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 28, 1996
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 - 18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware 93-0835214
- - --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421
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(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 28, 1996 there were 22,679,343 shares of the Registrant's common
stock, $.01 par value, outstanding.
LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Nine Months Ended Dec. 28, 1996 and
Dec. 30, 1995 3
Consolidated Balance Sheet - Dec. 28, 1996
and March 30, 1996 4
Consolidated Statement of Cash Flows -
Nine Months Ended Dec. 28, 1996
and Dec. 30, 1995 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 17
Signatures 18
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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. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenue $51,015 $51,538 $147,821 $145,159
Costs and expenses:
Cost of products sold 20,967 21,343 60,800 60,302
Research and development 6,933 6,816 20,575 19,889
Selling, general and administrative 8,459 8,003 24,550 23,090
------- ------- -------- --------
Total costs and expenses 36,359 36,162 105,925 103,281
------- ------- -------- --------
Income from operations 14,656 15,376 41,896 41,878
Other income, net 2,304 1,514 6,502 3,446
------- ------- -------- --------
Income before provision for income
taxes 16,960 16,890 48,398 45,324
Provision for income taxes 5,682 5,827 16,212 15,637
------- ------- -------- --------
Net income $11,278 $11,063 $32,186 $29,687
------- ------- -------- --------
------- ------- -------- --------
Net income per share $ 0.49 $ 0.52 $ 1.41 $ 1.45
------- ------- -------- --------
------- ------- -------- --------
Weighted average common and
common equivalent shares
outstanding 23,073 21,409 22,777 20,513
------- ------- -------- --------
------- ------- -------- --------
See accompanying Notes to Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
Assets Dec. 28, March 30,
1996 1996
----------- -----------
Current assets: (unaudited)
Cash and cash equivalents $ 59,756 $ 54,600
Short-term investments 183,506 160,570
Accounts receivable 22,850 22,884
Inventories 28,748 21,761
Prepaid expenses and other current assets 21,608 19,301
Deferred income taxes 12,700 9,700
----------- -----------
Total current assets 329,168 288,816
Wafer supply advance 0 14,507
Property and equipment, net 27,908 25,471
Foundry investment and other assets 22,485 14,141
----------- -----------
$379,561 $342,935
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $22,105 $22,471
Deferred income on sales to
distributors 14,810 16,896
Income taxes payable 388 4,800
----------- -----------
Total current liabilities 37,303 44,167
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, 22,679,343 and
22,123,069 shares issued and outstanding 227 221
Paid-in capital 193,255 181,957
Retained earnings 148,776 116,590
----------- -----------
Total stockholders' equity 342,258 298,768
----------- -----------
$379,561 $342,935
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
-------------------------
Dec. 28, Dec. 30,
1996 1995
---------- ---------
Cash flows from operating activities:
Net income $32,186 $29,687
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,319 5,280
Changes in assets and liabilities:
Accounts receivable 34 (5,430)
Inventories (6,987) (8,856)
Prepaid expenses and other assets (9,173) (109)
Wafer supply advance 13,028 7,853
Deferred income taxes (3,000) (2,073)
Accounts payable and other accrued
expenses (366) 3,301
Income taxes payable (4,412) 1,033
Deferred income (2,086) 5,099
---------- --------
Total adjustments (6,643) 6,098
---------- --------
Net cash provided by operating activities 25,543 35,785
---------- --------
Cash flows from investing activities:
Purchase of short-term investments, net (22,936) (44,497)
Capital expenditures (8,755) (9,894)
Proceeds from sale of equipment -- 21
---------- --------
Net cash used by investing activities (31,691) (54,370)
---------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock 11,304 97,295
---------- --------
Net cash provided by financing activities 11,304 97,295
---------- --------
Net increase in cash and cash equivalents 5,156 78,710
Beginning cash and cash equivalents 54,600 7,697
---------- --------
Ending cash and cash equivalents $59,756 $86,407
---------- --------
---------- --------
See accompanying Notes to Consolidated Financial Statements.
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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 March 30, 1996.
The Company reports on a 52 or 53 week fiscal year, which ends 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 Semiconductor Asia Ltd., Lattice Semiconductor International Ltd.
and Lattice UK Limited. The assets, liabilities and results of operations
of the subsidiaries were not material for the periods presented. 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
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 costs relating to distributor
sales are deferred until the product is sold by the distributor and the
related revenue and costs are 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 period (using the treasury stock method). Common
stock equivalents consist of stock options and warrants to purchase common
stock.
