UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0 - 18032
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LATTICE SEMICONDUCTOR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 681-0118
----------------------------------------------------
(Registrant's telephone number, including area code)
________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At December 31, 1994, there were 18,686,680 shares of the Registrant's common
stock, $.01 par value, outstanding.
Page 1 of 15
LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended December 31, 1994
and January 1, 1994 3
Consolidated Balance Sheet - December 31, 1994
and April 2, 1994 4
Consolidated Statement of Cash Flows -
Nine Months Ended December 31, 1994 and
January 1, 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1994 1994 1994 1994
---------- --------- ---------- ---------
Revenue $36,288 $28,573 $103,765 $96,054
Costs and expenses:
Cost of products sold 14,810 12,070 42,226 40,820
Research and development 5,790 4,797 16,674 15,650
Selling, general and administrative 6,283 5,113 18,121 16,959
------- ------- -------- -------
Total costs and expenses 26,883 21,980 77,021 73,429
------- ------- -------- -------
Income from operations 9,405 6,593 26,744 22,625
Other income, net 895 668 2,297 1,939
------- ------- -------- -------
Income before provision for income taxes 10,300 7,261 29,041 24,564
Provision for income taxes 3,450 2,178 9,773 7,714
------- ------- -------- -------
Net income $ 6,850 $ 5,083 $ 19,268 $16,850
------- ------- -------- -------
------- ------- -------- -------
Net income per share $ 0.36 $ 0.27 $ 1.01 $ 0.89
------- ------- -------- -------
------- ------- -------- -------
Weighted average common and common
equivalent shares outstanding 19,134 18,918 19,091 18,950
------- ------- -------- -------
------- ------- -------- -------
See accompanying Notes to Consolidated Financial Statements.
3
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
Assets DECEMBER 31, APRIL 2,
1994 1994
----------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,677 $ 18,363
Short-term investments 81,719 75,239
Accounts receivable 14,053 11,661
Inventories 14,489 13,847
Prepaid expenses and other current assets 7,102 1,401
Deferred income taxes 5,446 5,521
-------- --------
Total current assets 130,486 126,032
Wafer supply advance 27,644 --
Property and equipment, net 19,389 19,823
Other assets 474 238
-------- --------
$177,993 $146,093
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 18,339 $ 9,848
Deferred income on sales to distributors 8,878 7,086
Income taxes payable 3,608 4,091
-------- --------
Total current liabilities 30,825 21,025
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized; 18,686,680 and
18,411,035 shares issued and outstanding 187 184
Paid-in capital 79,873 77,044
Retained earnings 67,108 47,840
-------- --------
Total stockholders' equity 147,168 125,068
-------- --------
$177,993 $146,093
-------- --------
-------- --------
See accompanying Notes to Consolidated Financial Statements.
4
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
-----------------------
Dec. 31, Jan. 1,
1994 1994
---------- ---------
Cash flows from operating activities:
Net income $19,268 $16,850
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,464 4,280
Changes in assets and liabilities:
Accounts receivable (2,392) 1,946
Inventories (642) (2,998)
Prepaid expenses and other assets (5,937) (534)
Deferred income taxes 75 (1,475)
Accounts payable and other accrued expenses 8,491 (8,709)
Income taxes payable (483) 273
Deferred income 1,792 894
------- -------
Total adjustments 5,368 (6,323)
------- -------
Net cash provided by operating activities 24,636 10,527
------- -------
Cash flows from investing activities:
Wafer supply advance (27,644) --
Purchase of short-term investments (6,480) (12,894)
Capital expenditures (4,030) (6,231)
------- -------
Net cash used by investing activities (38,154) (19,125)
Cash flows from financing activities:
Net proceeds from issuance of stock 2,832 2,851
Payments of capital lease obligations -- (126)
------- -------
Net cash provided by financing activities 2,832 2,725
------- -------
Net decrease in cash and cash equivalents (10,686) (5,873)
Beginning cash and cash equivalents 18,363 10,755
------- -------
Ending cash and cash equivalents $ 7,677 $ 4,882
------- -------
------- -------
See accompanying Notes to Consolidated Financial Statements.
