subject to the same fluctuations in market value as is the Company, and may
experience downturns in value at the same time the Company is experiencing such
downturns. All of the risks that the Company may experience as a semiconductor
company are also applicable to UMC. In addition, because UMC is a semiconductor
manufacturer, it is subject to additional risks, such as fires and other
disasters, excess fabrication capacity, and other risks known to semiconductor
manufacturers. There can be no assurance that the Company's investment in UMC
will increase in value or even maintain its value. Because of the cyclical
nature of the semiconductor industry, it is very likely that UMC, like the
Company, will experience a significant business downturn in the future, which
will significantly depress the value of UMC stock. Additionally, because of the
loss of its wafer production capacity rights if the Company sells more than 50%
of its original holdings in UMC, there can be no assurance that the Company can
sell sufficient stock to realize its value on its investment in UMC.
MAVERICK NETWORKS, INC. / BROADCOM CORPORATION
In 1998, the Company was approached by a startup company, Maverick Networks,
Inc. ("Maverick"), regarding their need for imbedded memory in an internet
router semiconductor that Maverick was designing. Because the Company was also
interested in eventually entering the internet router semiconductor market, the
Company entered into an agreement with Maverick which called for the Company to
provide memory technology, access to the Company's wafer production rights, and
cash to Maverick, in exchange for certain rights to Maverick's technology and
stock in Maverick. On May 31, 1999, Maverick completed a transaction with
Broadcom Corporation, resulting in the Company selling its 39% ownership
interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common
stock. Based on Broadcom's closing share price on the date of sale, the Company
recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of
approximately $51.6 million based on the closing share price of Broadcom at the
date of the merger. During fiscal 2000, the Company sold 275,600 shares of
Broadcom stock and realized an additional pre-tax, non-operating gain of
approximately $23.7 million. In February 2000, Broadcom Corporation announced a
two for one stock split.
Broadcom's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Broadcom's and the Company's, sometimes move
as a group, it is likely that Broadcom's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in early 2000.
Thus, there can be no assurance that the Company's investment in Broadcom will
increase in value or even maintain its value.
ALLIANCE VENTURE MANAGEMENT, LLC
In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee out of the net profits of
the investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds by allowing them limited participation in the profits of the
various investment funds through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Venture Management acts as the general
partner of these partnerships and receives a management fee of 15% of the
profits from these partnerships for its managerial efforts.
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<PAGE>
At Alliance Venture Management's inception in November 1999, series A member
units and series B member units in Alliance Venture Management were created. The
unit holders of Series A units and Series B units receive management fees of 15%
of investment gains realized by Alliance Ventures I and Alliance Ventures II,
respectively. In February 2000, upon the creation of Alliance Ventures III, LP
("Alliance Ventures III"), the management agreement for Alliance Venture
Management was amended to create series C member units which are entitled to
receive a management fee of 16% of investment gains realized by Alliance
Ventures III.
Each of the owners of the Series A, B and C member units paid the initial
carrying value for their shares of the member units. While the Company owns 100%
of the common units in Alliance Venture Management, it does not hold any series
A, B or C member units and does not participate in the management fees generated
by the management of the investment funds. Several of the Company's senior
management hold the majority of the units of Alliance Venture Management.
After Alliance Ventures I was formed, the Company contributed all its then
current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I
to allow Alliance Venture Management to manage these investments. As of March
31, 2000, Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested $22.3 million in 10 companies,
with a fund allocation of $20 million. Alliance Ventures II, whose focus is in
investing in internet start-up ventures, has invested approximately $4.4 million
in 8 companies, from a total fund allocation of $15 million. As of March 31,
2000, Alliance Ventures III, whose focus is investing in emerging companies in
the networking and communication market areas, has invested $2 million in one
company, from a total fund allocation of $100 million.
Certain of the Company's officers have formed private venture funds which invest
in some of the same investments as the Company. Additionally, an outside venture
fund is being formed in which certain of the Company's officers and employees,
as well as the Company itself, are planning to make similar venture investments.
Alliance Venture Management generally directs the individual funds to invest in
startup, pre-IPO (initial public offering) companies. These types of investments
are inherently risky, and many venture funds have a large percentage of
investments decrease in value or fail. Successful investing relies on the skill
of the investment managers, but also on market and other factors outside the
control of the managers. Recently, the market for these types of investments has
been successful and many venture capital funds have been profitable, and while
the Company has been successful in its recent investments, there can be no
assurance as to any future or continued success. It is likely there will be a
downturn in the success of these types of investments in the future and the
Company will suffer significant diminished success in these investments. There
can be no assurance, and in fact it is likely, that many or most, and maybe all
of the Company's venture type investments may fail, resulting in the complete
loss of some or all the money the Company has invested in these types of
investments.
OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION
In August 1999, the Company made an investment in Orologic Corporation
("Orologic"), a fabless semiconductor company that develops high performance
system on a chip solutions. In November 1999, the Company transferred its
interest in Orologic to Alliance Ventures I, to allow it to be managed by
Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor
Corporation ("Vitesse") acquired Orologic. In connection with this merger,
Alliance Ventures I received 852,447 shares of Vitesse for its equity interest
in Orologic. As a result of the merger, the Company recognized approximately $69
million pre-tax, non-operating gain, in its fiscal fourth quarter ending March
31, 2000, based on the closing share price of Vitesse of $96.25 on March 31,
2000, the closing date of the merger. The Company records its investment in
Vitesse Semiconductor Corporation as an available-for-sale marketable security
in accordance with SFAS 115. At March 31, 2000, the Company owned 852,447 shares
of Vitesse.
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<PAGE>
On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock
that had been acquired by Alliance Ventures I in exchange for its sale of one
million shares of Orologic as follows:
<TABLE>
<CAPTION>
Shares of Vitesse
-----------------
<S> <C>
Alliance 632,876
11.21% shares to be held in escrow for 95,417
Alliance
Alliance Venture Management 124,154
-----------------
Total shares resulting from sale of 852,447
1,000,000 Orologic shares
=================
</TABLE>
Alliance Ventures Management then immediately distributed the Vitesse shares to
its unit holders.
Vitesse's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Vitesse's and the Company's, sometimes move as
a group, it is likely that Vitesse's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in early 2000.
Thus, there can be no assurance that the Company's investment in Vitesse will
increase in value or even maintain its value.
MALLEABLE TECHNOLOGIES, INC. / PMC-SIERRA, INC.
In 1999, the Company made an investment in a start-up called Malleable
Technologies, Inc. ("Malleable"). This investment was transferred to Alliance
Venture I, LP, upon its creation. In June 2000, PMC-Sierra, Inc. ("PMC"),
announced that it agreed to acquire Malleable. According to the terms of the
proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the
remaining 85% interest of Malleable that PMC does not already own. In connection
with the proposed merger, Alliance Ventures I will receive approximately 79,000
shares of PMC for its 7% interest in Malleable. Upon the completion of the
merger, the Company will report a gain based on the closing share price of PMC
on the date of the merger. Based on the closing share price of PMC on June 14,
2000, the estimated pretax gain from this transaction is approximately $11
million.
PMC's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like PMC's and the Company's, sometimes move as a
group, it is likely that PMC's stock and the Company's stock can both suffer
significant loss in value at the same time, as occurred in early 2000. Thus,
there can be no assurance that the Company's investment in PMC will increase in
value or even maintain its value.
THE INVESTMENT COMPANY ACT OF 1940
Following a special study after the stock market crash of 1929 and the ensuing
Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The
Act was primarily meant to regulate mutual funds, such as the families of funds
offered by the Fidelity and Vanguard organizations (to pick two of many), and
the smaller number of closed-end investment companies that are traded on the
public stock markets. In those cases the funds in question describe themselves
as being in the business of investing, reinvesting and trading in securities and
generally own relatively diversified portfolios of publicly traded securities
that are issued by companies that the investment companies do not control. The
fundamental intent of the Act is to protect the interests of public investors
from fraud and manipulation by the people who establish and operate such
investment companies, which constitute large pools of liquid assets that could
be used improperly, or be not properly safeguarded, by the persons in control of
them.
When the Act was written, its drafters (and Congress) also felt that a company
could, either deliberately or inadvertently, come to have the defining
characteristics of an investment company without proclaiming that fact or being
willing to voluntarily submit itself to regulation as an acknowledged investment
company, and that investors in such a company could be just as much in need of
protection as are investors in companies that are openly and deliberately
established as investment companies. In order to deal with this perceived
potential abuse, the Act and rules under it contain provisions and set forth
principles that are designed to differentiate "true" operating companies from
companies that may be considered to have sufficient investment-company-like
characteristics to require regulation by the Act's complex procedural and
substantive requirements. These provisions apply to companies that own or hold
securities, as well as companies that invest, reinvest and trade in securities,
and particularly focus on determining the primary nature of a company's
activities, including whether an investing
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<PAGE>
company controls and does business through the entities in which it invests or,
instead, holds its securities investments passively and not as part of an
operating business. For instance, under what is, for most purposes, the most
liberal of the relevant tests, a company may become subject to the Act's
registration requirements if it either holds more than 45% of its assets in, or
derives more than 45% of its income from, investments in companies that the
investor does not primarily control or through which it does not actively do
business. In making these determinations the Act generally requires that a
company's assets be valued on a current fair market value basis, determined on
the basis of securities' public trading price or, in the case of illiquid
securities and other assets, in good faith by the company's board of directors.
The Company viewed its investments in Chartered, USC and USIC as operating
investments primarily intended to secure adequate wafer manufacturing capacity;
as previously noted, the Company's access to the manufacturing resources that it
obtained in conjunction with those investments will decrease if the Company
ceases to own at least 50% of its original investments in the enterprises, as
modified, in the cases of USC and USIC, by their merger into UMC. In addition,
the Company believes that, before USC's merger into UMC, the Company's
investment in USC constituted a joint venture interest that the staff of the
Securities and Exchange Commission (the "SEC") would not regard as a security
for purposes of determining the proportion of the Company's assets that might be
viewed as having been held in passive investment securities. However, because of
the success during the last year of the Company's investments, including its
strategic wafer manufacturing investments, at least from the time of the
completion of the merger of USC and USIC into UMC in January 2000 the Company
believes that it could be viewed as holding a much larger portion of its assets
in investment securities than is presumptively permitted by the Act for a
company that is not registered under it.
On the other hand, the Company also believes that the investments that it
currently holds in Chartered and UMC, even though in companies that the Company
does not control, should be regarded as strategic deployments of Company assets
for the purpose of furthering the Company's memory chip business, rather than as
the kind of financial investments that generally are considered to constitute
investment securities. Applying certain other tests that the SEC utilizes in
determining investment company status, the Company has never held itself out as
an investment company; its historical development has focused almost exclusively
on the memory chip business; the activities of its officers and employees have
been overwhelmingly addressed to achieving success in the memory chip business;
and until the past year, its income (and losses) have derived almost exclusively
from the memory chip business. Accordingly, the Company believes that it should
be regarded as being primarily engaged in a business other than investing,
reinvesting, owning, holding or trading in securities, and shortly expects to
apply to the SEC for an order under section 3(b)(2) of the Act confirming its
non-investment-company status. However, if the Company's investments in
Chartered and UMC are now viewed as investment securities, it must be conceded
that an unusually large proportion of the Company's assets could be viewed as
invested in assets that would, under most circumstances, give rise to investment
company status. Therefore, while the Company believes that it has meritorious
arguments as to why it should not be considered an investment company and should
not be subject to regulation under the Act, there can be no assurance that the
SEC will agree. And even if the SEC grants some kind of exemption from
investment company status to the Company, it may place significant restrictions
on the amount and type of investments the Company is allowed to hold, which
might force the Company to divest itself of many of its current investments.
Significant potential penalties may be imposed upon a company that should be
registered under the Act but is not, and the Company intends to proceed
expeditiously to resolve its status.
If the Company does not receive an exemption from the SEC, the Company would be
required to register under the Act as a closed-end management investment
company. In the absence of exemptions granted by the SEC (if it determines to do
so in its discretion after an assessment of the public interest), the Act
imposes a number of significant requirements and restrictions upon registered
investment companies that do not normally apply to operating companies. These
would include, but not be limited to, a requirement that at least 40% of the
Company's board of directors not be "interested persons" of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain qualified employees); and broad prohibitions on
affiliate transactions, such as the compensation arrangements applicable to the
management of Alliance Venture Management, many kinds of incentive compensation
arrangements for management employees and joint investment by persons who
control the Company in entities in which the Company is also investing (which
could require the Company to abandon or significantly restructure its management
arrangements, particularly with respect to its investment activities). While the
Company could apply
- 15 -
<PAGE>
for individual exemptions from these restrictions, there could be no guarantee
that such exemptions would be granted, or granted on terms that the Company
would deem practical. Additionally, the Company would be required to report its
financial results in a different form from that currently used by the Company,
which would have the effect of turning the Company's Statement of Operations
"upside down" by requiring that the Company report its investment income and the
results of its investment activities, instead of its operations, as its primary
sources of revenue.
While the Company is working diligently to deal with these investment company
issues, there can be no assurance that a manageable solution will be found. The
SEC may be hesitant to grant an exemption from investment company status in the
Company's situation, and it may not be feasible for the Company to operate in
its present manner as a registered investment company. As a result, the Company
might be required to divest itself of assets that it considers strategically
necessary for the conduct of its operations, to reorganize as two or more
separate companies, or both. Such divestitures or reorganizations could have a
material adverse effect upon the Company's business and results of operations.
EMPLOYEES
As of April 1, 2000, the Company had 161 full-time employees, consisting of 79
in research and development, 5 in marketing, 15 in sales, 29 in administration
and 33 in operations. Of the 79 research and development employees (38 in the US
and 41 in India), 34 have advanced degrees. In 1997, the Company opened a design
center in India. The Company believes that the Company's future success will
depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly-skilled design engineers
involved in new product development, for whom competition is intense. The
Company's employees are not represented by any collective bargaining unit, and
the Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
The Company has recently experienced and may continue to experience growth in
the number of its employees and the scope of its operating and financial
systems, resulting in increased responsibilities for the Company's management.
To manage future growth effectively, the Company will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its employees. There can be no
assurance that the Company will be able effectively to manage future growth, and
the failure to do so could have a material adverse effect on the Company's
results of operations.
The Company will depend to a large extent on the continued contributions of its
founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and
President of the Company, and his brother C.N. Reddy, Executive Vice President
and Chief Operating Officer of the Company (collectively referred to as the
"Reddys"), as well as other officers and key design personnel, many of whom
would be difficult to replace. During fiscal 2000 and subsequently, a number of
officers and design personnel left the Company to pursue various other
opportunities. The future success of the Company will depend on its ability to
attract and retain qualified technical and management personnel, particularly
highly-skilled design engineers involved in new product development, for whom
competition is intense. The loss of either of the Reddys or key design personnel
could delay product development cycles or otherwise have a material adverse
effect on the Company's business. The Company is not insured against the loss of
any of its key employees, nor can the Company assure the successful recruitment
of new and replacement personnel.
ITEM 2
FACILITIES
The Company's executive offices and its principal marketing, sales and product
development operations are located in a 56,600 square foot leased facility in
Santa Clara, California under a lease which expires in June 2006. The Company
has an option to extend the lease for a term of five years. The Company also
leases office space in Hsin-Chu, Taiwan to manage the logistics of the wafer
fabrication, assembly and testing of the Company's products in Taiwan. The
Company leases an engineering office in Bangalore, India, and has purchased a
parcel of land in an office park under development in Hyderabad, India, for
product development. Additionally, the Company leases sales offices in Natick,
Massachusetts; Heathrow, Florida; San Diego, California: Berkshire, United
Kingdom; Taipei, Taiwan; and Japan.
- 16 -
<PAGE>
ITEM 3
LEGAL PROCEEDINGS
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. Plaintiffs have appealed the court's ruling dismissing the
claims and the parties have filed appeal briefs. 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 December 1996, Alliance Semiconductor International Corporation ("ASIC"), a
wholly-owned subsidiary of the Company, was served with a complaint filed in
Federal Court alleging that ASIC had infringed two patents owned by AMD related
to flash memory devices, and seeking injunctive relief and damages. In March
1997, the Company was added as a defendant. In April 1996, the Court allowed AMD
to expand its claims to include several new flash products which had been
recently announced by the Company. In January and February 2000, both parties
filed for motions for summary judgment. Each defendant has denied the
allegations of the complaint and asserted a counterclaim for declaration that
each of the AMD patents is invalid and not infringed by such defendant. A trial
date is currently set for September 2000. The Company believes the resolution of
this matter will not have a material adverse effect on its financial conditions
and its results of operations.
In July 1998, the Company learned that a default judgment was 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 TritTek 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. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. The appeal
brief and reply briefs have been filed and the parties are awaiting oral
arguments before the Court in June 2000.
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 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 filed an appeal in the United States Court of International
Trade (the "CIT"), challenging the determination by the ITC that imports of
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On
June 30, 1999, the CIT issued a decision remanding the ITC's affirmative
material injury determination to the ITC for reconsideration. The ITC's remand
determination reaffirmed its original determination. The CIT considered the
remand determination and remanded it back to the ITC for further
reconsideration. On June 12, 2000, in its second remand
- 17 -
<PAGE>
determination the ITC voted negative on injury, thereby reversing its original
determination that Taiwan-fabricated SRAMs were causing material injury to the
U.S. industry. The second remand determination will be transmitted to the CIT on
June 26, 2000 for consideration. The decision of the CIT can be further appealed
to the Court of Appeals for the Federal Circuit. The Company cannot predict
either the timing or the eventual results of the appeal. Until a final judgment
is entered in the appeal, no final duties will be assessed on the Company's
entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the
appeal is successful, the antidumping order will be terminated and cash deposits
will be refunded with interest. If the appeal is unsuccessful, the Company's
entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000
will be liquidated at the deposit rate in effect at the time of entry. On
subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make
cash deposits in the amount of 50.15% of the entered value. In April 2001, the
Company will have an opportunity to request a review of its sales of
Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review
Period"). If it does so, the amount of antidumping duties, if any, owed on
imports from April 2000 through March 2001 will remain undetermined until the
conclusion of the review in early 2002. 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. At
March 31, 2000, the Company had posted a bond secured by a letter of credit in
the amount of approximately $1.7 million and made cash deposits in the amount of
$1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs.