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(4) Inventories (in thousands): Dec. 28, March 30,
1996 1996
------- ---------
Work in progress $19,722 $13,174
Finished goods 9,026 8,587
------- -------
$28,748 $21,761
------- -------
------- -------
(5) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
------ ------- -------- -----
Balances, March 30, 1996 $ 221 $181,957 $116,590 $ 298,768
Stock option exercises 6 11,296 -- 11,302
Other -- 2 -- 2
Net income for the
nine-month period -- -- 32,186 32,186
------ -------- -------- ----------
Balances, Dec. 28, 1996 $ 227 $193,255 $148,776 $ 342,258
------ -------- -------- ----------
------ -------- -------- ----------
(6) Contingencies:
The Company is exposed to certain asserted and unasserted potential claims.
Patent and other proprietary rights infringement claims are common in the
semiconductor industry and the Company has received a letter from a
semiconductor manufacturer stating that it believes certain patents held by it
cover products previously sold by the Company. While the 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 be favorable to the Company. Management believes that the disposition of
these claims will not have a material adverse effect on the Company's financial
position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in the section
entitled "Factors Affecting Future Results" and elsewhere in this report.
RESULTS OF OPERATIONS
REVENUE
Revenue was $51.0 million and $51.5 million for the third quarters of fiscal
1997 and 1996, respectively. Revenue for the first nine month period of fiscal
1997 was $147.8 million, as compared to $145.2 million for the first nine month
period of fiscal 1996. The majority of the Company's revenue prior to fiscal
1997 was derived from sales of GAL-Registered Trademark- (Generic Array Logic)
products, which address the low-density segment of the CMOS programmable logic
market. The majority of the Company's revenue growth for the nine month period
of fiscal 1997 as compared to nine month period of fiscal 1996 resulted from the
sales of new products, primarily in the high-density segment of the PLD market.
Increases in the sales of the Company's high-density products have been
significant and have grown consistently as a percentage of the Company's overall
revenue. For the first nine month period of fiscal 1997, revenue from the sale
of high-density products made up the majority of the Company's overall revenue.
Revenue from international sales was 48% and 47% of total revenue in the third
quarter and the first nine month period of fiscal 1997, respectively, as
compared to 48% and 49% in the third quarter and the first nine month period of
fiscal 1996. The Company expects export sales to continue to represent a
significant portion of revenue. See "Factors Affecting Future Results".
Overall average selling prices increased in the third quarter and the first nine
month period of fiscal 1997 as compared to the third quarter and the first nine
month period of fiscal 1996. This was due primarily to a higher proportion of
high-density products included in the revenue mix. 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 generate
revenue growth and increase market penetration is in large part dependent on the
continued development, introduction and market acceptance of new products. See
"Factors Affecting Future Results".
GROSS MARGIN
The Company's gross margin as a percentage of revenue was 58.9% in the third
quarter of fiscal 1997 as compared to 58.6% in the third quarter of fiscal 1996.
For the first nine month period of fiscal 1997, the gross
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margin was 58.9%, an increase from 58.5% in the first nine month period of
fiscal 1996. This increase in gross margin percentage was primarily due to
reductions in the Company's manufacturing costs. Profit margins on older
products generally 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.
RESEARCH AND DEVELOPMENT
Research and development expense increased by approximately $117,000, or 2%, in
the third quarter of fiscal 1997 when compared to the third quarter of fiscal
1996, and increased $686,000, or 3%, in the first nine month period of fiscal
1997 when compared to the first nine month period of fiscal 1996. This expense
represented between 13% and 14% of revenue for all periods. The spending
increases were related primarily to the development of new technologies and new
products, including the Company's high-density product families and related
software development tools. The Company believes that a continued commitment to
research and development is essential in order to maintain product leadership in
its existing product families and to provide innovative new product offerings,
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 approximately $456,000,
or 6%, in the third quarter of fiscal 1997 when compared to the third quarter of
fiscal 1996, and increased by $1.46 million, or 6%, in the first nine months of
fiscal 1997 when compared to the first nine months of fiscal 1996. This
increase was primarily due to expansion of the Company's sales force and higher
sales commissions associated with the higher revenue levels. Selling, general
and administrative expense increased to approximately 17% of revenue in the
fiscal 1997 periods from approximately 16% of revenue in the fiscal 1996
periods.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) increased to approximately $2.30
million for the third quarter of fiscal 1997 from approximately $1.51 million
for the third quarter of fiscal 1996, and to $6.50 million for the first nine
month period of fiscal 1997 from $3.45 million for the first nine month period
of fiscal 1996. This was due to higher cash and investment balances resulting
from cash generated from operations and the Company's follow-on public offering
of common stock in November 1995.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.5% for the third quarter and the first
nine month period of fiscal 1997 as compared to 34.5% for the third quarter and
first nine month period of fiscal 1996. This decrease is due primarily to a
higher amount of non-taxable investment income associated with the higher cash
and investment balances as discussed above.
