-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CzXU/iN89Ownq7bloCFQeaPXZVwGnVTCKg5+L1eWzV1WdA/xhjfIgNPsTv0ahNzo rOH0ReGUWWT0wV3d4awWkg== 0000912057-96-017370.txt : 19960919 0000912057-96-017370.hdr.sgml : 19960919 ACCESSION NUMBER: 0000912057-96-017370 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LATTICE SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000855658 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 930835214 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18032 FILM NUMBER: 96609817 BUSINESS ADDRESS: STREET 1: 5555 NE MOORE COURT CITY: HILLSBORO STATE: OR ZIP: 97124-6421 BUSINESS PHONE: 5036810118 MAIL ADDRESS: STREET 1: 5555 NE MOORE COURT CITY: HILLSBORO STATE: OR ZIP: 97124 10-Q 1 10-Q 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 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________ Commission file number 0 - 18032 --------- LATTICE SEMICONDUCTOR CORPORATION (Exact name of Registrant as specified in its charter) State of Delaware 93-0835214 - - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421 - - -------------------------------------------------------------------------------- (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 June 29, 1996 there were 22,278,064 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 29, 1996 and July 1, 1995 3 Consolidated Balance Sheet - June 29, 1996 and March 30, 1996 4 Consolidated Statement of Cash Flows - Three Months Ended June 29, 1996 and July 1, 1995 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 19 Signatures 20 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LATTICE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands, except per share data) (unaudited) Three Months Ended ------------------------ June 29, July 1, 1996 1995 --------- --------- Revenue $ 48,168 $ 45,013 Costs and expenses: Cost of products sold 19,838 18,769 Research and development 6,754 6,383 Selling, general and administrative 7,897 7,371 --------- --------- Total costs and expenses 34,489 32,523 --------- --------- Income from operations 13,679 12,490 Other income, net 2,030 1,015 --------- --------- Income before provision for income taxes 15,709 13,505 Provision for income taxes 5,261 4,659 --------- --------- Net income $ 10,448 $ 8,846 --------- --------- --------- --------- Net income per share $ 0.46 $ 0.45 --------- --------- --------- --------- Weighted average common and common equivalent shares outstanding 22,651 19,811 --------- --------- --------- --------- See accompanying Notes to Consolidated Financial Statements LATTICE SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEET (In thousands, except share data) Assets June 29, March 30, 1996 1996 ----------- ----------- Current assets: (unaudited) Cash and cash equivalents $ 47,738 $ 54,600 Short-term investments 180,397 160,570 Accounts receivable 16,338 22,884 Inventories 27,008 21,761 Prepaid expenses and other current assets 20,429 19,301 Deferred income taxes 11,500 9,700 ----------- ----------- Total current assets 303,410 288,816 Wafer supply advance 8,773 14,507 Property and equipment, net 27,840 25,471 Investments and other assets 14,137 14,141 ----------- ----------- $ 354,160 $ 342,935 ----------- ----------- ----------- ----------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 23,765 $ 22,471 Deferred income on sales to distributors 17,070 16,896 Income taxes payable 1,708 4,800 ----------- ----------- Total current liabilities 42,543 44,167 Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued or outstanding -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 22,278,064 and 22,123,069 shares issued and outstanding 223 221 Paid-in capital 184,356 181,957 Retained earnings 127,038 116,590 ----------- ----------- Total stockholders' equity 311,617 298,768 ----------- ----------- $ 354,160 $ 342,935 ----------- ----------- ----------- ----------- See accompanying Notes to Consolidated Financial Statements. LATTICE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (unaudited) Three Months Ended ---------------------------- June 29, July 1, 1996 1995 ----------- ---------- Cash flows from operating activities: Net income $ 10,448 $ 8,846 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,910 1,771 Changes in assets and liabilities: Accounts receivable 6,546 4,375 Inventories (5,247) (2,461) Prepaid expenses and other assets (202) (91) Wafer supply advance 4,808 2,148 Deferred income taxes (1,800) (763) Accounts payable and other accrued expenses 1,294 (2,551) Income taxes payable (3,092) (3,249) Deferred income 174 (285) ----------- ---------- Total adjustments 4,391 (1,106) ----------- ---------- Net cash provided by operating activities 14,839 7,740 ---------- --------- Cash flows from investing activities: Purchase of short-term investments, net (19,827) (1,548) Capital expenditures (4,279) (3,545) Proceeds from sale of equipment -- 21 ----------- ---------- Net cash used by investing activities (24,106) (5,072) ----------- ---------- Cash flows from financing activities: Net proceeds