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 September 26, 1998
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
--- ---
At September 26, 1998 there were 23,430,849 shares of the Registrant's common
stock, $.01 par value, outstanding.
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LATTICE SEMICONDUCTOR CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Six Months Ended Sept. 26, 1998 and
Sept. 27, 1997 3
Consolidated Balance Sheet - Sept. 26, 1998
and March 28, 1998 4
Consolidated Statement of Cash Flows -
Six Months Ended Sept. 26, 1998
and Sept. 27, 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 4. Submission of Matters to a Vote of Security 19
Holders
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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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 Six Months Ended
-----------------------------------------------------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
-------------- -------------- --------------- --------------
Revenue $ 48,088 $ 64,068 $ 96,116 $ 125,688
Costs and expenses:
Cost of products sold 19,043 25,903 38,152 50,931
Research and development 7,920 8,016 15,815 15,841
Selling, general and administrative 9,005 10,250 18,010 20,074
-------------- -------------- --------------- --------------
Total costs and expenses 35,968 44,169 71,977 86,846
-------------- -------------- --------------- --------------
Income from operations 12,120 19,899 24,139 38,842
Other income, net 2,503 2,722 5,026 5,246
-------------- -------------- --------------- --------------
Income before provision for income taxes 14,623 22,621 29,165 44,088
Provision for income taxes 4,753 7,691 9,479 14,990
-------------- -------------- --------------- --------------
Net income $ 9,870 $ 14,930 $ 19,686 $ 29,098
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Basic net income per share $ 0.42 $ 0.64 $ 0.84 $ 1.26
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Diluted net income per share $ 0.42 $ 0.62 $ 0.83 $ 1.22
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Shares used in per share calculations:
Basic net income 23,518 23,216 23,496 23,111
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Diluted net income 23,614 23,982 23,737 23,860
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
See accompanying notes to consolidated financial statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
Assets Sept. 26, March 28,
1998 1998
---------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 90,227 $ 60,344
Short-term investments 196,845 206,766
Accounts receivable 18,866 28,229
Inventories 19,034 22,647
Prepaid expenses and other current assets 5,125 5,572
Deferred income taxes 15,450 14,500
---------------- -----------------
Total current assets 345,547 338,058
Foundry investments, advances and other assets 114,366 114,338
Property and equipment, net 42,625 36,670
---------------- -----------------
$ 502,538 $ 489,066
---------------- -----------------
---------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 29,429 $ 29,427
Deferred income on sales to
distributors 18,096 20,743
Income taxes payable 2,769 4,210
---------------- -----------------
Total current liabilities 50,294 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, 23,430,849 and
23,428,072 shares issued and outstanding 234 234
Paid-in capital 214,162 216,290
Retained earnings 237,848 218,162
---------------- -----------------
Total stockholders' equity 452,244 434,686
---------------- -----------------
$ 502,538 $ 489,066
---------------- -----------------
---------------- -----------------
See accompanying notes to consolidated financial statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
---------------------------------------
Sept. 26, Sept. 27,
1998 1997
-------------- --------------
Cash flows from operating activities:
Net income $ 19,686 $ 29,098
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,881 4,738
Changes in assets and liabilities:
Accounts receivable 9,363 188
Inventories 3,613 4,643
Prepaid expenses and other assets 419 (2,618)
Wafer supply advance -- (9,284)
Deferred income taxes (950) (625)
Accounts payable and accrued
expenses 2 84
Deferred income (2,647) 2,183
Income taxes payable (1,441) (505)
-------------- --------------
Total adjustments 13,240 (1,196)
-------------- --------------
Net cash provided by operating activities 32,926 27,902
-------------- --------------
Cash flows from investing activities:
Proceeds from short-term investments, net 9,921 (5,217)
Capital expenditures (10,836) (6,850)
-------------- --------------
Net cash used by investing activities (915) (12,067)
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 6,332 13,919
Repurchase of common stock (8,460) --
-------------- --------------
Net cash (used) provided by financing activities (2,128) 13,919
-------------- --------------
Net increase in cash and cash equivalents 29,883 29,754
Beginning cash and cash equivalents 60,344 53,949
-------------- --------------
Ending cash and cash equivalents $ 90,227 $ 83,703
-------------- --------------
-------------- --------------
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 such
distributor sales are deferred until the product is sold by such
distributors 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):
Three Months Six Months
Ended Ended
----- -----
Sept.26, Sept.27, Sept.26, Sept.27,
1998 1997 1998 1997
---- ---- ---- ----
Basic and diluted
net income $ 9,870 $14,930 $ 19,686 $29,098
------- ------- -------- -------
------- ------- -------- -------
Shares used in basic net income per
share calculations 23,518 23,216 23,496 23,111
Dilutive effect of options and warrants 96 766 241 749
------- ------- -------- -------
Shares used in diluted net income per share
calculations 23,614 23,982 23,737 23,860
------- ------- -------- -------
------- ------- -------- -------
Basic net income per share $0.42 $0.64 $0.84 $1.26
------- ------- -------- -------
------- ------- -------- -------
Diluted net income per share $0.42 $0.62 $0.83 $1.22
------- ------- -------- -------
------- ------- -------- -------
(4) Inventories (in thousands): Sept.26, March 28,
1998 1998
------- ------
Work in progress $10,188 $12,675
Finished goods 8,846 9,972
------- -------
$19,034 $22,647
------- -------
------- -------
(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 3 6,440 -- 6,443
Stock repurchases (3) (8,457) -- (8,460)
Other comprehensive income -- (111) -- (111)
Net income for the
six-month period -- -- 19,686 19,686
--------- --------- --------- ---------
Balances, Sept. 26, 1998 $ 234 $ 214,162 $ 237,848 $ 452,244
--------- --------- --------- ---------
--------- --------- --------- ---------
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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
notification of claimed infringements of certain patents. While the
Company has been offered licenses, there can be no assurance that, with
respect to these or any other such claims made against the Company, the
Company could obtain licenses 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 $48.1 million and $64.1 million for the second quarter of fiscal
1999 and 1998, respectively. Revenue for the first six month period of fiscal
1999 was $96.1 million, as compared to $125.7 million for the first six month
period of 1998. 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. Revenue
from these products comprised approximately 72% of total revenue for the second
quarter and first six month period of fiscal 1999, respectively, as compared to
62% and 61% in the second quarter and first six month period of fiscal 1998.
