10-K 1 s10k.txt ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K (Mark One) [ x ] Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the fiscal year ended March 31, 2001, 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: 0-22594 ALLIANCE SEMICONDUCTOR CORPORATION (Exact name of Registrant as specified in its charter) Delaware 77-0057842 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 2575 Augustine Drive Santa Clara, California 95054-2914 (Address of principal executive offices) Registrant's telephone number, including area code is (408)855-4900 Registrant's website address is http://www.alsc.com ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $0.01 NASDAQ 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant has filed all documents and reports required to be filed under Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes X No --- --- As of June 22, 2001, there were 41,522,266 shares of Registrant's Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 22, 2001, based upon the closing price of the Common Stock on the NASDAQ National Market for such date, was approximately $457,160,000. Documents Incorporated by Reference Portions of Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders ("Proxy Statement") to be filed pursuant to Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, which is anticipated to be filed within 120 days after the end of Registrant's fiscal year ended March 31, 2001, are incorporated by reference into Part III hereof. -1- Exhibit Index on page 36 ================================================================================ PART I Forward Looking Statements When used in this report, the words "expects," anticipates," "believes," "estimates" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements, are subject to risks and uncertainties and include the following statements concerning as the potential for further price erosion of the Company's products; additional cancellation of orders in the Company's backlog; continuing slowdown in the electronics industry; further decreased demand and increased competitive environment for the Company's products, including, without limitation, obsolescence of the Company's products; continued accumulation of excess inventory and price erosion or obsolescence of existing inventory, any of which may result in additional charges against the Company's earnings; inability to timely ramp up production of and deliver new or enhanced SRAM, DRAM or flash products; inability to successfully develop and introduce new products; inability to successfully recruit and retain qualified technical and other personnel; further adverse changes in the value of securities held by the Company, including those of Vitesse Semiconductor Corporation, PMC-Sierra, Inc., Broadcom Corporation, Chartered Semiconductor, United Microelectronics Corporation and Tower Semiconductor; further adverse changes in value of investments made by Alliance's venture funds managed by Alliance Venture Management, LLC; the Company's potential status as an Investment Act of 1940 reporting company. These risks and uncertainties include those set forth in Item 1 of Part I hereof (entitled "Business") and in Item 7 of Part II hereof (entitled "Factors That May Affect Future Results") and elsewhere in this Report. These risks and uncertainties, or the occurrence of other events, could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part. ITEM 1 BUSINESS Overview Alliance Semiconductor Corporation was incorporated in California on February 4, 1985 and reincorporated in Delaware on October 26, 1993. Unless the context indicates otherwise, the terms "Alliance" and the "Company" refer to Alliance Semiconductor Corporation, a Delaware corporation, and its direct and indirect subsidiaries. The Company designs, develops and markets high performance memory and memory intensive logic products to the personal computer, networking, telecommunications, instrumentation and consumer markets. Market trends, such an increased emphasis on high-throughput applications, including networking, graphics, multimedia, computer, consumer, and telecommunications products, have created opportunities for high performance memory products. The Company addresses these opportunities with its families of static random access memories ("SRAMs") and dynamic random access memories ("DRAMs"), characterized by high storage capacity (density), fast access times and low power consumption. 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 undercapacity, and accelerated erosion of selling prices. As the Company is currently experiencing, as well as during much of fiscal 1999, 1998 and 1997 the market for certain of the Company's DRAM and SRAM devices continued to experience excess supply relative to demand, which resulted in a significant downward trend in average selling prices. Although the Company is unable to predict future trends in average selling prices, historically the semiconductor industry has experienced significant annual declines in average selling prices. The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company is currently experiencing (as it did throughout much of fiscal 1999, 1998 and 1997) rapid erosion in product pricing which is not within the control of the Company could continue to have an adverse material effect on the Company's results of operations. The Company is unable to predict the future prices for its products. -2- Throughout this report, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal year ended March 31, 2001 contained 52 weeks, while the fiscal years ended March 31, 2000 and March 31, 1999 contained 52 weeks and 53 weeks, respectively. Industry Background Traditionally, large manufacturing companies, such as Samsung, Hyundai, Micron, NEC, Toshiba, Hitachi and Cypress Semiconductor have dominated the markets for SRAMs and DRAMs. The majority of the memory products from these manufacturers have consisted of commodity products, which have relatively predictable, multi-year product life cycles and thus require more focus on process technology and production cost and less on design. In recent years, certain technology trends dramatically increased the performance requirements for SRAMs and DRAMs, creating new design challenges and market opportunities for emerging semiconductor companies. The proliferation of more powerful personal computers and workstations in recent years and the increasing emphasis on high-throughput networking, graphics, multimedia and telecommunications products have created mass market opportunities for high speed and low power SRAMs and high speed DRAMs. SRAMs and DRAMs are forms of "volatile" memory, meaning that such devices retain their memory only when connected to a power supply. In contrast, flash memory is a form of "non-volatile" memory, which retains its memory even when the power supply is turned off. The demand for flash memory has increased in recent years. In addition to being a preferred method of storing the basic input/output system ("BIOS") for computers, a variety of applications make use of flash memory (for instance, cellular phone handsets often allow users to "store" frequently-dialed numbers in flash memory; such memory is retained when the handset power is turned off). Embedded-memory applications are growing rapidly, as manufacturers of items from cell phones to toasters are introducing "smart" machines that use integrated circuits to improve performance. Embedding memory and logic on a single chip may produce significant advantages in size and speed. Technology The Company has focused on using innovative design techniques to develop high performance SRAMs and DRAMs that can be manufactured using a simple CMOS manufacturing process. The Company combines both SRAM and DRAM design approaches in creating its SRAM and DRAM products, and believes that merging these techniques enables it to design SRAMs that feature some of the density attributes of DRAMs and to design DRAMs that feature some of the speed attributes of SRAMs. Since its inception in 1985, the Company has accumulated substantial experience in designing SRAM and DRAM products. The Company believes that the die sizes (the physical sizes of its complete, unpackaged, memory circuits) of many of its products are smaller than those of competing products, providing the Company with a key competitive advantage. Because yields increase significantly as die size decreases, the Company believes that its small die sizes have been a major contributor to its generally high manufacturing yields. Small die sizes also generally result in additional benefits, such as lower die cost, increased speed, greater reliability and lower power consumption. In addition to having small die sizes, many of the Company's products are designed to be manufactured using a CMOS process with fewer steps than required for some competitive memory products. The Company's competitors often require a greater number of mask steps and/or more complex manufacturing processes to achieve similar performance of such products. Because yields typically decline as manufacturing complexity and the number of process steps increase, the simpler manufacturing process utilized by the Company has contributed to its generally high manufacturing yields. The Company also believes that a simpler manufacturing process leads to faster time to market and shorter manufacturing cycle times. The Company's development strategy is to leverage its proprietary design modules, which have been created using its design philosophies. These modules, which are scaleable in size, can be used by the Company as building blocks for new products, resulting in shorter design cycles. The Company believes that this design strategy also enables it to maximize the performance, yield and cost advantages of its basic designs and sustain them over time in successive generations of higher performance and higher density products. -3- Products High Speed CMOS DRAMs Sales of the Company's DRAM products accounted for 57% of the Company's net revenues in fiscal 2001. During fiscal years 2000 and 1999, DRAM products contributed 56% and 40%, respectively, of the Company's net revenues. During fiscal year 2001, the Company continued to increase its volume of production of 4-Mbit and 16-Mbit DRAM products in the 256 Kbit x 16 and 1-Mbit x 16 configurations using technologies down to 0.18 micron. High Speed CMOS SRAMs Sales of the Company's SRAM products accounted for 43% of the Company's net revenues in fiscal 2001. During fiscal year's 2000 and 1999, SRAM products contributed approximately 43% and 58%, respectively, of the Company's net revenues. Focused on the telecommunications, networking and wireless markets, the Company currently offers SRAM products in broad range densities, packages, speed grades and low-power ranges from 64 Kbit to 4 Kbit with speeds as fast as 10ns and stand by power as low as 20uA. Currently the Company's volume SRAM products are manufactured using 0.35 and 0.25 micron technology, with development to 0.18 micron technology underway. High Speed CMOS Flash Memories During fiscal 2001, the Company changed its focus from 5V to 3V flash memory products (which use a single nominal, 3-volt power supply for read and programming functions). The Company has available the 8-Mbit product with access times as fast as 80ns, and has achieved functional silicon on 4-Mbit product. The Company is co-developing a 16-Mbit product with one of its fab partners, United Microelectronics Corporation ("UMC"). To date, the Company has not derived significant revenue from flash memory products. Network Hardware Accelerators In fiscal year 1999, the Company announced that it expected to introduce the first product of an Internet Protocol Routing Processor ("IPRP") family that will leverage the Company's logic and embedded memory technology, to enable hardware accelerated wire speed routing of IP packets, in multi-ported Gigabit and Terabit routers. These IPRP devices could become integral components in mission critical and multimedia enhanced high-end routers, which are being deployed to build the next generation Internet infrastructure. The Company achieved working silicon of the first product of IPRP family during the quarter ended April 3, 1999. However, these prototypes did not achieve all the specifications necessary to introduce the product, including the desired speed. The Company spent the entire fiscal years 2000 and 2001 redesigning the product and still has not produced a marketable product. While the Company plans on continuing its effort to produce an IPRP product, there can be no assurance that the Company can or will do so. Product Development Timely development and introduction of new products are essential to maintaining the Company's competitive position. The Company currently develops all of its products in-house and has 84 development personnel (38 in the United States and 46 in India) as of March 31, 2001. The Company uses a workstation-based computer-aided design environment to design and prototype new products. The Company's design process uses network computing, high-level design methodologies, simulators, circuit synthesizers and other related tools. During fiscal 2001, 2000 and 1999, the Company spent approximately $13.8 million, $14.6 million and $14.1 million respectively, on product development activities. The Company plans to continue to invest substantial amounts in development to design additional products. The markets for the Company's products are characterized by rapid technological change, evolving industry standards and product obsolescence. The Company's future success will be highly dependent upon the timely completion and introduction of new products at competitive