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 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(Address of principal executive offices) (Zip Code)
(503) 681-0118
(Registrant's telephone number, including area code)
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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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At December 27, 1997 there were 23,370,785 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. 27, 1997 and
Dec. 28, 1996 3
Consolidated Balance Sheet - Dec. 27, 1997
and March 29, 1997 4
Consolidated Statement of Cash Flows -
Nine Months Ended Dec. 27, 1997
and Dec. 28, 1996 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 18
Signatures 19
-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
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Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
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Revenue $ 60,038 $ 51,015 $ 185,726 $ 147,821
Costs and expenses:
Cost of products sold 23,855 20,967 74,786 60,800
Research and development 7,983 6,933 23,824 20,575
Selling, general and administrative 10,184 8,459 30,258 24,550
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Total costs and expenses 42,022 36,359 128,868 105,925
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Income from operations 18,016 14,656 56,858 41,896
Other income, net 2,667 2,304 7,913 6,502
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Income before provision for income taxes 20,683 16,960 64,771 48,398
Provision for income taxes 7,032 5,682 22,022 16,212
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Net income $ 13,651 $ 11,278 $ 42,749 $ 32,186
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Net income per share (Basic) $ 0.58 $ 0.50 $ 1.84 $ 1.44
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Net income per share (Diluted) $ 0.57 $ 0.49 $ 1.79 $ 1.41
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Weighted average common and
common equivalent shares
outstanding:
Basic 23,342 22,501 23,186 22,342
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Diluted 23,981 23,073 23,888 22,777
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See accompanying Notes to Consolidated Financial Statements
-3-
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
Assets Dec. 27, March 29,
1997 1997
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Current assets: (unaudited)
Cash and cash equivalents $ 65,366 $ 53,949
Short-term investments 199,239 174,698
Accounts receivable 27,517 25,940
Inventories 23,017 27,809
Prepaid expenses and other current assets 6,563 16,519
Deferred income taxes 12,425 11,725
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Total current assets 334,127 310,640
Foundry investments, advances and other assets 97,212 65,419
Property and equipment, net 33,643 27,403
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$ 464,982 $ 403,462
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 25,205 $ 23,924
Deferred income on sales to
distributors 19,278 18,265
Income taxes payable 1,588 782
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Total current liabilities 46,071 42,971
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized, 23,370,785 and
22,877,724 shares issued and outstanding 234 229
Paid-in capital 214,333 198,667
Retained earnings 204,344 161,595
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Total stockholders' equity 418,911 360,491
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$ 464,982 $ 403,462
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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. 27, Dec. 28,
1997 1996
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Cash flows from operating activities:
Net income $ 42,749 $ 32,186
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,160 6,319
Changes in assets and liabilities:
Accounts receivable (1,577) 34
Inventories 4,792 (6,987)
Prepaid expenses and other assets (34,353) (9,173)
Wafer supply advance 12,516 13,028
Deferred income taxes (700) (3,000)
Accounts payable and accrued expenses 1,281 (366)
Deferred income 1,013 (2,086)
Income taxes payable 806 (4,412)
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Total adjustments (9,062) (6,643)
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Net cash provided by operating activities 33,687 25,543
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Cash flows from investing activities:
Purchase of short-term investments, net (24,541) (22,936)
Capital expenditures (13,400) (8,755)
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Net cash used by investing activities (37,941) (31,691)
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Cash flows from financing activities:
Net proceeds from issuance of stock 15,671 11,304
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Net cash provided by financing activities 15,671 11,304
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Net increase in cash and cash equivalents 11,417 5,156
Beginning cash and cash equivalents 53,949 54,600
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Ending cash and cash equivalents $ 65,366 $ 59,756
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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 March 29, 1997.
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.,
Lattice UK Limited and Lattice Semiconductor AB. 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.