In October 1998, Micron Technology, Inc. filed an antidumping petition with the
DOC and the ITC, alleging that DRAMs fabricated in Taiwan were being sold in the
United States at less than fair value, and that the United States industry
producing DRAMs was materially injured or threatened with material injury by
reason of imports of DRAMs fabricated in Taiwan. The petition requested the
United States government to impose antidumping duties on imports into the United
States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily
determined that there was a reasonable indication that the imports of the
products under investigation were injuring the United States industry. In May
1999 the DOC issued a preliminary affirmative determination of dumping. Under
that determination, the Company's imports into the United States on or after May
28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty
deposit in the amount of 16.65% (the preliminary "all others" rate) of the
entered value of such DRAMs, an antidumping margin calculated by
weight-averaging the antidumping margins of individually investigated respondent
companies. The Company posted a bond to cover deposits on such entries. In
October 1999 the DOC issued a final affirmative determination of dumping. Under
that determination, the Company's imports into the United States on or after
October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping
duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on
December 8, 1999, the ITC issued a final negative determination of injury.
Consequently, the investigation was terminated, the suspension of liquidation
lifted, and the bond posted in September 1999 released. In January 2000, Micron
filed an appeal in the CIT challenging the determination by the ITC that imports
of Taiwan-fabricated DRAMs were not causing material injury to the U.S.
industry. On March 21, 2000 the appeal of the ITC decision was dismissed by the
CIT.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of the Company as of the date of this
report is set forth below:
<TABLE>
<CAPTION>
Name Age Position
---------------- ---- --------------------------------------------------
<S> <C> <C>
N. Damodar Reddy 61 Chairman, President and Chief Executive Officer
C.N. Reddy 44 Executive Vice President, Chief Operating
Officer, Director and Secretary
David Eichler 51 Vice President, Finance and Administration and
Chief Financial Officer
Bradley Perkins 43 Vice President and General Counsel
Ritu Shrivastava 49 Vice President, Technology Development
</TABLE>
- 18 -
<PAGE>
N. Damodar Reddy is the co-founder of the Company and has served as the
Company's Chairman of the Board, Chief Executive Officer and President from
its inception in February 1985. Mr. Reddy also served as the Company's Chief
Financial Officer from June 1998 until January 1999 . From September 1983 to
February 1985, Mr. Reddy served as President and Chief Executive Officer of
Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of
Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of
Honeywell, Inc. Prior to that time, Mr. Reddy held various research and
development and management positions at Four Phase Systems, a subsidiary of
Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. Mr. Reddy
is a member of the board of directors of two publicly traded companies, Sage,
Inc. and eMagin Corporation. He holds an M.S. degree in Electrical
Engineering from North Dakota State University and an M.B.A. from Santa Clara
University. N. Damodar Reddy is the brother of C.N. Reddy.
C.N. Reddy is the co-founder of the Company and has served as the Company's
Secretary and director since its inception in February 1985. Beginning in
February 1985, Mr. Reddy served as the Company's Vice President -
Engineering. In May 1993, he was appointed Senior Vice-President -
Engineering and Operations of the Company. In December 1997, he was
appointed Executive Vice President and Chief Operating Officer. From 1984 to
1985, he served as Director of Memory Products of Modular Semiconductor,
Inc., and from 1983 to 1984, Mr. Reddy served as a SRAM product line manager
for Cypress Semiconductor Corporation. From 1980 to 1983, Mr. Reddy served
as a DRAM development manager for Texas Instruments, Inc. and, before that,
he was a design engineer with National Semiconductor Corporation for two
years. Mr. Reddy holds an M.S. degree in Electrical Engineering from Utah
State University. C.N. Reddy is named inventor of over 15 patents related to
SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy.
David Eichler joined the Company in January 1999, and was appointed Vice
President Finance and Administration and Chief Financial Officer. Prior to
joining the Company, Mr. Eichler was Vice President Finance and Chief Accounting
Officer for Adobe Systems Incorporated in 1998. From 1994 to 1998, he was Senior
Vice President Finance & Administration and Chief Financial Officer for Hyundai
Electronics America. He has also held senior financial management positions at
Syntex Corporation, Oki Semiconductor and Tandem Computers Incorporated.
Bradley A. Perkins joined the Company in January 1999, and was appointed Vice
President and General Counsel. Prior to joining the Company, Mr. Perkins was
Vice President, General Counsel and Secretary at Mission West Properties
(formerly Berg & Berg Developers), from January 1998 to January 1999. From
November 1991 to January 1998, Mr. Perkins was with Valence Technology, Inc.,
where he was Vice President, General Counsel and Secretary. From August 1988
to November 1991, Mr. Perkins was Assistant General Counsel and Intellectual
Property Counsel with VLSI Technology, Inc.
Ritu Shrivastava joined the Company in November 1993, and was appointed Vice
President - Technology Development in August 1995. Mr. Shrivastava was
designated as an executive officer of the Company in July 1997. Prior to joining
the Company, Dr. Shrivastava worked at Cypress Semiconductor Corporation for
more than 10 years in various technology management positions, the last one
being Director of Technology Development. Prior to that time, Dr. Shrivastava
was with Mostek Corporation for 3 years, responsible for CMOS development. Dr.
Shrivastava served on the Electrical Engineering faculty at Louisiana State
University where he also received his Ph.D.. Dr. Shrivastava completed his
Masters and Bachelor's degrees in Electrical Communication Engineering from
Indian Institute of Science, Bangalore, India and a Bachelor's degree in Physics
from Jabalpur University, India. Dr. Shrivastava is named inventor in over 9
patents related to various technologies, and is a Senior Member of IEEE.
- 19 -
<PAGE>
================================================================================
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the NASDAQ National Market under the
symbol ALSC. The Company completed its initial public offering on December 1,
1993. The following table sets forth, for the periods indicated the high and low
closing sale prices on NASDAQ for the Company's Common Stock.
<TABLE>
<CAPTION>
Fiscal Year High Low
----------- ----------
1999
<S> <C> <C>
1st Quarter $9.62 $2.56
2nd Quarter 3.66 2.09
3rd Quarter 5.12 1.94
4th Quarter 5.56 2.50
2000
1st Quarter $11.56 $2.63
2nd Quarter 12.94 7.69
3rd Quarter 16.69 9.00
4th Quarter 26.31 14.81
2001
1st Quarter $29.38 $14.00
(through June 19, 2000)
</TABLE>
As of June 19, 2000, there were approximately 131 holders of record of the
Company's Common Stock.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain future earnings, if any, for development
of its business and, therefore, does not anticipate that it will declare or pay
cash dividends on its capital stock in the foreseeable future.
- 20 -
<PAGE>
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated financial information for
each of the five fiscal years ended March 31st and should be read in conjunction
with the consolidated financial statements and notes relating thereto.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues $89,153 $47,783 $118,400 $82,572 $201,098
Cost of revenues 58,428 60,231 117,400 84,630 158,159
-------- -------- ------- -------- --------
Gross profit (loss) 30,725 (12,448) 1,000 (2,058) 42,939
Operating expenses:
Research and development 14,568 14,099 15,254 15,012 14,664
Selling, general and 15,962 12,652 18,666 10,344 17,202
administrative
-------- -------- ------- -------- --------
Income (loss)from 195 (39,199) (32,920) (27,414) 11,073
operations
Gain on investments 1,049,130 15,823 - - -
Other income, net 29 (1,126) 287 6,498
1,753
-------- -------- ------- -------- --------
Income (loss) before 1,049,354 (24,502) (32,633) (25,661) 17,571
income taxes
Provision for income taxes 410,348 8,397 (11,421) (8,990) 6,852
-------- -------- ------- -------- --------
Income (loss) before 639,006 (32,899) (21,212) (16,671) 10,719
equity in investees
Equity in income of 9,094 10,856 15,475 - -
investees
-------- -------- ------- -------- --------
Net income (loss) $648,100 $(22,043) $(5,737) $(16,671 $10,719
======== ======== ======= ======== ========
Net income (loss) per share:
Basic $15.49 $(0.53) $(0.15) $(0.43) $0.28
======== ======== ======= ======== ========
Diluted $15.07 $(0.53) $(0.15) $(0.43) $0.26
======== ======== ======= ======== ========
Weighted average number of common shares:
Basic 41,829 41,378 39,493 38,653 37,900
======== ======== ======= ======== ========
Diluted 42,992 41,378 39,493 38,653 40,633
======== ======== ======= ======== ========
Year ended March 31,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- --------
(in thousands)
Consolidated Balance Sheet
Data:
Working capital $615,937 $22,102 $39,879 $78,000 $106,171
Total assets 1,520,442 193,557 243,668 232,486 263,238
Stockholders' equity 963,955 163,570 189,111 204,594 219,381
Long term obligations 2,714 578 1,276 2,219 -
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year 1999
------------------------------------------ -----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---------- --------- ---------- ---------- --------- --------- --------- ----------
Operating Summary: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $28,833 $23,497 $19,112 $17,711 $13,879 $13,282 $10,472 $10,150
Cost of revenues 18,241 15,412 12,304 12,470 8,332 10,864 13,544 27,491
---------- --------- ---------- ---------- --------- --------- --------- ----------
Gross profit (loss) 10,592 8,085 6,808 5,241 5,547 2,418 (3,072) (17,341)
Operating expenses:
Research and 3,789 3,330 4,244 3,206 3,087 3,285 3,511 4,216
development
Selling, general and 3,355 6,753 3,108 2,745 2,981 2,863 2,797 4,011
administrative
---------- --------- ---------- ---------- --------- --------- --------- ----------
Income (loss) from 3,448 (1,998) (544) (710) (521) (3,730) (9,380) (25,568)
operations
Gain on investments 988,717 5,111 3,696 51,606 - - - 15,823
Other income 233 (56) (269) 121 (476) (387) (180) (83)
(expense), net
---------- --------- ---------- ---------- --------- --------- --------- ----------
Income (loss) before 992,398 3,057 2,883 51,017 (997) (4,117) (9,560) (9,828)
income taxes
Provision (benefit) 410,945 (963) 1,186 (819) - - - 8,397
for income taxes
---------- --------- ---------- ---------- --------- --------- --------- ----------
Income (loss) before 581,453 4,020 1,697 51,836 (997) (4,117) (9,560) (18,225)
equity in income
of investees
Equity in income (368) 5,134 2,796 1,532 1,555 2,064 3,691 3,546
(loss) of investees
---------- --------- ---------- ---------- --------- --------- --------- ----------
Net income (loss) $581,085 $9,154 $4,493 $53,368 $558 $(2,053) $(5,869) $(14,679)
========== ========= ========== ========== ========= ========= ========= ==========
Net income (loss) per share:
Basic $13.88 $0.22 $0.11 $1.28 $0.01 $(0.05) $(0.14) $(0.36)
========== ========= ========== ========== ========= ========= ========= ==========
Diluted $13.48 $0.21 $0.10 $1.27 $0.01 $(0.05) $(0.14) $(0.36)
========== ========= ========== ========== ========= ========= ========= ==========
Weighted average number of common shares:
Basic 41,864 41,858 41,812 41,608 41,573 41,512 41,456 40,963
========== ========= ========== ========== ========= ========= ========= ==========
Diluted 43,118 42,944 42,995 42,149 41,840 41,512 41,456 40,963
========== ========= ========== ========== ========= ========= ========= ==========
</TABLE>
During fiscal year 2000, the Company experienced an increase in the average
selling price and increased demand for DRAM and SRAM products. In the first
fiscal 2000 quarter, the Company recognized a gain on its investment in Maverick
Networks ("Maverick") when it was sold to Broadcom Corporation ("Broadcom"), for
$51.6 million. In subsequent quarters, the Company recognized additional gains
of $23.7 million on sale of Broadcom securities. In the third fiscal 2000
quarter, the Company also recorded a $3.6 million discretionary non-recurring
compensation expense related to this transaction. In the fourth fiscal 2000
quarter, the Company recognized a gain on its investment in United
Microelectronics Corporation ("UMC") of $908 million ($532 million net of tax).
Also in the fourth fiscal 2000 quarter, the Company recognized a gain of $69
million ($41 million net of tax) on its investment in Orologic Corporation
("Orologic") when it was sold to Vitesse Semiconductor Corporation ("Vitesse").
In fiscal 1999, the Company recorded pre-tax charges in the first, second and
third quarters of approximately $20 million for decline in market value of
certain inventory and to provide additional reserves for obsolete and excess
inventory. During the first quarter of fiscal 1999, the Company recorded a
valuation allowance of $8.4 million with respect to the Company's previously
recorded deferred tax assets. In the first quarter of fiscal 2000, when the
Company recognized a gain of $51.6 million related to the sale of Maverick
Networks to Broadcom Corporation, the Company released the entire $17.8 million
valuation allowance and recorded the tax benefit as an offset to income.
- 22 -
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements in this Management's Discussion and Analysis that are forward
looking involve numerous risks and uncertainties and are based on current
expectations. Actual results may differ materially. Certain of these risks and
uncertainties are discussed under "Factors That May Affect Future Results."
OVERVIEW
The Company designs and develops high performance memory products and memory
intensive logic products. These circuits are used in a wide variety of
electronic products, including; desktop and portable computers, networking,
telecommunications, instrumentation and consumer devices. The Company's business
strategy has been to be a supplier of these products, operating on a fabless
basis by utilizing independent manufacturing facilities.
During fiscal 2000, DRAM products accounted for approximately 56% of net
revenues, SRAM products accounted for approximately 43% of net revenues and
flash products accounted for approximately 1% of net revenues. This compares to
40%, 58% and 2%, respectively, for fiscal 1999. During the latter part of fiscal
1999, the Company introduced 16-Mbit DRAM in 4-Mbit x 4 configuration.
The market for memory products used in personal computers is characterized by
price volatility and has experienced significant fluctuations and cyclical
downturns in product demand, such as the severe price erosion of DRAMs and SRAMs
in fiscal 1999, 1998 and 1997. While the Company's strategy is to increase its
penetration into the networking, telecommunications, instrumentation and
consumer markets with its existing SRAM, DRAM and flash products and to develop
and sell in volume quantities new products complementary to its existing
products, the Company may not be successful in executing such strategy. A
decline in demand in the personal computer industry or lack of success in
developing new markets or new products could have a material adverse effect on
the Company's results of operations.
RESULTS OF OPERATIONS
The percentage of net revenues represented by certain line items in the
Company's consolidated statements of operations for the years indicated, are set
forth in the table below.
<TABLE>
<CAPTION>
Percentage of Net Revenues for Year
Ended March 31,
--------------------------------------
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 65.5 126.1 99.2
----------- ------------ -----------
Gross profit (loss) 34.5 (26.1) 0.8
Operating expenses:
Research and development 16.3 29.5 12.9
Selling, general and 17.9 26.5 15.7
administrative
----------- ------------ -----------
Income( loss) from operations 0.3 (82.1) (27.8)
Gain on investments 1176.8 33.2 -
Other income, net 0.0 (2.4) 0.2
----------- ------------ -----------
Income (loss) before income taxes 1177.1 (51.3) (27.6)
Provision (benefit) for income 460.3 17.7 (9.7)
taxes
----------- ------------ -----------
Income (loss) before equity in 716.8 (69.0) (17.9)
Income of investees
Equity in income of investees 10.2 22.7 13.1
----------- ------------ -----------
Net income (loss) 727.0% (46.3)% (4.8)%
=========== ============ ===========
</TABLE>
NET REVENUES
The Company's net revenues increased to $89.2 million in fiscal 2000 or
approximately 87%, from $47.8 million in fiscal 1999. The increase in net
revenues in fiscal 2000 was primary due to a combination of sale of new
products, overall increase in average selling prices and increase in unit sales
of the Company's SRAM and DRAM products. The Company's net revenues in fiscal
1999 declined to $47.8 million from $118.4 million in fiscal 1998,
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a decrease of approximately 60%. The decrease in net revenues in fiscal 1999 was
due to a lower average selling price and a drop in the unit shipments of the
Company's SRAM, DRAM and MMUI products.
Net revenue from the Company's DRAM product family in fiscal 2000 contributed
$50.2 million or approximately 56%, up from $18.4 million or approximately 39%
in fiscal 1999. During fiscal 2000, sales of the Company's 16-Mbit DRAM in
4-Mbit x 4 configuration, which was introduced in the latter part of fiscal
1999, increased significantly along with an overall increase in the average
selling prices. DRAM net revenues for fiscal 1998 were $76.1 million or
approximately 64% of total net revenues.
Net revenue from the Company's SRAM product family in fiscal 2000 contributed
$38.1 million or approximately 43% of the Company's revenues. In absolute
dollars, this was an increase of $9.7 million but as a percent of total revenues
was down 17%. SRAM average selling prices and units sales increased throughout
fiscal 2000. SRAM net revenues in fiscal 1998 were $33.7 million or
approximately 28% of total net revenues.
The Company's flash memory products did not contribute any significant revenues
for fiscal 2000 and prior years.
The Company continues to focus its effort in selling in the non-PC market. Net
sales to non-PC segments of the market, such as telecommunications, networking,
datacom and consumer in fiscal 2000 accounted for approximately 56% compared to
approximately 52% during fiscal 1999 and 25% in fiscal 1998.
International net revenues in fiscal 2000 increased by approximately 121% over
fiscal 1999. International net revenues are derived from customers in Europe,
Asia and the rest of the world. The largest increase in international net
revenues was to customers in Europe, which increased approximately 195% over
fiscal year 1999. The increase was due to an overall increase in product demand
and higher selling prices. See Note 15 of Notes to Consolidated Financial
Statements for details of revenue by geographic area..
During fiscal 2000, one customer accounted for approximately 10% of net
revenues. Two customers accounted for approximately 15% and 13% of net revenues
during fiscal 1999, while one customer in fiscal 1998 accounted for
approximately 18%. See Note 1 of Notes to Consolidated Financial Statements.
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, which 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 results of operations.