performance levels. The success of new products depends on a variety of factors, including product selection, successful and timely completion of product development, the Company's ability to secure sufficient foundry capacity for volume manufacturing of wafers, achievement of acceptable wafer fabrication yields (the proportion of good die on a silicon wafer) by the Company's independent foundries and the Company's ability to offer products at competitive prices. There can be no assurance that the Company will be able to identify new product opportunities successfully, develop and -4- bring to market such new products in a timely and cost effective manner, or that the Company will be able to respond effectively to new technological changes or new product announcements by others. There also can be no assurance that the Company can secure adequate foundry capacity for the production of such products, or obtain acceptable manufacturing yields necessary to enable the Company to offer products at competitive prices. Additionally, there can be no assurance that the Company's products will gain or maintain market acceptance. Such inabilities could materially and adversely affect the Company's results of operations. The markets for SRAMs, DRAMs, and flash memory products are volatile and subject to rapid technological and price change. Any inventory of products for those markets may be subject to obsolescence and price erosion, which could materially and adversely affect the Company's results of operations. Customers The Company's primary customers are major domestic and international manufacturers of personal computer and computer peripherals, consumer, networking, telecommunications and wireless products, including; 3Com, Pace Micro Technology, Lucent, Sony, IBM, Toshiba, Acer, Alcatel, Nokia, Solectron, Jabil, Newbridge Networks, Efficient Networks, General Instruments, Seagate, Brother and Pioneer. A decline in demand in these industries or lack of success in developing new markets or new products could have a material adverse effect on the Company's results of operations. The Company believes that if its sales penetration into these markets increases, its customer base will diversify not only by product application but also geographically. There can be no assurance that such sales penetration into these markets will, in fact, increase. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. During fiscal year 2000, the Company moved all of its SRAM production out of Taiwan. The Company intends to sell its remaining SRAM inventory that was manufactured in Taiwan, outside the United States. See Note 17 of Notes to Consolidated Financial Statements. Sales to the Company's customers are typically made pursuant to specific purchase orders, which may be canceled by the customer without enforceable penalties. For the fiscal year ended March 31, 2001, no customers accounted for 10% or more of the Company's net revenues. For the fiscal year ended March 31, 2000, one customer accounted for approximately 10% of the Company's net revenues. For the fiscal year ended March 31, 1999, two customers accounted for approximately 15% and 13% of the Company's net revenues. See Note 1 of Notes to Consolidated Financial Statements. Historically, the semiconductor industry in general, and the semiconductor memory business in particular have experienced cyclical downturns in business every few years. The industry experienced such a downturn in the mid 1990's and had been recovering over the last few years, as had the Company. In the fourth fiscal quarter of fiscal year 2001, the industry and the Company experienced a significant downturn. The Company cannot predict when the current downturn will end. Even after the end of the current downturn, the Company fully expects that other downturns will occur. And while the Company will try to take precautions so that it will not be carrying significant inventory (as happened in both the current and the last downturns) when another downturn occurs, it is difficult to predict when such downturns will occur, and when customers will start canceling orders. There can be no assurance that the Company will be able to manage its business in a manner so as to prepare for downturns, when they occur. Additionally, even if the Company is able to prepare for downturns, any such downturns could have a significant and material negative impact on the Company's ability to sell products and results of operations, and such a negative impact on the Company may last several years. Sales and Marketing The Company markets and distributes its products through a network of manufacturers' representatives and distributors throughout North America, Europe, Asia and the rest of the world. The Company uses manufacturers' representatives and distributors who are not subject to minimum purchase requirements and who can discontinue marketing the Company's products at any time. Many of the Company's distributors are permitted to return a limited amount of product purchased in exchange for future orders. The loss of one or more manufacturers' representatives or distributors could have a material adverse effect on the -5- Company's results of operations. The Company believes that its relations with its manufacturers' representatives and distributors generally are good. The Company believes that customer service and technical support are important competitive factors in selling to major customers. The Company provides technical support to its customers worldwide. Distributors and manufacturers' representatives supplement the Company's efforts by providing additional customer service at a local level. The Company also works closely with its customers in qualification of its products and providing the needed quality and reliability data. The Company believes that close contact with its customers not only improves the customers' level of satisfaction but also provides important insights into future market directions. International revenues accounted for approximately 63%, 59% and 50% of net revenues in fiscal 2001, 2000 and 1999, respectively. The Company expects that international sales will continue to represent a significant portion of net revenues. In addition, the Company's products are manufactured, assembled and tested by independent third parties primarily located in Asia and North America, and the Company has in the past, and intends in the future, to make investments in certain foundries in Asia or elsewhere in order to secure production capacity. Due to its international sales and independent third party manufacturing, assembly and testing operations, the Company is subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements, delay resulting from difficulty in obtaining export licenses of certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because the Company's international sales generally are denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive than competitors' products that are denominated in local currencies. Although the Company to date has not experienced any material adverse effect on its results of operations as a result of such regulatory, geopolitical and other factors, there can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. See Note 19 of Notes to Consolidated Financial Statements. Manufacturing The Company subcontracts its manufacturing to independent foundries, which allows the Company to avoid the significant capital investment required for wafer fabrication facilities. The Company, however, has entered into agreements providing for the investment of significant sums for the formation of companies to build and operate manufacturing facilities or to obtain guaranteed capacity, as described below. As a result, the Company focuses its resources on product design and development, quality assurance, marketing and sales, and customer support. The Company designs its products using proprietary circuit modules and standard fabrication processes in order to operate within the process parameters of its contract manufacturers. The Company's major foundries are United Microelectronics Corporation ("UMC") in Taiwan and Japan, Chartered Semiconductor Manufacturing Ltd. ("Chartered") in Singapore and National Semiconductor Corporation ("National") in the United States. The Company has entered into foundry production agreements with all of its major foundries. In fiscal 2001, the Company entered into a foundry production agreement with Tower Semiconductor, Ltd. ("Tower"), in connection with an investment in a new fabrication facility being constructed by Tower. Although the Company believes it currently has adequate capacity to address market requirements, there can be no assurance that in the future the Company's current foundries, together with any additional sources, would be willing or able to satisfy all of the Company's requirements on a timely basis. The Company has encountered delays in the qualification process and production ramp-up in the past, and qualification of or production ramp-up at any additional foundries could take longer than anticipated. The Company has entered into equity arrangements in order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies. The Company will continue to consider various possible transactions, including but not limited to equity investments in independent wafer manufacturers, in exchange for guaranteed production; the formation with others of new companies to own and operate foundries; the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods; and the licensing of certain of the Company's designs, in order to obtain an adequate supply of wafers using advanced process technologies. There can be no assurance, however, that the Company would be able to consummate any such transaction in a timely manner, or at all, or on terms commercially acceptable to the Company. -6- In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000 Alliance Semiconductor owned approximately 283.3 million shares, or approximately 3.2%, of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. In January 2001, Tower satisfied the closing conditions of the share purchase agreements (as described in Investments section) it entered into with the Company to make an investment in Tower, in exchange for shares of Tower and certain manufacturing rights, including capacity rights and wafer credits. The investment in Tower, along with the investment of the Israel Corporation ("TIC"), SanDisk Corporation, Inc. ("SanDisk") and Macronix International Co., Ltd. to purchase an aggregate of 3,629,873 Tower shares, will be used to build and operate a new fabrication facility, which is expected to become operational in 2002. The Company has encountered delays in qualification and production ramp-up in the past and the production ramp-up at any additional foundries could take longer than anticipated. In the event that the Company's foundries are unable or unwilling to satisfy the Company's requirements in a timely manner, the Company's results of operations could be materially adversely affected. In addition, some of UMC's foundries are located in the Science-Based Industrial Park in Hsin-Chu City, Taiwan. The Company currently expects these foundries to supply the substantial portion of the Company's products in fiscal 2002. Disruption of operations at the Company's foundries for any reason, including work stoppages, fire, and earthquakes as was the case in September 1999, or other natural disasters, could cause delays in shipments of the Company's products, and could have a material adverse effect on the Company's results of operations. In or about October 1997, a fire caused extensive damage to one of UMC's foundries, not used by the Company, which is located in the Hsin-Chu Science-Based Industrial Park. There have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse effect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations. The Company is using multiple sources for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products, and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. The Company purchases semiconductor wafers from these foundries pursuant to various agreements. The Company believes that its relationship with each of these foundries is good. However, UMC and Chartered manufacture similar products which are sold to the Company's competitors and customers. Reliance on these foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, costs and loss of production due to seismic activity, weather conditions and other factors. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations. There can be no assurance that problems affecting manufacturing yields of the Company's products will not occur in the future such as those occurring during late fiscal 1996. The Company uses offshore subcontractors, which are located primarily in Taiwan and Singapore for die assembly and testing. In the assembly process, the silicon wafers are separated into individual dies that are then assembled into packages and tested in accordance with procedures developed by the Company. Following assembly, the packaged devices are further tested and inspected pursuant to the Company's quality assurance program before shipment to customers. While the timeliness, yield and quality of product deliveries from the -7- Company's suppliers of assembly and test services have been acceptable to date, there can be no assurance that problems will not occur in the future. Any significant disruption in adequate supplies from these subcontractors, or any other circumstances that would require the Company to qualify alternative sources of supply, could delay shipment and result in the loss of customers, limitations or reductions in the Company's revenue, and other adverse effects on the Company's results of operations. Most of the Company's wafer foundries, assembly and testing facilities comply with the requirements of ISO 9000. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced by such suppliers. The occurrence of such price increases could have a material adverse effect on the Company's results of operations. The Company also is subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. Shortages of raw materials or disruptions in the provision of services by the Company's assembly or testing houses or other circumstances that would require the Company to seek alternative sources of supply, assembly or testing could lead to constraints or delays in timely delivery of the Company's products. Such constraints or delays may result in the loss of customers, limitations or reductions in the Company's revenue or other adverse effects on the Company's results of operations. The Company's reliance on outside foundries and independent assembly and testing houses involves several other risks, including reduced control over delivery schedules, quality assurance and costs. Interruptions in supply at the Company's foundries or assembly or testing houses may cause delays in delivery of the Company's products. The occurrence of any supply or other problem resulting from the risks described above could have a material adverse effect on the Company's results of operations. Competition The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, product obsolescence and heightened international competition in many markets. Many of the Company's customers may be purchasing products from both the Company and the Company's competitors. The Company's principal competitors include Cypress Semiconductor Corporation, Integrated Device Technology, Inc., Integrated Silicon Solutions, Inc., Micron Technology, Inc., AMD, NEC, Samsung, Toshiba, and other U.S., Japanese, Korean, and Taiwanese manufacturers. Most of the Company's competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than the Company. During an industry downturn such as the current downturn and as occurred in 1999, 1998 and 1997 in the SRAM and DRAM markets, companies that have broader product lines and longer-standing customer relationships may be in a stronger competitive position than the Company. In addition, as the Company enters into new markets, the Company may face additional competition. Markets for most of the Company's products are characterized by intense price competition. The Company's future success will be highly dependent upon the successful development and timely introduction of new products that meet the needs of the market at a competitive price. There can be no assurance that the Company will be able to develop or market any such products successfully. The Company believes that its ability to compete successfully depends on a number of factors both within and outside of its control, including price, product quality, performance, success in developing new products, adequate foundry capacity, sources of raw materials, efficiency of production, timing of new product introductions by competitors, protection of Company products by effective utilization of intellectual property laws and general market and economic conditions. There can be no assurance that the Company will be able to compete successfully in the future. Licenses, Patents and Maskwork Protection The Company seeks to protect its proprietary technology by filing patent applications in the United States and registering its circuit designs pursuant to the Semiconductor Chip Protection Act of 1984. As of June 22, 2001, the Company holds 64 United States patents covering certain aspects of its product designs or manufacturing technology, which patents expire between 2009 and 2019. The Company also has 27 pending United States patent applications, three of which have been allowed and are expected to be issued as patents. No assurance can be given that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given 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 loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete -8- successfully in its products business. There can be no assurance that any existing or future patent applications by the Company will result in issued patents with the scope of the claims sought by the Company, or at all, that any current or future issued or licensed patents, trade secrets or know-how will afford sufficient protection against competitors with similar technologies or processes, or that any patents issued will not be infringed upon or designed around by others. In addition, there can be no assurance that others will not independently develop proprietary technologies and processes, which are the same as or substantially, equivalent or superior to those of the Company. From time to time, the Company is contacted by companies who hold patents which they claim the Company infringes. As of June 22, 2001, the Company is in discussions with one company who has made such claims. If the Company determines that the Company possibly infringes a patent and the patent appears valid, the Company will negotiate a license, if possible. There can be no assurance that the Company has not or will not infringe prior or future patents owned by others, that the Company will not need to acquire licenses under patents belonging to others for technology potentially useful or necessary to the Company, or that such licenses will be available to the Company, if at all, on terms acceptable to the Company. Copyrights and maskwork protection are also key elements in the conduct of the Company's business. The Company also relies on trade secrets and proprietary know-how, which it seeks to protect by confidentiality agreements with its employees and consultants, and with third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that its trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will receive in the future, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties. The ultimate conclusion with respect to any alleged infringement must be determined by a court or administrative agency in the event of litigation, and there can be no assurance that a court or administrative agency would determine that the Company's products do not infringe the patents in question. Patent litigation is inherently uncertain and the Company cannot predict the result of any such litigation or the level of damages that could be imposed if it were determined that certain of the Company's products or processes infringe any of the patents in question. There can be no assurance that other third parties will not assert claims against the Company with respect to existing or future products or that, in the case of the existing or potential allegations described above or any new dispute, licenses to disputed third-party technology will be available on reasonable commercial terms, if at all. In the event of litigation to determine the validity of any third-party claims (or claims against the Company for indemnification related to such third-party claims), including the claims and potential claims referred to in the preceding paragraph, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, and expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. In addition, the laws of certain territories, in which the Company's products are or may be developed, manufactured or sold, including Asia, Europe and Latin America, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Backlog Sales of the Company's products are made pursuant to standard purchase orders. Purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in the customers' requirements and to price renegotiations. In addition, orders typically may be canceled at the discretion of the buyer without enforceable penalty. The Company's business, in line with that of much of the semiconductor industry, is characterized by short lead-time orders and quick delivery schedules. Also, the Company's actual shipments depend on the manufacturing capacity of the Company's foundries. Finally, capacity constraints or -9- unexpected manufacturing delays may prevent the Company from meeting the demand for certain of its products. Therefore backlog is not necessarily indicative of future sales. Investments In the past six months, marketable securities held by the Company have experienced significant declines in their market value primary due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their fair value. Such evaluation included researching commentary from industry experts, analysts, and other companies, all of whom were not optimistic that the semiconductor sector would recover in the next quarter or two or three. Based on the continuing depression in the investments' stock prices from those originally used to record the investment and coupled with the expectation that stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for companies in the semiconductor industry in general management determined that a write-down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax, non-operating loss of approximately $509.4 million during the fourth quarter of fiscal 2001 based on the quoted price of the respective marketable securities as of March 31, 2001. This was recorded in the Write-down of Marketable Securities. Chartered Semiconductor Corporation In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2," if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up," or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, in which the Company decided not to participate. In June 2000, the underwriter of the secondary offering released the Company from the lockup, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered. During fiscal 2001, the Company sold 500,000 shares and recognized a pre-tax non-operating gain of approximately $33.5 million. At March 31, 2001, the Company owned approximately 16.4 million ordinary shares or approximately 1.64 million American Depository Shares or "ADSs" of Chartered. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more than 50% of its original holdings of Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Since Chartered is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to Chartered. In addition, because Chartered is a semiconductor manufacturer, it is subject to additional risks, such as fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurances that the Company's investment in Chartered will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is very likely that Chartered, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of Chartered stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in Chartered. United Microelectronics Corporation In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19% of the outstanding shares and 25% of the total wafer capacity. -10- In April 1998, the Company received approximately US$31.7 million In connection with the sale of 35 million shares of USC, and the Company had the right to receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence of certain potential future events, including the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, this right resulted in Alliance's receipt of approximately NTD 665 million (US$ 21.5 million) as a result of the merger between USC and UMC. Following the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC made a stock distribution to its employees, thereby the Company's ownership in USC was reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million shares to the Company by way of dividend distribution as well as distributions to other entities. As a result of these distributions, the Company owned approximately 14.8% of the outstanding shares. Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights and the board seat, Alliance had participated in both strategic and operating decisions of USC on a routine basis and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000 and 1999, the Company reported its proportionate share of equity income of USC of $9.5 million and $10.9 million, net of tax, respectively. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC has the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. The Company received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the Company owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As the Company no longer has an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares were subject to a six-month "lock-up" or no trade period. This lock-up period expired in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger, the Company accounted for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which became unrestricted on January 2, 2001 as an available-for-sale marketable security in accordance with SFAS 115. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% and 42% of the Company's holdings at March 31, 2000 and 2001, respectively), is accounted for as a cost method investment and is presented as a long-term investment. As this -11- long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short-term portion of the investments. At the end of the fourth quarter of fiscal 2001, the Company wrote-down its investment in UMC and recognized a pre-tax, non-operating loss of approximately $460.0 million. This was recorded in the write-down of marketable securities. At March 31, 2001, the Company owned approximately 340.0 million shares of UMC. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more than 50% of its original holdings of UMC, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Since UMC is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to UMC. In addition, because UMC is a semiconductor manufacturer, it is subject to additional risks, such as fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurance that the Company's investment in UMC will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is possible that UMC, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of UMC stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in UMC, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in UMC. Maverick Networks, Inc. / Broadcom Corporation In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for embedded memory in an internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split. During fiscal 2001, the Company sold 287,522 shares and realized a pre-tax, non-operating gain of approximately $31.3 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8 million. This was recorded in the write-down of marketable securities. At March 31, 2001, the Company owned approximately 200,000 shares of Broadcom. Broadcom's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Broadcom's and the Company's, sometimes move as a group, it is possible that Broadcom's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. Thus, there can be no assurance that the Company's investment in Broadcom will increase in value or even maintain its value. Alliance Venture Management, LLC In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with -12- the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds, by allowing them limited participation in the profits of the various investment funds, through the management fees paid by the investment funds. In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts. At Alliance Venture Management's inception in November 1999, series A member units and series B member units in Alliance Venture Management were created. The unit holders of Series A units and Series B units receive management fees of 15% of investment gains realized by Alliance Ventures I and Alliance Ventures II, respectively. In February 2000, upon the creation of Alliance Ventures III, LP ("Alliance Ventures III"), the management agreement for Alliance Venture Management was amended to create series C member units which are entitled to receive a management fee of 16% of investment gains realized by Alliance Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"), the management agreement for Alliance Venture Management was amended to create series D and E member units which are entitled to receive a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively. Each of the owners of the series A, B, C, D and E member units paid the initial carrying value for their shares of the member units. While the Company owns 100% of the common units in Alliance Venture Management, it does not hold any series A, B, C, D or E member units and does not participate in the management fees generated by the management of the investment funds. Several of the Company's senior management hold the majority of the units of Alliance Venture Management. After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2001, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures has invested approximately $9.1 million in ten companies, with a total fund allocation of $15.0 million. As of March 31, 2001, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $38.6 million in 14 companies, with a total fund allocation of $100.0 million. As of March 31, 2001, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $4.0 million in two companies, with a total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $6.5 million in three companies, with a total fund allocation of $60.0 million. Several of the Alliance Venture investments are accounted for as the equity method due to the Company's ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of Alliance Ventures was approximately $5.7 million for the year ended March 31, 2001. In addition, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million, at the end of the fourth quarter fiscal 2001. This was recorded in the write-down of marketable securities and other investments. Certain of the Company's officers have formed private venture funds, which invest in some of the same investments as the Company. Additionally, an outside venture fund has been formed in which certain of the Company's officers and employees, as well as the Company itself, has made similar venture investments, including investment in some of the same companies as Alliance Ventures. Alliance Venture Management generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has -13- been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is possible, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these types of investments. Solar Venture Partners, LP In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company has invested $12.5 million, $9.5 million is in the form of three promissory notes, which on March 31, 2001 were converted into a limited partnership interest in Solar. Due to changes in the venture capital market, Alliance has decided to limit its investment in Solar to $12.5 million already invested. Certain of the Company's officers and employees have invested in Solar. Solar has made investments in some of the same companies as Alliance Ventures. Orologic Corporation / Vitesse Semiconductor Corporation In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under the current accounting practice, the Company is required to offset the gain on the contracts with the loss on the Vitesse stock, both were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax, non-operating gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Vitesse and recognized a pre-tax, non-operating loss of approximately $52.9 million. At March 31, 2001, the Company owned 728,293 shares of Vitesse. Vitesse's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Vitesse's and the Company's, sometimes move as a group, it is possible that Vitesse's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. Thus, there can be no assurance that the Company's investment in Vitesse will increase in value or even maintain its value. Malleable Technologies, Inc. / PMC-Sierra, Inc. In 1999, the Company made an investment in a start-up called Malleable Technologies, Inc. ("Malleable"). This investment was transferred to Alliance Venture I, LP, upon its creation. In June 2000, PMC-Sierra, Inc. ("PMC"), -14- announced that it agreed to acquire Malleable. According to the terms of the acquisition, PMC exchanged 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC did not already own. In connection with the proposed merger, Alliance Ventures I will receive approximately 79,000 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company will report a gain based on the closing share price of PMC on the date of the merger. Based on the closing share price of PMC on June 14, 2000, the estimated pretax gain from this transaction is approximately $11 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in PMC and recognized a pre-tax, non-operating loss of approximately $10.8 million, which was recorded in the write-down of marketable securities. . At March 31, 2001, the Company owned 68,152 shares of PMC. PMC's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like PMC's and the Company's, sometimes move as a group, it is likely that PMC's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value. Tower Semiconductor Ltd. In August 2000, the Company entered into a share purchase agreement with Tower Semiconductor ("Tower") under which Alliance committed to make a $75 million strategic investment in Tower as part of Tower's plan to build its new fab. In return for its investment, Alliance will receive equity, corresponding representation on Tower's Board of Director and committed production capacity in the advanced fab, which Tower intends to build. Pursuant to the agreement, the Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase price of $31 million in the fourth quarter of fiscal 2001. The Company has an obligation to purchase an additional 1,466,760 ordinary shares in four equal increments upon occurrence of events relating to Tower's construction of FAB 2 as specified in the agreement. These additional shares are expected to be purchased by the Company during fiscal 2002 and 2003. In connection with the share purchase agreement, the Company entered into a foundry agreement under which the Company is entitled to a certain amount of credits towards future wafer purchases from Tower. The amount of credits is determined upon each share purchase transaction by Alliance and is calculated based on the difference between Tower's average stock price for 30 days preceding a purchase transaction and Alliance's share purchase exercise price. At March 31, 2001, such wafer credits from Tower totaled $14.7 million. The wafer credits will be utilized as the Company purchases wafers from Tower in the future where 15% of order value will be applied against the wafer credits. Under the terms of the foundry agreement, the Company is guaranteed a capacity of up to 15% of available wafer starts but not to exceed 5,000 wafers starts per month. The guaranteed capacity may be reduced if the Company elects not to exercise its additional share purchase obligation. The Company accounts for its investment in Tower under the cost method based on the Company's inability to exercise significant influence over Tower's operations. The Investment Company Act of 1940 Following a special study after the stock market crash of 1929 and the ensuing Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The Act was primarily meant to regulate mutual funds, such as the families of funds offered by the Fidelity and Vanguard organizations (to pick two of many), and the smaller number of closed-end investment companies that are traded on the public stock markets. In those cases the funds in question describe themselves as being in the business of investing, reinvesting and trading in securities and generally own relatively diversified portfolios of publicly traded securities that are issued by companies that the investment companies do not control. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the people who establish and operate such investment companies, which constitute large pools of liquid assets that could be used improperly, or not be properly safeguarded, by the persons in control of them. When the Act was written, its drafters (and Congress) also felt that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company without proclaiming that fact or being willing to voluntarily submit itself to regulation as an acknowledged investment company, and that investors in such a company could be just as much in need of protection as are investors in companies that are openly and deliberately established as investment companies. In order to deal with this perceived potential abuse, the Act -15- and rules under it contain provisions and set forth principles that are designed to differentiate "true" operating companies from companies that may be considered to have sufficient investment-company-like characteristics to require regulation by the Act's complex procedural and substantive requirements. These provisions apply to companies that own or hold securities, as well as companies that invest, reinvest and trade in securities, and particularly focus on determining the primary nature of a company's activities, including whether an investing company controls and does business through the entities in which it invests or, instead, holds its securities investments passively and not as part of an operating business. For instance, under what is, for most purposes, the most liberal of the relevant tests, a company may become subject to the Act's registration requirements if it either holds more than 45% of its assets in, or derives more than 45% of its income from, investments in companies that the investor does not primarily control or through which it does not actively do business. In making these determinations the Act generally requires that a company's assets be valued on a current fair market value basis, determined on the basis of securities' public trading price or, in the case of illiquid securities and other assets, in good faith by the company's board of directors. The Company viewed its investments in Chartered, USC and USIC, and its new investment in Tower, as operating investments primarily intended to secure adequate wafer manufacturing capacity; as previously noted, the Company's access to the manufacturing resources that it obtained in conjunction with those investments will decrease if the Company ceases to own at least 50% of its original investments in the enterprises, as modified, in the cases of USC and USIC, by their merger into UMC. In addition, the Company believes that, before USC's merger into UMC, the Company's investment in USC constituted a joint venture interest that the staff of the Securities and Exchange Commission (the "SEC") would not regard as a security for purposes of determining the proportion of the Company's assets that might be viewed as having been held in passive investment securities. However, because of the success during the last two years of the Company's investments, including its strategic wafer manufacturing investments, at least from the time of the completion of the merger of USC and USIC into UMC in January 2000 the Company believes that it could be viewed as holding a much larger portion of its assets in investment securities than is presumptively permitted by the Act for a company that is not registered under it. On the other hand, the Company also believes that the investments that it currently holds in Chartered and UMC, even though in companies that the Company does not control, should be regarded as strategic deployments of Company assets for the purpose of furthering the Company's memory chip business, rather than as the