-6-
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which is effective for the Company for periods
ending after December 15, 1997. Primary earnings per share as previously
reported has been replaced by net income per share (Basic) and net income
per share (Diluted). Prior period results have been restated to conform
to the new presentation.
The most significant difference between basic and diluted earnings per
share is that basic earnings per share does not treat potentially dilutive
securities such as options and warrants as outstanding.
For the Company, there is no difference between diluted earnings per share
and primary earnings per share as previously reported.
(4) Inventories (in thousands):
Dec. 27, March 29,
1997 1997
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Work in progress $13,832 $20,286
Finished goods 9,185 7,523
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$23,017 $27,809
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(5) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
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Balances, March 29, 1997 $ 229 $198,667 $161,595 360,491
Stock option exercises 5 15,714 -- 15,719
Other -- (48) -- (48)
Net income for the
nine-month period -- -- 42,749 42,749
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Balances, Dec. 27, 1997 $ 234 $214,333 $204,344 $418,911
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(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.
-7-
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 $60.0 million and $51.0 million for the third quarter of fiscal 1998
and 1997, respectively. Revenue for the first nine month period of fiscal 1998
was $185.7 million, as compared to $147.8 million for the first nine month
period of fiscal 1997. The majority of the Company's revenue in the 1998 fiscal
periods was derived from the sale of products that address the in-system
programmable ("ISP-TM-") segment of the CMOS programmable logic market. The
majority of the Company's revenue growth for the periods presented resulted from
the sales of new products, primarily ISP products. Increases in the sales of the
Company's ISP products have been significant and have grown consistently as a
percentage of the Company's overall revenue.
Revenue from international sales was 51% of total revenue in the third quarter
and first nine month period of fiscal 1998, respectively, as compared to 48% and
47% in the third quarter and first nine month period of fiscal 1997. Revenue for
the third quarter of fiscal 1998 was adversely impacted by the inability to ship
nearly $4 million in backlog due to the Korean financial crisis. 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 1998 as compared to the third quarter and the first nine
month period of fiscal 1997. This was due primarily to product mix changes.
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 maintain its recent trend of revenue growth 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 60.3% in the third
quarter of fiscal 1998 as compared to 58.9% in the third quarter of fiscal 1997.
For the first nine month period of fiscal 1998, the gross margin was 59.7%, an
increase from 58.9% in the first nine month period of fiscal 1997. These
increases in gross margin percentage were primarily due to changes in product
mix and reductions in the Company's manufacturing costs.
-8-
RESEARCH AND DEVELOPMENT
Research and development expense increased by approximately $1.1 million, or
15%, in the third quarter of fiscal 1998 when compared to the third quarter of
fiscal 1997, and increased approximately $3.2 million, or 16%, in the first nine
month period of fiscal 1998 when compared to the first nine month period of
fiscal 1997. As a percentage of revenue, this expense decreased to approximately
13% in the third quarter and the first nine month period of fiscal 1998 from
approximately 14% in the third quarter and the first nine month period of fiscal
1997. The spending increases were related primarily to the development of new
technologies and new products, including the Company's ISP 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 $1.7
million, or 20%, in the third quarter of fiscal 1998 when compared to the third
quarter of fiscal 1997, and increased by approximately $5.7 million, or 23%, in
the first nine month period of fiscal 1998 when compared to the first nine month
period of fiscal 1997. This increase was primarily due to expansion of the
Company's sales force and higher sales commissions associated with the higher
revenue levels. For all periods presented, selling, general and administrative
expense represented between 16% and 17% of revenue.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) increased to approximately $2.7
million for the third quarter of fiscal 1998 from approximately $2.3 million for
the third quarter of fiscal 1997, and to $7.9 million for the first nine month
period of fiscal 1998 from $6.5 million for the first nine month period of
fiscal 1997. This increase was due to higher cash and investment balances.