GROSS PROFIT (LOSS)
The Company's gross profit for fiscal 2000 was approximately $30.7 million or
34.5% of net revenues as compared to a loss of approximately $12.4 million or
approximately 26.1% of net revenues for the same period in fiscal 1999, and $1
million or approximately 0.8% in fiscal 1998. The dramatic improvement in gross
profits during fiscal year 2000 was primarily the result of higher average
selling prices, higher unit sales, and an increased mix of higher margin DRAM
products. During fiscal 1999, the Company recorded $20 million pre-tax inventory
charges in recognition of lower average selling prices together with the decline
in the unit shipments for the Company's DRAM and SRAM products due to
competitive market conditions. The Company's gross profit for fiscal 1998 was
approximately $1 million or approximately 0.8% of net revenues and recorded a
pre-tax charge of approximately $15 million, primarily to adjust the value of
the Company's inventory to reflect declines in market value.
The Company is subject to a number of factors that may have an adverse impact on
gross profits, including the availability and cost of products from the
Company's suppliers; increased competition and related decreases in unit average
selling prices; changes in the mix of product 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 the
commencement of such manufacturing will not have a material adverse effect on
the Company's gross profits in future periods.
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RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of salaries and benefits
for engineering design, contracted development efforts, facilities costs,
equipment and software depreciation and amortization, wafer masks and tooling
costs, test wafers and other expense items.
Research and development expenses were approximately $14.6 million or
approximately 16.3% of net revenues for fiscal 2000 as compared to $14.1 million
or approximately 29.5% of net revenues for fiscal 1999, and approximately $15.3
million or approximately 12.9% of net revenues for fiscal 1998. The small
increase in spending between fiscal 2000 and 1999 was due to higher mask and
tooling charges while the decrease in spending between fiscal 1999 and 1998 was
due to lower engineering headcount and personnel related costs, as well as,
lower mask and tooling charges due to the discontinuance of the Company's
graphic accelerator product line in July 1998.
During fiscal 2000, the Company's development efforts focused on advanced
process and design technology involving SRAMs, DRAMs and Flash memory products.
The Company believes that investments in research and development are necessary
to remain competitive in the marketplace and accordingly, 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 generally include salaries and
benefits associated with sales, sales support, marketing and administrative
personnel, as well as sales commissions, outside marketing costs, travel,
equipment depreciation and software amortization, facilities costs, bad debt
expense, insurance and legal costs.
Selling, general and administrative expenses in fiscal 2000 were approximately
$16.0 million or approximately 17.9% of net revenues as compared to
approximately $12.7 million or approximately 26.5% in fiscal 1999 and
approximately $18.7 million or approximately 15.7% of net revenues for fiscal
1998. In fiscal 2000, the Company recorded a $3.6 million discretionary
non-recurring compensation expense related to the sale of Maverick Networks,
Inc. ("Maverick") to Broadcom Corporation ("Broadcom"). The decrease in spending
in fiscal 1999 compared to fiscal 1998 was due principally to lower outside
sales commissions which was a result of a 60% decrease in net revenues, which
was partially offset by higher legal fees associated with the SRAM anti-dumping
proceeding.
Selling, general and administrative expenses may increase in absolute dollars,
and may also fluctuate as a percentage of net revenues in the future primarily
as the result of commissions, which are dependent on the level of revenues.
GAIN ON INVESTMENTS
On May 31, 1999, Maverick (an entity in which the Company had a 39% interest in)
completed a transaction with Broadcom, resulting in the Company selling its
ownership interest in Maverick in exchange for 538,961 shares of Broadcom's
Class B common stock. Based on Broadcom's closing share price on the date of
sale, the Company recorded a pre-tax gain in the first quarter of fiscal 2000 of
approximately $51.6 million. Subsequent to the transaction date, the Company's
investment in Broadcom is being be accounted for as an available-for-sale
marketable security in accordance with SFAS 115. During fiscal 2000, the Company
sold 275,600 shares of Broadcom stock and realized an additional pre-tax gain of
approximately $23.7 million. At March 31, 2000, the Company owned 487,522
shares, after being adjusted for a 2 for 1 stock split in February 2000, and
recorded an additional unrealized gain of approximately $23.4 million, which is
net of deferred tax of approximately $16.1 million tax, as part of accumulated
other comprehensive income in the stockholders equity section of the balance
sheet. See Note 2 of Notes to Consolidated Financial Statements.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Through its representation on USC's board,
the Company had the right to choose whether to consent to the merger and
concluded it to be in the Company's best interest to do so. Alliance received
247.7 million shares of UMC stock for its 247.7 million shares, or 14.8%
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ownership of USC, and approximately 35.6 million shares of UMC stock for its
48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000, the Company
owned approximately 283.3 million shares, or approximately 3.2% of UMC, and
maintained its 25% and 3.7% wafer capacity allocation rights in the former USC
and USIC foundries, respectively. As the Company no longer has an ability to
exercise significant influence over UMC's operations, the investment in UMC is
accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax, non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US
$3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued approximately
$3.0 million for the Taiwan securities transaction tax in connection with the
shares received by the Company. This transaction tax will be paid, on a per
share basis, when the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up
period expires in July 2000. Of the remaining 50%, or 141.6 million shares,
approximately 28.3 million shares will become eligible for sale two years from
the closing date of the transaction (i.e. January 2002), with approximately 28.3
million shares available for sale every six months thereafter, during years
three and four (i.e. 2002 to 2004). In May 2000, the Company received an
additional 20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger the Company accounts for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which becomes
unrestricted within twelve months as an available-for-sale marketable security
in accordance with SFAS 115. At March 31, 2000, the Company has recorded an
unrealized gain of approximately $25.7 million, which is net of deferred tax of
$17.6 million, as part of accumulated other comprehensive income in the
stockholders' equity section of the balance sheet with respect to the short term
portion of the investments. The portion of the investment in UMC, which is
restricted beyond twelve months (approximately 50% of the Company's holdings at
March 31, 2000), is accounted for as a cost method investment and is presented
as a long-term investment. As this long-term portion becomes current over time,
the investment will be transferred to short-term investments and will be
accounted for as an available-for-sale marketable security in accordance with
SFAS 115. The long-term portion of the investments become unrestricted
securities between 2002 and 2004.
On March 31, 2000, Orologic completed a transaction with Vitesse, resulting in
the Company selling its ownership interest in Orologic in exchange for 852,447
shares of Vitesse. Based on Vitesse's closing share price on the date of sale,
the Company recognized approximately $69 million pre-tax, non-operating gain, in
fiscal 2000. Subsequent to the transaction date, the Company's investment in
Vitesse is being be accounted for as an available-for-sale marketable security
in accordance with SFAS 115. At March 31, 2000, the Company owns 852,447 Vitesse
shares. See Note 7 of Notes to Consolidated Financial Statements.
OTHER INCOME, NET
Other Income, Net represents interest income from short-term investments and
interest expense on short and long-term obligations. Other Income, Net was
approximately $29,000 compared to a net expense of $1.1 million in fiscal 1999
and net income of $287,000 in fiscal 1998. The change from fiscal 1999 to fiscal
2000 was attributed to higher interest income and lower interest expense.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for fiscal years 2000, 1999 and 1998 was 39.1%,
(34.3%), and 35.0%, respectively. During fiscal 2000, the Company recorded a
provision for income taxes of approximately $410.3 million, primarily the result
of the gains on investments of Broadcom, UMC and Vitesse.
For the year ended March 31, 1999, the Company incurred a $24.5 million pretax
loss, $9.8 million of which was incurred in the quarter ended June 30, 1998. As
a result of the fiscal year 1999 loss, the lack of carryback potential, and the
uncertainty regarding future results due to significant, rapid and unexpected
product selling price declines that the Company experienced during the first and
subsequent quarters of fiscal 1999, management
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could no longer conclude that it was "more likely than not" that its deferred
tax assets would be realized. As a result, a full valuation allowance of $8.4
million was recorded during quarter ended June 30, 1998.
EQUITY IN INCOME OF INVESTEES
Prior to the UMC merger discussed elsewhere, the Company had made several
investments with other parties to form a separate Taiwanese company, USC. This
investment was 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 fiscal 2000, the Company reported its share in the
income of USC in the amount of $9.5 million. As a result of the merger in
January 2000, the Company no longer recorded its proportionate share of equity
income in USC, as the Company no longer has an ability to exercise significant
influence over UMC's operations. The investment in UMC is accounted for as a
cost method investment. In fiscal 1999, the Company reported its share in the
income of USC in the amount of $10.9 million, as compared to $15.5 million
reported in fiscal 1998. The 30% decrease in income between fiscal 1999 and 1998
was primarily due to lower net income and a decrease in the Company's ownership
percentage from approximately 18% to 15%.
The Company, through Alliance Venture Management, invested approximately $28.7
million during fiscal 2000 in three Alliance ventures funds, Alliance Ventures
I, Alliance Ventures II and Alliance Ventures III. Alliance Ventures I, whose
focus is investing in networking and communication start-up companies, has
invested $22.3 million in ten companies, with approximately $20 million
allocated to this fund. Alliance Ventures II, whose focus is in investing in
internet start-up ventures, has approximately $4.4 million invested to-date in
eight companies, with approximately $15 million total designated for this fund.
Alliance Ventures III, whose focus is on emerging companies in the networking
and communication market areas, has invested $2 million in one company and has
been allocated up to $100 million for new investments.
Several of the Alliance Venture investments are accounted for as the equity
method due to the Company's ability to exercise significant influence on the
operations of investees resulting primarily from ownership interest and/or board
representation. The total equity in the net losses of the equity investees of
Alliance Ventures was approximately $368,000 for the year ended March 31, 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual results of operations 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 of new or enhanced
versions of the Company's products; seasonal customer demand; and the timing of
significant orders. Results of operations could also be adversely affected by
economic conditions generally or in various geographic areas, other conditions
affecting the timing of customer orders and capital spending, a downturn in the
market for personal computers, or order cancellations or rescheduling.
Additionally, because the Company is continuing to increase its operating
expenses for personnel and new product development to be able to support
increased sales levels, the Company's results of operations will be adversely
affected if such increased sales levels are not achieved.
The markets for the Company's products are characterized by rapid technological
change, evolving industry standards, product obsolescence and significant price
competition and, as a result, are subject to decreases in average selling
prices. The Company experienced significant deterioration in the average selling
prices for its SRAM and DRAM products during fiscal years 1998, 1997 and 1996.
The Company is unable to predict the future prices for its products.
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 significantly reduce its cost per unit in an
amount 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 significantly
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reduce its cost per unit. 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 products 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 results of operations. 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 results of operations could be adversely affected, as
was the case in fiscal 1999, 1998 and 1997, when the Company recorded pre-tax
charges totaling approximately $20 million, $15 million and $17 million,
respectively, primarily to reflect a decline in market value of certain
inventory.
The Company currently relies on independent 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 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 UMC and various companies.
UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where
Company has products manufactured. 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 in the future. In addition, as a result of the
rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based
Industrial Park, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity could
adversely affect the Company's foundries' ability to supply the Company's
products, which could have a material adverse effect on the Company's results of
operations or financial condition. Although the Company continuously evaluates
sources of supply and may seek to add additional foundry capacity, there can be
no assurance that such additional capacity can be obtained at acceptable prices,
if at all. The occurrence of any supply or other problem resulting from these
risks could have a material adverse effect on the Company's results of
operations, 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
results of operations.
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
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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. 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.
There can be no assurance that such factors will not adversely impact the
Company's results of operations in the future or require the Company to modify
its current business practices.
Additionally, other factors may materially adversely affect the Company's
results of operations. 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 results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Upon adoption of SFAS No. 133, we will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle. We
believe the adoption of this statement will not have a significant effect on our
results of operations.
Current pending litigation, administrative proceedings and claims are set forth
in Item 3 - Legal Proceedings and in Item 1 - Licenses, Patents and Maskwork
Protection, above. The Company intends to vigorously defend itself in the
litigation and claims and, subject to the inherent uncertainties of litigation
and based upon discovery completed to date, management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position. However, should the outcome of any of these
actions be unfavorable, the Company may be required to pay damages and other
expenses, or may be enjoined from manufacturing or selling any products deemed
to infringe the intellectual property rights of others, which could have a
material adverse effect on the Company's financial position or results of
operations. Moreover, the semiconductor industry is characterized by frequent
claims and litigation regarding patent and other intellectual property rights.
The Company has from time to time received, and believes that it likely will in
the future receive, notices alleging that the Company's products, or the
processes used to manufacture the Company's products, infringe the intellectual
property rights of third parties, and the Company is subject to the risk that it
may become party to litigation involving such claims (the Company currently is
involved in patent litigation). 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 results of operations could be materially
adversely affected.
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 entered 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 the future (see
Item 3 - Legal Proceedings, above), the deposit requirement, and the potential
that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March
31, 1999 will be liquidated at the bond rate or deposit rate in effect at
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the time of entry, 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 the United States 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.
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 were being sold in the United States at less than fair
value, and that the United States industry producing DRAMs was materially
injured or threatened with material injury by reason of imports of DRAMs
fabricated in Taiwan. The petition requested the United States government to
impose antidumping duties on imports into the United States of DRAMs fabricated
in Taiwan. In December 1998, the ITC preliminarily determined that there was a
reasonable indication that the imports of the products under investigation were
injuring the United States industry. In May 1999, the DOC issued a preliminary
affirmative determination of dumping. Under that determination, the Company's
imports into the United States on or after May 28, 1999 of DRAMs fabricated in
Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the
preliminary "all others" rate) of the entered value of such DRAMs, an
antidumping margin calculated by weight-averaging the antidumping margins of
individually investigated respondent companies. The Company posted a bond to
cover deposits on such entries. In October 1999 the DOC issued a final
affirmative determination of dumping. Under that determination, the Company's
imports into the United States on or after October 19, 1999 of DRAMs fabricated
in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%,
(the final "all-others" rate). However, on December 8, 1999, the ITC issued a
final negative determination of injury. Consequently, the investigation was
terminated, the suspension of liquidation lifted, and the bond posted in
September 1999 released. In January 2000, Micron filed an appeal in the CIT
challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs
were not causing material injury to the U.S. industry. On March 21, 2000, the
appeal of the ITC decision was dismissed by the CIT.
The Company, through Alliance Venture Management, invests in startup, pre-IPO
(initial public offering) companies. These types of investments are inherently
risky and many venture funds have a large percentage of investments decrease in
value or fail. Most of these startup companies fail, and the investors lose
their entire investment. Successful investing relies on the skill of the
investment managers, but also on market and other factors outside the control of
the managers. Recently, the market for these types of investments has been
successful and many venture capital funds have been profitable, and while the
Company has been successful in its recent investments, there can be no assurance
as to any future or continued success. It is likely there will be a downturn in
the success of these types of investments in the future and the Company will
suffer significant diminished success in these investments. There can be no
assurance, and in fact it is likely, that many or most, and maybe all of the
Company's venture type investments may fail, resulting in the complete loss of
some or all the money the Company invested.
As a result of the foregoing factors, as well as other factors affecting the
Company's results of operations, 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 results of operations 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
At March 31, 2000, the Company had approximately $34.8 million in cash and cash
equivalents, an increase of $28.6 million from March 31, 1999; and approximately
$615.9 million in net working capital, an increase of approximately $593.8
million from approximately $22.1 million at March 31, 1999.
Additionally, the Company had short-term investments in marketable securities
whose fair value at March 31, 2000 was $883.3 million. Refer to Notes 2-5,7 and
16 of Notes to the Consolidated Financial Statements for further details.
- 30 -
<PAGE>
During fiscal year 2000, operating activities used cash of $3.5 million. This
was primarily the result of net income, the impact of non-cash items such as
depreciation and amortization, non-cash investment gains related primarily to
the merger of USC and USIC into UMC and Broadcom, net of deferred taxes, offset
in part by growth in inventory and accounts receivable, accounts payable and
taxes payable. Cash used in operating activities of $23.6 million in fiscal year
1999 was primarily due to the operating loss of $22 million, while the cash
provided from operating activities in fiscal year 1998 of $6.9 million was
primarily related to the growth in working capital items.
Investing activities provided cash in the amount of $38.9 million in fiscal 2000
as the result of the proceeds from the sale of a portion of the Company's
holdings in Broadcom of $48.9 million, additional proceeds from the April 1998
sale of USC stock of $21.5 million, offset in part, by investments made by
Alliance Ventures of $28.7 million. Investing activities in fiscal 1999 provided
cash in the amount of $25.0 million as the result of proceeds from the sale of a
portion of the Companies holdings in USC, which were offset, in part, by
additional investments in USIC and other start-up companies and purchases of
equipment. In fiscal 1998 investing activities used cash in the amount of $21.0
million which was primarily the result of additional investments in USC of $17.6
million and $2.4 million in purchases of equipment.
Net cash used in financing activities in fiscal 2000 was approximately $6.8
million compared to cash provided by financing activities in fiscal 1999 of
approximately $1.8 million, and cash used in financing activities of
approximately $0.2 million in fiscal 1998. The use of cash for financing
activities in fiscal 2000 was primarily the result of repurchase of 720 thousand
shares of the Company's common stock for $12.5 million offset, by a decrease in
restricted cash of approximately $2.3 million, and proceeds from sale of common
stock of approximately $4.7 million. Cash provided by financing activities in
fiscal 1999 primarily reflects a decrease in restricted cash of approximately
$1.3 million and net proceeds from the issuance of common stock, offset, in
part, by principal lease payments of $1.5 million.
The Company believes these sources of liquidity, and financing opportunities
available to it will be sufficient to meet its projected working capital and
other cash requirements for the foreseeable future. However, it is possible that
the Company may need to raise additional funds to fund its activities beyond the
next year or to consummate acquisitions of other businesses, products, wafer
capacity or technologies. The Company could raise such funds by selling some its
short term investments, selling more stock to the public or to selected
investors, or by borrowing money. The Company may not be able to obtain
additional funds on terms that would be favorable to its shareholders and the
Company, or at all. If the Company raises additional funds by issuing additional
equity, the ownership percentages of existing shareholders would be reduced.
In order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process technologies, the Company has entered into and will
continue to consider various possible transactions, including equity investments
in or loans to foundries in exchange for guaranteed production capacity, the
formation of joint ventures to own and operate foundries, as was the case with
Chartered Semiconductor or UMC, 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 equity or
debt 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. Refer to Part I, Item 1- Investments and Notes 3 and 4 in the Notes to
the Consolidated Financial Statements.