kind of financial investments that generally are considered to constitute investment securities. Applying certain other tests that the SEC utilizes in determining investment company status, the Company has never held itself out as an investment company; its historical development has focused almost exclusively on the memory chip business; the activities of its officers and employees have been overwhelmingly addressed to achieving success in the memory chip business; and until the past two years, its income (and losses) have derived almost exclusively from the memory chip business. Accordingly, the Company believes that it should be regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities, and has applied to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. However, if the Company's investments in Chartered, UMC and Tower are now viewed as investment securities, it must be conceded that an unusually large proportion of the Company's assets could be viewed as invested in assets that would, under most circumstances, give rise to investment company status. Therefore, while the Company believes that it has meritorious arguments as to why it should not be considered an investment company and should not be subject to regulation under the Act, there can be no assurance that the SEC will agree. And even if the SEC grants some kind of exemption from investment company status to the Company, it may place significant restrictions on the amount and type of investments the Company is allowed to hold, which might force the Company to divest itself of many of its current investments. Significant potential penalties may be imposed upon a company that should be registered under the Act but is not, and the Company is proceeding expeditiously to resolve its status. If the Company does not receive an exemption from the SEC, the Company would be required to register under the Act as a closed-end management investment company. In the absence of exemptions granted by the SEC (if it determines to do so in its discretion after an assessment of the public interest), the Act imposes a number of significant requirements and restrictions upon registered investment companies that do not normally apply to operating companies. These would include, but not be limited to, a requirement that at least 40% of the Company's board of directors not be "interested persons" of the Company as defined in the Act and that those directors be granted certain special rights with respect to the approval of certain kinds of transactions (particularly those that pose a possibility of giving rise to conflicts of interest); prohibitions on the grant of stock options that would be outstanding for more than 120 days and upon the use of stock for compensation (which could be highly detrimental to the Company in view of the competitive circumstances in which it seeks to attract and retain -16- qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control the Company in entities in which the Company is also investing (which could require the Company to abandon or significantly restructure its management arrangements, particularly with respect to its investment activities). While the Company could apply for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that the Company would deem practical. Additionally, the Company would be required to report its financial results in a different form from that currently used by the Company, which would have the effect of turning the Company's Statement of Operations "upside down" by requiring that the Company report its investment income and the results of its investment activities, instead of its operations, as its primary sources of revenue. While the Company is working diligently to deal with these investment company issues, there can be no assurance that a manageable solution will be found. The SEC may be hesitant to grant an exemption from investment company status in the Company's situation, and it may not be feasible for the Company to operate in its present manner as a registered investment company. As a result, the Company might be required to divest itself of assets that it considers strategically necessary for the conduct of its operations, to reorganize as two or more separate companies, or both. Such divestitures or reorganizations could have a material adverse effect upon the Company's business and results of operations. Employees As of March 31, 2001, the Company had 203 full-time employees, consisting of 84 in research and development, 6 in marketing, 19 in sales, 38 in administration and 56 in operations. Of the 84 research and development employees (38 in the US and 46 in India), 24 have advanced degrees. In 1997, the Company opened a design center in India. The Company believes that the Company's future success will depend, in part, on its ability to continue to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The Company's employees are not represented by any collective bargaining unit, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. The Company has recently experienced and may continue to experience growth in the number of its employees and the scope of its operating and financial systems, resulting in increased responsibilities for the Company's management. To manage future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate and manage its employees. There can be no assurance that the Company will be able effectively to manage future growth, and the failure to do so could have a material adverse effect on the Company's results of operations. The Company will depend to a large extent on the continued contributions of its founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and President of the Company, and his brother C.N. Reddy, Executive Vice President for Investments and Director of the Company (collectively referred to as the "Reddys"), as well as other officers and key design personnel, many of whom would be difficult to replace. During fiscal 2000 and subsequently, a number of officers and design personnel left the Company to pursue various other opportunities. The future success of the Company will depend on its ability to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The loss of either of the Reddys or key design personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business. The Company is not insured against the loss of any of its key employees, nor can the Company assure the successful recruitment of new and replacement personnel. ITEM 2 FACILITIES The Company's executive offices and its principal marketing, sales and product development operations are located in a 56,600 square foot leased facility in Santa Clara, California under a lease which expires in June 2006. The Company has an option to extend the lease for a term of five years. The Company also leases office space in Hsin-Chu, Taiwan to manage the logistics of the wafer fabrication, assembly and testing of the Company's products in Taiwan. The Company leases an engineering office in Bangalore, India, and has purchased a parcel -17- of land in an office park under development in Hyderabad, India, for product development. Additionally, the Company leases sales offices in Natick, Massachusetts; Garner, North Carolina; San Diego, California; Berkshire, United Kingdom; Taipei, Taiwan; and Japan. ITEM 3 LEGAL PROCEEDINGS In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately $170 million (USD), in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. The plaintiffs appealed the setting aside of the default judgment against the Company to the Canadian Supreme Court. In June 2001, the Canadian Supreme Court refused to hear the appeal of the setting aside of the default judgment against the Company. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999, the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is unsuccessful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is successful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. At March 31, 2001, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -18- Executive Officers of the Registrant Information concerning executive officers of the Company as of the date of this report is set forth below:
Name Age Position ---------------- ---- -------------------------------------------------- N. Damodar Reddy 62 Chairman, President, Chief Executive Officer, and Acting Chief Financial Officer C.N. Reddy 45 Executive Vice President for Investments, Director Bradley A. Perkins 44 Vice President, General Counsel and Secretary Ritu Shrivastava 50 Vice President, Technology Development
N. Damodar Reddy is the co-founder of the Company and has served as the Company's Chairman of the Board, Chief Executive Officer and President from its inception in February 1985. Mr. Reddy also served as the Company's Chief Financial Officer from June 1998 until January 1999 . From September 1983 to February 1985, Mr. Reddy served as President and Chief Executive Officer of Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of Honeywell, Inc. Prior to that time, Mr. Reddy held various research and development and management positions at Four Phase Systems, a subsidiary of Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. Mr. Reddy is a member of the board of directors of two publicly traded companies, Sage, Inc. and eMagin, Corporation. He holds an M.S. degree in Electrical Engineering from North Dakota State University and an M.B.A. from Santa Clara University. N. Damodar Reddy is the brother of C.N. Reddy. C.N. Reddy is the co-founder of the Company and has served as a director of the Company since its inception in February 1985. Mr. Reddy served as Secretary to the Company from February 1985 to October 2000. Beginning in February 1985, Mr. Reddy served as the Company's Vice President - Engineering. In May 1993, he was appointed Senior Vice-President - Engineering and Operations of the Company. In December 1997, he was appointed Executive Vice President and Chief Operating Officer. In October 2000, Mr. Reddy resigned his positions as Chief Operating Officer and Secretary, and was appointed Executive Vice President for Investments. From 1984 to 1985, he served as Director of Memory Products of Modular Semiconductor, Inc., and from 1983 to 1984, Mr. Reddy served as a SRAM product line manager for Cypress Semiconductor Corporation. From 1980 to 1983, Mr. Reddy served as a DRAM development manager for Texas Instruments, Inc. and, before that, he was a design engineer with National Semiconductor Corporation for two years. Mr. Reddy holds an M.S. degree in Electrical Engineering from Utah State University. Mr. Reddy is named inventor of over 15 patents related to SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy. Bradley A. Perkins joined the Company in January 1999, and was appointed Vice President and General Counsel. In January 2001, Mr. Perkins was appointed Secretary of the Company. Prior to joining the Company, Mr. Perkins was Vice President, General Counsel and Secretary at Mission West Properties (formerly Berg & Berg Developers), from January 1998 to January 1999. From November 1991 to January 1998, Mr. Perkins was with Valence Technology, Inc., where he was Vice President, General Counsel and Secretary. From August 1988 to November 1991, Mr. Perkins was Assistant General Counsel and Intellectual Property Counsel with VLSI Technology, Inc. Mr. Perkins holds a B.S.E. in electrical engineering from Duke University, and a J.D. from McGeorge School of Law, University of the Pacific. Ritu Shrivastava joined the Company in November 1993, and was appointed Vice President - Technology Development in August 1995. Dr. Shrivastava was designated as an executive officer of the Company in July 1997. Prior to joining the Company, Dr. Shrivastava worked at Cypress Semiconductor Corporation for more than 10 years in various technology management positions, the last one being Director of Technology Development. Prior to that time, Dr. Shrivastava was with Mostek Corporation for 3 years, responsible for CMOS development. Dr. Shrivastava served on the Electrical Engineering faculty at Louisiana State University where he also received his Ph.D.. Dr. Shrivastava completed his Masters and Bachelor's degrees in Electrical Communication Engineering from Indian Institute of Science, Bangalore, India and a Bachelor's degree in Physics from Jabalpur University, India. Dr. Shrivastava is named inventor in over 9 patents related to various technologies, and is a Fellow of IEEE. -19- ================================================================================ PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the NASDAQ National Market under the symbol ALSC. The Company completed its initial public offering on December 1, 1993. The following table sets forth, for the periods indicated the high and low closing sale prices on NASDAQ for the Company's common stock.
Fiscal Year High Low ----------- ---------- 2000 1st Quarter $11.56 $2.63 2nd Quarter 12.94 7.69 3rd Quarter 16.69 9.00 4th Quarter 26.31 14.81 2001 1st Quarter $29.38 $14.00 2nd Quarter 26.69 17.88 3rd Quarter 20.75 10.88 4th Quarter 16.19 10.69 2002 1st Quarter (through June $14.55 $10.00 22, 2001)
As of June 22, 2001, there were approximately 129 holders of record of the Company's common stock. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings, if any, for development of its business and, therefore, does not anticipate that it will declare or pay cash dividends on its capital stock in the foreseeable future. -20- ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes selected consolidated financial information for each of the five fiscal years ended March 31st and should be read in conjunction with the consolidated financial statements and notes relating thereto.
