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 27, 1998
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)
________________________________
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 27, 1998 there were 23,518,291 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 27, 1998 and
June 28, 1997 3
Consolidated Balance Sheet - June 27, 1998
and March 28, 1998 4
Consolidated Statement of Cash Flows -
Three Months Ended June 27, 1998
and June 28, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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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 27, June 28,
1998 1997
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Revenue $48,028 $61,620
Costs and expenses:
Cost of products sold 19,109 25,028
Research and development 7,895 7,825
Selling, general and administrative 9,005 9,824
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Total costs and expenses 36,009 42,677
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Income from operations 12,019 18,943
Other income, net 2,523 2,524
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Income before provision for income taxes 14,542 21,467
Provision for income taxes 4,726 7,299
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Net income $9,816 $14,168
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Basic net income per share $0.42 $0.62
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Diluted net income per share $0.41 $0.60
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Shares used in per share calculations:
Basic net income 23,490 22,996
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Diluted net income 23,858 23,718
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See accompanying Notes to Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
Assets
June 27, March 28,
1998 1998
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Current assets: (unaudited)
Cash and cash equivalents $ 77,459 $ 60,344
Short-term investments 197,490 206,766
Accounts receivable 19,880 28,229
Inventories 22,998 22,647
Prepaid expenses and other current assets 5,430 5,572
Deferred income taxes 15,425 14,500
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Total current assets 338,682 338,058
Foundry investments, advances and other assets 114,340 114,338
Property and equipment, net 40,319 36,670
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$493,341 $489,066
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $24,953 $29,427
Deferred income on sales to
distributors 18,854 20,743
Income taxes payable 2,036 4,210
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Total current liabilities 45,843 54,380
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, 23,518,291 and
23,428,072 shares issued and outstanding 235 234
Paid-in capital 219,285 216,290
Retained earnings 227,978 218,162
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Total stockholders' equity 447,498 434,686
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$493,341 $489,066
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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)
Three Months Ended
-----------------------
June 27, June 28,
1998 1997
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Cash flows from operating activities:
Net income $ 9,816 $14,168
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,391 2,359
Changes in assets and liabilities:
Accounts receivable 8,349 23
Inventories (351) 3,130
Prepaid expenses and other assets 140 (749)
Wafer supply advance -- 3,745
Deferred income taxes (925) (600)
Accounts payable and accrued
expenses (4,474) (2,874)
Deferred income (1,889) 1,684
Income taxes payable (2,174) 1,302
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Total adjustments 1,067 8,020
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Net cash provided by operating activities 10,883 22,188
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Cash flows from investing activities:
Proceeds from short-term investments, net 9,276 3,120
Capital expenditures (6,040) (3,607)
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Net cash provided (used) by investing activities 3,236 (487)
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Cash flows from financing activities:
Net proceeds from issuance of common stock 4,230 5,455
Repurchase of common stock (1,234) --
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Net cash provided by financing activities 2,996 5,455
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Net increase in cash and cash equivalents 17,115 27,156
Beginning cash and cash equivalents 60,344 53,949
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Ending cash and cash equivalents $77,459 $81,105
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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 28, 1998.
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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A reconciliation of the numerators and denominators of basic and diluted
net income per share is presented below (in thousands, except per share
amounts):
Quarter Ended
-------------------------
June 27, June 28,
1998 1997
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Basic and diluted
net income $ 9,816 $14,168
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Shares used in basic
net income per share
calculations 23,490 22,996
Dilutive effect of
options and warrants 368 722
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Shares used in diluted
net income per share
calculations 23,858 23,718
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Basic net income per share $0.42 $0.62
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Diluted net income per share $0.41 $0.60
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(4) Inventories (in thousands):
June 27, March 28,
1998 1998
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Work in progress $11,654 $12,675
Finished goods 11,344 9,972
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$22,998 $22,647
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(5) Changes in Stockholders' Equity (in thousands):
Common Paid-in Retained
Stock Capital Earnings Total
------- -------- --------- --------
Balances, March 28, 1998 $ 234 $ 216,290 $ 218,162 $434,686
Stock option exercises 1 4,310 -- 4,311
Stock repurchases -- (1,234) -- (1,234)
Other comprehensive income -- (81) -- (81)
Net income for the
three-month period -- -- 9,816 9,816
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Balances, June 27, 1998 $ 235 $ 219,285 $ 227,978 $447,498
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(6) New Accounting Pronouncements:
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
Under SFAS 130, the Company is required to report comprehensive income
and its components in its consolidated financial statements in addition to
net income. For the Company, comprehensive income consists principally of
net income. However, it also consists of translation of net assets held in
foreign subsidiaries and other minor items. This portion of comprehensive
income is included in Note 5 as "Other comprehensive income".
Also in June 1997, the FASB issued SFAS 131, "Disclosure About Segments of
an Enterprise and Related Information". This pronouncement establishes
standards for the way companies report information about operating segments
for fiscal years beginning after December 15, 1997. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers.