5
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements are unaudited and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management include
all adjustments, consisting only of normal recurring adjustments, necessary
for the fair statement of results for the interim periods. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year
ended April 2, 1994.
The Company reports on a 52 or 53 week fiscal year, ending on the Saturday
closest to March 31. The accompanying financial statements include the
accounts of Lattice Semiconductor Corporation and its wholly-owned
subsidiaries, Lattice Semiconducteurs SARL, Lattice GmbH, Lattice
Semiconductor KK, Lattice Semiconductor (Shanghai) Co. Ltd, Lattice UK
Limited, Lattice Semiconductor Asia Limited, and Lattice Semiconductor
International Limited. The operations of the subsidiaries have not been
significant in relation to the consolidated financial statements to date,
and all intercompany accounts and transactions have been eliminated. The
results of the interim period are not necessarily indicative of the results
for the entire year.
(2) Revenue Recognition
Revenue from sales to OEM (original equipment manufacturer) customers is
generally recognized upon shipment. Certain of the Company's sales are
made to distributors under agreements providing price protection and right
of return on unsold merchandise. Revenue and related costs on such sales
are deferred until the product is sold by the distributor and the
transaction is then reflected in income.
(3) Net Income Per Share
Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents assumed to be
outstanding during the periods (using the treasury stock method). Common
stock equivalents consist of stock options and warrants to purchase common
stock.
6
(4) Inventories (in thousands):
December 31, April 2,
1994 1994
------------ ----------
Work in progress $10,139 $ 9,984
Finished goods 4,350 3,863
------- -------
$14,489 $13,847
------- -------
------- -------
(5) Foreign Exchange
Substantially all of the Company's silicon wafer purchases are denominated
in Japanese yen. The Company maintains yen-denominated bank accounts to
limit its exposure to fluctuations in the yen/dollar exchange rate. These
bank deposits are accounted for as identifiable hedges against specific and
firm wafer purchases.
(6) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
------ ------- -------- --------
Balances, April 2, 1994 $ 184 $77,044 $ 47,840 $125,068
Stock option exercises 3 2,829 -- 2,832
Net income for the nine-month
period -- -- 19,268 19,268
------ ------- -------- --------
Balances, December 31, 1994 $ 187 $79,873 $ 67,108 $147,168
------ ------- -------- --------
------ ------- -------- --------
(7) Commitments and Contingencies
Patent and other proprietary rights infringement claims are common in the
semiconductor industry and the Company is exposed to both asserted and
unasserted claims. The Company has received a letter from a semiconductor
manufacturer stating that it believes certain patents held by it cover
products sold by the Company. While this manufacturer has offered to
license certain of such patents to the Company, there can be no assurance
that, on this or any other claim which may be made against the Company, the
Company could obtain a license on terms or under conditions that would not
have a material adverse effect on the Company. Management believes that
the disposition of this claim will not have a material adverse effect on
the Company's financial position or results of operations.
In July 1994, the Company signed an agreement with its principal wafer
supplier which calls for the Company to advance $44 million to the supplier
to be used in conjunction with the construction of additional wafer
fabrication capacity and technology development. $23 million and $10.5
million of this amount was paid during the quarters ended October 1, 1994
and December 31, 1994, respectively; the remaining $10.5 million
installment will be paid during the fourth fiscal quarter. The $44 million
advance will be repaid in the form of semiconductor wafers over a multi-
7
year period beginning this fiscal year. The balance sheet caption "Prepaid
expenses and other current assets" includes management's estimate of such
wafers to be received under the agreement during the twelve months
subsequent to December 31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
REVENUE
Revenue was $36.3 million in the third quarter of fiscal 1995, an increase of 27
percent over the third quarter of fiscal 1994. Revenue for the nine months
ended December 31, 1994 was $103.8 million, an increase of eight percent over
the prior year's comparable nine-month revenue. Substantially all of the
Company's revenue is derived from sales of programmable logic devices (PLDs).