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Deferred tax asset valuation allowances are recorded to offset deferred tax
assets that can only be realized by earning taxable income in distant future
years. Management established the valuation allowances because it cannot
determine if it is more likely than not that such income will be earned.
FACTORS AFFECTING FUTURE RESULTS
The Company believes that its future operating results will be subject to
quarterly variations based upon a wide variety of factors, including the
cyclical nature of both the semiconductor industry and the markets addressed by
the Company's products, the timing of new product introductions, price erosion,
product obsolescence, substantial adverse currency exchange rate movements,
variations in product mix, scheduling, rescheduling and cancellation of large
orders, competitive factors, the availability of manufacturing capacity, the
ability to develop and implement new process technologies, fluctuations in
manufacturing yields, changes in effective tax rates and litigation expenses.
Due to these and other factors, the Company's past results are a less useful
predictor of future results than is the case in more mature and stable
industries. The Company has over time increased its level of operating expenses
and investment in manufacturing capacity in anticipation of future growth in
revenues. To the extent that this revenue growth does not materialize, the
Company's operating results would be adversely affected.
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 accelerated erosion of
average selling prices. The Company's rate of growth in recent periods has been
impacted by the cyclicality of the semiconductor industry. Any material
imbalance in industry-wide production capacity relative to demand, shift in
industry capacity toward products competitive with the Company's products,
reduced demand or reduced growth in demand or other factors could result in a
decline in the demand for or the prices of the Company's products and could have
a material adverse effect on the Company's operating results.
The market price of the Company's Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
shortfalls in revenues or earnings from levels expected by securities analysts
and other factors such as announcements of technological innovations or new
products by the Company or by the Company's competitors, government regulations,
developments in patent or other proprietary rights, and developments in the
Company's relationships with parties to collaborative agreements. In addition,
the stock market has recently experienced significant price fluctuations. These
fluctuations at times have been unrelated to the operating performance of the
specific companies whose stocks are traded. Broad market fluctuations, as well
as economic conditions generally and in the semiconductor industry specifically,
could adversely affect the market price of the Company's Common Stock.
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The Company does not manufacture finished silicon wafers. Its products,
however, require wafers manufactured with state-of-the-art fabrication equipment
and techniques. Accordingly, the Company's strategy has been to maintain
relationships with large semiconductor manufacturers for the production of its
wafers. Substantially all of its silicon wafers are currently manufactured by
Seiko Epson Corporation ("Seiko Epson") in Japan and sold to the Company,
through Seiko Epson's affiliated U.S. distributor, S MOS Systems Inc. ("S MOS").
In connection with a series of agreements entered into in September 1995 with
United Microelectronics Corporation ("UMC") providing for the formation of a
separate Taiwanese company, United Integrated Circuits Corporation ("UICC"), for
the purpose of building and operating an advanced semiconductor manufacturing
facility in Taiwan, Republic of China, UMC began supplying the Company with
sub-micron production wafers in the third calendar quarter of 1996. A
significant interruption in supply from Seiko Epson through S MOS, or from UMC,
could have a material adverse effect on the Company's business.
Worldwide manufacturing capacity for silicon wafers is limited and inelastic.
Therefore, significant increases in demand or interruptions in supply could
adversely affect the Company. There can be no assurance that existing capacity
commitments will be sufficient to permit the Company to satisfy all of its
customers' demand in future periods. The Company negotiates wafer prices and
wafer supply commitments with its principal wafer suppliers on a periodic basis.
Moreover, wafer prices and commitments are subject to continuing review and
revision by the parties. However, there can be no assurance that Seiko Epson, S
MOS or UMC will not reduce their allocations of wafers or increase prices to the
Company in future periods. If any substantial reduction of supply or
substantial price increase were to occur, the Company's operating results could
be materially adversely affected.