The Company has adopted this pronouncement for the year ending April 3,
1999. Required disclosures, if any, will be reflected in the Company's year
end consolidated financial statements. It is anticipated that such
disclosures will not have a significant impact on the consolidated
financial statements.
(7) Contingencies:
Patent and other proprietary rights infringement claims are common in the
semiconductor industry. The Company is exposed to certain asserted and
unasserted potential claims. The Company has recently received a
notification of a claimed infringement of a portfolio of manufacturing
patents. While the Company has been offered a license, there can be no
assurance that, with respect to this or any other such claim made against
the Company, the Company could obtain a license on terms or under
conditions that would not have a material adverse effect on the Company.
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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 $48.0 million and $61.6 million for the first quarter of fiscal
1999 and 1998, respectively. The majority of the Company's revenue in the
fiscal periods presented was derived from the sale of products that address
the in-system programmable ("ISP-TM-") segment of the CMOS programmable logic
market, and which comprised approximately 71% and 60% of total revenue for
the first quarter of fiscal 1999 and 1998, respectively. Revenue in the first
quarter of fiscal 1999 was negatively impacted by a decline in demand in Asia
due to the continuing regional economic crisis, and a decline in demand in
the computing and communications end markets.
Revenue from international sales was 48% of total revenue in the first quarter
of fiscal 1999, as compared to 49% in the first quarter of fiscal 1998. 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 1999 as
compared to the first quarter of fiscal 1998. 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 60.2% in the first
quarter of fiscal 1999 as compared to 59.4% in the first quarter of fiscal 1998.
This increase in gross margin percentage was primarily due to changes in product
mix and reductions in the Company's manufacturing costs.
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RESEARCH AND DEVELOPMENT
Research and development expense was approximately flat in the first quarter of
fiscal 1999 when compared to the first quarter of fiscal 1998. As a percentage
of revenue, this expense increased to approximately 16% in the first quarter of
fiscal 1999 from approximately 13% in the first quarter of fiscal 1998. Spending
remained focused primarily on the development of 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 decreased by approximately $.8
million, or 8%, in the first quarter of fiscal 1999 when compared to the
first quarter of fiscal 1998. This decrease was primarily due to lower sales
commissions associated with the lower revenue levels. Selling, general and
administrative expense represented approximately 19% and 16% of revenue for
the first quarter of fiscal 1999 and 1998, respectively.
INTEREST AND OTHER INCOME
Interest and other income (net of expense) was approximately $2.5 million for
the first quarter of fiscal 1999 and 1998, respectively.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 32.5% for the first quarter of fiscal 1999
as compared to 34.0% for the first quarter of fiscal 1998. This decrease 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, general economic conditions in countries where the
Company's products are sold, price erosion, timing of new product introductions,
product obsolescence, scheduling, rescheduling and cancellation of large orders,
competitive factors, ability to develop and implement new process technologies,
fluctuations in manufacturing yields, ability to achieve volume production at
Seiko Epson's and UICC's new eight-inch wafer fabs, substantial adverse currency
exchange rate movements, availability of manufacturing capacity and wafer supply
and potential litigation expenses. Due to these and other factors, the
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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 in the past
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 will be adversely
affected.
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,
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 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.
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 and make improvements to its existing products on a
timely basis that meet a market need at a competitive price with acceptable
margins. The success of new products, including the Company's ISP 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.
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 proprietary software development
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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 impacted 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 effect
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.
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 development of new products,
both silicon and software, and process technology. 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 does not manufacture finished silicon wafers; however, its products
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 manufactured by either Seiko
Epson in Japan or UMC in Taiwan. A significant interruption in supply from Seiko
Epson, through S MOS, Seiko Epson's affiliated U.S. distributor, or from UMC
would have a material adverse effect on the Company's business.
The Company's finished silicon wafers are assembled and packaged by
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independent subcontractors located in Hong Kong, Malaysia, the Philippines,
South Korea, 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 stoppages or other failure of these
contractors to supply finished products could have a material adverse effect
on the Company's operating results.
International revenues accounted for 48% and 49% of the Company's revenues for
the first quarter of fiscal 1999 and 1998, respectively. The Company believes
that international revenues will continue to represent a significant percentage
of revenues. International revenues and operations may continue to be adversely
affected by regional economic conditions such as the current Asian economic
crisis, or may be 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 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 Hong Kong, Malaysia, the
Philippines, South Korea and Taiwan. Although the Company has yet not
experienced significant problems or 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 recession, exchange rate volatility,
changes in tax laws, tariffs, or freight rates, or interruptions in air
transportation, 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
process technology. Successful implementation of the Company's proprietary
E(2)CMOS process technology, UltraMOS, requires a high degree of coordination
between the Company and its wafer supplier. Therefore, significant lead time
is required to reach volume production at a new wafer supply location such as
Seiko Epson's or UICC's new eight-inch wafer fabs. Accordingly, there can be
no assurance that volume production at Seiko Epson's or UICC's new eight-inch
wafer fabs will be achieved in the near term or at all. 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.