- 31 -
<PAGE>
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to the impact of foreign currency fluctuations and changes in
market values of our investments. These investments operate in markets that have
experienced significant exchange rate and market price fluctuations over the
year ended March 31, 2000. These entities, in which we hold varying percentage
interests, operate and sell their products in various global markets; however,
the majority of their sales are denominated in U.S. dollars, and therefore,
their foreign currency risk is reduced. We did not hold any derivative financial
instruments for trading purposes as of March 31, 2000.
INVESTMENT RISK
As of March 31, 2000, our short-term investment portfolio consisted of
marketable equity securities in Chartered Semiconductor, UMC, Broadcom
Corporation, and Vitesse Semiconductor, the future whose value of which is
subject to market value fluctuations. Refer to Notes 2,3,4,5 and 7 for further
details.
FOREIGN CURRENCY RISK
Based on our overall currency rate exposure at March 31, 2000, a near term 10%
appreciation or depreciation in the value of the U.S. dollar would have an
insignificant effect on our financial position, results of operations and cash
flows over the next fiscal year. There can be no assurance that there will not
be a material impact in the future.
As of June 20, 2000, the Company owned approximately 339.9 million shares of
UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable
in the United States, they are subject to foreign currency risk. The market
value of these holdings on June 20, 2000 based on the price per share of NTD 87
and the NTD/US dollar exchange rate of NTD $30.833 per US$ is US$ 959 million.
The value of these investments could be impacted by foreign currency
fluctuations which could have a material impact on the financial condition and
results of operations of the Company in the future.
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS
The index to the Company's Consolidated Financial Statements and Schedules, and
the report of the independent accountants appear in Part III of this Form 10-K.
Selected quarterly financial data appears in Item 6 above.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
- 32 -
<PAGE>
===============================================================================
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Other than the information required pursuant to Item 405 of Regulation S-K, the
information required by this item concerning executive officers of the Company
is set forth in Part I of this Form 10-K after Item 4. The information required
by this item with respect to directors is incorporated by reference to the
section captioned "Election of Directors" in the proxy statement.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section captioned "Certain Transactions" contained in the Proxy Statement.
ITEM 14
EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) (I) FINANCIAL STATEMENTS - See Index to Consolidated Financial
Statements on page F-1 of this Form 10-K Annual Report.
(II) REPORT OF INDEPENDENT ACCOUNTANTS - See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report.
(2) (I) SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS - See
Index to Consolidated Financial Statements on F-1 of this Form
10-K Annual Report.
(II) FINANCIAL STATEMENTS OF UNITED SEMICONDUCTOR CORPORATION, A
TAIWANESE COMPANY - The following financial statements are filed as
part of this report: Financial Statements of United Semiconductor
Corporation for the Fiscal Year Ended December 31, 1998.
(3) EXHIBITS - See Exhibit Index on page 34 of this Form 10-K Annual
Report.
- 33 -
<PAGE>
===============================================================================
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Document Description
Number
----------- --------------------------------------------------------------
<S> <C>
3.01(A) Registrant's Certificate of Incorporation
3.02(A) Registrant's Certificate of Elimination of Series A
Preferred Stock
3.03(F) Registrant's Certificate of Amendment of Certificate of
Incorporation
3.04(A) Registrant's Bylaws
4.01(A) Specimen of Common Stock Certificate of Registrant
10.01+(K) Registrant's 1992 Stock Option Plan adopted by Registrant on
April 7, 1992 and amended through September 19, 1996, and
related documents
10.02+(A) Registrant's Directors Stock Option Plan adopted by
Registrant on October 1, 1993 and related documents
10.03+(A) Form of Indemnity Agreement used between Registrant and
certain of its officers and directors
10.04+(K) Form of Indemnity Agreement used between the Registrant and
certain of its officers
10.05(B) Sublease Agreement dated February 1994 between Registrant
and Fujitsu America, Inc.
10.06(B) Net Lease Agreement dated February 1, 1994 between Registrant and
Realtec Properties I L.P.
10.07*I Subscription Agreement dated February 17, 1995, by and among
Registrant, Singapore Technology Pte. Ltd. and Chartered
Semiconductor Manufacturing Pte. Ltd.
10.8*I Manufacturing Agreement dated February 17, 1995, between
Registrant and Chartered Semiconductor Manufacturing Pte.
Ltd.
10.9(D) Supplemental Subscription Agreement dated March 15, 1995, by
and among Registrant, Singapore Technology Pte. Ltd. and
Chartered Semiconductor Manufacturing Pte. Ltd.
10.10*(D) Supplemental Manufacturing Agreement dated March 15, 1995,
between Registrant and Chartered Semiconductor Manufacturing
Pte. Ltd.
10.11*(E) Foundry Venture Agreement dated July 8, 1995, by and among
Registrant, S3 Incorporated and United Microelectronics Corporation
10.12*(E) Foundry Capacity Agreement dated July 8, 1995, by and among
Registrant, Fabco, S3 Incorporated and United
Microelectronics Corporation
10.13*(F) Foundry Venture Agreement dated September 29, 1995, between
Registrant and United Microelectronics Corporation
10.14*(F) Foundry Capacity Agreement dated September 29, 1995, by and
among Registrant, FabVen and United Microelectronics
Corporation
10.15*(F) Written Assurances Re: Foundry Venture Agreement dated
September 29, 1995 by and among Registrant, FabVen and
United Microelectronics Corporation
10.16*(G) Letter Agreement dated June 26, 1996 by and among Registrant, S3
Incorporated and United Microelectronics Corporation
10.17(H) Stock Purchase Agreement dated as of June 30, 1996 by and
among Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.18*(H) Amendment to Fabco Foundry Capacity Agreement dated as of
July 3, 1996 by and among Registrant, S3 Incorporated,
United Microelectronics Corporation and United Semiconductor
Corporation
10.19(H) Side Letter dated July 11, 1996 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United
Semiconductor Corporation
10.20+(I) 1996 Employee Stock Purchase Plan
10.21(J) Letter Agreement dated December 23, 1996 by and among
Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.22(K) Trademark License Agreement dated as of October 17, 1996 between
Registrant and Alliance Semiconductor International Corporation, a
Delaware corporation, as amended through May 31, 1997
10.23(K) Restated Amendment to FabCo Foundry Venture Agreement dated
as of February 28, 1997 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United
Semiconductor Corporation
10.24(K) Letter Agreement dated April 25, 1997 by and among
Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.25*(K) Restated DRAM Agreement dated as of February 28, 1996
between Registrant and United Microelectronics Corporation
10.26*(K) First Amendment to Restated DRAM Agreement dated as of March 26,
1996 between Registrant and United Microelectronics Corporation
10.27*(K) Second Amendment to Restated DRAM Agreement dated as of July 10,
1996 between Registrant and United Microelectronics Corporation
10.28(K) Promissory Note and Security Agreement dated March 28, 1997
between Registrant and Matrix Funding Corporation
10.29*(L) Sale and Transfer Agreement dated as of March 4, 1998
10.30(M) Alliance Venture Management, LLC Limited Liability Company
Operating Agreement dated October 15, 1999
10.31(M) Alliance Venture Management, LLC Amended Limited Liability
Company Operating Agreement dated February 28, 2000
10.32(M) Alliance Ventures I, LP Agreement of Limited Partnership
dated November 12, 1999
10.33(M) Alliance Ventures II, LP Agreement of Limited Partnership
dated November 12, 1999
10.34(M) Alliance Ventures III, LP Agreement of Limited Partnership
dated February 28, 2000
21.01(M) Subsidiaries of Registrant
23.01(M) Consent of PricewaterhouseCoopers LLP (San Jose, California)
23.02(M) Consent of PricewaterhouseCoopers (Hsinchu, Taiwan, R.O.C.)
27.01(M) Financial Data Schedule (filed only with the electronic
version of the Form 10-K)
</TABLE>
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED
AS AN EXHIBIT TO THIS FORM 10-K.
* CONFIDENTIAL TREATMENT HAS BEEN GRANTED WITH RESPECT TO CERTAIN PORTIONS OF
THIS DOCUMENT.
- 34 -
<PAGE>
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN PORTIONS OF
THIS DOCUMENT.
(A)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'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
REGISTRANT'S ANNUAL REPORT ON FORM 10-KSB FILED WITH THE COMMISSION ON JUNE
29, 1994.
(C)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 33-90346-LA)
DECLARED EFFECTIVE BY THE COMMISSION ON MARCH 28, 1995.
(D)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON APRIL
28, 1995.
(E)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON JULY 24,
1995.
(F)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON OCTOBER
23, 1995.
(G)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON
AUGUST 13, 1996.
(H)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON
NOVEMBER 12, 1996.
(I)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-13461) FILED
WITH THE COMMISSION ON OCTOBER 4, 1996.
(J)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON
FEBRUARY 11, 1997.
(K)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FILED WITH THE COMMISSION ON JUNE 27,
1997.
(L)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM
REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON MARCH
19, 1998.
(M) THE DOCUMENT REFERRED TO IS FILED HEREWITH.
- 35 -
<PAGE>
===============================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
June 28, 2000 By: /S/ N. DAMODAR REDDY
------------------------------------
N. Damodar Reddy
Chairman of the Board, President and Chief Executive
Officer
(Principal Executive Officer)
June 28, 2000 By: /S/ DAVID EICHLER
-------------------------------
David Eichler
Vice President, Finance and Administration and Chief
Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints N. Damodar Reddy and Bradley A. Perkins or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ N. DAMODAR REDDY Director, Chairman of the Board, June 28, 2000
-------------------------
N. Damodar Reddy President and Chief Executive
Officer
/S/ DAVID EICHLER Vice President, Finance and June 28, 2000
-------------------------
David Eichler Administration and Chief
Financial Officer
/S/ C. N. REDDY Director, Chief Operating June 28, 2000
-------------------------
C. N. Reddy Officer and Secretary
/S/ SANFORD L. KANE Director June 28, 2000
-------------------------
Sanford L. Kane
/S/ JON B. MINNIS Director June 28, 2000
-------------------------
Jon B. Minnis
- 36 -
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
Index to Consolidated Financial Statements
PAGES
CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Accountants........................................F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999................F-3
Consolidated Statements of Operations for the years ended March 31, 2000,
1999 and 1998............................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended March
31, 2000, 1999 and 1998..................................................F-5
Consolidated Statements of Cash Flows for the years ended March 31, 2000,
1999 and 1998............................................................F-6
Notes to Consolidated Financial Statements ..............................F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Accountants........................................F-22
Schedule II - Valuation and Qualifying Accounts..........................F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Alliance Semiconductor Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Alliance
Semiconductor Corporation and its subsidiaries at March 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 25, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31,
-------------------------
2000 1999
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $34,770 $6,219
Restricted cash 2,804 5,175
Short term investments (Notes 883,300 -
2,3,4,5 and 7)
Accounts receivable, net (Note 2) 15,858 8,943
Inventory (Note 2) 37,439 12,927
Related party receivables (Note 14) 1,778 1,815
Other current assets 1,958 1,709
----------- ------------
Total current assets 977,907 36,788
Property and equipment, net (Note 2) 9,990 9,943
Investment in Chartered Semiconductor - 51,596
(Note 3)
Investment in United Semiconductor - 77,310
Corp.(Note 4)
Investment in United Silicon, Inc. - 16,799
(Note 4)
Investment in United Microelectronics 505,478 -
Corp. (excluding short term portion)
(Notes 2 and 4)
Alliance Ventures investments (Note 6) 26,646 -
Other assets 421 1,121
----------- ------------
Total assets $1,520,442 $193,557
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $27,133 $8,046
Accrued liabilities 10,388 5,325
Income taxes payable 6,641 -
Deferred income taxes (Note 9) 316,903 -
Current portion of capital lease 905 1,315
obligation
----------- ------------
Total current liabilities 361,970 14,686
Long term obligations 1,517 -
Long term capital lease obligation 1,197 578
Deferred income taxes (Note 9) 191,803 14,723
----------- ------------
Total liabilities 556,487 29,987
----------- ------------
Commitments and contingencies (Notes
8,12 and 13)
Stockholders' equity:
Preferred stock, $0.01 par value;
5,000 shares authorized; none issued - -
and outstanding
Common stock, $0.01 par value; 100,000
shares authorized; 42,406 and 41,609 424 416
shares issued and 41,686 and 41,609
shares outstanding
Additional paid-in capital 193,260 185,025
Treasury stock (720 shares at cost) (12,468) -
Retained earnings (deficit) 644,595 (3,505)
Accumulated other comprehensive income 138,144 (18,366)
(loss) (Note 2)
----------- ------------
----------- ------------
Total stockholders' equity 963,955 163,570
----------- ------------
Total liabilities and $1,520,442 $193,557
stockholders' equity
=========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended March 31,
---------------------------------
2000 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Net revenues $89,153 $47,783 $118,400
Cost of revenues 58,428 60,231 117,400
---------- --------- ---------
Gross profit (loss) 30,725 (12,448) 1,000
Operating expenses:
Research and development 14,568 14,099 15,254
Selling, general and 15,962 12,652 18,666
administrative
---------- --------- ---------
Income (loss) from 195 (39,199) (32,920)
operations
Gain on investments 1,049,130 15,823 -
Other income, net 29 (1,126) 287
---------- --------- ---------
Income (loss) before 1,049,354 (24,502) (32,633)
income taxes
Provision (benefit) for 410,348 8,397 (11,421)
income taxes
---------- --------- ---------
Income (loss) before 639,006 (32,899) (21,212)
equity in income of
investees
Equity in income of 9,094 10,856 15,475
investees
---------- --------- ---------
Net Income (loss) $648,100 $(22,043) $(5,737)
========== ========= =========
Net Income (loss) per share:
Basic $15.49 $(0.53) $(0.15)
========== ========= =========
Diluted $15.07 $(0.53) $(0.15)
========== ========= =========
Weighted average number of common shares:
Basic 41,829 41,378 39,493
========== ========= =========
Diluted 42,992 41,378 39,493
========== ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Stock Additional Other Retained Total
-------------------------- Paid In Treasury Comprehensive Earnings Stockholder's
Shares Amount Capital Stock Income(loss) (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at 38,984,901 $390 $180,012 $- $(83) $24,275 $204,594
March 31, 1997
Issuance of common 1,465,087 14 3,087 - - - 3,101
stock under
employee stock
plans
Cumulative - - - - (12,847) -
translation
adjustments
Net loss - - - - - (5,737)
Total comprehensive (18,584)
loss
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at 40,449,988 404 183,099 - (12,930) 18,538 189,111
March 31, 1998
Issuance of common 1,158,635 12 1,926 - - - 1,938
stock under
employee stock plans
Cumulative - - - - (5,436) -
translation
adjustments
Net loss - - - - - (22,043)
Total comprehensive loss (27,479)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at 41,608,623 416 185,025 - (18,366) (3,505) 163,570
March 31, 1999
Issuance of common 797,482 8 4,719 - - - 4,727
stock under
employee stock
plans
Repurchase of -(1) - (12,468) - - - (12,468)
common stock
Tax Benefit on - - 3,516 - - - 3,516
exercise of stock
options
Cumulative - - - - 18,366 -
translation
adjustments
Unrealized gain on
investments - - - - 138,144 -
(net of tax,
$94,814)
Net income - - - - - 648,100
Total 804,610
comprehensive income
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at 42,406,105(1) $424 $193,260 $(12,468) $138,144 $644,595 $963,955
March 31, 2000
============ ============ ============ ============ ============ ============ ============
</TABLE>
(1) At March 31, 2000, the Company held 720,000 shares in treasury stock, which
have not been retired. After taking in account these treasury shares, the
net outstanding shares at March 31, 2000 was 41,686,105.
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended March 31,
---------------------------------
2000 1999 1998
---------- --------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net Income (loss) $648,100 $(22,043) $(5,737)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 4,417 3,789 3,465
Inventory write-down 742 20,437 15,154
Non-recurring compensation 3,655 - -
charge
Equity in income of investees (9,094) (10,856) (15,475)
Gain on investments (1,049,130) (15,823) -
Changes in assets and
liabilities:
Accounts receivable ( 6,915) 6,773 1,111
Inventory (25,254) (989) (17,994)
Related party 37 (1,815) -
receivables
Other assets (99) 1,622 3
Accounts payable 19,087 (27,668) 16,948
Accrued liabilities 92 (2,446) 3,187
Deferred income 399,168 25,466 6,238
taxes
Income tax payable 10,157 - -
Long-term obligation 1,517 - -
---------- --------- ----------
Net cash provided by (used in) (3,520) (23,553) 6,900
operating activities
---------- --------- ----------
Cash provided by (used in) investing activities:
Purchase of property and (2,816) (2,609) (2,408)
equipment
Proceeds from sale of
securities of United 21,481 31,662 (17,631)
Semiconductor Corporation
Proceeds from sale of 48,911 - -
securities of Broadcom
Purchase of securities of - (3,098) -
United Silicon, Inc.
Purchase of other (28,696) (1,000) (1,000)
investments
---------- --------- ----------
Net cash provided by (used in) 38,880 24,955 (21,039)
investing activities
---------- --------- ----------
Cash flows from financing activities:
Net proceeds from the 4,727 1,938 3,101
issuance of common stock
Principal payments on lease (1,439) (1,468) (1,929)
obligation
Repurchase of common stock (12,468) - -
Restricted cash 2,371 1,337 (1,391)
---------- --------- ----------
Net cash provided by (used in) (6,809) 1,807
financing activities (219)
---------- --------- ----------
Net increase (decrease) in cash 28,551 3,209 (14,358)
and cash equivalents
Cash and cash equivalents at 6,219 3,010 17,368
beginning of the period
---------- --------- ----------
Cash and cash equivalents at $34,770 $6,219 $3,010
end of the period
========== ========= ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid (refunded) for $355 $(17,736) $(17,783)
income taxes
========== ========= ==========
Cash paid for interest $99 $214 $393
========== ========= ==========
SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
Property and equipment $1,648 $- $828
leases
========== ========= ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
ALLIANCE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Alliance Semiconductor Corporation (the "Company" or "Alliance"), a Delaware
corporation, designs, develops and markets high performance memory products and
memory intensive logic products. The Company sells its products to the desktop
and portable computing, networking, telecommunications, instrumentation and
consumer markets.