These devices have been the source of most of the Company's revenue to date.
The Company entered the high density segment of the PLD market in fiscal 1993
with its pLSI-Registered Trademark- and ispLSI-Registered Trademark- product
families. The increase in revenue for the fiscal 1995 periods over the 1994
periods resulted primarily from the increased sales of new products, especially
high density products.
Revenue from export sales increased as a percentage of total revenue in the
third fiscal 1995 quarter compared to the third fiscal 1994 quarter, from 45
percent to 46 percent, and increased from 41 percent to 45 percent between the
two nine-month periods. The Company expects export sales to continue to
represent a significant portion of revenue. The Company's export sales are
subject to risks common to all export activities, including but not limited to
governmental regulation and possible imposition of tariffs and other trade
barriers.
Overall average selling prices for the Company's products remained relatively
constant between the fiscal 1994 nine-month period and the comparable fiscal
1995 nine-month period. Average selling prices declined slightly in the fiscal
1995 third quarter as compared to the prior year's third quarter. Although
selling prices of mature products generally decline over time, this decline is
at times offset by higher selling prices of new products. The Company's ability
to achieve future revenue growth and maintain overall selling prices is largely
dependent on the continued development, introduction and market acceptance of
new products.
GROSS MARGIN
The Company's gross margin was 59.2 percent in the third quarter of fiscal 1995,
up from 57.8 percent in the third quarter of fiscal 1994. For the 1995 nine-
month period, the gross margin was 59.3 percent, up from 57.5 percent a year
earlier. These increases were primarily due to improved capacity utilization
and reductions in the Company's manufacturing costs. Profit margins on older
products tend to decrease over time as selling prices decline, but the Company's
strategy has been to offset these decreases by continuously introducing new
products with higher margins.
8
The Company's gross margin percentage in future periods will be negatively
affected if the Company fails to execute its new product strategy, or if profit
contribution from new products is not sufficient to offset the anticipated
margin decline from older products.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased by $993,000, or 21 percent, from the
third quarter of fiscal 1994 to the third quarter of fiscal 1995, and by
$1,024,000, or seven percent between the two comparable nine-month periods. As
a percentage of revenue, research and development spending decreased slightly
between the two quarters, from 16.8 percent in the third quarter of fiscal 1994
to 16.0 percent in the third quarter of fiscal 1995, and remained relatively
constant between the two nine-month periods at just over 16 percent. The higher
spending level in the fiscal 1995 periods was related to the development of new
technologies and new products, including the Company's high density product
families and their related software development tools. The decrease in spending
as a percentage of revenue for the fiscal 1995 third quarter as compared to the
comparable prior year fiscal period is reflective of the higher revenue level in
the fiscal 1995 period. The Company believes that a continued commitment to
research and development is essential in order to maintain product leadership,
and therefore expects to continue to make significant investments in research
and development in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased by $1,170,000, or 23
percent, from the fiscal 1994 third quarter to the fiscal 1995 third quarter,
and by $1,162,000 or seven percent between the two nine-month periods. The
increased expense in the fiscal 1995 periods is primarily due to the expansion
of the Company's sales force and higher sales commissions related to the higher
revenue levels in the fiscal 1995 periods. Selling, general and administrative
expense as a percentage of revenue decreased from 17.9 percent in the fiscal
1994 quarter to 17.3 percent in the fiscal 1995 quarter, and decreased from 17.7
percent to 17.5 percent between the two nine-month periods.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) increased by $227,000 or
approximately 34 percent from the third quarter of fiscal 1994 to the third
quarter of fiscal 1995 and by $358,000 or 18 percent for the two comparable
nine-month periods. This was due to larger invested cash balances during fiscal
1995 and higher interest rates in the fiscal 1995 periods, particularly in the
fiscal 1995 third quarter.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 30 percent and approximately 31.4 percent
for the three and nine months ended January 1, 1994, respectively, and
approximately 33.5 percent and 33.7 percent, respectively, for the comparable
fiscal 1995 periods. This increase occurred primarily because both net
operating loss and tax credit carryforwards were available in the fiscal 1994
9
periods, while only the remaining tax credit carryforwards are available in
fiscal 1995.