-9-
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.0% for the third quarter and the first
nine month period of fiscal 1998 as compared to 33.5% for the third quarter and
the first nine month period of fiscal 1997. This increase is due primarily to a
change in the proportion of tax-exempt investment income as a percentage of the
Company's overall net income.
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 end 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
and wafer supply, the ability to achieve volume production at Seiko Epson
Corporation's ("Seiko Epson") new eight-inch facility or United Integrated
Circuit Corporation ("UICC"), 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 increased its level of
operating expenses and investment in manufacturing capacity in anticipation of
future growth in revenues, primarily from increased sales of its ISP products.
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
positively and negatively impacted by trends in 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.
-10-
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 can experience significant price fluctuations. These
fluctuations often are 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.
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. Currently, all of its silicon wafers are being manufactured by Seiko
Epson in Japan and United Microelectronics Corporation ("UMC") in Taiwan. A
significant interruption in supply from Seiko Epson through S MOS, Seiko Epson's
affiliated U.S. distributor, 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. Although current commitments are anticipated to be
adequate through fiscal 1998, 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
certain wafer supply commitments with Seiko Epson, S MOS and UMC on an annual
basis, and, in some cases as frequently as semiannually. Moreover, wafer prices
and commitments are subject to continuing review and revision by the parties.
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 or
that any such reduction in supply could be offset pursuant to arrangements with
alternate sources of supply. 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.
In the past, the dollar has lost substantial value with respect to the yen.
There is no assurance that the value of the dollar with respect to the yen will
not again experience substantial deterioration. Any substantial continued
deterioration of dollar-yen exchange rates could have a material adverse effect
on the Company's results of operations.
-11-
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 E2CMOS-Registered
Trademark- process technology. Successful implementation of the Company's
proprietary E2CMOS process technology, UltraMOS-Registered Trademark-, requires
a high degree of coordination between the Company and its wafer suppliers. The
manufacture of high performance E2CMOS 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 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, could cause delays in
shipments of the Company's products and could have a material adverse effect on
the Company's operating results.
The Company's finished silicon wafers are assembled and packaged by independent
subcontractors in the Philippines, South Korea, Malaysia, Hong Kong, Taiwan and
the United States. Although the Company has not yet experienced significant
problems or interruptions in supply from its assembly contractors, any prolonged
work stoppage or other failure of these contractors to supply finished products
could have a material adverse effect on the Company's operating results.
-12-
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
performance of its existing products. The success of new products, including
the Company's ISP product families, depends on a variety of factors, including
product definition, 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 defining,
developing, manufacturing, marketing and selling new products.
Future revenue growth will be largely dependent on market acceptance of the
Company's new and proprietary products, including its ISP product families, and
market acceptance of the Company's software development tools. There can be no
assurance that the Company's product and process development efforts will be
successful or that new products, including the Company's ISP products, will
continue to achieve market acceptance. If the Company were unable to
successfully define, develop and introduce competitive new products in a timely
manner, its future operating results would be adversely affected.
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
-13-
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 enter various financial 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. To the extent the Company pursues any such financial
arrangements, the Company may be required to seek additional equity or debt
financing. 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.
-14-
International revenues accounted for approximately 51% and 47% of the Company's
revenues for the nine month periods of fiscal 1998 and fiscal 1997,
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 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.
The Company currently depends on foreign manufacturers -- Seiko Epson, a
Japanese company, and UMC, a Taiwanese company -- for the manufacture of all
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,
Malaysia, Taiwan and Hong Kong. Although the Company has not experienced any
interruption in supply from its subcontractors, the social, economic 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 27, 1997, the Company's principal source of liquidity was
$264.6 million of cash and short-term investments, an increase of approximately
$36.0 million from the balance of $228.6 million at March 29, 1997. This
increase was primarily the result of cash generated from operations and common
stock issuance from employee stock option exercises. 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.