from issuance of stock 2,405 5,248 ----------- ---------- Net cash provided by financing activities 2,405 5,248 ----------- ---------- Net increase (decrease) in cash and cash equivalents (6,862) 7,916 Beginning cash and cash equivalents 54,600 7,697 ----------- ---------- Ending cash and cash equivalents $ 47,738 $ 15,613 ----------- ---------- ----------- ---------- See accompanying Notes to Consolidated Financial Statements. LATTICE SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation The accompanying consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended March 30, 1996. The Company reports on a 52 or 53 week fiscal year, which ends on the Saturday closest to March 31. The accompanying financial statements include the accounts of Lattice Semiconductor Corporation and its wholly- owned subsidiaries, Lattice Semiconducteurs SARL, Lattice GmbH, Lattice Semiconductor KK, Lattice Semiconductor (Shanghai) Co. Ltd., Lattice Semiconductor Asia Ltd., Lattice Semiconductor International Ltd. and Lattice UK Limited. The assets, liabilities and results of operations of the subsidiaries were not material for the periods presented. The results of the interim period are not necessarily indicative of the results for the entire year. (2) Revenue Recognition Revenue from sales to OEM (original equipment manufacturer) customers is recognized upon shipment. Certain of the Company's sales are made to distributors under agreements providing price protection and right of return on unsold merchandise. Revenue and costs relating to distributor sales are deferred until the product is sold by the distributor and the related revenue and costs are then reflected in income. (3) Net Income Per Share Net income per share is computed based on the weighted average number of shares of common stock and common stock equivalents assumed to be outstanding during the period (using the treasury stock method). Common stock equivalents consist of stock options and warrants to purchase common stock. -6- (4) Inventories (in thousands): June 29, March 30, 1996 1996 -------- -------- Work in progress $17,226 $13,174 Finished goods 9,782 8,587 ------- ------- $27,008 $21,761 ------- ------- ------- ------- (5) Changes in Stockholders' Equity (in thousands): Common Paid-in Retained Stock Capital Earnings Total ------- -------- --------- --------- Balances, March 30, 1996 $ 221 $181,957 $116,590 $ 298,768 Stock option exercises 2 2,402 -- 2,404 Other -- (3) -- (3) Net income for the three-month period -- -- 10,448 10,448 ------- -------- --------- --------- Balances, June 29, 1996 $ 223 $184,356 $127,038 $ 311,617 ------- -------- --------- --------- ------- -------- --------- --------- (6) Contingencies The Company is exposed to certain asserted and unasserted potential claims. Patent and other proprietary rights infringement claims are -7- common in the semiconductor industry and the Company has received a letter from a semiconductor manufacturer stating that it believes certain patents held by it cover products previously sold by the Company. While this manufacturer has offered to license certain of such patents to the Company, there can be no assurance that, on this or any other claim which may be made against the Company, the Company could obtain a license on terms or under conditions that would be favorable to the Company. Management believes that the disposition of these claims will not have a material adverse effect on the Company's financial position or results of operations. -8- 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 $48.2 million in the first quarter of fiscal 1997, an increase of seven percent as compared to $45.0 million for the first quarter of fiscal 1996. The majority of the Company's revenue for the periods presented was derived from sales of GAL-Registered Trademark- (Generic Array Logic) products, which address the low-density segment of the CMOS programmable logic market. The majority of the Company's revenue growth for the periods presented resulted from the sales of new products, primarily in the high-density segment of the PLD market. Increases in the sales of the Company's high-density products have been significant and have grown consistently as a percentage of the Company's overall revenue. For the first quarter of fiscal 1997, revenue from the sale of high- density products amounted to approximately one-half of the Company's overall revenue. Revenue from international sales was 47% of total revenue in the first quarter of fiscal 1997 as compared to 48% in the same 1996 fiscal period. 