The Company expects its effective tax rate in future years to be slightly higher
than the current rate due to the full utilization during fiscal 1995 of the
remaining tax credit carryforwards.
FACTORS AFFECTING FUTURE RESULTS
In the future, the Company's operating results may fluctuate as a result of a
number of factors, including but not limited to cancellations or delays of
orders, interruption or delays in the supply of raw materials, increases in the
cost of raw materials , interruption or delays in work performed by third party
contractors, changes in customer base or product mix, delays in purchase
decisions due to new product announcements by the Company or its competitors,
increased competition, reductions in average selling prices, the Company's
ability to obtain and defend competitive patents and other intellectual
property, and weak economic conditions, political instability or natural
disasters in foreign markets in which the Company distributes or manufactures
its products.
The Company's continued success will depend in large part on its ability to
introduce new products on a timely basis that achieve market acceptance, are
competitively priced and produce acceptable profit margins, and also on various
factors outside of the Company's control, such as the health and cyclical nature
of the semiconductor industry and the worldwide economy.
Due to its rapidly changing technology and competitive nature, the semiconductor
industry from time to time experiences depressed economic conditions. In
addition, the inherent volatility of the industry has produced and may continue
to produce fluctuations in the price of the stock of companies participating in
this industry, including the Company's common stock.
The Company's revenue and profitability to date are due primarily to sales of
the Company's GAL-Registered Trademark- products, many of which are second
sourced by other suppliers. Continued revenue growth will be largely dependent
on market acceptance of the Company's new and proprietary products, including
the Company's pLSI-Registered Trademark- and ispLSI-Registered Trademark-
product families and accompanying software development tools.
Significant Transactions
In July 1994, the Company entered into an advanced production payment agreement
with Seiko Epson Corporation ("Seiko") and S-MOS Systems, Inc. ("S-MOS"), a U.S.
affiliate of Seiko, which calls for advances by the Company to Seiko of $42
million to be used by Seiko to finance additional sub-micron semiconductor wafer
manufacturing capacity. The Company paid $21 million and $10.5 million,
respectively, of this amount during the quarters ended October 1 and December
31, 1994; the remaining $10.5 million installment is to be made during the
Company's current fiscal year. Under the terms of the agreement, the advances
are to be repaid in the form of advanced technology sub-micron semiconductor
wafers. Subject to certain conditions set forth in the agreement, Seiko has
10
agreed to supply, and the Company has agreed to receive, such wafers at a price
(in Japanese yen) and volume expected to achieve full repayment of the advance
over a three to four year period. In connection with the advanced production
payment agreement, the Company also paid Seiko $2 million for the development of
sub-micron process technology and the fabrication of engineering wafers to be
delivered over the same period.
The advanced production payment agreement calls for the wafers to be supplied by
Seiko through S-MOS, as U.S. distributor for Seiko, pursuant to a purchase
agreement concluded with S-MOS.
Most of the Company's wafer requirements are currently supplied by Seiko.
Daniel S. Hauer, a member of the Company's Board of Directors, is Chairman of
the Board of S-MOS. The Company also has a wafer supply agreement with
Chartered Semiconductor Pte. Ltd ("Chartered") in Singapore, although Chartered
is not currently supplying semiconductor wafers to the Company.