The Company's wafer purchases from Seiko Epson are denominated in Japanese yen.
Historical fluctuations in the dollar/yen exchange rate have been significant.
There is no assurance that the value of the dollar with respect to the yen will
not experience substantial deterioration in the future. Any substantial
prolonged or permanent deterioration of dollar/yen exchange rates could have a
material adverse effect on the Company's results of operations.
The Company depends upon wafer suppliers to produce wafers with acceptable
yields and to deliver them to the Company in a timely manner. Substantially
all of the Company's revenues are derived from products based on
E(2)CMOS-Registered Trademark- process technology. Successful implementation
of the Company's proprietary E(2)CMOS process technology, UltraMOS-Registered
Trademark-, requires a high degree of coordination between the Company and
its wafer suppliers. The manufacture of high performance E(2)CMOS
semiconductor wafers is a complex process that requires a high degree of
technical skill, state-of-the-art equipment and effective cooperation between
the wafer supplier and the circuit designer to produce acceptable yields.
Minute impurities, errors in any step of the fabrication process, defects in
the masks used to print circuits on a wafer and other factors can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer
to be non-functional. As is common
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in the semiconductor industry, the Company has from time to time experienced
in the past and expects that it will experience in the future production
yield problems and delivery delays. Any prolonged inability to obtain
adequate yields or deliveries could adversely affect the Company's operating
results.
The Company expects that, as is customary in the semiconductor business, it will
in the future seek to convert its fabrication process technology to larger wafer
sizes, to smaller device geometries 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 could have a material adverse impact on the Company's operating
results. To a considerable extent, the Company's ability to execute its
strategies will depend upon its ability to maintain and enhance its advanced
process technologies. As the Company does not presently operate its own wafer
fabrication or process development facility, the Company depends upon silicon
wafer manufacturers to provide the facilities and support for its process
development. In light of this dependency and the intensely competitive nature
of the semiconductor industry, there is no assurance that either process
technology development or timely product introduction can be sustained in the
future.
In addition, other unanticipated changes in or disruptions of the Company's
wafer supply arrangements could reduce product availability, increase cost or
impair product quality and reliability. Many of the factors that could result
in such changes are beyond the Company's control. For example, a disruption of
operations at Seiko Epson's or UMC's manufacturing facilities as a result of a
work stoppage, fire, earthquake or other natural disaster, would cause delays in
shipments of the Company's products and would have a material adverse effect on
the Company's operating results.
The Company currently depends on foreign manufacturers -- Seiko Epson, a
Japanese company, and UMC, a Taiwanese company -- for the manufacture of all of
its finished silicon wafers, and anticipates depending on UICC, a Taiwanese
company, for the manufacture of a portion of its finished silicon wafers. In
addition, after wafer manufacturing is completed and each wafer is tested,
products are assembled by subcontractors in South Korea, the Philippines, Hong
Kong, the United States and Malaysia. Although the Company has not experienced
any interruption in supply from its subcontractors, the social and political
situations in these countries can be volatile, and any prolonged work stoppages
or other disruptions in the Company's ability to manufacture and assemble its
products would have a material adverse effect on the Company's results of
operations. Furthermore, economic risks, such as changes in currency exchange
rates, tax laws, tariffs, or freight rates, or interruptions in air
transportation, could have a material adverse effect on the Company's results of
operations.
Because of the rapid rate of technological change in the semiconductor industry,
the Company's success will ultimately depend in large part on its ability to
introduce new products on a timely basis that meet a market need at a
competitive price and with acceptable margins as well as enhancing the
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performance of its existing products. The success of new products, including
the Company's high-density product families, depends on a variety of factors,
including product selection, timely and efficient completion of product design,
timely and efficient implementation of manufacturing and assembly processes,
product performance, quality and reliability in the field and effective sales
and marketing. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both future demand and
the technology that will be available to supply that demand. New and enhanced
products are continually being introduced into the Company's markets by others,
and these products can be expected to affect the competitive environment in the
markets in which they are introduced. There is no assurance that the Company
will be successful in enhancing its existing products or in selecting,
developing, manufacturing, marketing and selling new products.
The semiconductor industry is intensely competitive and is characterized by
rapid technological change, sudden price fluctuations, general price erosion,
rapid rates of product obsolescence, periodic shortages of materials and
manufacturing capacity and variations in manufacturing costs and yields. The
Company's competitive position is affected by all of these factors and by
industry competition for effective sales and distribution channels. The
Company's existing and potential competitors range from established major
domestic and international semiconductor companies to emerging companies. Many
of the Company's competitors have substantially greater financial,
technological, manufacturing, marketing and sales resources than the Company.