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 fiscal 1997 first quarter as compared to the same fiscal 1996 quarter. This was due primarily to a higher proportion of high-density products included in the revenue mix. Although selling prices of mature products generally decline over time, this decline is at times offset by higher selling prices of new products. The Company's ability to maintain its recent trend of revenue growth and market penetration is in large part dependent on the continued development, introduction and market acceptance of new products. See "Factors Affecting Future Results". GROSS MARGIN The Company's gross margin as a percentage of revenue was 58.8% in the first quarter of fiscal 1997 as compared to 58.3% for the same quarter of fiscal 1996. This increase in gross margin percentage was primarily due to improved capacity utilization and other reductions in the Company's manufacturing costs offsetting higher period costs associated with -9- increased production of high-density products. Profit margins on older products generally tend to decrease over time as selling prices decline, but the Company's strategy has been to offset these decreases by continuously introducing new products with higher margins. RESEARCH AND DEVELOPMENT Research and development expense increased by approximately $371,000, or six percent, from the first quarter of fiscal 1996 to the first quarter of fiscal 1997, and represented approximately 14% of revenue for each of the fiscal periods. The spending increases were related primarily to the development of new technologies and new products, including the Company's high-density product families and their related software development tools. The Company believes that a continued commitment to research and development is essential in order to maintain product leadership in its existing product families and to provide innovative new product offerings, and therefore expects to continue to make significant investments in research and development in the future. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense increased by approximately $526,000, or seven percent, between the first quarter of fiscal 1996 and the fiscal 1997 first quarter. This increase was primarily due to expansion of the Company's sales force and higher sales commissions associated with the higher revenue levels. Selling, general and administrative expense as a percentage of revenue was constant at 16.4% for both of the fiscal periods presented. INTEREST AND OTHER INCOME Interest and other income (net of expense) doubled from approximately $1.0 million for the first quarter of fiscal 1996 to approximately $2.0 million for the same 1997 fiscal quarter. This was due to higher cash and investment balances resulting from cash generated from operations and the Company's follow- on public offering of common stock in November 1995. PROVISION FOR INCOME TAXES The Company's effective tax rate was 33.5% for the first quarter of fiscal 1997 as compared to 34.5% recorded in the same fiscal quarter of 1996. This decrease is due primarily to a higher amount of non-taxable investment income associated with the higher cash and investment balances as discussed above. 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. -10- FACTORS AFFECTING FUTURE RESULTS The Company believes that its future operating results will be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of both the semiconductor industry and the markets addressed by the Company's products, the timing of new product introductions, price erosion, product obsolescence, substantial adverse currency exchange rate movements, variations in product mix, scheduling, rescheduling and cancellation of large orders, competitive factors, the availability of manufacturing capacity, the ability to develop and implement new process technologies, fluctuations in manufacturing yields, changes in effective tax rates and litigation expenses. Due to these and other factors, the Company's past results are a less useful predictor of future results than is the case in more mature and stable industries. The Company has over time increased its level of operating expenses and investment in manufacturing capacity in anticipation of future growth in revenues. To the extent that this revenue growth does not materialize, the Company's operating results would be adversely affected. The semiconductor industry is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity and accelerated erosion of average selling prices. The Company's rate of growth in recent periods has been impacted by the cyclicality in the semiconductor industry. Any material imbalance in industry-wide production capacity relative to demand, shift in industry capacity toward products competitive with the Company's products, reduced demand or reduced growth in demand or other factors could result in a decline in the demand for or the prices of the Company's products and could have a material adverse effect on the Company's operating results. The market price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, shortfalls in revenues or earnings from levels expected by securities analysts and other factors such as announcements of technological innovations or new products by the Company or by the Company's competitors, government regulations, developments in patent or other proprietary rights, and developments in the Company's relationships with parties to collaborative agreements. In addition, the stock market has recently experienced significant