-15-
Inventories decreased by approximately $4.8 million, or 17%, versus amounts
recorded at March 29, 1997 to support an increase in shipments associated with
higher revenue levels in the first nine month period of fiscal 1998. Prepaid
expenses and other current assets decreased by approximately $10.0 million, or
60%, as compared to the balance at March 29, 1997 due primarily to a decrease in
the current portion of wafer supply advances. Deferred income on sales to
distributors increased approximately $1.0 million, or 6%, associated with
increased resale activity at the distributors. Income taxes payable increased by
$0.8 million, or 103%, as compared to the balance at March 29, 1997 primarily
due to the timing of tax deductions and payments.
The majority 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 Taiwan, Republic
of China. Under the terms of the agreements, the Company has invested
approximately $49.7 million, paid in three installments over two years, for
approximately a 10% equity interest in UICC and the right to receive a
percentage of the facility's wafer production at market prices. The first
payment, in the amount of approximately $13.7 million, was paid in January 1996,
the second payment, in the amount of approximately $25.8 million, was paid
during January 1997, and the final payment of approximately $10.2 million was
made in December 1997.
In October 1997, the above joint venture foundry was substantially
destroyed by fire. UMC, the majority owner of UICC, has informed the Company
that this loss is fully insured and that it intends to rebuild the foundry.
Further, alternative foundry capacity arrangements are being made available to
the Company during the rebuilding period. Based on these assurances from UMC,
management believes the Company will not be materially adversely effected by
this event.
In March 1997, the Company entered into a second advance payment production
agreement with Seiko Epson and its affiliated U.S. distributor, S MOS, under
which it agreed to advance approximately $90 million, payable over two years, to
Seiko Epson to finance construction of an eight-inch sub-micron wafer
manufacturing facility. Under the terms of the agreement, the advance is to be
repaid with semiconductor wafers over a multi-year period. The agreement calls
for wafers to be supplied by Seiko Epson through S MOS pursuant to purchase
agreements with S MOS. The Company also has an option under this agreement to
advance Seiko Epson an additional $60 million for additional wafer supply under
similar terms. The first payment pursuant to this agreement, approximately $17.0
million, was made during March 1997, and the second payment, also approximating
$17.0 million, was made in September 1997. As a result of the future payments to
Seiko Epson, the Company's cash and short-term investments will be reduced by
approximately $56 million over the time period of the remaining payments.
-16-
The Company currently anticipates capital expenditures of approximately $18
to $22 million for the fiscal year ending March 28, 1998. A significant portion
is planned for improvements and expansions to the Company's facilities and
manufacturing capacity.
The Company believes its existing sources of liquidity and expected cash 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 payments to Seiko Epson.
In an effort to secure additional wafer supply, the Company may from time
to time enter 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 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.
-17-
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 27, 1997
(b) No reports on Form 8-K were filed during the nine months ended
December 27, 1997.
-18-
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, 1998 /s/ Stephen A. Skaggs
-------------------- ------------------------------------
By: Stephen A. Skaggs, Senior Vice
President, Chief Financial Officer and
Secretary
-19-
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. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
-------- -------- -------- --------
Net income $ 13,651 $ 11,278 $ 42,749 $ 32,186
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding 23,342 22,501 23,186 22,342
-------- -------- -------- --------
Effect of dilutive securities:
Options and warrants 639 572 702 435
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding 23,981 23,073 23,888 22,777
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share (Basic) $ 0.58 $ 0.50 $ 1.84 $ 1.44
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share (Diluted) $ 0.57 $ 0.49 $ 1.79 $ 1.41
-------- -------- -------- --------
-------- -------- -------- --------
-20-
5
1,000
9-MOS
MAR-28-1998
MAR-30-1997
DEC-27-1997
65,366
199,239
27,517
858
23,017
334,127
79,920
46,277
464,982
46,071
0
0
0
234
418,677
464,982
185,726
185,726
74,786
128,868
0
0
(7,913)
64,771
22,022
42,749
0
0
0
42,749
1.84
1.79