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The Company depends upon assembly contractors to package and test its devices
with acceptable quality, yield and delivery schedules. The majority of the
Company's revenues are derived from products assembled in fine-pitched
packages. The assembly and testing of semiconductor devices in advanced
fine-pitch packages is a complex process that requires a high degree of
technical skill, state-of-the-art equipment and effective cooperation between
the assembly contractor and the device manufacturer to produce acceptable
quality and yields. Raw material impurities, errors in any step of the
assembly process, defects in lead frames used to attach devices to the
package and other factors can cause substantial problems in yield, quality
and reliability of packaged products. 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, such product problems and
delivery delays. Any prolonged inability to obtain adequate yields or
deliveries of quality products 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's wafer purchases from Seiko Epson are denominated in Japanese yen.
In the past, the dollar has experienced a substantial loss of 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.
Worldwide manufacturing capacity for silicon wafers is limited and inelastic.
Therefore, significant increases in demand or interruptions in supply could
adversely affect the Company. In the past, the Company has experienced delays in
obtaining wafers and capacity commitments. Although current commitments are
anticipated to be adequate through fiscal 1999,
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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 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. There can be
no assurance that intellectual property claims will not be made against the
Company in the future or that in the event of such a claim, the Company will be
able to obtain a license on terms or under conditions that would not have a
material adverse impact on the Company.
The Company is currently working to address the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's internal
computer systems, including its electronic interfaces to distributor, customer
and supplier systems. At present, the Company has completed an initial
assessment of its potential exposure. Based on this assessment, the Company
does not anticipate that resolution of potential internal Year 2000 issues will
have a material adverse impact on the Company's operating results. However,
there can be no assurance that the Company's computer systems or the systems of
the Company's major distributors, suppliers, customers or financial service
providers will completely address all internal Year 2000 issues in a timely
manner. In the event that Year 2000 issues create significant disruption in the
operations of the Company or any of the Company's major distributors, suppliers,
customers or financial service providers, the Company's operating results could
be materially adversely affected.
-15-
LIQUIDITY AND CAPITAL RESOURCES
As of June 27, 1998, the Company's principal source of liquidity was $274.9
million of cash and short-term investments, an increase of approximately $7.8
million from the balance of $267.1 million at March 28, 1998. 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.
Accounts receivable decreased by approximately $8.3 million, or 30%, versus
amounts recorded at March 28, 1998, reflecting decreased shipments associated
with lower revenue levels in the first quarter of fiscal 1999. Accounts payable
and accrued expenses decreased by approximately $4.5 million, or 15%, versus the
balances recorded at March 28, 1998 due to reduced spending associated with the
lower revenue levels. Deferred income on sales to distributors decreased
approximately $1.9 million, or 9%, associated with decreased resale activity at
the distributors. Income taxes payable decreased by $2.2 million, or 52%, as
compared to the balance at March 28, 1998 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 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 invested approximately
$49.7 million for an approximate 10% equity interest in UICC and the right to
receive a percentage of the facility's wafer production at market prices. In
October 1997, the UICC foundry was substantially destroyed by fire. UMC, the
majority owner of UICC, has informed the Company that this loss has been fully
covered by an insurance settlement and additional investment income and that it
has begun the process of rebuilding the foundry. Further, alternative foundry
capacity arrangements have been made available to the Company. 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 an advance payment production agreement
with Seiko Epson and its affiliated U.S. distributor, S MOS, under which it
agreed to advance approximately $86 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 fiscal 1997. During fiscal 1998, the Company made two additional payments
aggregating
-16-
approximately $34.2 million.
On June 12, 1998, the Company's Board of Directors authorized management to
repurchase up to 1.2 million shares of the Company's common stock. As of June
27, 1998, the Company had repurchased 45,000 shares at an aggregate cost of
approximately $1.2 million.
The Company currently anticipates capital expenditures of approximately $20 to
$25 million for the fiscal year ending April 3, 1999.
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 or assembly supply, the Company may from
time to time enter consider various financial arrangements including joint
ventures, equity investments, advance purchase payments, loans, or similar
arrangements with independent wafer or assembly manufacturers in exchange for
committed capacity. To the extent the Company pursues any such financial
additional 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 (1)
27 Financial Data Schedule for Three Months Ended
June 27, 1998
(b) No reports on Form 8-K were filed during the three months ended
June 27, 1998.
(1) Incorporated by reference to Note 3 to the
Consolidated Financial Statements in the
Company's report on Form 10-Q for the three
months ended June 27, 1998.
-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: August 11, 1998 /s/ Stephen A. Skaggs
-------------------- ----------------------------------------
By: Stephen A. Skaggs, Senior Vice
President, Chief Financial Officer and
Secretary
-19-
5
1,000
3-MOS
APR-03-1999
MAR-29-1998
JUN-27-1998
77,459
197,490
19,880
(815)
22,998
338,682
90,191
(49,872)
493,341
45,843
0
0
0
235
447,263
493,341
48,028
48,028
19,109
36,009
0
17
(2,523)
14,542
4,726
9,816
0
0
0
9,816
0.42
0.41