price fluctuations. These fluctuations at times have been unrelated to the operating performance of the specific companies whose stocks are traded. Broad market fluctuations, as well as economic conditions generally and in the semiconductor industry specifically, could adversely affect the market price of the Company's Common Stock. The Company does not manufacture finished silicon wafers. Its products, however, require wafers manufactured with state-of-the-art fabrication equipment and techniques. Accordingly, the Company's strategy has been to -11- maintain relationships with large semiconductor manufacturers for the production of its wafers. Substantially all of its silicon wafers are currently manufactured by Seiko Epson Corporation ("Seiko Epson") in Japan and sold to the Company, through Seiko Epson's affiliated U.S. distributor, S MOS Systems Inc. ("S MOS"). In connection with a series of agreements entered into in September 1995 with United Microelectronics Corporation ("UMC") providing for the formation of a separate Taiwanese company, United Integrated Circuits Corporation ("UICC"), for the purpose of building and operating an advanced semiconductor manufacturing facility in Taiwan, Republic of China, UMC committed to supply the Company with sub-micron wafers beginning in the first calendar quarter of 1996. The Company received the first of such wafers during the first calendar quarter of 1996. A significant interruption in supply from Seiko Epson through S MOS, or from UMC, could have a material adverse effect on the Company's business. Worldwide manufacturing capacity for silicon wafers is limited and inelastic. Therefore, significant increases in demand or interruptions in supply could adversely affect the Company. Although current commitments are anticipated to be adequate through fiscal 1997, there can be no assurance that existing capacity commitments will be sufficient to permit the Company to satisfy all of its customers' demand in future periods. The Company negotiates wafer prices and wafer supply commitments with its principal wafer suppliers on a periodic basis. Moreover, wafer prices and commitments are subject to continuing review and revision by the parties. However, there can be no assurance that Seiko Epson, S MOS or UMC will not reduce their allocations of wafers or increase prices to the Company in future periods. If any substantial reduction of supply or substantial price increase were to occur, the Company's operating results could be materially adversely affected. The Company's wafer purchases from Seiko Epson are denominated in Japanese yen. Historical fluctuations in the dollar/yen exchange rate have been significant. There is no assurance that the value of the dollar with respect to the yen will not experience substantial deterioration in the future. Any substantial prolonged or permanent deterioration of dollar/yen exchange rates could have a material adverse effect on the Company's results of operations. -12- The Company depends upon wafer suppliers to produce wafers with acceptable yields and to deliver them to the Company in a timely manner. Substantially all of the Company's revenues are derived from products based on E2CMOS-Registered Trademark- process technology. Successful implementation of the Company's proprietary E2CMOS process technology, UltraMOS-Registered Trademark-, requires a high degree of coordination between the Company and its wafer supplier. The manufacture of high performance E2CMOS semiconductor wafers is a complex process that requires a high degree of technical skill, state-of-the-art equipment and effective cooperation between the wafer supplier and the circuit designer to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. As is common in the semiconductor industry, the Company has from time to time experienced in the past and expects that it will experience in the future production yield problems and delivery delays. Any prolonged inability to obtain adequate yields or deliveries could adversely affect the Company's operating results. The Company expects that, as is customary in the semiconductor business, it will in the future seek to convert its fabrication process technology to larger wafer sizes, to smaller device geometries or to new or additional suppliers in order to maintain or enhance its competitive position. Such conversions entail inherent technological risks that could adversely affect yields and delivery times and could have a material adverse impact on the Company's operating results. To a considerable extent, the Company's ability to execute its strategies will depend upon its ability to maintain and enhance its advanced process technologies. As the Company does not presently operate its own wafer fabrication or process development facility, the Company depends upon silicon wafer manufacturers to provide the facilities and support for its process development. In light of this dependency and the intensely competitive nature of the semiconductor industry, there is no assurance that either process