Revenue in the second quarter and first six month period of fiscal 1999 as
compared to the same fiscal periods in fiscal 1998 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 50% and 49% of total revenue in the second
quarter and first six month period of fiscal 1999, respectively, as compared to
53% and 51% in the second quarter and first six month period 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 second quarter and first six
month period of fiscal 1999 as compared to the second quarter and first six
month period 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 achieve 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 60.4% in the second
quarter of fiscal 1999 as compared to 59.6% in the second quarter of fiscal
1998. For the first six month period of fiscal 1999, the gross margin was 60.3%,
an increase from 59.5% in the first six month period of fiscal 1998. This
increase in gross margin percentages 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 second quarter
and first six month period of fiscal 1999 when compared to the second quarter
and first six month period of fiscal 1998. As a percentage of revenue, this
expense increased to approximately 16% in the second quarter and first six month
period of fiscal 1999 from approximately 13% in the second quarter and first six
month period 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 $1.2
million, or 12%, in the second quarter of fiscal 1999 when compared to the
second quarter of fiscal 1998, and decreased by $2.1 million, or 10%, in the
first six month period of fiscal 1999 when compared to the first six month
period 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
fiscal 1999 and 1998 periods, respectively.
OTHER INCOME, NET
Interest and other income (net of expense) was approximately flat in the second
quarter and first six month period of fiscal 1999, respectively, as compared to
the second quarter and first six month period of fiscal 1998 as higher cash
balances were offset by slightly lower yields on invested balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 32.5% for the second quarter and first six
month period of fiscal 1999 as compared to 34.0% for the second quarter and
first six month period 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
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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 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
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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
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
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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
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 49% and 51% of the Company's revenues
for the first six months 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 Asian 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 Asian 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
Asian subcontractors, the economic, financial, social and political situation
in Asia has recently been volatile. Specific financial difficulties,
prolonged work stoppages or other difficulties experienced by the Company's
subcontractors as a result of the conditions in Asia may disrupt the
Company's ability to manufacture and assemble its products and would have a
material adverse effect on the Company's results of operations. Furthermore,
general 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 E2CMOS semiconductor wafers is a complex process that
requires a high degree of technical skill, state-of-the-art
-13-
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 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.
The value of the dollar with respect to the yen has fluctuated in the past.
There is no assurance that the value of the dollar with respect to
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the yen will be stable in the future. Any substantial and prolonged
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, 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 information by the Company's computerized systems,
including interfaces to its business partners. The Company has established a
project team to manage Year 2000 activities and divided the project into
three phases: assessment, compliance and testing. At present, the Company is
generally in the compliance phase. The Company plans to be compliant by July
1999 and does not anticipate that resolution of Year 2000 issues will have a
material adverse impact on the Company's financial
-15-
position or operating results. Accordingly, the Company has not yet
established formal contingency plans. However, in the event the Company, or
any of its critical business partners is not successful in addressing Year
2000 issues on a timely basis, there could be a material adverse impact on
the Company's operating results. Status of the Company's Year 2000 effort by
area is as follows:
INTERNAL BUSINESS SOFTWARE AND SYSTEMS: The Company has completed an
inventory and assessment of its internal business software and systems,
including electronic business partner interfaces. At present, two main
compliance projects are ongoing. During 1998, as part of a business
modernization effort, the Company purchased an Enterprise Resource Planning
(ERP) package that the vendor has contractually stipulated to be Year 2000
compliant. Implementation of this ERP package is scheduled for the first half
of calendar 1999. The Company is also modifying its internally developed
inventory management system to achieve Year 2000 compliance. Modification of
the inventory management system is scheduled for completion during the first
half of calendar 1999. The total combined cost of these two projects is not
expected to exceed $2 million. Based on current schedules, the Company
expects its internal business software and systems to be in compliance before
the Year 2000. However, if due to unforeseen circumstances compliance
projects are not successful or are not completed on a timely basis, Year 2000
issues could have a material adverse impact on the Company's operating
results.