The Company faces direct competition from companies that have developed or
licensed similar technology and from licensees of the Company's products and
technology. The Company also faces indirect competition from a wide variety of
semiconductor companies offering products and solutions based on alternative
technologies. Although to date the Company has not experienced significant
competition from companies located outside the United States, such companies may
become a more significant competitive factor in the future. As the Company and
its current competitors seek to expand their markets, competition may increase,
which could have an adverse effect on the Company's operating results.
Competitors' development of new technologies that have price/performance
characteristics superior to the Company's technologies could adversely affect
the Company's results of operations. There can be no assurance that the Company
will be able to develop and market new products successfully or that the
products introduced by others will not render the Company's products or
technologies non-competitive or obsolete. The Company expects that its markets
will become more competitive in the future.
In an effort to secure additional wafer supply, the Company may from time to
time consider various arrangements, including joint ventures with, minority
investments in, advanced purchase payments to, loans to or similar arrangements
with independent wafer manufacturers in exchange for committed production
capacity. Such arrangements are becoming common within the industry as
independent wafer manufacturers increasingly seek to require their customers to
share a portion of the cost of capital intensive wafer fabrication facilities.
The Company entered into an advanced production
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payment arrangement with Seiko Epson in 1994 pursuant to which it advanced a
total of $42 million to Seiko Epson. In September 1995, the Company entered
into an agreement with UMC to invest approximately $55 million for an
approximately 10% equity interest in a separate Taiwanese company (UICC)
providing for the formation of a joint venture with UMC and several other
companies for the purpose of building and operating an advanced semiconductor
manufacturing facility. To the extent the Company pursues any other such
transactions with Seiko Epson, UMC or any other wafer manufacturers, such
transactions could entail even greater levels of investment requiring the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that any such additional funding could be obtained
when needed or, if available, on terms acceptable to the Company.
The Company's success depends in part on its proprietary technology. While the
Company attempts to protect its proprietary technology through patents,
copyrights and trade secrets, it believes that its success will depend more upon
technological expertise, continued development of new products, and successful
market penetration of its silicon and software products. There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. The
Company currently has a number of United States and foreign patents and patent
applications. There can be no assurance that the claims allowed on any patents
held by the Company will be sufficiently broad to protect the Company's
technology, or that any patents will issue from any application pending or filed
by the Company. In addition, there can be no assurance 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 semiconductor industry is generally characterized by vigorous protection and
pursuit of intellectual property rights and positions, which have on occasion
resulted in protracted litigation that utilizes cash and management resources,
which can have a significant adverse effect on operating results. The Company
has received a letter from a semiconductor manufacturer stating that it believes
a number of its patents, related to product packaging, cover certain products
previously sold by the Company. While the manufacturer has offered to license
certain of such patents to the Company, there can be no assurance on this or any
other claim which may be made against the Company, that the Company could obtain
a license on terms or under conditions that would be favorable to the Company.
In addition, there can be no assurance that other intellectual property claims
will not be made against the Company in the future or that the Company will not
be prohibited from using the technologies subject to such claims or be required
to obtain licenses and make corresponding royalty payments for past or future
use.
International revenues accounted for 47% and 49% of the Company's revenues for
the first nine month periods of fiscal 1997 and fiscal 1996, respectively. The
Company believes that international revenues will continue to represent a
significant percentage of revenues. International revenues and operations may
be adversely affected by the imposition of
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governmental controls, export license requirements, restrictions on the
export of technology, political instability, trade restrictions, changes in
tariffs and difficulties in staffing and managing international operations.
The future success of the Company is dependent, in part, on its ability to
attract and retain highly qualified technical and management personnel,
particularly highly skilled engineers involved in new product, both silicon and
software, and process technology development. Competition for such personnel is
intense. There can be no assurance that the Company will be able to retain its
existing key technical and management personnel or attract additional qualified
employees in the future. The loss of key technical or management personnel
could delay product development cycles or otherwise have a material adverse
effect on the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 1996, the Company's principal source of liquidity was
$243.3 million of cash and short-term investments, an increase of approximately
$28.1 million from the balance of $ 215.2 million at March 30, 1996. This
increase was primarily the result of cash generated from operations. The
Company also has available an unsecured $10 million demand bank credit facility
with interest due on outstanding balances at a money market rate. This facility
has not been used.