The semiconductor industry is highly cyclical and has been subject to
significant rapid technological changes at various times that have been
characterized by diminished product demand, production overcapacity, product
shortages due to production undercapacity and accelerated erosion of selling
prices. The average selling price that the Company is able to command for its
products is highly dependent on industry-wide production capacity and demand,
and as a consequence the Company could experience rapid erosion in product
pricing (such as that occurred with SRAM and DRAM pricing during fiscal year
1999, 1998 and 1997), which is not within the control of the Company and which
could have an adverse material effect on the Company's results of operations.
The Company is unable to predict future prices for its products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its direct and indirect subsidiaries, including Alliance Venture Management,
LLC, Alliance Ventures, LP I, II and III (See Note 6). All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
BASIS OF PRESENTATION
For purposes of presentation, the Company has indicated its fiscal years as
ending on March 31, whereas the Company's fiscal year actually ends on the
Saturday nearest the end of March. The fiscal year ended March 31, 2000
contained 52 weeks while the fiscal years ended March 31, 1999 and March 31,
1998 contained 53 weeks and 52 weeks, respectively. Certain items previously
reported in specific financial statement captions have been reclassified to
conform to the fiscal year 2000 presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and highly liquid money
market instruments with banks and financial institutions. The Company considers
all highly liquid debt investments with maturity from the date of purchase of
three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash, in the form of certificates of deposit, support stand-by
letters of credit, which in turn are used to secure customs duties and other
purchase commitments.
SHORT TERM INVESTMENTS
The Company accounts for its short term investments in accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate classification of investment securities at the time
of purchase and reevaluates such designation as of each balance sheet date. At
March 31, 2000, all short-term investment securities were designated as
available-for-sale in accordance with SFAS 115.
Available-for-sale securities are carried at fair value, using available market
information with unrealized gains and losses reported in accumulated other
comprehensive income (loss) in the balance sheet.
F-7
<PAGE>
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market. Market is based on the estimated
net realizable value. The Company also evaluates its open purchase order
commitments on an on-going basis and accrues for any expected loss if
appropriate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated economic useful lives of the assets, which range from
three to seven years. Upon disposal, the cost of the asset and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the result of operations.
LONG-LIVED ASSETS
Long-lived assets held by the Company are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of carrying amounts to
future net cash flows an asset is expected to generate. If an asset is
considered to be impaired, the impairment to be recognized is measured by the
amount to which the carrying amount of the assets exceeds the projected
discounted future cash flows arising from the asset.
REVENUE RECOGNITION
Revenue from product sales, including sales to distributors, is recognized upon
shipment, net of accruals for estimated sales returns and allowances.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the research and development of semiconductor devices are
expensed as incurred, including the cost of prototype wafers and new production
mask sets.
INCOME TAXES
The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and income tax bases of
the assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short and long
term investments and accounts receivable.
Cash is deposited with one major bank in the United States while cash
equivalents are deposited with two major financial institutions in the United
States. The Company attempts to limit its exposure to these investments by
placing such investments with several financial institutions and performs
periodic evaluations of these institutions.
Short and long term investments are subject to declines in market as well as
risk associated with the underlying investment. The Company evaluates its
investments from time to time in terms of credit risk since a substantial
portion of its assets are now in the form of investments, not all of which are
liquid, and may enter into full or partial hedging strategies involving
financial derivative instruments to minimize market risk. During fiscal year
2000, the Company entered into a number of "cashless collar" and "covered call"
option transactions to partially hedge its holdings in Broadcom Corporation. The
Company may enter into other similar transactions in the future.
F-8
<PAGE>
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers and, on occasion, may require letters of credit
from its non-US customers. The following table summarizes the revenues from
customers, all of which were third parties, in excess of 10% of total net
revenues, for fiscal year 2000, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Customer A 10% - -
Customer B 7% 15% 2%
Customer C - - 18%
Customer D 6% 13% -
</TABLE>
At March 31, 2000 Customer A accounted for 8% of accounts receivable, net.
The Company conducts the majority of its business in U.S. dollars and foreign
currency translation gains and losses have not been material in any one year.
International sales accounted for approximately $53.0 million, $24.0 million,
and $48.5 million of net revenues for the years ended March 31, 2000, March 31,
1999 and March 31, 1998, respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees." The Company's policy is to grant options with an exercise
price equal to the fair market value of the Company's stock on the date of
grant. Accordingly, no compensation expense has been recognized in the Company's
statements of operations. The Company provides additional pro forma disclosures
as required under Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Refer to Note 10.
NET INCOME (LOSS) PER SHARE
Basic EPS is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including stock options, using the treasury stock method. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the proceeds
obtained upon exercise of stock options.
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income/(loss) available to $648,100 $(22,043) $(5,737)
common shareholders
======== ======== ========
Weighed average common shares 41,829 41,378 39,493
outstanding (basic)
Effect of dilutive options 1,163 - -
-------- -------- --------
Weighed average common shares 42,992 41,378 39,493
outstanding (diluted)
======== ======== ========
Net income/(loss) per share:
Basic $15.49 $(0.53) $(0.15)
======== ======== ========
Diluted $15.07 $(0.53) $(0.15)
======== ======== ========
</TABLE>
Due to the Company's net loss from continuing operations in 1999 and 1998, a
calculation of EPS assuming dilution is not required for those years. At March
31, 1999 there were 2,741,298 options outstanding to purchase common stock at a
weighted average price of $5.37 per share and at March 31, 1998, there were
3,675,431 options outstanding to purchase common stock at a weighted average
price of $5.81 per share. The outstanding options at March 31, 1999 and 1998
were excluded from the diluted loss per share computations because their effect
would be anti-dilutive.
F-9
<PAGE>
COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from non-owner sources. Total accumulated comprehensive income
for fiscal year 2000 was $804.6 million compared to total accumulated
comprehensive losses of $27.5 million and $18.6 million for fiscal years 1999
and 1998 respectively. The components of accumulated comprehensive income (loss)
are shown in the consolidated statements of shareholders' equity.
SEGMENT REPORTING
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company operates in one reportable segment, memory products.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Upon adoption of SFAS No. 133, the Company will
be required to adjust hedging instruments to fair value in the balance sheet,
and recognize the offsetting gain or loss as transition adjustments to be
reported in net income or other comprehensive income, as appropriate, and
presented in a manner similar to the cumulative effect of a change in accounting
principle. The Company believes the adoption of this statement will not have a
significant effect on the results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has complied with SAB 101 for all periods presented.
In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB
interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation an interpretation of APB Opinion No. 25". This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15,1998 and others that become effective after June 30, 2000. The
adoption of this interpretation is not expected to have a material impact on the
financial statements.
NOTE 2. BALANCE SHEET COMPONENTS
SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale securities at
March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
March 31, 2000
-------------------------
Number of Market
Shares Value
------------ -----------
<S> <C> <C>
UMC 141,650 $548,752
Chartered Semiconductor 2,141 201,789
Broadcom Corporation 488 62,831
Vitesse Semiconductor 852 69,928
-----------
Total $883,300
===========
</TABLE>
F-10
<PAGE>
LONG-TERM INVESTMENTS
At March 31, 2000, the Company's long term investments were as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 2000
-----------------------
Number of $
Shares
------------ ---------
<S> <C> <C>
UMC 141,650 $505,478
Alliance Ventures 26,646
---------
Total $532,124
=========
</TABLE>
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
March 31,
-----------------------
2000 1999
----------- -----------
(in thousands)
Accounts receivable:
<S> <C> <C>
Trade receivables $16,812 $11,470
Less allowance for (954) (2,527)
doubtful accounts
and sales related reserves
----------- -----------
$15,858 $8,943
=========== ===========
</TABLE>
INVENTORIES
<TABLE>
<CAPTION>
March 31,
-----------------------
2000 1999
----------- -----------
(in thousands)
Inventory:
<S> <C> <C>
Work in process $20,737 $5,119
Finished goods 16,702 7,808
----------- -----------
$37,439 $12,927
=========== ===========
</TABLE>
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31,
-----------------------
2000 1999
----------- -----------
(in thousands)
<S> <C> <C>
Engineering and test $13,756 $12,258
equipment
Computers and software 9,474 9,011
Furniture and office 1,599 778
equipment
Leasehold improvements 1,299 467
Land 288 288
----------- -----------
26,416 22,802
Less: Accumulated (16,426) (12,859)
depreciation and
amortization
----------- -----------
$9,990 $9,943
=========== ===========
</TABLE>
Depreciation and amortization expense for fiscal years 2000, 1999 and 1998 were
$4.4 million, $3.8 million and $3.5 million, respectively.
Property and equipment includes $2.5 million and $4.7 million of assets under
capital leases at March 31, 2000 and 1999, respectively. Accumulated
depreciation of assets under capital leases totaled $0.7 million and $3.5
million at March 31, 2000 and 1999, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income at March 31, 2000 were as
follows:
<TABLE>
<CAPTION>
Unrealized Tax Effect Net
Gain Unrealized
Gain
---------- ----------- -------------
<S> <C> <C> <C>
UMC $43,274 $(17,613) $ 25,661
Chartered 150,194 (61,129) 89,065
Semiconductor
Broadcom 39,490 (16,072) 23,418
Corporation
---------- ----------- -------------
$232,958 $(94,814) $138,144
========== =========== =============
</TABLE>
F-11
<PAGE>
NOTE 3. INVESTMENT IN CHARTERED SEMICONDUCTOR MANUFACTURING LTD. ("CHARTERED")
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States. At March 31, 2000, the Company
owned approximately 21.4 million ordinary shares or approximately 2.14 million
American Depository Shares or "ADSs."
These shares were subject to a six-month "lock-up", or no trade period, which
expired in April 2000. In May 2000, Chartered completed a secondary public
offering, which Alliance decided not to participate in and as a result, the
Company's shares are now subject to an additional three-month "lock-up" which
expires in August 2000. In June 2000, the underwriter of the secondary offering
released the Company from the lock-up, and the Company started selling some of
its shares. The Company does not own a material percentage of the equity of
Chartered. If the Company sells more that 50% of its original holdings in
Chartered, the Company will start to lose a proportionate share of its wafer
production capacity rights, which could materially affect its ability to conduct
its business. Additionally, because of the potential loss of its wafer
production capacity rights if the Company sells more than 50% of its original
holdings in Chartered, there can be no assurance that the Company can realize
its value on its investment in Chartered.
Prior to the fiscal third quarter of fiscal year 2000, the Company recorded its
investment in Chartered as a long-term investment using the cost method of
accounting. The Company now records its investment as an available-for-sale
marketable security in accordance with SFAS 115. At March 31, 2000, the Company
has recorded an unrealized gain of approximately $89.1 million, which is net of
deferred tax of approximately $61.1 million, as part of accumulated other
comprehensive income in the stockholder's equity section of the balance sheet.
NOTE 4. INVESTMENT IN UNITED MICROELECTRONICS CORPORATION ("UMC")
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. Between
September 1995 and July 1997 the Company invested approximately $70.4 million in
USC in exchange for 190 million shares or 19.0% of the outstanding shares and
25% of the total wafer capacity. 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, the Company had the right to receive an additional
NTD 665 million upon the occurrence of certain potential future events, which
included the sale or transfer of USC shares by USC in an arms length
transaction, or by a public offering of USC stock, or by the sale of all or
substantially all of the assets of USC. In March 2000, Alliance received
approximately NTD 665 million (US$21.5 million) as a result of the merger
between USC and UMC, described below.
Subsequent to the April 1998 USC stock sale, the Company owned approximately
15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million
shares to the Company by way of a dividend distribution. Additionally, USC also
made a stock distribution to its employees thereby reducing the Company's
ownership in USC to 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was
entitled to 25% of the output capacity of the wafer fabrication facility
operated by USC as well as a seat on the board of directors of USC. As a result
of the capacity rights, the board seat, and certain contractual rights, Alliance
had participated in both strategic and operating decisions of USC on a routine
basis, had rights of approval with respect to major business decisions and
concluded that it had significant influence on financial and operating decisions
of USC. Accordingly, the Company accounted for its investment in USC using the
equity method with a ninety-day lag in reporting the Company's share of results
for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its
proportionate share of equity income of USC of $9.5 million, $10.9 million, and
$15.5 million, net of tax, respectively.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
F-12
<PAGE>
approximately $16.8 million and owned approximately 3.2% of the outstanding
shares of USIC and had the right to purchase approximately 3.7% of the
manufacturing capacity of the facility. The Company accounted for its investment
in USIC using the cost method of accounting prior to the merger with UMC in
January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Through its representation on USC's board,
the Company had the right to choose whether to consent to the merger and
concluded it to be in the Company's best interest to do so. Alliance received
247.7 million shares of UMC stock for its 247.7 million shares, or 14.8%
ownership of USC, and approximately 35.6 million shares of UMC stock for its
48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000 Alliance
Semiconductor owned approximately 283.3 million shares, or approximately 3.2% of
UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the
former USC and USIC foundries, respectively. As a result of the merger in
January 2000, the Company no longer recorded its proportionate share of equity
income in USC, as the Company no longer has an ability to exercise significant
influence over UMC's operations. The investment in UMC is accounted for as a
cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax, non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US$
3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued approximately
$3.0 million for the Taiwan securities transaction tax in connection with the
shares received by the Company. This transaction tax will be paid, on a per
share basis, when the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up
period expires in July 2000. Of the remaining 50%, or 141.6 million shares,
approximately 28.3 million shares will become eligible for sale two years from
the closing date of the transaction (i.e. January 2002), with approximately 28.3
million shares available-for-sale every six months thereafter, during years
three and four (i.e.2002-2004). In May 2000, the Company received an additional
20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger the Company accounts for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which becomes
unrestricted within twelve months as an available-for-sale marketable security
in accordance with SFAS 115. At March 31, 2000, the Company has recorded an
unrealized gain of approximately $25.7 million, which is net of deferred tax of
$17.6 million, as part of accumulated other comprehensive income in the
stockholders' equity section of the balance sheet with respect to the short term
portion of the investments. As the portion of the investment in UMC which is
restricted beyond twelve months (approximately 50% of the Company's holdings at
March 31, 2000) is accounted for as a cost method investment and is presented as
a long-term investment. As this long-term portion becomes current over time, the
investment will be transferred to short-term investments and will be accounted
for as an available-for-sale marketable security in accordance with SFAS 115.
The long-term portion of the investments become unrestricted securities between
2002 and 2004.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported.
Note 5. INVESTMENT IN MAVERICK NETWORKS, INC. / BROADCOM CORPORATION
In 1998, the Company was approached by a startup company, Maverick Networks,
Inc. ("Maverick"), regarding their need for imbedded memory in a internet router
semiconductor that Maverick was designing. Because the Company was also
interested in eventually entering the internet router semiconductor market, the
Company entered into an agreement with Maverick which called for the Company to
provide memory technology, access to the Company's wafer production rights, and
cash to Maverick, in exchange for certain rights to Maverick's technology and
stock in Maverick. On May 31, 1999, Maverick completed a transaction with
Broadcom Corporation, resulting in the Company selling its 39% ownership
interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common
stock. Based on Broadcom's closing share price on the date of sale, the Company
recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of
approximately $51.6 million based on the closing share price of Broadcom at the
date of the merger. During fiscal 2000,
F-13
<PAGE>
the Company sold 275,600 shares of Broadcom stock and realized an additional
pre-tax, non-operating gain of approximately $23.7 million. In February 2000,
Broadcom Corporation announced a two for one stock split.
The Company records its investment in Broadcom as an available-for-sale
marketable security in accordance with SFAS 115. At March 31, 2000, the Company
owned approximately 487,522 shares of Broadcom and recorded an additional
unrealized gain of approximately $23.4 million, which is net of deferred tax of
approximately $16.1 million, as part of accumulated other comprehensive income
in the stockholders equity section of the balance sheet.
Note 6. ALLIANCE VENTURE MANAGEMENT, LLC
In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee out of the net profits of
the investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds, by allowing them limited participation in the profits of the
various investment funds, through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Venture
I") and Alliance Ventures II ("Alliance Venture II"), both California limited
partnerships. The Company, as the sole limited partner, owns 100% of the shares
of each partnership. Alliance Venture Management acts as the general partner of
these partnerships and receives a management fee of 15% of the profits from
these partnerships for its managerial efforts. In February 2000, the Company
formed Alliance Ventures III ("Alliance Venture III"), a California limited
partnership. The Company, as the sole limited partner, owns 100% of the shares
of this partnership. Alliance Venture Management acts as the general partner of
this partnership and receives a management fee of 16% of the profits from this
partnership for its managerial efforts. Several of the Company's senior
management hold a majority of the units of Alliance Venture Management.
After Alliance Ventures I, was formed, the Company contributed all its then
current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I
to allow Alliance Venture Management to manage these investments. As of March
31, 2000, Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested $22.3 million in 10 companies,
and Alliance Ventures II, whose focus is in investing in internet start-up
ventures has approximately $4.4 million in 8 companies, with a total fund
allocation of $15 million. As of March 31, 2000, Alliance Ventures III, whose
focus is investing in emerging companies in the networking and communication
market areas, has invested $2 million in one company, with a total fund
allocation of $100 million.
Several of these investments are accounted for as the equity method due to the
Company's ability to exercise its influence on the operations of investees
resulting primarily from ownership interest and/or board representation. The
total equity in the net losses of the equity investees of these venture funds
was $368,000 for the year ended March 31, 2000.
Note 7. INVESTMENT IN OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION
In August 1999, the Company made an investment in Orologic Corporation
("Orologic"), a fabless semiconductor company that develops high performance
system on a chip solutions. In November 1999, the Company transferred its
interest in Orologic to Alliance Ventures I, to allow it to be managed by
Alliance Venture Management. See Note 6. Subsequently, in March 2000, Vitesse
Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this
merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity
interest in Orologic. As a result of the merger, the Company recognized
approximately $69 million pre-tax, non-operating gain, in its fiscal fourth
quarter ending March 31, 2000, based on the closing share price of Vitesse of
$96.25 on March 31, 2000, the closing date of the merger.
The Company records its investment in Vitesse Semiconductor Corporation as an
available-for-sale marketable security in accordance with SFAS 115. At March 31,
2000, the Company owned 852,447 shares of Vitesse.