technology development or timely product introduction can be sustained in the future. In addition, other unanticipated changes in or disruptions of the Company's wafer supply arrangements could reduce product availability, increase cost or impair product quality and reliability. Many of the factors that could result in such changes are beyond the Company's control. For example, a disruption of operations at Seiko Epson's or UMC's manufacturing facilities as a result of a work stoppage, fire, earthquake or other natural disaster, would cause delays in shipments of the Company's products and would have a material adverse effect on the Company's operating results. The Company currently depends on foreign manufacturers -- Seiko Epson, a Japanese company, and UMC, a Taiwanese company -- for the manufacture of all of its finished silicon wafers, and anticipates depending on UICC, a Taiwanese company, for the manufacture of a portion of its finished silicon -13- wafers. In addition, after wafer manufacturing is completed and each wafer is tested, products are assembled by subcontractors in South Korea, the Philippines, Hong Kong, the United States and Malaysia. Although the Company has not experienced any interruption in supply from its subcontractors, the social and political situations in these countries can be volatile, and any prolonged work stoppages or other disruptions in the Company's ability to manufacture and assemble its products would have a material adverse effect on the Company's results of operations. Furthermore, economic risks, such as changes in currency exchange rates, tax laws, tariffs, or freight rates, or interruptions in air transportation, could have a material adverse effect on the Company's results of operations. Because of the rapid rate of technological change in the semiconductor industry, the Company's success will ultimately depend in large part on its ability to introduce new products on a timely basis that meet a market need at a competitive price and with acceptable margins as well as enhancing the performance of its existing products. The success of new products, including the Company's high-density product families, depends on a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance, quality and reliability in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. New and enhanced products are continually being introduced into the Company's markets by others, and these products can be expected to affect the competitive environment in the markets in which they are introduced. There is no assurance that the Company will be successful in enhancing its existing products or in selecting, developing, manufacturing, marketing and selling new products. The semiconductor industry is intensely competitive and is characterized by rapid technological change, sudden price fluctuations, general price erosion, rapid rates of product obsolescence, periodic shortages of materials and manufacturing capacity and variations in manufacturing costs and yields. The Company's competitive position is affected by all of these factors and by industry competition for effective sales and distribution -14- channels. The Company's existing and potential competitors range from established major domestic and international semiconductor companies to emerging companies. Many of the Company's competitors have substantially greater financial, technological, manufacturing, marketing and sales resources than the Company. The Company faces direct competition from companies that have developed or licensed similar technology and from licensees of the Company's products and technology. The Company also faces indirect competition from a wide variety of semiconductor companies offering products and solutions based on alternative technologies. Although to date the Company has not experienced significant competition from companies located outside the United States, such companies may become a more significant competitive factor in the future. As the Company and its current competitors seek to expand their markets, competition may increase, which could have an adverse effect on the Company's operating results. Competitors' development of new technologies that have price/performance characteristics superior to the Company's technologies could adversely affect the Company's results of operations. There can be no assurance that the Company will be able to develop and market new products successfully or that the products introduced by others will not render the Company's products or technologies non-competitive or obsolete. The Company expects that its markets will become more competitive in the future. In an effort to secure additional wafer supply, the Company may from time to time consider various arrangements, including joint ventures with, minority investments in, advanced purchase payments to, loans to or similar arrangements with independent wafer manufacturers in exchange for committed production capacity. Such arrangements are becoming common within the industry as independent wafer