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 June 28, 1997
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
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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)
________________________________
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 June 28, 1997 there were 23,068,099 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 Months Ended June 28, 1997 and
June 29, 1996 3
Consolidated Balance Sheet - June 28, 1997
and March 29, 1997 4
Consolidated Statement of Cash Flows -
Three Months Ended June 28, 1997
and June 29, 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 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
---------------------
JUNE 28, JUNE 29,
1997 1996
-------- --------
Revenue $ 61,620 $ 48,168
Costs and expenses:
Cost of products sold 25,028 19,838
Research and development 7,825 6,754
Selling, general and administrative 9,824 7,897
-------- --------
Total costs and expenses 42,677 34,489
-------- --------
Income from operations 18,943 13,679
Other income, net 2,524 2,030
-------- --------
Income before provision for income taxes 21,467 15,709
Provision for income taxes 7,299 5,261
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Net income $ 14,168 $ 10,448
-------- --------
-------- --------
Net income per share $ 0.60 $ 0.46
-------- --------
-------- --------
Weighted average common and
common equivalent shares
outstanding 23,718 22,651
-------- --------
-------- --------
See accompanying Notes to Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
Assets JUNE 28, MARCH 29,
1997 1997
----------- ----------
Current assets: (unaudited)
Cash and cash equivalents $ 81,105 $ 53,949
Short-term investments 171,578 174,698
Accounts receivable 25,917 25,940
Inventories 24,679 27,809
Prepaid expenses and other current assets 13,523 16,519
Deferred income taxes 12,325 11,725
--------- ---------
Total current assets 329,127 310,640
Foundry investments, advances and other assets 65,419 65,419
Property and equipment, net 28,651 27,403
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$ 423,197 $ 403,462
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 21,050 $ 23,924
Deferred income on sales to
distributors 19,949 18,265
Income taxes payable 2,084 782
--------- ---------
Total current liabilities 43,083 42,971
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par value,
100,000,000 shares authorized, 23,068,099 and
22,877,724 shares issued and outstanding 231 229
Paid-in capital 204,120 198,667
Retained earnings 175,763 161,595
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Total stockholders' equity 380,114 360,491
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$ 423,197 $ 403,462
--------- ---------
--------- ---------
See accompanying Notes to Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
THREE MONTHS ENDED
-------------------
JUNE 28, JUNE 29,
1997 1996
--------- --------
Cash flows from operating activities:
Net income $ 14,168 $ 10,448
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,359 1,910
Changes in assets and liabilities:
Accounts receivable 23 6,546
Inventories 3,130 (5,247)
Prepaid expenses and other assets (749) (202)
Wafer supply advance 3,745 4,808
Deferred income taxes (600) (1,800)
Accounts payable and other accrued
expenses (2,874) 1,294
Income taxes payable 1,302 (3,092)
Deferred income 1,684 174
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Total adjustments 8,020 4,391
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Net cash provided by operating activities 22,188 14,839
-------- --------
Cash flows from investing activities:
Proceeds from (purchase of)short-term investments, net 3,120 (19,827)
Capital expenditures (3,607) (4,279)
-------- --------
Net cash used by investing activities (487) (24,106)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock 5,455 2,405
-------- --------
Net cash provided by financing activities 5,455 2,405
-------- --------
Net increase (decrease) in cash and cash equivalents 27,156 (6,862)
Beginning cash and cash equivalents 53,949 54,600
-------- --------
Ending cash and cash equivalents $ 81,105 $ 47,738
-------- --------
-------- --------
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 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.
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(4) Inventories (in thousands): June 28, March 29,
1997 1997
-------- ---------
Work in progress $16,298 $20,286
Finished goods 8,381 7,523
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$24,679 $27,809
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------- -------
(5) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
------- -------- --------- ----------
Balances, March 29, 1997 $ 229 $198,667 $161,595 $ 360,491
Stock option exercises 2 5,455 -- 5,457
Other -- (2) -- (2)
Net income for the
three-month period -- -- 14,168 14,168
----- -------- -------- ---------
Balances, June 28, 1997 $ 231 $204,120 $175,763 $ 380,114
----- -------- -------- ---------
----- -------- -------- ---------
(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 $61.6 million and $48.2 million for the first quarter of fiscal
1998 and 1997, respectively. The majority of the Company's revenue in both
fiscal quarters 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 49% and 47% of total revenue in the
first quarter of fiscal 1998 and 1997, respectively. 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 first quarter of fiscal 1998
as compared to the first quarter 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 59.4% in the first
quarter of fiscal 1998 as compared to 58.8% in the first quarter of fiscal
1997. This increase in gross margin percentage was primarily due to changes
in product mix and reductions in the Company's manufacturing costs.