Due to the complexity of the manufacturing process and the extremely low defect
tolerances associated with the manufacture of complex integrated circuits, the
Company considers the relationship with its wafer suppliers to be critical to
its success. State-of-the-art semiconductor manufacturing processes are
sensitive to a wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the raw materials and the
performance of the personnel and equipment employed. To date, the Company has
not experienced any material difficulties or delays in the supply of wafers, but
there can be no assurance that the Company will not experience such difficulties
and delays in the future. Any prolonged inability to obtain adequate yields or
deliveries on any existing or new products could adversely affect the Company's
operating results. The Company also expects that, as is customary in the
semiconductor business, it will in the future seek to convert its fabrication
process arrangements to larger wafer sizes, to more advanced process
technologies, or to new or additional suppliers in order to maintain or enhance
its competitive position. Such conversions entail inherent technological risks
that could adversely affect yields and delivery times, and have material adverse
impact on the Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 1994, the Company's principal source of liquidity was $89.4
million of cash and short-term investments, a decrease of $4.2 million as
compared to the balance of $93.6 million at April 2, 1994. This balance
decreased primarily because the cash generated from operations was offset by the
advance payments made to Seiko (see "Significant Transactions" above).
Accounts receivable and deferred income on sales to distributors increased 21
percent and 25 percent, respectively, as compared to the balances at April 2,
1994. These increases are primarily due to the increase in revenue of 20
percent for the fiscal 1995 third quarter over the fiscal 1994 fourth quarter.
Accounts payable and accrued expenses increased 86 percent as compared to the
balance at April 2, 1994 due to increased expense activity related to the higher
revenue levels as well as timing of payments.
11
The decrease in income taxes payable of $483,000 at December 31, 1994 as
compared to April 2, 1994 is primarily related to the timing of quarterly tax
payments offsetting increased profitability in the fiscal 1995 periods.
Substantially all of the Company's silicon wafer purchases from Seiko are
denominated in Japanese yen. The Company maintains yen-denominated bank
accounts to mitigate its exposure to fluctuations in the yen/dollar exchange
rate. These bank deposits are accounted for as identifiable hedges against
specific and firm wafer purchases.
The Company currently anticipates capital expenditures of approximately $7
million to $8 million for the fiscal year ending April 1, 1995. A significant
portion of these expenditures is for improvements and expansions to the
company's manufacturing capacity and facilities.
In July 1994, the Company signed an agreement with its principal wafer supplier
which calls for the Company to advance $44 million to the supplier to be used in
conjunction with the construction of additional wafer fabrication capacity and
technology development. $33.5 million of this amount has been paid; the
remaining $10.5 million installment will be paid during the current fiscal
quarter. This advance will be repaid in the form of semiconductor wafers over a
multi-year period beginning this fiscal year (see "Significant Transactions"
above).
The Company believes its existing sources of liquidity and funds expected to be
generated from operations will provide adequate cash to fund the Company's
anticipated cash needs for at least the next 12 months.
12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of Net Income Per Share
27 Financial Data Schedule for Nine Months Ended
December 31, 1994
(b) No reports on Form 8-K were filed during the three months ended
December 31, 1994.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION
Date: February 9, 1995 Rodney F. Sloss
----------------------------------------
By: Rodney F. Sloss
Vice President, Finance
(Principal Financial and Accounting
Officer)
14
EXHIBIT 11.1
LATTICE SEMICONDUCTOR CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
--------------------- --------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1994 1994 1994 1994
--------- --------- --------- ---------
Net income $ 6,850 $ 5,083 $19,268 $16,850
------- ------- ------- -------
------- ------- ------- -------
Weighted average common stock and common stock equivalents:
Common stock 18,673 18,255 18,567 18,131
Options and warrants 461 663 524 819
------- ------- ------- -------
19,134 18,918 19,091 18,950
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ 0.36 $ 0.27 $ 1.01 $ 0.89
------- ------- ------- -------
------- ------- ------- -------
15
5
1,000
9-MOS
APR-01-1995
APR-03-1994
DEC-31-1994
7,677
81,719
14,053
726
14,489
130,486
42,833
23,444
177,993
30,825
0
187
0
0
146,981
177,993
103,765
103,765
42,226
77,021
0
0
(2,297)
29,041
9,773
19,268
0
0
0
19,268
1.01
1.01