manufacturers increasingly seek to require their customers to share a portion of the cost of capital intensive wafer fabrication facilities. The Company entered into an advanced production payment arrangement with Seiko Epson in 1994 pursuant to which it advanced a total of $42 million to Seiko Epson. In September 1995, the Company entered into an agreement with UMC to invest approximately $60 million for a 10% equity interest in a separate Taiwanese company (UICC) providing for the formation of a joint venture with UMC and several other companies for the purpose of building and operating an advanced semiconductor manufacturing facility. To the extent the Company pursues any other such transactions with Seiko Epson, UMC or any other wafer manufacturers, such transactions could entail even greater levels of investment requiring the Company to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional funding could be obtained when needed or, if available, on terms acceptable to the Company. The Company's success depends in part on its proprietary technology. While the Company attempts to protect its proprietary technology through patents, copyrights and trade secrets, it believes that its success will depend more upon technological expertise, continued development of new products, and successful market penetration of its silicon and software products. There can be no assurance that the Company will be able to protect its technology -15- or that competitors will not be able to develop similar technology independently. The Company currently has a number of United States and foreign patents and patent applications. There can be no assurance that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology, or that any patents will issue from any application pending or filed by the Company. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The semiconductor industry is generally characterized by vigorous protection and pursuit of intellectual property rights and positions, which have on occasion resulted in protracted litigation that utilizes cash and management resources, which can have a significant adverse effect on operating results. The Company has received a letter from a semiconductor manufacturer stating that it believes a number of its patents, related to product packaging, cover certain products previously sold by the Company. While the manufacturer has offered to license certain of such patents to the Company, there can be no assurance, on this or any other claim which may be made against the Company, that the Company could obtain a license on terms or under conditions that would be favorable to the Company. In addition, there can be no assurance that other intellectual property claims will not be made against the Company in the future or that the Company will not be prohibited from using the technologies subject to such claims or be required to obtain licenses and make corresponding royalty payments for past or future use. International revenues accounted for 47% and 48% of the Company's revenues for the first three months of fiscal 1997 and fiscal 1996, respectively. The Company believes that international revenues will continue to represent a significant percentage of revenues. International revenues and operations may be adversely affected by the imposition of governmental controls, export license requirements, restrictions on the export of technology, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations. The future success of the Company is dependent, in part, on its ability to attract and retain highly qualified technical and management personnel, particularly highly skilled engineers involved in new product, both silicon and software, and process technology development. Competition for such personnel is intense. There can be no assurance that the Company will be able to retain its existing key technical and management personnel or attract additional qualified employees in the future. The loss of key technical or management personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business. LIQUIDITY AND CAPITAL RESOURCES As of June 29, 1996, the Company's principal source of liquidity was $228.1 million of cash and short-term investments, an increase of -16- approximately $13 million from the balance of $ 215.2 million at March 30, 1996. This increase was primarily the result of cash generated from operations. The Company also has available an unsecured $10 million demand bank credit facility with interest due on outstanding balances at a money market rate. This facility has not been used. Accounts receivable decreased 29% as compared to the balance at March 30, 1996. This decrease was primarily due to the lower revenue level in the fiscal 1997 first quarter as compared to the fourth quarter of fiscal 1996 and the timing of billings to end customers and distributors. Inventories increased by 24% versus amounts recorded at March 30, 1996 due to increased production based on wafer supply commitments made in anticipation of revenue levels higher than actually