On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock
that had been acquired by Alliance Ventures I in exchange for its sale of one
million shares of Orologic as follows:
F-14
<PAGE>
<TABLE>
<CAPTION>
Shares of Vitesse
-----------------
<S> <C>
Alliance 632,876
11.21% shares to be held in escrow for 95,417
Alliance
Alliance Venture Management 124,154
-----------------
Total shares resulting from sale of 852,447
1,000,000 Orologic shares
=================
</TABLE>
Alliance Ventures Management then immediately distributed the Vitesse shares to
its unit holders.
NOTE 8. LONG TERM OBLIGATIONS, LEASES AND COMMITMENTS
OPERATING LEASES
The Company leases its headquarters facility under an operating lease that
expires in June 2006. Under the terms of the lease, the Company is required to
pay property taxes, insurance and maintenance costs. In addition, the Company
also leases sales and design center offices under operating leases, which expire
between 2000 and 2007.
Future minimum fiscal rental payments under non-cancelable leases are as
follows:
<TABLE>
<CAPTION>
Fiscal (in
Year thousands)
----------- ----------
<S> <C>
2001 $1,601
2002 1,598
2003 1,604
2004 1,636
2005 1,696
Thereafter 2,160
----------
Total $10,295
payments
==========
</TABLE>
Rent expense for fiscal 2000, 1999, and 1998 was $1,386,000, $635,000, and
$484,000, respectively.
CAPITAL LEASES
At March 31, 2000, equipment under capital leases amounted to approximately $2.5
million compared to $4.7 million at March 31, 1999. The original lease terms
range from three to five years.
The following is a schedule of future minimum fiscal lease payments under
capital leases:
<TABLE>
<CAPTION>
Fiscal Year (in
thousands)
------------------------- ----------
<S> <C>
2001 $1,129
2002 864
2003 327
----------
Total payments minimum 2,320
lease payments
Amount representing (318)
interest
----------
2,002
Less current portion (905)
----------
Long-term capital lease $1,097
obligations
==========
</TABLE>
LETTERS OF CREDIT
At March 31, 2000, approximately $2.8 million in standby letters of credit were
outstanding and expire through March 30, 2001, secured by restricted cash.
F-15
<PAGE>
NOTE 9. PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------------
2000 1999 1998
-------- --------- ----------
(in thousands)
Current:
<S> <C> <C> <C>
Federal $14,340 $- $(20,173)
State 228 - -
-------- --------- ----------
14,568 - (20,173)
-------- --------- ----------
Deferred:
Federal $340,351 $8,397 8,752
State 55,429 - -
-------- --------- ----------
395,780 8,397 8,752
-------- --------- ----------
Total $410,348 $8,397 $(11,421)
provision
(benefit)
======== ========= ==========
</TABLE>
In addition to the provision (benefit) for taxes noted above, deferred taxes of
$ $6.4 million, and $8.3 million for the years ended March 31, 1999 and 1998,
respectively, are recorded as part of the equity in income of USC.
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
------- ---------
(in thousands)
<S> <C> <C>
Inventory reserves $1,982 $5,267
Accrued expenses and 4,198 3,226
reserves
NOL carry forward - 8,531
Other - 791
------- ---------
Gross deferred tax 6,180 17,815
assets
Investment in USC - (14,723)
Investment in UMC (398,851) -
Investment in Broadcom (25,127) -
Investment in Chartered (61,129) -
Investment in Orologic (27,952) -
Other (1,827) -
------- ---------
Gross deferred tax (514,886) (14,723)
liabilities
------- ---------
Deferred tax asset - (17,815)
valuation allowance
------- ---------
$(508,706) $(14,723)
======= =========
</TABLE>
The provision (benefit) for income taxes differs from the amount obtained by
applying the U.S. federal statutory rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
2000 1999 1998
---------- ---------- -----------
(in thousands, except percentages)
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
Tax at federal $367,274 $(8,531) $(11,421)
statutory rate
State taxes, net of 59,813 - -
federal benefit
Change in valuation (17,815) 8,397 -
allowance
Current year losses and
timing differences - 8,531 -
with no tax benefit
recognized
Other, net 1,076 - -
---------- ---------- -----------
Total $410,348 $8,397 $(11,421)
========== ========== ===========
</TABLE>
Due to the uncertainty of the realization of the deferred tax assets, the
Company provided a full valuation allowance on the deferred tax assets at March
31, 1999. In the first quarter of fiscal 2000, when the Company recognized a
gain of $51.6 million related to the sale of Maverick Networks to Broadcom
Corporation, the Company released the entire $17.8 million valuation allowance
and recorded the tax benefit as an offset to income during fiscal 2000. The tax
benefit associated with the previous exercises of non-qualified stock options
and disqualifying dispositions of incentive stock options reduced taxes
currently payable by $3.5 million in fiscal year 2000 and $0 in fiscal years
1999 and 1998.
F-16
<PAGE>
Note 10. STOCK OPTION PLANS
1992 STOCK OPTION PLAN
In April 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") and
reserved 5,625,000 shares of Common Stock for issuance to employees and
consultants of the Company. The Board of Directors may terminate the Plan at any
time at its discretion. On September 30, 1993, the number of shares of Common
Stock reserved for issuance under the Plan was increased to 7,875,000 and on
September 14, 1995, the number of shares reserved for issuance under the Plan
was increased to 9,000,000. On August 31, 1999, the number of shares reserved
for issuance under the Plan was increased by 2,000,000 to 11,000,000. The Option
Plan, which has a term of ten years, provides for incentive as well as
nonqualified stock options.
Incentive stock options may not be granted at less than 100 percent of the
estimated fair value, as determined by the Board of Directors, of the Company's
Common Stock at the date of grant and the option term may not exceed 10 years.
For holders of more than 10 percent of the total combined voting power of all
classes of the Company's stock, options may not be granted at less than 110
percent of the estimated fair value of the Common Stock at the date of grant and
the option term may not exceed five years.
DIRECTORS' STOCK OPTION PLAN
On September 30, 1993, the Company adopted its 1993 Directors' Stock Option Plan
("Directors' Plan"), under which 900,000 shares of Common Stock have been
reserved for issuance. The Directors' Plan provides for the automatic grant to
each non-employee director of the Company (but excluding persons on the
Company's Board of Directors in November 1993) of an option to purchase 22,500
shares of Common Stock on the date of such director's election to the Company's
Board of Directors. Thereafter, such director will receive an automatic annual
grant of an option to purchase 11,250 shares of Common Stock on the date of each
annual meeting of the Company's stockholders at which such director is
re-elected. The maximum number of shares that may be issued to any one director
under this plan is 90,000. Such options will vest ratably over four years from
their respective dates of grant.
The following table summarizes grant and stock option activity under the Plan
and the Directors' Plan for fiscal years 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Options Options Outstanding
------------ --------------------------
Available Weighted
for Grant Shares Average Prices
------------ ---------- ---------------
<S> <C> <C> <C>
Balance at 2,210,796 4,191,289 $3.87
March 31, 1997
Options (1,588,504) 1,588,504 8.18
granted
Options 736,197 (736,197) 6.77
canceled
Options - (1,368,165) 2.12
exercised
------------ ---------- ---------------
Balance at 1,358,489 3,675,431 $5.81
March 31, 1998
Options (1,405,150) 1,405,150 3.52
granted
Options 1,352,324 (1,352,324) 7.23
canceled
Options - (986,959) 1.56
exercised
------------ ---------- ---------------
Balance at 1,305,663 2,741,298 $5.37
March 31, 1999
Options 2,000,000 - -
Authorized
Options (1,150,950) 1,150,950 $11.91
granted
Options 925,374 (925,374) $5.49
canceled
Options - (677,717) $5.85
exercised
------------ ---------- ---------------
Balance at 3,080,087 2,289,157 $8.44
March 31, 2000
============ ========== ===============
</TABLE>
As of March 31, 2000, options to purchase approximately 350,037 shares of Common
stock were exercisable. Options granted vest over a period of four to five
years.
The weighted average estimated fair value at the date of grant, as defined by
SFAS 123, for options granted in fiscal 2000, 1999, and 1998 was $8.57, $2.44
and $4.90 per option, respectively. The estimated grant date fair value
disclosed above was calculated using the Black-Scholes model. This model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. Significant option groups outstanding at March 31, 2000, and
related weighted average exercise price and contractual life information are as
follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
Outstanding and Exercisable by Price Range
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Vested and Average
Exercise As of Remaining Exercise Exercisable Exercise
Prices March 31, Contractual Price As of March Price
2000 Life 31, 2000
------------- ------------ ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$2.09 - 296,900 4.46 $2.31 27,540 $2.31
$2.31
$2.44 - 609,775 4.57 $3.81 165,675 $3.75
$5.50
$5.56 - 277,482 2.83 $7.19 96,922 $7.12
$7.38
$7.44 - 255,100 4.03 $8.80 58,700 $7.95
$11.13
$11.19 - 350,000 5.42 $11.19 - -
$11.19
$11.25- 231,000 5.41 $11.95 - -
$12.06
$12.13 - 268,900 5.79 $20.05 1,200 $12.44
$25.75
------------- ------------ ------------ ---------- ------------- ---------
$2.09 - 2,289,157 4.64 $8.44 350,037 $5.30
$25.75
============= ============ ============ ========== ============= =========
</TABLE>
The following assumptions are included in the estimated grant date fair value
calculations for stock options:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ---------- ------------
<S> <C> <C> <C>
Expected life 5.00 5.00 5.00
years years years
Risk-free 6.7% 5.7% 6.0%
interest rate
Volatility 86% 88.0% 65.0%
Dividend 0.0% 0.0% 0.0%
yield
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Company and its shareholders approved an Employee Stock
Purchase Plan ("ESPP"), which allows eligible employees of the Company and its
designated subsidiaries to purchase shares of Common Stock through payroll
deductions. The ESPP consists of a series of 12-month offering periods composed
of two consecutive 6-month purchase periods. The purchase price per share is 85%
of the fair market value of the Common Stock, at the date of commencement of the
offering period, or at the last day of the respective 6-month purchase period,
whichever is lower. Purchases are limited to 10% of an eligible employee's
compensation, subject to a maximum annual employee contribution and limited to a
$25,000 fair market value. Of the 750,000 shares of Common Stock authorized
under the ESPP, 119,765, 171,676, and 96,922 shares were issued during fiscal
2000, 1999, and 1998, respectively.
Compensation costs (included in pro forma net income (loss) and pro forma net
income (loss) per share amounts) for the grant date fair value, as defined by
SFAS 123, of the purchase rights granted under the ESPP, were calculated using
the Black-Scholes model. The following weighted average assumptions are included
in the estimated grant date fair value calculations for rights to purchase stock
under the ESPP;
<TABLE>
<CAPTION>
2000 1999 1998
--------- ----------- -----------
<S> <C> <C> <C>
Expected life 6 months 6 months 6 months
Risk-free 6.4% 4.9% 5.4%
interest rate
Volatility 78.0% 88.0% 65.0%
Dividend 0.0% 0.0% 0.0%
yield
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS 123, or
rights to purchase Common Stock under the ESPP granted in fiscal 2000, 1999 and
1998 was $2.24, $2.55 and $3.04 per share, respectively.
PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME (LOSS) PER SHARE
Had the Company recorded compensation expense based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under the Plan, the
Directors' Plan and its ESPP, the Company's pro forma net income (loss) and pro
forma net income (loss) per share for the years ended March 31, 2000, 1999 and
1998, would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
March 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Pro forma income $646,905 $(23,231) $(8,153)
(loss):
Pro forma net
loss per share:
Basic $15.47 $(0.56) $(0.21)
Diluted $15.05 $(0.56) $(0.21)
</TABLE>
F-18
<PAGE>
NOTE 11. 401(K) SALARY SAVINGS PLAN
Effective May 1992, the Company adopted the Salary Savings Plan (the "Savings
Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"),
whereby eligible employees may contribute up to 15% of their earnings, not to
exceed amounts allowed under the Code. Effective April 1999, the Company agreed
to match up to 50% of the first 6% of the employee contribution to a maximum of
two thousand dollars annually per employee. The Company's matching contribution
vests over five years. In fiscal year 2000 the Company contributed approximately
$131,000. There were no contributions made in fiscal 1999 and 1998.
NOTE 12. LEGAL MATTERS
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. Plaintiffs have appealed the court's ruling dismissing the
claims and the parties have filed appeal briefs. 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 December 1996, Alliance Semiconductor International Corporation ("ASIC"), a
wholly owned subsidiary of the Company, was served with a complaint filed in
Federal Court alleging that ASIC had infringed two patents owned by AMD related
to flash memory devices, and seeking injunctive relief and damages. In March
1997, the Company was added as a defendant. In April 1996, the Court allowed AMD
to expand its claims to include several new flash products which had been
recently announced by the Company. In January and February 2000, both parties
filed for motions for summary judgment. Each defendant has denied the
allegations of the complaint and asserted a counterclaim for declaration that
each of the AMD patents is invalid and not infringed by such defendant. A trial
date is currently set for September 2000. The Company believes the resolution of
this matter will not have a material adverse effect on its financial conditions
and its results of operations.
In July 1998, the Company learned that a default judgment was 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 TritTek 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. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. The appeal
brief and reply briefs have been filed and the parties are awaiting oral
arguments before the Court in June 2000.
NOTE 13. ANTIDUMPING PROCEEDING (TAIWAN-MANUFACTURED SRAMS AND DRAMS)
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 SRAMs fabricated
F-19
<PAGE>
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 filed an appeal in the United States Court of International
Trade (the "CIT"), challenging the determination by the ITC that imports of
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On
June 30, 1999 the CIT issued a decision remanding the ITC's affirmative material
injury determination to the ITC for reconsideration. The ITC's remand
determination reaffirmed its original determination. The CIT considered the
remand determination and remanded it back to the ITC for further
reconsideration. On June 12, 2000, in its second remand determination the ITC
voted negative on injury, thereby reversing its original determination that
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The
second remand determination will be transmitted to the CIT on June 26, 2000 for
consideration. The decision of the CIT can be further appealed to the Court of
Appeals for the Federal Circuit. The Company cannot predict either the timing or
the eventual results of the appeal. Until a final judgment is entered in the
appeal, no final duties will be assessed on the Company's entries of SRAMs from
Taiwan covered by the DOC antidumping duty order. If the appeal is successful,
the antidumping order will be terminated and cash deposits will be refunded with
interest. If the appeal is unsuccessful, the Company's entries of
Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be
liquidated at the deposit rate in effect at the time of entry. On subsequent
entries of Taiwan-fabricated SRAMs, the Company will continue to make cash
deposits in the amount of 50.15% of the entered value. In April 2001, the
Company will have an opportunity to request a review of its sales of
Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review
Period"). If it does so, the amount of antidumping duties, if any, owed on
imports from April 2000 through March 2001 will remain undetermined until the
conclusion of the review in early 2002. 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. At
March 31, 2000, the Company had posted a bond secured by a letter of credit in
the amount of approximately $1.7 million and made cash deposits in the amount of
$1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs.
In October 1998, Micron Technology, Inc. filed an antidumping petition with the
DOC and the ITC, alleging that DRAMs fabricated in Taiwan were being sold in the
United States at less than fair value, and that the United States industry
producing DRAMs was materially injured or threatened with material injury by
reason of imports of DRAMs fabricated in Taiwan. The petition requested the
United States government to impose antidumping duties on imports into the United
States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily
determined that there was a reasonable indication that the imports of the
products under investigation were injuring the United States industry. In May
1999 the DOC issued a preliminary affirmative determination of dumping. Under
that determination, the Company's imports into the United States on or after May
28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty
deposit in the amount of 16.65% (the preliminary "all others" rate) of the
entered value of such DRAMs, an antidumping margin calculated by
weight-averaging the antidumping margins of individually investigated respondent
companies. The Company posted a bond to cover deposits on such entries. In
October 1999 the DOC issued a final affirmative determination of dumping. Under
that determination, the Company's imports into the United States on or after
October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping
duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on
December 8, 1999, the ITC issued a final negative determination of injury.
Consequently, the investigation was terminated, the suspension of liquidation
lifted, and the bond posted in September 1999 released. In January 2000, Micron
filed an appeal in the CIT challenging the determination by the ITC that imports
of Taiwan-fabricated DRAMs were not causing material injury to the U.S.
industry. On March 21, 2000 the Appeal of the ITC decision was dismissed by the
CIT.
NOTE 14. RELATED PARTY TRANSACTIONS
On May 18, 1998, the Company provided loans to two of its officers and a
director aggregating $1,735,000. The officer loans were used for the payment of
taxes resulting from the gain on the exercise of non-qualified stock options.
The loan to a director was used for the exercise of stock options. Under these
loans, both principal and
F-20
<PAGE>
accrued interest were due on December 31, 1999, with accrued interest at rates
ranging from 5.50% to 5.58% per annum. The loan to the director was paid at
December 31, 1999. The officer loans were extended to December 31, 2000. As of
March 31, 2000, $1,615,000 was outstanding under these loans with accrued
interest of $163,000.
In fiscal year 2000, the Company made wafer purchases from USC of approximately
$15.1 million prior to the merger with UMC in January 2000. After the completion
of the merger in January 2000, the Company purchased $1.5 million of wafers from
UMC. In fiscal year 1999, the Company made wafer purchases $8.8 million, from
USC.
NOTE 15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment, memory products. The memory
products segment includes; Static Random Access Memories ("SRAMs"), Dynamic
Random Access Memories ("DRAMs"), and Flash Memories ("Flash").
The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customer's location.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
2000 1999 1998
-------- --------- ----------
(in thousands)
<S> <C> <C> <C>
United States $36,088 $23,770 $68,985
Taiwan 11,310 6,061 24,966
Asia (except 16,462 9,076 11,262
Taiwan)
Europe 25,293 8,567 12,240
Rest of world - 309 947
-------- --------- ----------
Total $89,153 $47,783 $118,400
======== ========= ==========
</TABLE>
International net revenues in fiscal 2000 increased by 121% over fiscal 1999.
International net revenues are derived from customers in Europe, Asia and the
rest of the world. The largest increase in international net revenues was to
customers in Europe, which increased approximately 195% over fiscal year 1999.