INTERNAL EQUIPMENT AND NON-BUSINESS SOFTWARE: The Company has completed an
inventory and assessment of its internal equipment and non-business software.
At present, the Company is working with suppliers of non-compliant equipment
and software in order to resolve identified Year 2000 issues. The cost of
this activity is not expected to be material. Based on current schedules, the
Company expects to complete this activity and achieve compliance of its
equipment and non-business software by the first half of calendar 1999.
However, if due to unforeseen circumstances this activity is not successful
or is not completed on a timely basis, Year 2000 issues could have a material
adverse impact on the Company's operating results.
BUSINESS PARTNER NON-COMPLIANCE: The Company has identified its critical
suppliers and is in the process of contacting them to ascertain the extent of
their Year 2000 readiness. At present, all critical suppliers have informally
assured the Company that they will be compliant prior to the Year 2000. In
the event that any of the Company's critical suppliers fail to adequately
address their Year 2000 exposure on a timely basis, and this exposure results
in a significant disruption in the operations of that supplier, there could
be a material adverse impact on the Company's operating results. The Company
plans to request formal compliance statements from critical suppliers prior
to July 1999. Based on the responses to this request, the Company will
develop supplier specific contingency plans at that time. Additionally, there
can be no assurance that the Company's customers, distributors, financial
service and utility providers will completely address all their Year 2000
issues on a timely basis. In the event that Year 2000 issues create
significant disruption in the operations of any of the Company's major
customers, distributors, financial service or utility providers, there could
be a material adverse impact on the Company's operating results.
-16-
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 1998, the Company's principal source of liquidity was
$287.1 million of cash and short-term investments, an increase of
approximately $20.0 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 $9.4 million, or 33%, versus
amounts recorded at March 28, 1998, reflecting decreased shipments associated
with lower revenue levels in the second quarter of fiscal 1999. Inventories
decreased by $3.6 million, or 16%, versus amounts recorded at March 28, 1998,
due to decreased production in response to lower revenue levels in the first
six months of fiscal 1999. Property and equipment, net, increased by
approximately $6.0 million, or 16%, versus amounts recorded at March 28,
1998, primarily due to construction in progress of additional corporate
facilities. Accounts payable and accrued expenses remained flat versus
balances recorded at March 28, 1998, as decreased inventory expenditures were
offset by the timing of payments for other expenses. Deferred income on sales
to distributors decreased approximately $2.6 million, or 13%, associated with
decreased inventory and resale levels at the distributors. Income taxes
payable decreased by $1.4 million, or 34%, 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.
-17-
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
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
September 26, 1998, the Company had repurchased 305,000 shares at an aggregate
cost of approximately $8.5 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 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.
-18-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on August 10,
1998.
(b) The following directors were elected at the meeting to
serve a term of three years:
Mark O. Hatfield
Cyrus Y. Tsui
The following directors are continuing to serve their terms:
Daniel S. Hauer
Harry A. Merlo
Larry W. Sonsini
Douglas C. Strain
(c) The matters voted upon at the meeting and results of the
voting with respect to those matters are as follows:
For Withheld
----------- ------------
(1) Election of directors:
Mark O. Hatfield 21,714,945 137,676
Cyrus Y. Tsui 21,696,183 156,438
For Against Abstain Not Voted
---------- --------- --------- ---------
(2) Approval of
Amendment to
Company's 1996 Stock
Incentive Plan 11,058,688 7,912,278 60,129 2,821,526
(3) Ratification of
Pricewaterhousecoopers
LLP as the Company's
independent public
accountant for the
fiscal year ending
April 3, 1999 21,801,798 21,158 29,665 0
The foregoing matters are described in further detail in the Company's
definitive proxy statement dated July 7, 1998, for the Annual Meeting of
Stockholders held on August 10, 1998.
-19-
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 Six Months Ended
September 26, 1998
(b) No reports on Form 8-K were filed during the three
months ended September 26, 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
September 26, 1998.
-20-
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: November 9, 1998 /s/ Stephen A. Skaggs
----------------- -------------------------------------------
By: Stephen A. Skaggs, Senior Vice
President, Chief Financial Officer and
Secretary
-21-
5
1,000
6-MOS
APR-03-1999
MAR-29-1998
SEP-26-1998
90,227
196,845
18,866
(846)
19,034
345,547
94,938
(52,313)
502,538
50,294
0
0
0
234
452,010
502,538
96,116
96,116
38,152
71,977
0
34
(5,026)
29,165
9,479
19,686
0
0
0
19,686
.84
.83