attained. The wafer supply advance decreased by approximately $5.7 million, or 40%, as compared to the balance at March 30, 1996 due to the receipt of wafers under the Advance Production Payment agreement with Seiko Epson and a $926,000 reclassification to "Prepaid expenses and other current assets" as an increase in management's estimate of wafers to be received under this agreement in the next twelve months. Accounts payable and accrued expenses increased six percent as compared to the balance at March 30, 1996 due to the higher level of wafer receipts and timing of payments. The decrease in income taxes payable of $3.1 million between March 30, 1996 and June 29, 1996 is primarily attributable to the timing of quarterly tax payments and lower pretax profits in the first fiscal 1997 period as compared to the fourth fiscal quarter of 1996. Substantially all of the Company's silicon wafer purchases are currently denominated in Japanese yen. The Company maintains yen-denominated bank accounts and bills its Japanese customers in yen. The yen bank deposits utilized to hedge yen-denominated wafer purchases are accounted for as identifiable hedges against specific and firm wafer purchases. The Company entered into a series of agreements with UMC in September 1995 pursuant to which the Company has agreed to join UMC and several other companies to form a separate Taiwanese company, UICC, for the purpose of building and operating an advanced semiconductor manufacturing facility in Taiwan, Republic of China. Under the terms of the agreements, the Company will invest approximately $60 million, payable in three installments over two and one-half years, for a 10% equity interest in the corporation and the right to receive a percentage of the facility's wafer production at market prices. The timing of the payments is related to certain milestones in the development of the advanced semiconductor manufacturing facility. The first payment, in the amount of approximately $13.7 million, was paid in January 1996, the second payment, in the amount of approximately $27.2 million, is anticipated to be required during the three month period ending February 1997, and the final payment is anticipated to be required within the six month period ending December 1997. The Company expects to finance these payments from existing sources and funds generated from operations. As a result of the future payments, the Company's working capital will be -17- reduced by an aggregate of approximately $46.3 million over the time period of the remaining payments. The Company currently anticipates capital expenditures of approximately $15 to $20 million for the fiscal year ending March 29, 1997. A significant portion of these expenditures is planned for improvements and expansions to the Company's manufacturing capacity and facilities. The Company believes its existing sources of liquidity and funds expected to be generated from operations will provide adequate cash to fund the Company's anticipated cash needs for the next twelve months, including the anticipated required payment to UICC during this period. In an effort to secure additional wafer supply, the Company may from time to time consider various financial arrangements including joint ventures with, minority investments in, advance purchase payments to, loans to, or similar arrangements with independent wafer manufacturers in exchange for committed wafer capacity. To the extent the Company pursues any such additional financial arrangements, additional debt or equity financing may be required. There can be no assurance that any such additional funding could be obtained when needed or, if available, on terms acceptable to the Company. -18- PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. 11.1 Computation of Net Income Per Share 27 Financial Data Schedule for Three Months Ended June 29, 1996 (b) No reports on Form 8-K were filed during the three months ended June 29, 1996. -19- 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 13, 1996 /S/ Rodney F. Sloss ------------------ ----------------------------- By: Rodney F. Sloss Vice President, Finance (Principal Accounting Officer) -20- EX-11.1 2 EX-11.1 EXHIBIT 11.1 LATTICE SEMICONDUCTOR CORPORATION COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data) (unaudited)
THREE MONTHS ENDED ------------------ JUNE 29, JULY 1, 1996 1995 ----------- ---------- Net income $ 10,448 $ 8,846 ----------- ---------- ----------- ---------- Weighted average common stock and common stock equivalents: Common stock 22,193 19,031 Options and warrants 458 780 ----------- ---------- 22,651 19,811 ----------- ---------- ----------- ---------- Net income per share $ 0.46 $ 0.45 ----------- ---------- ----------- ----------
EX-27 3 EXHIBIT 27 FDS
5 1,000 3-MOS MAR-29-1997 MAR-31-1996 JUN-29-1996 47,738 180,397 16,338 827 27,008 303,410 61,100 27,839 354,160 42,543 0 0 0 223 311,394 354,160 48,168 48,168 19,838 34,489 0 0 (2,030) 15,709 5,261 5,261 0 0 0 5,261 0.46 0.46
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