The increase was due to an overall increase in product demand and higher average
selling prices, in the respective areas. International revenues declined 51%
from fiscal 1998 to fiscal 1999. The largest decrease in international net
revenues was to customers in Taiwan, which decreased 76%. This decrease was due
to an overall decrease in product demand and lower selling prices in the
respective areas.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In June 2000, PMC-Sierra, Inc. ("PMC"), announced that it agreed to acquire
Malleable Technologies, Inc. ("Malleable"). According to the terms of the
proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the
remaining 85% interest of Malleable that PMC does not already own. In connection
with the proposed merger, Alliance Ventures I will receive approximately 79,000
shares of PMC for its 7% interest in Malleable. Upon the completion of the
merger, the Company will report a gain based on the closing share price of PMC
on the date of the merger. Based on the closing share price of PMC on June 14,
2000, the estimated pretax gain from this transaction is approximately $11
million. There is no assurance that this acquisition will be completed or that
the realized gain amount will be equal or exceed the reported gain amount on the
closing date of the merger.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Alliance Semiconductor Corporation:
Our audits of the consolidated financial statements referred to in our report
dated April 25, 2000, appearing in this Annual Report on Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a)(2)(I) of this
Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 25, 2000
F-22
<PAGE>
<TABLE>
<CAPTION>
ALLIANCE SEMICONDUCTOR CORPORATION
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Balance
Description beginning at end
of period Additions Reductions period
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended March 31, 2000
Allowance for doubtful $2,527 $6,209 $(7,782) $954
accounts and sales-related
reserves
Inventory related reserves for
excess and obsolescence; and $15,701 $5,862 $(13,293) $8,270
lower of cost or market issues
Year ended March 31, 1999
Allowance for doubtful $2,010 $3,193 $(2,676) $2,527
accounts and sales-related
reserves
Inventory related reserves for
excess and obsolescence; and $14,967 $20,437 $(19,703) $15,701
lower of cost or market issues
Year ended March 31, 1998
Allowance for doubtful $650 $7,512 $(6,152) $2,010
accounts and sales-related
reserves
Inventory related reserves for
excess and obsolescence; and $40,732 $15,154 $(40,919) $14,967
lower of cost or market issues
</TABLE>
F-23
<PAGE>
Financial Statements of United Semiconductor Corporation
for the Fiscal Year Ended December 31, 1998 and December 31, 1997.
F-24
<PAGE>
UNITED SEMICONDUCTOR CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
2/F No. 11 Innovation Rd., 1
Science-Based Industrial Park
Hsinchu, Taiwan, Republic of China
Tel:(03) 578-0205
Fax:(03) 577-7985
January 22, 1999
(99)B.L36P4065
To the Board of Directors of United Semiconductor Corporation
We have examined the accompanying balance sheets of United Semiconductor
Corporation as of December 31, 1998 and 1997, and the related statements of
income, of changes in stockholders' equity and of cash flows for the years then
ended. Our examinations were made in accordance with the "Rules Governing the
Certification of Financial Statements by Certified Public Accountants" and
generally accepted auditing standards in the United States and accordingly
included such tests of the accounting records and such other auditing procedures
as we considered necessary in the circumstances.
In our opinion, the financial statements examined by us present fairly the
financial position of United Semiconductor Corporation as of December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles
consistently applied.
/S/ PRICEWATERHOUSECOOPERS
~1~
<PAGE>
<TABLE>
<CAPTION>
UNITED SEMICONDUCTOR CORPORATION
--------------------------------
BALANCE SHEET
-------------
DECEMBER 31,
------------
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents (Note 4(1)) $ 7,516,907 $ 5,469,227
Marketable securities (Note 4(2)) 3,138,393 3,190,746
Notes receivable -- third parties 189 --
-- related parties (Note 5) 8,352 781
Accounts receivable
third parties (Note 4(3)) 778,399 937,320
related parties (Note 5) 436,937 939,664
Other receivables 165,146 88,905
Inventories (Note 4(4)) 665,344 511,486
Prepaid expenses 7,803 17,669
Other current assets (Note 4(12)) 93,353 230,381
----------- -----------
12,810,823 11,386,179
----------- -----------
Long-Term Investments (Note 4(5))
Long-term investment 105,759 --
Prepaid long-term investment 250,400 --
----------- -----------
356,159 --
----------- -----------
Property, Plant and Equipment (Notes 4(6) and 6)
Cost
Machinery and equipment 18,591,271 10,169,495
Transportation equipment 3,206 3,206
Furniture and fixtures 217,742 130,771
Leasehold improvements 10,966 10,966
Other equipment 40,974 14,270
----------- -----------
18,864,159 10,328,708
Acculmulated depreciation (4,452,290) (1,944,961)
Construction in progress and prepayments 967,065 2,460,306
----------- -----------
15,378,934 10,844,053
Tangible Asset ----------- -----------
Other intangible assets 813,455 1,037,500
----------- -----------
Other Assets
Deposit -- out 1,475 30,979
Preferred expense 134,044 54,027
Preferred income tax assets (Note 4(12)) 238,121 103,102
Other assets 2,231 --
----------- -----------
375,871 188,108
----------- -----------
TOTAL ASSETS $29,735,242 $23,455,840
=========== ===========
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term loans (Note 4(7)) $ 781,944 $ 1,911,632
Notes payable (Note 5) -- 125,209
Accounts payable -- third parties 461,646 513,371
-- related parties (Note 5) 23,634 21,485
Accrued expenses (Notes 5) 811,301 578,013
Other payables 1,213,782 359,172
Current portion of long-term loans (Note 4(8)) 1,571,458 656,744
Other current liabilities 6,607 1,268
----------- -----------
4,870,372 4,166,894
----------- -----------
Long-term Liabilities
Long-term loans (Note 4(8)) 7,041,589 5,190,525
----------- -----------
Other Liabilities
Accrued pension liabilities 24,958 11,619
----------- -----------
Total Liabilities 11,936,919 9,369,038
----------- -----------
Stockholders' Equity
Common stock (Note 4(10)) 13,367,809 10,000,000
Capital reserve generated from the gain on
disposal of fixed assets 40 40
Retained earnings (Note 4(11))
-- Legal reserve 408,676 --
-- Unappropriated earnings 4,022,045 4,086,762
Cumulative translation adjustment (247) --
----------- -----------
Total stockholders' equity 17,798,323 14,086,802
----------- -----------
Commitments and Contingent Liabilities (Note 7)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,735,242 $23,455,840
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
~2~
<PAGE>
<TABLE>
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS
EXCEPT EARNINGS PER SHARE DATA)
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Operating Revenues
Sales revenues $ 12,614,679 $ 10,003,022
Sales returns (186,848) (21,216)
Sales allowance (634,954) (302,184)
------------ ------------
Net sales 11,792,877 9,679,622
Other operating revenues 183,553 81,542
------------ ------------
Net operating revenues 11,976,430 9,761,164
------------ ------------
Operating Cost
Cost of goods sold (6,748,200) (5,278,405)
Other operating cost (129,181) (38,604)
------------ ------------
(6,877,381) (5,317,009)
------------ ------------
Gross Profit 5,099,049 4,444,155
------------ ------------
Operating Expenses
Selling expenses (218,789) (88,841)
Administrative expenses (214,364) (265,943)
Research and development expenses (701,179) (443,866)
------------ ------------
(1,134,332) (798,650)
------------ ------------
Operating Income 3,964,717 3,645,505
------------ ------------
Non-operating Income
Interest income 368,695 264,153
Dividends revenue 28,010 21,420
Gain on disposal of investment 41,516 16,956
Foreign exchange gain -- 397,616
Gain on reverse of allowance on inventory loss 59,540 --
Other income 5,370 6,853
------------ ------------
503,131 706,998
------------ ------------
Non-operating Expenses
Interest expense (464,199) (354,973)
Foreign exchange loss (71,071) --
Provision for loss on obsolescence of inventories -- (50,562)
Financial expense (10,919) (391)
Other loss (103,307) (419)
------------ ------------
(649,496) (406,345)
------------ ------------
Income before income tax 3,818,352 3,946,158
Income tax (expense) benefit (Note 4(12)) (69,803) 84,057
------------ ------------
Net income $ 3,748,549 $ 4,030,215
============ ============
Earnings per share (Note 4(13))
Net income $ 2.80 $ 3.01
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
~3~
<PAGE>
<TABLE>
UNITED SEMICONDUCTOR CORPORATION
--------------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
<CAPTION>
Retained Earnings
-----------------
Unappropriated
Common Stock Capital Reserve Legal Reserve Earnings
------------ --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 10,000,000 $ -- $ -- $ 56,587
Net income for 1997 -- -- -- 4,030,215
Transfer of the gain on disposal of
fixed assets to capital reserve -- 40 -- (40)
------------ ---- -------- -----------
Balance at December 31,1997 10,000,000 40 -- 4,086,762
Appropriation of 1997 earnings:
Appropriation for legal reserve -- -- 408,676 (408,676)
Capitalization of employees' bonus 367,809 -- -- (367,809)
Directors' and supervisors'
remuneration -- -- -- (36,781)
Stock dividends 3,000,000 -- -- (3,000,000)
Net income for 1998 -- -- -- 3,748,549
Accumulative translation adjustment -- -- -- --
------------ ---- -------- -----------
Balance at December 31, 1998 $13,367,809 $ 40 $408,676 $ 4,022,045
============ ==== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Cumulative Translation
Adjustment from Long- Total Stock-
Term Investments holders' Equity
---------------- ---------------
<S> <C> <C>
Balance at January 1, 1997 $ -- $10,056,587
Net income for 1997 -- 4,030,215
Transfer of the gain on disposal of
fixed assets to capital reserve -- --
---- -----------
Balance at December 31,1997 -- 14,086,802
Appropriation of 1997 earnings:
Appropriation for legal reserve -- --
Capitalization of employees' bonus -- --
Directors' and supervisors'
remuneration -- (36,781)
Stock dividends -- --
Net income for 1998 -- 3,748,549
Accumulative translation adjustment (247) (247)
----- -----------
Balance at December 31, 1998 $(247) $17,798,323
===== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
~4~
<PAGE>
<TABLE>
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 3,748,549 $ 4,030,215
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation 2,510,951 1,591,371
Amortization 363,314 320,071
(Reverse of) Provision for loss on obsolescence of inventories (47,943) 38,403
Loss (gain) on disposal of fixed assets 15 (40)
Fixed assets transferred to expenses 4,759 26,516
Changes in asset and liability accounts:
Accounts and notes receivable 653,888 (1,026,445)
Other receivables (76,241) (24,017)
Inventories (105,915) (64,203)
Prepaid expenses 9,866 (5,673)
Other current assets 137,028 (208,429)
Deferred income tax assets (135,019) 116,684
Other assets (2,231) --
Accounts and notes payable (174,785) 213,748
Accrued expenses and other payable 233,288 283,571
Other current liabilities (908) 5,911
Accrued pension liabilities 13,339 11,619
----------- -----------
Net cash provided by operating activities 7,131,955 5,309,302
----------- -----------
Investing activities:
Acquisition of fixed assets (6,280,177) (4,644,743)
Proceeds from disposal of fixed assets -- 9,180
Decrease (increase) in marketable securities 52,353 (2,987,926)
Increase in long-term investment (356,406) --
Increase in deferred expense and intangible assets (128,858) (25,882)
Decrease (increase) in deposit-out 29,504 (915)
----------- -----------
Net cash used in investing activities (6,683,584) (7,650,286)
----------- -----------
</TABLE>
~5~
<PAGE>
<TABLE>
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Financing activities:
(Decrease) increase in short-term loans (1,129,688) 1,750,112
Proceeds from long-term loans 2,765,778 1,517,771
Appropriation of directors' and supervisors' remuneration (36,781) --
----------- -----------
Net cash provided by financing activities 1,599,309 3,267,883
----------- -----------
Net increase in cash and cash equivalents 2,047,680 926,899
Cash and cash equivalents at the beginning of year 5,469,227 4,542,328
----------- -----------
Cash and cash equivalents at the end of year $ 7,516,907 $ 5,469,227
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest (excluding interest capitalized) $ 444,233 $ 345,781
=========== ===========
Cash paid for income tax $ 1,744 $ 51,501
=========== ===========
Investing activities partially paid by cash
Acquisition of fixed assets $ 7,154,510 $ 3,445,946
Add: payable at the beginning of year 352,925 1,551,722
Less: payable at the end of year (1,213,782) (352,925)
Fixed assets exchange (13,476) --
----------- -----------
Cash paid $ 6,280,177 $ 4,644,743
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
~6~
<PAGE>
UNITED SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1. HISTORY AND ORGANIZATION
United Semiconductor Corporation was incorporated as a company limited by
shares on October 6, 1995 and commenced its operations in June, 1996. As of
December 31, 1998, the paid-in capital is $13,367,809. The Company's major
business activities are as follows:
a. Semiconductor and semiconductor device foundry;
b. Providing the mask tooling, package, burn-in, and testing services for the
above-mentioned products; and
c. Research and development for the technology of wafer fabrication.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Translation of foreign currency transactions
The accounts of the Company are maintained in New Taiwan dollars.
Transactions denominated in foreign currencies are translated into New Taiwan
dollars at the rates of exchange prevailing on the transaction dates.
Receivables, other monetary assets and liabilities denominated in foreign
currencies are translated into New Taiwan dollars at the rates of exchange
prevailing at the balance sheet date. Exchange gains or losses are included
in the current year's results.
Cash equivalents
Cash equivalents are short-term, highly liquid investments, which are readily
convertible to known amounts of cash and with maturity dates that do not
present significant risk of changes in value because of changes in interest
rates.
Marketable securities
Marketable securities are recorded at cost when acquired. The carrying amount
of the marketable securities portfolio is stated at the lower of its
aggregate cost or market value at the balance sheet date. The market value
for listed equity securities or close-ended funds are determined by the
average closing prices occurred during the last month of the fiscal year. The
market value for open-ended funds are determined by their equity per unit at
balance sheet date.
~7~
<PAGE>
Inventories
Inventories, except raw materials stated at actual, are stated at standard
cost which is adjusted to actual cost based on weighted average method at
month end. Inventories are valued at the lower of cost or market value at the
year end. An allowance for loss on obsolescence and decline in market value
is provided when necessary.
Long-term investments
A. If the investee company is listed and the Company owns less than 20% of
the outstanding shares and has no significant influence on operational
decisions of the listed company, such investment is accounted for by the
lower of cost or market value method. The unrealized loss resulting from
the decline in market value of such investment is deducted from
stockholders' equity. The Company's investment in a company which is not
listed is accounted for under the cost method.
B. Investment income or loss from investments in both listed and unlisted
companies is accounted for under equity method provided that the Company
owns over 20% of the outstanding shares or has significant influence on
operational decisions of the listed and unlisted companies.
C. For long-term investments in which the Company owns more than 50% of the
subsidiary, consolidated financial statements are prepared, if the total
assets and the operating income of the subsidiary are less than 10% of the
respective nonconsolidated total assets and income of the Company, the
subsidiary's financial statements are not consolidated and instead are
accounted for using the equity method. Irrespective of the above test,
when the total combined assets or operating income of all such
nonconsolidated subsidiaries constitute more than 30% of the Company's
nonconsolidated total assets or income, then each individual subsidiary
with total assets or operating income greater than 3% of the Company's
respective nonconsolidated total assets and income is included in the
consolidation.
D. In evaluation of overseas long-term investment, the cumulative translation
adjustment derived form the investee's foreign currency financial
statements is treated as adjusted item of the Company's stockholders'
equity account.
Property, plant and equipment
A. Property, plant and equipment are stated at cost. Interest incurred on
loans used to finance the construction of property and plant is
capitalized and depreciated accordingly.
~8~
<PAGE>
B. Depreciation is provided on the straight-line method using the assets'
economic service lives. When the economic service lives are completed,
fixed assets which are still in use are depreciated based on the residual
value. The service lives of the fixed assets are five to ten years.
C. Maintenance and repairs are charged to expenses as incurred. Significant
renewals and improvements are treated as capital expenditures and are
depreciated accordingly.
Intangible assets
A. Technology knowhow was provided by a major shareholder as part of paid-in
capital. The asset is amortized over five years on the straight-line
method starting from the date of operation.
B. Royalties are stated at cost and amortized on a straight-line basis over
the contract period.
Deferred charges
Deferred charges are stated at cost and amortized on a straight-line basis
over the following years: software - 3 years; organization cost - 5 years.
Retirement plan
A. The Company has a non-contributory and funded defined benefit retirement
plan covering all its regular employees.
B. The net pension cost is computed based on an actuarial valuation in
accordance with the provision of FASB No. 18 of the R.O.C., which requires
consideration of cost components such as service cost, interest cost,
expected return on plan assets and amortization of net obligation at
transition.
Income tax
Income tax is provided based on accounting income after adjusting for
permanent differences. The provision for income tax includes deferred tax
resulting from items reported in different periods for tax and financial
reporting purposes and from investment tax credits. A valuation allowance is
provided for deferred tax asset to the extent that it is more likely than not
that the tax benefits will not be realized. Deferred tax assets or
liabilities are further classified into current or noncurrent items and are
presented in the financial statements as net balance. Over or under provision
of prior years' income tax liabilities are included in the current year's
income tax expense.
3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES
None.