Inventories increased by $7.0 million, or 32%, versus amounts recorded at
March 30, 1996 due to increased production based on wafer supply commitments
made in anticipation of future requirements. The wafer supply advance decreased
by approximately $14.5 million as compared to the balance at March 30, 1996 due
to the receipt of wafers under the Advance Production Payment agreement with
Seiko Epson. The remaining balance of wafers to be received pursuant to this
agreement are classified under "Prepaid expenses and other current assets".
Prepaid expenses and other current assets increased by $2.3 million, or 12%, as
compared to the balance at March 30, 1996 due primarily to an increase in the
current portion of prepaid wafers and the timing of interest receipts. Deferred
income on sales to distributors decreased approximately $2.1 million, or 12%,
reflecting lower inventory levels at the distributors. Income taxes payable
decreased by $4.4 million, or 92%, as compared to the balance at March 30, 1996
primarily due to the timing of tax deductions.
Substantially all of the Company's silicon wafer purchases are currently
denominated in Japanese yen. The Company maintains yen-denominated bank
accounts and bills its Japanese customers in yen. The yen bank deposits
utilized to hedge yen-denominated wafer purchases are accounted for as
identifiable hedges against specific and firm wafer purchases.
The Company entered into a series of agreements with UMC in September 1995
pursuant to which the Company has agreed to join UMC and several other companies
to form a separate Taiwanese company, UICC, for the purpose of building and
operating an advanced semiconductor manufacturing facility in
-15-
Taiwan, Republic of China. Under the terms of the agreements, the Company
will invest approximately $55 million, payable in three installments over two
and one-half years, for an approximately 10% equity interest in the
corporation and the right to receive a percentage of the facility's wafer
production at market prices. The timing of the payments is related to certain
milestones in the development of the advanced semiconductor manufacturing
facility. The first payment, in the amount of approximately $13.7 million,
was paid in January 1996, the second payment, in the amount of approximately
$25.9 million, was paid during January 1997, and the final payment is
anticipated to be required within the six month period ending December 1997.
The Company expects to finance the remaining payment from existing sources
and funds generated from operations. As a result of the remaining payment,
the Company's working capital will be reduced by approximately $15 million
over the time period including this payment.
The Company currently anticipates capital expenditures of approximately $12
to $15 million for the fiscal year ending March 29, 1997. A significant portion
of these expenditures is planned for improvements and expansions to the
Company's manufacturing capacity and facilities.
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 the next twelve months, including the anticipated
required payment to UICC during this period.
In an effort to secure additional wafer supply, the Company may from time
to time consider various financial arrangements including joint ventures with,
minority investments in, advance purchase payments to, loans to, or similar
arrangements with independent wafer manufacturers in exchange for committed
wafer capacity. To the extent the Company pursues any such additional financial
arrangements, additional debt or equity financing may be required. There can be
no assurance that any such additional funding could be obtained when needed or,
if available, on terms acceptable to the Company.
-16-
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 28, 1996
(b) No reports on Form 8-K were filed during the three months ended
December 28, 1996.
-17-
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 10, 1997 /s/ Rodney F. Sloss
------------------ -----------------------------------------
By: Rodney F. Sloss
Vice President, Finance (Principal
Accounting Officer)
-18-
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. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
--------- --------- -------- ---------
Net income $ 11,278 $ 11,063 $ 32,186 $ 29,687
--------- --------- -------- ---------
--------- --------- -------- ---------
Weighted average common stock and
common stock equivalents:
Common stock 22,501 20,765 22,342 19,789
Options and warrants 572 644 435 724
--------- --------- -------- ---------
23,073 21,409 22,777 20,513
--------- --------- -------- ---------
--------- --------- -------- ---------
Net income per share $ 0.49 $ 0.52 $ 1.41 $ 1.45
--------- --------- -------- ---------
--------- --------- -------- ---------
-19-
5
1,000
9-MOS
MAR-29-1997
MAR-31-1996
DEC-28-1996
59,756
183,506
22,850
856
28,748
329,168
65,556
37,648
379,561
37,303
0
0
0
227
342,031
379,561
147,821
147,821
60,800
105,925
0
0
(6,502)
48,398
16,212
32,186
0
0
0
32,186
1.41
1.41