RESEARCH AND DEVELOPMENT
Research and development expense increased by approximately $1.1 million, or
16%, in the first quarter of fiscal 1998 when compared to the first quarter
of fiscal 1997. As a percentage of revenue, this expense decreased from
approximately 14% in the first fiscal 1997 quarter to approximately
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13% in the first fiscal 1998 quarter. 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 $1.9
million, or 24%, in the first quarter of fiscal 1998 when compared to the
first quarter 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. Selling, general and administrative expense
approximated 16% of revenue for both fiscal periods presented.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) increased to approximately $2.5
million for the first quarter of fiscal 1998 from approximately $2.0 million
for the first quarter of fiscal 1997. This increase was due to higher cash
and investment balances resulting from cash generated from operations and
common stock issuance from employee stock option exercises.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.0% for the first quarter of fiscal
1998 as compared to 33.5% for the first quarter 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
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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.
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
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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.
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 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.
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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'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.
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
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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 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.
-13-
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 49% and 47% of the Company's revenues
for the first quarter 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 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.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 28, 1997, the Company's principal source of liquidity was
$252.7 million of cash and short-term investments, an increase of
approximately $24.0 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.
Inventories decreased by $3.1 million, or 11%, versus amounts recorded at
March 29, 1997 to support an increase in shipments associated with higher
revenue levels in the first quarter of fiscal 1998. Prepaid expenses and
other current assets decreased by $3.0 million, or 18%, as compared to the
balance at March 29, 1997 due primarily to a decrease in the current portion
of wafer supply advances. Accounts payable and accrued expenses decreased by
$2.9 million, or 12%, versus amounts recorded at March 29, 1997 due primarily
to the timing of vendor payments. Deferred income on sales to distributors
increased approximately $1.7 million, or 9%, associated with increased resale
activity at the distributors. Income taxes payable increased by $1.3 million,
or 166%, 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 is
committed to invest approximately $53 million, payable 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 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 $25.8 million, was
paid during January 1997, and the final payment is anticipated to be required
within the six-month period ending December 1997.
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
-15-
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. As a result of the future payments to UICC and Seiko Epson, the
Company's cash and short-term investments will be reduced by a minimum of
$86.5 million over the time period of the remaining payments.
The Company currently anticipates capital expenditures of approximately
$20 to $30 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 UICC and Seiko Epson during this time
period.
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.
-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 Three Months Ended
June 28, 1997
(b) No reports on Form 8-K were filed during the three months ended
June 28, 1997.
-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: August 11, 1997 /s/ STEPHEN A. SKAGGS
--------------------- --------------------------------------
By: Stephen A. Skaggs, Senior Vice
President, Chief Financial Officer and
Secretary
-18-
EXHIBIT 11.1
LATTICE SEMICONDUCTOR CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
------------------------
JUNE 28, JUNE 29,
1997 1996
--------- ---------
Net income $ 14,168 $ 10,448
--------- ---------
--------- ---------
Weighted average common stock and
common stock equivalents:
Common stock 22,996 22,193
Options and warrants 722 458
--------- ---------
23,718 22,651
--------- ---------
--------- ---------
Net income per share $ 0.60 $ 0.46
--------- ---------
--------- ---------
-19-
5
1,000
3-MOS
MAR-28-1997
MAR-30-1997
JUN-28-1997
81,105
171,578
25,917
824
24,679
329,127
70,270
(41,619)
423,197
43,083
0
0
0
231
379,883
423,197
61,620
61,620
25,028
42,677
0
(50)
0
21,467
7,299
14,168
0
0
0
14,168
0.60
0.60