4. CONTENTS OF SIGNIFICANT ACCOUNTS
~9~
<PAGE>
(1) CASH AND CASH EQUIVALENTS
December 31
---------------------------
1998 1997
---------- ----------
Cash:
Cash on hand $ 2,355 $ 1,817
Demand accounts 387,694 58,655
Checking accounts 169,402 16,607
Time deposits 6,054,016 5,342,348
---------- ----------
6,613,467 5,419,427
Cash equivalents:
Bonds with repurchase agreement 903,440 49,800
---------- ----------
$7,516,907 $5,469,227
========== ==========
(2) MARKETABLE SECURITIES
December 31
---------------------------
1998 1997
---------- ----------
Mutual funds $ 199,040 $ 251,393
Listed equity securities stocks 2,939,353 2,939,353
---------- ----------
$3,138,393 $3,190,746
========== ==========
(3) ACCOUNTS RECEIVABLE - NET
December 31
------------------------
1998 1997
--------- ---------
Accounts receivable -- third parties $ 863,417 $ 959,159
Less: Allowance for doubtful accounts (20,982) (21,839)
Allowance for sales returns and discounts (64,036) --
--------- ---------
$ 778,399 $ 937,320
========= =========
(4) INVENTORIES
December 31
------------------------
1997 1998
--------- ---------
Raw materials, supplies and spare parts $ 88,653 $ 226,426
Work in process 445,414 315,274
Finished goods 171,737 58,189
--------- ---------
705,804 599,889
Less: Allowance for loss on obsolescence (40,460) (88,403)
--------- ---------
$ 665,344 $ 511,486
========= =========
~10~
<PAGE>
<TABLE>
(5) LONG-TERM INVESTMENT
<CAPTION>
December 31,
--------------------------------------------------
1998 1997
------------------------ ------------------------
Percentage Percentage
Investee Company Amount of ownership Amount of ownership
---------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Investment accounted for under equity
method:
UMC-USA $106,006 20% $ -- --
Cumulative translation adjustment (247) --
-------- --------
Subtotal 105,759 --
-------- --------
Prepaid long-term investment:
Industrial Bank of Taiwan 250,000 --
SBIP Administration Recycle Co. 400 --
-------- --------
Subtotal 250,400 --
-------- --------
Grand total $356,159 $ --
======== ========
</TABLE>
<TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
<CAPTION>
December 31, 1998
------------------------------------------------------------
Accumulated
Cost depreciation Book value
------------ ------------ ------------
<S> <C> <C> <C>
Machinery and equipment $ 18,591,271 $ (4,387,198) $ 14,204,073
Transportation equipment 3,206 (1,122) 2,084
Furniture and fixtures 217,742 (53,978) 163,764
Leasehold improvements 10,966 (4,142) 6,824
Other equipment 40,974 (5,850) 35,124
Construction in progress and prepayments 967,065 -- 967,065
------------ ------------ ------------
$ 19,831,224 $ (4,452,290) $ 15,378,934
============ ============ ============
December 31, 1997
------------------------------------------------------------
Accumulated
Cost depreciation Book value
------------ ------------ ------------
Machinery and equipment $ 10,169,495 $ (1,915,540) $ 8,253,955
Transportation equipment 3,206 (587) 2,619
Furniture and fixtures 130,771 (24,341) 106,430
Leasehold improvements 10,966 (2,315) 8,651
Other equipment 14,270 (2,178) 12,092
Construction in progress and prepayments 2,460,306 -- 2,460,306
------------ ------------ ------------
$ 12,789,014 $ (1,944,961) $ 10,844,053
============ ============ ============
</TABLE>
Interest expense amounting to $118,745 and $24,321 were capitalized in 1998 and
1997, respectively.
~11~
<PAGE>
(7) SHORT-TERM LOANS
December 31
---------------------------------
1998 1997
------------- -------------
Unsecured loans $ 781,944 $ 1,911,632
============= =============
Annual interest rates 0.73% - 8.22% 1.25% - 7.66%
============= =============
(8) LONG-TERM LOANS
December 31
-------------------------------------
1998 1997
------------- -------------
Long-term loans $ 8,613,047 $ 5,847,269
Less: Current portion (1,571,458) (656,744)
------------- -------------
$ 7,041,589 $ 5,190,525
============= =============
Annual interest rates 1.25% - 7.60% 1.31% - 7.20%
============= =============
(9) RETIREMENT PLAN
A. All of the regular employees of the Company are covered by the pension
plan. Under the plan, the Company contributes an amount equal to 2% of
total wages on a monthly basis to the pension fund deposited in the Central
Trust of China. Pension benefits are generally based on service years (two
points per year for service years 15 years and below and one point per year
for service years over 15 years). Each employee is limited up to 45 points.
During 1998 and 1997, the Company recognized pension cost amounting to
$22,262 and $17,793, respectively. The balances of the Company's employees'
retirement fund in Central Trust of China was $18,068 and $9,270 at
December 31, 1998 and 1997, respectively.
B. Based on actuarial assumptions for the years of 1998 and 1997, both the
discount rate and expected rate of return on plan asset are 6.25% and 6.5%,
respectively and the rates of compensation increase are both 8%. The
unrecognized net obligation at transition is amortized equally over 15
years. The funded status of pension plan is listed as follows:
~12~
<PAGE>
December 31
----------------------
1998 1997
-------- --------
Vested benefit obligation $ -- $ --
Non-vested benefit obligation (11,417) (4,947)
-------- --------
Accumulated benefit obligation (11,417) (4,947)
Effect on projected salary increase (57,082) (25,388)
-------- --------
Projected benefit obligation (68,499) (30,335)
Market-related value of plan assets 18,068 8,638
-------- --------
Projected benefit obligation exceeds plan asset (50,431) (21,697)
Unrecognized net obligation at transition 260 281
Unrecognized pension gain or loss 26,647 11,360
-------- --------
Accrued pension liability $(23,524) $(10,056)
======== ========
(10) COMMON STOCK
A. As of December 31, 1998, the Company's authorized capital was $23,000,000,
representing 2,300,000 thousand shares, with par value of NT$10. The total
issued and outstanding capital at December 31, 1998 and 1997 were
$13,367,809 and $10,000,000, respectively.
B. Based on the resolution of the shareholders' meeting on May 26, 1998, the
Company issued new shares of 336,781 thousand shares from the
capitalization of retained earnings of $3,000,000 and employees' bonus of
$367,809. The Company has completed the amendment procedures for
registration.
(11) RETAINED EARNINGS
A. According to the Company's Articles of Incorporation, current year's
earnings, if any, shall be distributed in the following order:
(1) paying all taxes and dues;
(2) covering prior years' operating losses, if any;
(3) setting aside 10% of the remaining amount, after deducting (1) and
(2), as legal reserve;
(4) allocating not over 10% of the par value of common stocks as interest
of capital to common stockholders;
(5) allocating 1% of the remaining amount, after deducting (1), (2), (3)
and (4) above from the current year's earnings, as directors' and
supervisor's renumeration;
(6) allocating not below 10% of the remaining amount, after deducting (1),
(2), (3) and (4) above from the current year's earnings, as employees'
bonus; and
~13~
<PAGE>
(7) distributing the remaining amount in accordance with the resolution of
the board of directors and stockholders.
(12) INCOME TAX
A. Income tax receivable at December 31, 1998 and 1997 was derived as follows:
1998 1997
-------- --------
Income tax expense (benefit) $ 69,803 $(84,057)
Net effect of the change in deferred
income tax assets and liabilities (54,187) 89,634
Adjustment of prior year's income tax expense (3,101) --
Withholding income tax (34,994) (51,259)
Tax on interest which is subject to separate
withholding income tax (1,744) (242)
-------- --------
Income tax receivable (shown in other
current assets) $(24,223) $(45,924)
======== ========
B. Deferred income tax assets and liabilities as of December 31, 1998 and 1997
were as follows
December 31
---------------------------
1998 1997
----------- -----------
Deferred income tax assets -- current $ 43,335 $ 228,270
Deferred income tax liabilities -- current (4,271) --
----------- -----------
39,064 228,270
----------- -----------
Deferred income tax assets -- noncurrent 1,526,536 1,262,960
Deferred income tax liabilities -- noncurrent (470,012) (611,435)
Valuation allowance for deferred income
tax assets -- noncurrent (818,403) (548,423)
----------- -----------
238,121 103,102
----------- -----------
$ 277,185 $ 331,372
=========== ===========
<TABLE>
C. Components of deferred income tax assets and liabilities as of December 31,
1998 and 1997 were as follows:
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Amount Tax Effect Amount Tax Effect
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current items:
Temporary differences
Unrealized foreign exchange gain $ 195,322 $ 39,064 $ 1,141,350 $ 228,270
----------- ----------- ----------- -----------
Non-current items
Temporary differences
Depreciation (2,350,062) (470,012) (3,057,175) (611,435)
Amortization of technology knowhow, etc. 135,180 27,036 956,290 191,258
Investment tax credits -- 1,499,500 -- 1,071,702
Valuation allowance for deferred income
tax assets -- (818,403) -- (548,423)
----------- ----------- ----------- -----------
$(2,214,882) 238,121 $(2,100,885) 103,102
=========== ----------- =========== -----------
$ 277,185 $ 331,372
=========== ===========
</TABLE>
~14~
<PAGE>
D. The Company's income tax return for 1996 has been assessed and approved by
the Tax Authority.
E. Pursuant to the "Statute For The Establishment and Administration of
Science-Based Industrial Park", the Company was granted several periods of
tax holidays with respect to income derived from approved investments. The
tax holidays will be expired on December, 2001.
F. As of December 31, 1998, the unused investment tax credits amounting to
$1,499,500 resulting from the acquisition of equipment and expenditures on
research and development will expire on December 31, 2002.
G. As of December 31, 1998, the Company's deductible credit account balance
for shareholders' income tax is $36,733. The ending balance of
unappropriated earnings amounting to $4,022,045, of which $3,748,549 came
from the year of 1998 and $273,496 came from and before the years of 1997.
The estimated ratio of deductible tax credit for the appropriation of
1998's earnings is 0.33%.
(13) EARNINGS PER SHARE
1998 1997
----------- -----------
Net income $ 3,748,549 $ 4,030,215
=========== ===========
Weighted average outstanding common stock
(Expressed in thousand shares) 1,336,781 1,000,000
=========== ===========
Retroactively adjusted weighted average
outstanding common stock
(Expressed in thousand shares) 1,336,781 1,336,781
=========== ===========
Earnings per share (Expressed in
New Taiwan dollars) $ 2.80 $ 4.03
=========== ===========
Retroactively adjusted weighted average
earnings per share $ 2.80 $ 3.01
=========== ===========
5. RELATED PARTY TRANSACTION
(1) Names and Relationships of Related Parties
Name of the related parties The relationship with the Company
--------------------------- ---------------------------------
United Microelectronics Co., Ltd. (UMC) The major investor of the Company
United Integrated Circuits Corporation Common board chairman
United Silicon Incorporated Common board chairman
Utek Semiconductor Inc. Common board chairman
AMIC Technology, Incorporated The affiliate of UMC
Faraday Technology Corporation Common major investor
NOVATEK Microelectronics Corp. Common major investor
Integrated Technology Express Common major investor
MediaTek Incorporation Common major investor
Industrial Bank of Taiwan The Company is the promoter
Chiao Tung Bank The Company's chairman is a board
member of the Bank
S3 Inc. A director of the Company
S3 International Ltd. 100% investee of S3 Inc.
ALLIANCE Semiconductor Corp. (Alliance) A director of the Company
UMC-USA The investee of the Company
~15~
<PAGE>
(2) Significant Related Party Transactions
a. Sales
1998 1997
------------------------- -------------------------
Percentage Percentage
Amount of net sales Amount of net sales
---------- ------------ ---------- ------------
United Microelectronics
Co., Ltd. $1,562,443 13% $2,503,897 26%
United Integrated
Circuit Co., Ltd. 229,583 2% 302,866 3%
S3 International Ltd. 1,456,778 12% -- --
Alliance 271,453 2% -- --
Others 108,098 1% 425,071 4%
---------- ---------- ---------- ----------
$3,628,355 30% $3,231,834 33%
========== ========== ========== ==========
The above sales are dealt with in the ordinary course of business similar
to those with other companies. The actual collection period is appoximately
two months.
b. Purchases
1998 1997
--------------------- --------------------
Percentage Percentage
of net of net
Amount purchases Amount purchases
-------- --------- -------- ---------
United Microelectronics
Co., Ltd. $ 69,942 3% $ 15,912 2%
United Silicon Incorporated 17,115 1% -- --
United Integrated Circuit
Co., Ltd. 19,060 1% -- --
-------- -------- -------- --------
$106,117 5% $ 15,912 2%
======== ======== ======== ========
The above purchases are dealt with in the ordinary course of business
similar to those with other companies and are payable after two months from
the date of transaction entries.
c. Notes receivable
1998 1997
------------------- -------------------
Percentage Percentage
of notes of notes
Amount receivable Amount receivable
------ ---------- ------ ----------
United Microelectronics
Co., Ltd. $ -- -- $ 781 100%
AMIC Technology Incorporated 6,736 79% -- --
Faraday Technology Corporation 812 10% -- --
Integrated Technology Express 804 9% -- --
------ ------ ------ ------
8,352 98% $ 781 100%
====== ====== ====== ======
~16~
<PAGE>
<TABLE>
d. Accounts receivable
<CAPTION>
1998 1997
----------------------------- ------------------------------
Percentage Percentage
of accounts of accounts
Amount receivable Amount receivable
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
United Microelectronics Co., Ltd. $ 303,987 22% $ 218,633 11%
United Integrated Circuits Co., Ltd. -- -- 317,533 17%
S3 International Ltd. 140,624 10% 263,252 14%
Others 79,157 6% 148,453 8%
--------- --------- --------- ---------
523,768 38% 947,871 50%
Less: Allowance for doubtful accounts (4,541) -- (8,207) --
Allowance for sales returns and discounts (82,290) (6)% -- --
--------- --------- --------- ---------
$ 436,937 32% $ 939,664 50%
========= ========= ========= =========
</TABLE>
e. Notes payable
1998 1997
---------------- -------------------
Percentage Percentage
of notes of notes
Amount payable Amount payable
------ ------- ------ -------
United Microelectronics
Co., Ltd. $ -- -- $25,992 21%
====== == ======= =======
f. Accounts payable
1998 1997
------------------- -------------------
Percentage Percentage
of accounts of accounts
Amount payable Amount payable
------ ------- ------ -------
United Microelectronics
Co., Ltd. $20,776 4% $ 9,428 2%
United Integrated
Circuit Co., Ltd. 1,281 -- 12,057 2%
United Silicon
Incorporated 1,577 1% -- --
------- ------- ------- -------
$23,634 5% $21,485 4%
======= ======= ======= =======
~17~
<PAGE>
g. Accrued expenses
1998 1997
-------------------- --------------------
Percentage Percentage
of accrued of accrued
Amount expenses Amount expenses
-------- -------- -------- --------
United Microelectronics
Co., Ltd. $190,761 24% $ 77,387 13%
Others 197 -- -- --
-------- -------- -------- --------
$190,958 24% $ 77,387 13%
======== ======== ======== ========
h. Property transaction
1998: None.
1997: The Company sold one set of machinery and equipment to United
Integrated Circuit Co., Ltd. for $9,180. The gain on the transaction
was $40.
<TABLE>
i. Financing transaction -- Long-term loan
<CAPTION>
1998
-------------------------------------------------------------------------------------
The Highest Balance
----------------------
Chiao-Tung Bank Time Amount Ending Balance Interest Rate Interest Expense Paid
---- ------ -------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
February 1998 $ 720,144 $ 576,112 6.575% ~ 6.975% $ 44,824
========= ========= ========
1997
-------------------------------------------------------------------------------------
The Highest Balance
----------------------
Chiao-Tung Bank Time Amount Ending Balance Interest Rate Interest Expense Paid
---- ------ -------------- ------------- ---------------------
December 1997 $ 720,144 $ 720,144 6.575% $ 40,409
========= ========= ========
</TABLE>
<TABLE>
j. Other transactions
<CAPTION>
Related Parties Item 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
United Microelectronics Co., Ltd. Rental $ 201,211 $ 199,329
" Fab service charge 87,696 64,954
" Research & design
expense 168,420 76,992
" Technology
developing expense 145,911 --
" Management
allocation fee 69,915 --
--------- ---------
673,153 341,275
UMC-USA Commission 137,272 --
--------- ---------
$ 810,425 $ 341,275
========= =========
</TABLE>
~18~
<PAGE>
<TABLE>
6. ASSETS PLEDGED AS COLLATERAL
<CAPTION>
December 31
-------------------------------
1998 1997 Subject of collateral
------------ ----------- ---------------------
<S> <C> <C> <C>
Machinery and equipment $ 12,575,024 $ 6,272,029 Long-term loan
Deferred assets-software 53,690 -- Long-term loan
Time deposits 2,231 2,111 Guaranty for Customs Duties
------------ -----------
$ 12,630,945 $ 6,274,140
============ ===========
</TABLE>
7. COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company's unused letters of credit for import of machinery were
approximately USD25,510 thousand dollars, JPY3,516,992 thousand
dollars, and DEMl20 thousand dollars at December 31, 1998.
b. The Company has signed several contracts for the purchase of equipment
amounting to USD1,204,098 thousand dollars, TPY91,153,936 thousand
dollars, and DEM703 thousand dollars. As of December 31, 1998, the
amount of unrecorded outstanding obligations under these contracts are
USD1,101,281 thousand dollars, JPY77,117,921 thousand dollars, and
DEM120 thousand dollars.
c. On September 24, 1997, the Department of Commerce (DOC) of the United
States of America (USA) made a preliminary determination that Static
Random Access Memory (SRAM) manufactured in Taiwan are being sold at
less than fair market value, i.e. dumped prices. In March, 1998, the
DOC issued its final determination, setting the duty rate at 41.75%
for "all others" not named as direct participants in the investigation
(such as customers who used the Company to fabricate SRAM). Management
believes that this final ruling of the case will not have a material
adverse effect on the Company's financial position because the volume
of SRAM products exported by the Company to the USA is not
significant.
~19~
<PAGE>
d. On December 7, 1998, the International Trade Commission (ITC) of the
USA issued a statement to the DOC that there was a reasonable
indication that the U.S. industry is suffering a material injury as a
result of Dynamic Random Access Memory (DRAM), which are manufactured
in Taiwan and being sold at less than fair market value in the USA.
Based on the precedent set in the SRAM investigation described above,
the Company expects that foundry customers who were not participants
in the investigation will also be subject to the "all other" rate with
respect to DRAM. Management believes that the final outcome of the
investigation will not have a material adverse effect to the Company's
financial position because the Company's volume of export sales of
DRAM to the USA is not significant.
e. A number of third parties hold patents in the area of semiconductor
processing, and some have notified the Company demanding that the
Company obtain a license for various semiconductor fabrication
techniques and circuit designs. The third parties involved include
Texas Instruments, EMI, Intel, Chou H. Li, NEC, and Sanyo. Management
has indicated a willingness to obtain licenses wherever required and
necessary to continue its business.
8. COMPARATIVE FIGURES RECLASSIFICATION
Certain accounts in the 1997 financial statements have been reclassified to
conform with the presentation adopted for the 1998 financial statements.
~20~