Year Ended March 31, -------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- ------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues $208,678 $89,153 $47,783 $118,400 $82,572 Cost of revenues 187,913 58,428 60,231 117,400 84,630 -------- -------- ------- -------- -------- Gross profit (loss) 20,765 30,725 (12,448) 1,000 (2,058) Operating expenses: Research and development 13,766 14,568 14,099 15,254 15,012 Selling, general and 19,691 15,962 12,652 18,666 10,344 administrative -------- -------- ------- -------- -------- Income (loss)from (12,692) 195 (39,199) (32,920) (27,414) operations Gain on investments 75,801 1,049,130 15,823 - - Write-down of marketable securities and (509,449) - - - - Other investments Other income, net (200) 29 (1,126) 287 1,753 -------- -------- ------- -------- -------- Income (loss) before (446,540) 1,049,354 (24,502) (32,633) (25,661) income taxes Provision (benefit) for income taxes (179,956) 410,348 8,397 (11,421) (8,990) -------- -------- ------- -------- -------- Income (loss) before equity in income (loss) (266,584) 639,006 (32,899) (21,212) (16,671) of investees Equity in income (loss) of investees (5,737) 9,094 10,856 15,475 - -------- -------- ------- -------- -------- Net income (loss) $(272,321) $648,100 $(22,043) $(5,737) $(16,671) ======== ======== ======= ======== ======== Net income (loss) per share: Basic $(6.58) $15.49 $(0.53) $(0.15) $(0.43) ======== ======== ======= ======== ======== Diluted $(6.58) $15.07 $(0.53) $(0.15) $(0.43) ======== ======== ======= ======== ======== Weighted average number of common shares: Basic 41,376 41,829 41,378 39,493 38,653 ======== ======== ======= ======== ======== Diluted 41,376 42,992 41,378 39,493 38,653 ======== ======== ======= ======== ======== Year ended March 31, -------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- ------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital $289,659 $615,937 $22,102 $39,879 $78,000 Total assets 849,239 1,520,442 193,557 243,668 232,486 Stockholders' equity 547,289 963,955 163,570 189,111 204,594 Long term obligations 12,568 2,714 578 1,276 2,219
-21-
Fiscal Year 2001 Fiscal Year 2000 -------------------------------------- ------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. -------- -------- -------- -------- -------- -------- -------- -------- Operating Summary: (in thousands, except per share data) Net revenues $32,993 $63,815 $64,466 $47,404 $28,833 $23,497 $19,112 $17,711 Cost of revenues 75,557 42,530 39,943 29,883 18,242 15,412 12,304 12,470 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit (loss) (42,564) 21,285 24,523 17,521 10,591 8,085 6,808 5,241 Operating expenses: Research and 3,599 3,109 3,467 3,591 3,788 3,330 4,244 3,206 development Selling, general and 5,140 4,777 5,260 4,514 3,356 6,753 3,108 2,745 administrative -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from (51,303) 13,399 15,796 9,416 3,447 (1,998) (544) (710) operations Gain on investments 9,541 5,258 13,485 47,517 988,717 5,111 3,696 51,606 Write-down of marketable securities(509,449) - - - - - - - and other investments Other income (673) (200) 333 340 233 (56) (269) 121 (expense), net -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before (551,884) 18,457 29,614 57,273 992,397 3,057 2,883 51,017 income taxes Provision (benefit) (220,973) 5,654 12,053 23,310 410,944 (963) 1,186 (819) for income taxes -------- -------- -------- -------- -------- -------- -------- -------- (330,911) 12,803 17,561 33,963 581,453 4,020 1,697 51,836 Income (loss) before equity in income (loss) of investees Equity in income (2,092) (1,854) (1,093) (698) (368) 5,134 2,796 1,532 (loss) of investees -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $(333,003) $10,949 $16,468 $33,265 $581,085 $9,154 $4,493 $53,368 ======== ======== ======== ======== ======== ======== ======== ======== et income (loss) per share: Basic $(8.05) $0.27 $0.40 $0.80 $13.88 $0.22 $0.11 $1.28 ======== ======== ======== ======== ======== ======== ======== ======== Diluted $(8.05) $0.26 $0.39 $0.78 $13.48 $0.21 $0.10 $1.27 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares: Basic 41,383 41,296 41,326 41,543 41,864 41,858 41,812 41,608 ======== ======== ======== ======== ======== ======== ======== ======== Diluted 41,383 42,221 42,537 42,778 43,118 42,944 42,995 42,149 ======== ======== ======== ======== ======== ======== ======== ========
During the first and second quarters of fiscal year 2001, the Company experienced an increase in the average selling price and increased demand for DRAM and SRAM products. During the third and fourth quarters of fiscal year 2001, the Company experienced substantial order cancellations and reschedules. As a result, the Company experienced a decrease in certain product average selling prices and a decrease in demand. In the first fiscal quarter of 2001, the Company recognized a gain on its investment in Malleable Technologies, Inc. ("Malleable") when it was sold to PMC-Sierra, Inc. ("PMC"), for $11.0 million. Also in the first fiscal quarter, the Company recognized gains of $2.9 million on the sale of Broadcom Corporation ("Broadcom") securities, and $33.5 million on the sale of Chartered Semiconductor Corporation ("Chartered") securities. In subsequent quarters, the Company recognized gains of $28.5 million on additional sales of Broadcom securities. In the fourth fiscal quarter, the Company recorded a pre-tax charge of $509.4 million for a write-down of its marketable securities and other investments. In the third and fourth fiscal quarters, the Company recorded pre-tax charges of $53.9 million ($32.2 million net of tax) for decline in market value of certain inventory and to provide additional reserves for obsolete and excess inventory. In the first fiscal 2000 quarter, the Company recognized a gain on its investment in Maverick Networks ("Maverick") when it was sold to Broadcom Corporation ("Broadcom"), for $51.6 million. In subsequent quarters, the Company recognized additional gains of $23.7 million on sale of Broadcom securities. In the third fiscal 2000 quarter, the Company also recorded a $3.6 million discretionary non-recurring compensation expense related to this transaction. In the fourth fiscal 2000 quarter, the Company recognized a gain on its investment in United Microelectronics Corporation ("UMC") of $908 million ($532 million net of tax). Also in the fourth fiscal 2000 quarter, the Company recognized a gain of $69 million ($41 million net of tax) on its investment in Orologic Corporation ("Orologic") when it was sold to Vitesse Semiconductor Corporation ("Vitesse"). -22- ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements in this Management's Discussion and Analysis that are forward looking involve numerous risks and uncertainties and are based on current expectations. Actual results may differ materially. Certain of these risks and uncertainties are discussed under "Factors That May Affect Future Results," as well as elsewhere in this report. Overview
Overview Years ended -------------------------------- March March March 31, 2001 31, 2000 31, 1999 --------- ---------- --------- Revenue $208,678 $89,153 $47,783 ========= ========== ========= Net income $(272,321) $648,100 $(22,043) (loss) ========= ========== ========= Diluted earnings per share $(6.58) $15.07 $(0.53) ========= ========== =========
The Company designs and develops high performance memory products and memory intensive logic products. These circuits are used in a wide variety of electronic products, including desktop and portable computers, networking, telecommunications, instrumentation and consumer devices. The Company's business strategy has been to be a supplier of these products, operating on a fabless basis by utilizing independent manufacturing facilities. During fiscal 2001, DRAM products accounted for approximately 57% of net revenues, SRAM products accounted for approximately 43% of net revenues and flash products accounted for approximately less than 1% of net revenues. This compares to 56%, 43% and 1% of net revenues, respectively, for fiscal 2000. The market for memory products used in personal computers is characterized by price volatility and has experienced significant fluctuations and cyclical downturns in product demand, such as the severe price erosion of DRAMs and SRAMs in fiscal 1999, 1998 and 1997. On June 8, 2001, the Company announced that it expected that its revenues for the first quarter of fiscal 2002 will be approximately 50% to 55% below the $33.0 million reported in the fourth quarter of fiscal 2001, as a result of lower demand and lower average selling prices of some of its products. While the Company's strategy is to increase its penetration into the networking, telecommunications, instrumentation and consumer markets with its existing SRAM, DRAM and flash products and to develop and sell in volume quantities new products complementary to its existing products, the Company may not be successful in executing such strategy. A decline in demand in the personal computer industry or lack of success in developing new markets or new products could have a material adverse effect on the Company's results of operations. -23- Results of Operations The percentage of net revenues represented by certain line items in the Company's consolidated statements of operations for the years indicated, are set forth in the table below.
Percentage of Net Revenues for Year Ended March 31, -------------------------------------- 2001 2000 1999 ----------- ------------ ----------- Net revenues 100.0% 100.0% 100.0% Cost of revenues 90.1 65.5 126.1 ----------- ------------ ----------- Gross profit (loss) 9.9 34.5 (26.1) Operating expenses: Research and development 6.6 16.3 29.5 Selling, general and 9.4 17.9 26.5 administrative ----------- ------------ ----------- Income (loss) from operations (6.1) 0.3 (82.1) Gain on investments 36.3 1176.8 33.2 Write-down of marketable s ecurities and other (244.1) - - investments Other income (loss), net (0.1) 0.0 (2.4) ----------- ------------ ----------- Income (loss) before income taxes (214.0) 1177.1 (51.3) Provision (benefit) for income (86.2) 460.3 17.7 taxes ----------- ------------ ----------- Income (loss) before equity in (127.8) 716.8 (69.0) income (loss) of investees Equity in income (loss) of (2.7) 10.2 22.7 investees ----------- ------------ ----------- Net income (loss) (130.5)% 727.0% (46.3)% =========== ============ ===========
Net Revenues
Revenues Years ended Percentage change -------------------------------- ------------------- March March March 2000 1999 31, 31, 31, to to 2001 2000 1999 2001 2000 --------- --------- ---------- -------- --------- SRAMS $90,549 $38,088 $28,435 137.7% 33.9% DRAMS 117,938 50,235 18,424 134.8% 172.7% Other 191 830 924 (77.0)% (10.2)% --------- --------- ---------- -------- --------- Total $208,678 $89,153 $47,783 134.1% 86.6% Revenues ========= ========= ========== ======== =========
The Company's net revenues increased to $208.7 million in fiscal 2001 or approximately 134%, from $89.2 million in fiscal 2000. The increase in net revenues in fiscal 2001 was primarily due to a combination of sales of new products, overall increase in average selling prices and an increase in unit sales of the Company's SRAM and DRAM products during the first three quarters. During the fourth quarter of fiscal 2001 the Company's net revenues fell, largely due to a decrease in demand and in some cases a decrease in average selling prices. The Company's net revenues in fiscal 2000 increased to $89.2 million from $47.8 million in fiscal 1999, an increase of approximately 87%. The increase in net revenues in fiscal 2000 was due to a higher average selling price and an increase unit shipments of the Company's SRAM and DRAM products. Net revenue from the Company's DRAM product family in fiscal 2001 contributed $117.9 million or approximately 57%, up from $50.2 million or approximately 56% in fiscal 2000. During the first three quarters of fiscal 2001, sales of the Company's 16-Mbit DRAM in both the 1-Mbit x 16 configuration and the 4-Mbit x 4 configuration, increased significantly, along with an overall increase in the average selling prices. During the fourth quarter of fiscal 2001 demand for these products decreased as well as the average selling prices. DRAM net revenues for fiscal 1999 were $18.4 million or approximately 39% of total net revenues. Net revenue from the Company's SRAM product family in fiscal 2001 contributed $90.5 million or approximately 43% of the Company's revenues up from $38.1 million or approximately 43% in fiscal 2000. During the first three quarters of fiscal 2001, sales of the Company's 4-Mbit SRAM in both the 3.3V and 5V fast asynchronous configurations, increased significantly along with an overall increase in the average selling prices. During the fourth quarter of fiscal 2001 the demand for those products decreased but the average selling prices remained stable. SRAM net revenues in fiscal 1999 were $28.4 million, or approximately 59% of total net revenues. -24- The Company continues to focus its effort in selling in the non-PC market. Net sales to non-PC segments of the market, such as telecommunications, networking, datacom and consumer in fiscal 2001 accounted for approximately 73% compared to approximately 56% during fiscal 2000 and 52% in fiscal 1999. International net revenues in fiscal 2001 were $131.6 million or approximately 63% of total net revenues for fiscal 2001. This was an increase of approximately 148% over fiscal 2000. International net revenues in fiscal 2000 increased approximately 121% over fiscal 1999. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest percentage increase in international net revenues was to customers in Asia, which increased approximately 236% over fiscal year 2000. The increase was due to an overall increase in product demand and higher selling prices during the first three quarters of the year. During fiscal 2001, no single customer accounted for over 10% of net revenues. During fiscal 2000, one customer accounted for approximately 10% of net revenues. Two customers accounted for approximately 15% and 13% of net revenues during fiscal 1999. On June 8, 2001, the Company announced that it expected that its revenues for the first quarter of fiscal 2002 will be approximately 50% to 55% below the $33.0 million reported in the fourth quarter of fiscal 2001, as a result of lower demand and lower average selling prices of some of its products. Generally, the markets for the Company's products are characterized by volatile supply and demand conditions, numerous competitors, rapid technological change, and product obsolescence. These conditions could require the Company to make significant shifts in its product mix in a relatively short period of time. These changes involve several risks, including, among others, constraints or delays in timely deliveries of products from the Company's suppliers; lower than anticipated wafer manufacturing yields; lower than expected throughput from assembly and test suppliers; and less than anticipated demand and selling prices. The occurrence of any problems resulting from these risks could have a material adverse effect on the Company's results of operations. Gross Profit (Loss) The Company's gross profit for fiscal 2001 was approximately $20.8 million, or 10.0% of net revenues, as compared to $30.7 million, or approximately 34.5% of net revenues, for the same period in fiscal 2000, and a loss of approximately $12.4 million, or approximately 26.1% of net revenues, in fiscal 1999. During third and fourth quarter of fiscal 2001, the Company took pre-tax inventory charges of $53.9 million in recognition of lower average selling prices and inventory in excess of demand due to the decline in unit shipments for the Company's DRAM and SRAM products. The dramatic improvement in gross profits during fiscal year 2000 was primarily the result of higher average selling prices, higher unit sales, and an increased mix of higher margin DRAM products. During fiscal 1999, the Company recorded $20.0 million pre-tax inventory charges in recognition of lower average selling prices together with the decline in the unit shipments for the Company's DRAM and SRAM products due to competitive market conditions. The Company is subject to a number of factors that may have an adverse impact on gross profits, including the availability and cost of products from the Company's suppliers; increased competition and related decreases in unit average selling prices; changes in the mix of product sold; and the timing of new product introductions and volume shipments. In addition, the Company may seek to add additional foundry suppliers and transfer existing and newly developed products to more advanced manufacturing processes. The commencement of manufacturing at a new foundry is often characterized by lower yields as the manufacturing process is refined. There can be no assurance that the commencement of such manufacturing will not have a material adverse effect on the Company's gross profits in future periods. Research and Development
Research and Development Years ended Percentage change --------------------------------- ------------------- March March March 2000 to 1999 31, 2001 31, 2000 31, 1999 2001 to 2000 ---------- ---------- ---------- --------- -------- Revenue $208,678 $89,153 $47,783 134.1% 86.6% ========== ========== ========== ========= ======== Research and $13,766 $14,568 $14,099 (5.5)% 3.3% Development ========== ========== ========== ========= ======== R&D as a percent of revenues 6.6% 16.3% 29.5% (59.6)% (44.6)% ========== ========== ========== ========= ========
-25- Research and development expenses consist principally of salaries and benefits for engineering design, contracted development efforts, facilities costs, equipment and software depreciation and amortization, wafer masks and tooling costs, test wafers and other expense items. Research and development expenses were approximately $13.8 million or approximately 7% of net revenues for fiscal 2001 as compared to $14.6 million or approximately 16% of net revenues for fiscal 2000, and approximately $14.1 million or approximately 29% of net revenues for fiscal 1999. The small decrease in spending between fiscal 2001 and 2000 was due to lower depreciation expense for R&D equipment. The small increase in spending between fiscal 2000 and 1999 was higher mask and tooling charges. During fiscal 2001, the Company's development efforts focused on advanced process and design technology involving SRAMs, DRAMs and Flash memory products. The Company believes that investments in research and development are necessary to remain competitive in the marketplace and accordingly, research and development expenses may increase in absolute dollars and may also increase as a percentage of net revenue in future periods. Selling, General and Administrative
Selling, General and Administration Years ended Percentage change --------------------------------- ------------------- March March March 2000 to 1999 31, 2001 31, 2000 31, 1999 2001 to 2000 ---------- ---------- --------- --------- -------- Revenue $208,678 $89,153 $47,783 134.1% 86.6% ========== ========== ========= ========= ======== Selling, General $19,691 $15,962 $12,652 23.4% 26.2% and Administration ========== ========== ========= ========= ======== SG&A as a percent of revenues 9.4% 17.9% 26.5% (47.3)% (32.4)% ========== ========== ========= ========= ========
Selling, general and administrative expenses generally include salaries and benefits associated with sales, sales support, marketing and administrative personnel, as well as sales commissions, outside marketing costs, travel, equipment depreciation and software amortization, facilities costs, bad debt expense, insurance and legal costs. Selling, general and administrative expenses in fiscal 2001 were approximately $20 million or approximately 9% of net revenues as compared to approximately $16 million or approximately 18% in fiscal 2000 and approximately $12.7 million or approximately 26% of net revenues for fiscal 1999. The increase in spending between fiscal 2001 and 2000 was higher sales commissions principally due to the 134% growth in net revenues, travel and an increase in allowances for bad debts. In fiscal 2000, the Company recorded a $3.6 million discretionary non-recurring compensation expense related to the sale of Maverick Networks, Inc. ("Maverick") to Broadcom Corporation ("Broadcom"). The decrease in spending in fiscal 1999 compared to fiscal 2000 was due principally to lower outside sales commissions. Selling, general and administrative expenses may increase in absolute dollars, and may also fluctuate as a percentage of net revenues in the future primarily as the result of commissions, which are dependent on the level of revenues. Gain on Investments Gain on investments during fiscal 2001 was largely attributed to the sale of Chartered and Broadcom securities. During fiscal 2001, the Company sold 500,000 shares of Chartered and recorded a pre-tax gain of $33.5 million and sold 287,522 shares of Broadcom and recorded a pre-tax gain $31.3 million. In June 2000, Malleable completed a merger with PMC-Sierra, resulting in the Company's selling its ownership interest in Malleable in exchange for 68,000 shares of PMC-Sierra Common Stock with a fair market value of $12.4 million. Upon completion of the transaction in June 2000, the Company recorded a pre-tax gain of $11.0 million. Subsequent to the transaction date, the Company's investment in PMC-Sierra is accounted for as an "available-for-sale" security in accordance with SFAS No. 115. In May 1999, Maverick (an entity in which the Company had a 39% interest in) completed a transaction with Broadcom, resulting in the Company selling its ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company -26- recorded a pre-tax gain in the first quarter of fiscal 2000 of approximately $51.6 million. Subsequent to the transaction date, the Company's investment in Broadcom is being be accounted for as an available-for-sale marketable security in accordance with SFAS 115. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax gain of approximately $23.7 million. At March 31, 2000, the Company owned 487,522 shares, after being adjusted for a 2 for 1 stock split in February 2000, and recorded an additional unrealized gain of approximately $23.4 million, which is net of deferred tax of approximately $16.1 million tax, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. At March 31, 2001, the Company owned 200,000 shares of Broadcom. See Note 2 of Notes to Consolidated Financial Statements. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 15% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3% ownership of USIC. At March 31, 2001 and 2000, the Company owned approximately 340.0 and 283.3 million shares, respectively or approximately 3.0% and 3.2% of UMC, and maintained its 25% and 4% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As the Company no longer has an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued approximately $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares were subject to a six-month "lock-up" or no trade period. This lock-up period expired in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e. 2002 to 2004). In May 2000, the Company received additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which became unrestricted in January 2001 as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short-term portion of the investments. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 42% of the Company's holdings at March 31, 2001), is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. On March 31, 2000, Orologic completed a transaction with Vitesse, resulting in the Company selling its ownership interest in Orologic in exchange for 852,447 shares of Vitesse. Based on Vitesse's closing share price on the date of sale, the Company recognized approximately $69 million pre-tax, non-operating gain, which is in fiscal 2000. Subsequent to the transaction date, the Company's investment in Vitesse is being be accounted for as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2001, the Company owns 728,293 Vitesse shares, after distribution made to Alliance Venture Management in May 2000. Write-Down of Marketable Securities and Other Investments In the past six months, marketable securities held by the Company have experienced significant declines in their market value primarily due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their value. -27- Such evaluation included researching commentary from industry experts, analysts and other companies, all of whom were not optimistic that the semiconductor sector would recover in the quarter or two or three. Based on the continuing depression in the in investments' stock prices from those originally used to record the investment and coupled with the expectation that the stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for the companies in the semiconductor industry in general (including lower Fab capacity at UMC), management determined that a write down was necessary as of March 31, 2001. As a result the Company recorded a pre-tax loss of $506.8 million during the fourth quarter of fiscal 2001 based on the quoted market price of the respective marketable securities as of March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. This was recorded in the write-down of marketable securities and other investments. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under the current accounting practice, the Company is required to offset the gain on the contracts with the loss on the Vitesse stock, both were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. The Company has adopted SFAS No. 133 effective April 2, 2001. Under SFAS No. 133, the derivative contracts must be accounted for based on their fair value. These changes in fair value contracts must be reported in earnings until maturity. Other Income (Expense), Net Other Income (Expense), Net represents interest income from short-term investments and interest expense on short and long-term obligations. In fiscal 2001, Other Expense, Net was approximately $200,000 compared to a net income of $29,000 in fiscal 2000. The change from fiscal 2000 to fiscal 2001 was attributed to higher interest expense on short and long-term borrowing. In fiscal 1999 net expense was $1.1 million. Provision for Income Taxes The Company's effective tax rate for fiscal years 2001, 2000, and 1999 was (40.3%), 39.1%, and (34.3%), respectively. During fiscal 2001, the Company recorded a benefit for income taxes of approximately $180 million primarily as a result of a write down of marketable securities and other investments of $509.4 million in the fourth quarter. During fiscal 2000, the Company recorded a provision for income taxes of approximately $410.3 million, primarily the result of the gains on investments of Broadcom, UMC and Vitesse. For the year ended March 31, 1999, the Company incurred a $24.5 million pretax loss, $9.8 million of which was incurred in the quarter ended June 30, 1998. As a result of the fiscal year 1999 loss, the lack of carryback potential, and the uncertainty regarding future results due to significant, rapid and unexpected product selling price declines that the Company experienced during the first and subsequent quarters of fiscal 1999, management could no longer conclude that it was "more likely than not" that its deferred tax assets would be realized. As a result, a full valuation allowance of $8.4 million was recorded during quarter ended June 30, 1998. -28- Equity in Income of Investees The Company, through Alliance Venture Management, invested approximately $62.0 million during fiscal 2001 in five Alliance venture funds, Alliance Ventures I, Alliance Ventures II, Alliance Ventures III, Alliance Ventures IV, and Alliance Ventures V. Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with approximately $20.0 million allocated to this fund. Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $9.1 million invested to-date in ten companies, with approximately $15.0 million total designated for this fund. Alliance Ventures III, whose focus is on emerging companies in the networking and communication market areas has invested approximately $38.6 million in 14 companies and has been allocated up to $100.0 million for new investments. Alliance Ventures IV, whose focus is on emerging companies in the networking and communication market areas has invested approximately $4.0 million in two companies and has been allocated up to $40.0 million for new investments. Alliance Ventures V, whose focus is on emerging companies in the networking and communication market areas has invested approximately $6.5 million in three companies and has been allocated up to $60.0 million for new investments. Several of the Alliance Venture investments are accounted for under the equity method due to the Company's ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of Alliance Ventures was approximately $5.7 million for the year ended March 31, 2001. Prior to the UMC merger (discussed elsewhere), the Company had made several investments with other parties to form a separate Taiwanese company, USC. This investment was accounted for under the equity method of accounting with a ninety-day lag in reporting the Company's share of results for the entity. Equity in income of USC reflects the company's share of income earned by USC for the previous quarter. In fiscal 2000, the Company reported its share in the income of USC in the amount of $9.5 million. As a result of the merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment. In fiscal 1999, the Company reported its share in the income of USC in the amount of $10.9 million, as compared to $15.5 million reported in fiscal 1998. The 30% decrease in income between fiscal 1999 and 1998 is primarily due to lower net income and a decrease in the Company's ownership percentage from approximately 18% to 15%. Factors That May Affect Future Results The Company's quarterly and annual results of operations have historically been, and will continue to be, subject to quarterly and other fluctuations due to a variety of factors, including; general economic conditions; changes in pricing policies by the Company, its competitors or its suppliers; anticipated and unanticipated decreases in unit average selling prices of the Company's products; fluctuations in manufacturing yields, availability and cost of products from the Company's suppliers; the timing of new product announcements and introductions by the Company or its competitors; changes in the mix of products sold; the cyclical nature of the semiconductor industry; the gain or loss of significant customers; increased research and development expenses associated with new product introductions; market acceptance of new or enhanced versions of the Company's products; seasonal customer demand; and the timing of significant orders. Results of operations could also be adversely affected by economic conditions generally or in various geographic areas, other conditions affecting the timing of customer orders and capital spending, a downturn in the market for personal computers, or order cancellations or rescheduling. Additionally, because the Company is continuing to increase its operating expenses for personnel and new product development to be able to support increased sales levels, the Company's results of operations will be adversely affected if such increased sales levels are not achieved. The markets for the Company's products are characterized by rapid technological change, evolving industry standards, product obsolescence and significant price competition and, as a result, are subject to decreases in average selling prices. The Company had experienced significant deterioration in the average selling prices for its SRAM and DRAM products during fiscal years 2001, 1998, 1997 and 1996. The Company is unable to predict the future prices for its products. Historically, average selling prices for semiconductor memory products have declined and the Company expects that average-selling prices will decline in the future. Accordingly, the Company's ability to maintain or increase revenues will be highly dependent on its ability to increase unit sales volume of existing products and to successfully develop, introduce and sell new products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to significantly -29- reduce its cost per unit in an amount to offset the declines in average selling prices. There can be no assurance that the Company will be able to increase unit sales volumes of existing products, develop, introduce and sell new products or significantly reduce its cost per unit. There also can be no assurance that even if the Company were to increase unit sales volumes and sufficiently reduce its costs per unit, the Company would be able to maintain or increase revenues or gross margins. The Company usually ships more product in the third month of each quarter than in either of the first two months of the quarter, with shipments in the third month higher at the end of the month. This pattern, which is common in the semiconductor industry, is likely to continue. The concentration of sales in the last month of the quarter may cause the Company's quarterly results of operations to be more difficult to predict. Moreover, a disruption in the Company's production or shipping near the end of a quarter could materially reduce the Company's net sales for that quarter. The Company's reliance on outside foundries and independent assembly and testing houses reduces the Company's ability to control, among other things, delivery schedules. The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as the Company has experienced from time to time. The Company's ability to maintain adequate levels of inventory is primarily dependent upon the Company obtaining sufficient supply of products to meet future demand, and any inability of the Company to maintain adequate inventory levels may adversely affect its relations with its customers. In addition, the Company must order products and build inventory substantially in advance of products shipments, and there is a risk that because demand for the Company's products is volatile and subject to rapid technology and price change, the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of the Company's key customers place orders with short lead times. The Company's customers' ability to reschedule or cancel orders without significant penalty could adversely affect the Company's liquidity, as the Company may be unable to adjust its purchases from its independent foundries to match such customer changes and cancellations. The Company has in the past produced excess quantities of certain products, which has had a material adverse effect on the Company's results of operations. There can be no assurance that the Company in the future will not produce excess quantities of any of its products. To the extent the Company produces excess or insufficient inventories of particular products, the Company's results of operations could be adversely affected, as was the case in fiscal 2001, 1999, 1998 and 1997, when the Company recorded pre-tax charges totaling approximately $53.9 million, $20.0 million, $15.0 million and $17.0 million, respectively, primarily to reflect a decline in market value of certain inventory. The Company currently relies on independent foundries to manufacture all of the Company's products. Reliance on these foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance and costs and loss of production due to seismic activity, weather conditions and other factors. In or about October 1997, a fire caused extensive damage to United Integrated Circuits Corporation ("UICC"), a foundry joint venture between UMC and various companies. UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where Company has products manufactured. UICC suffered an additional fire in January 1998, and since October 1996, there have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse affect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations or financial condition. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations, as was the case during the third quarter of fiscal 1996, during which period manufacturing yields of one of the Company's products were materially adversely affected by manufacturing problems at one of the Company's foundry suppliers. There can be no assurance that other problems affecting manufacturing yields of the Company's products will not occur in the future. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced at such suppliers. The occurrence of such price increases could have a material adverse affect on the Company's results of operations. -30- The Company conducts a significant portion of its business internationally and is subject to a number of risks resulting from such operations. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. Current or potential customers of the Company in Asia, for instance, may become unwilling or unable to purchase the Company's products, and the Company's Asian competitors may be able to become more price-competitive relative to the Company due to declining values of their national currencies. There can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. Additionally, other factors may materially adversely affect the Company's results of operations. The Company relies on domestic and offshore subcontractors for die assembly and testing of products, and is subject to risks of disruption in adequate supply of such services and quality problems with such services. The Company is subject to the risks of shortages of goods or services and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. The Company faces intense competition, and many of its principal competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than does the Company, any of which factors may place such competitors and potential competitors in a stronger competitive position than the Company. The Company's corporate headquarters are located near major earthquake faults, and the Company is subject to the risk of damage or disruption in the event of seismic activity. There can be no assurance that any of the foregoing factors will not materially adversely affect the Company's results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Effective April 2, 2001, we have adopted SFAS No. 133, and we are required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. Current pending litigation, administrative proceedings and claims are set forth in Item 3 - Legal Proceedings and in Item 1 - Licenses, Patents and Maskwork Protection, above. The Company intends to vigorously defend itself in the litigation and claims and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position. However, should the outcome of any of these actions be unfavorable, the Company may be required to pay damages and other expenses, or may be enjoined from manufacturing or selling any products deemed to infringe the intellectual property rights of others, which could have a material adverse effect on the Company's financial position or results of operations. Moreover, the semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will in the future receive, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties, and the Company is subject to the risk that it may become party to litigation involving such claims (the Company currently is involved in patent litigation). In the event of litigation to determine the validity of any third-party claims (such as the current patent litigation), or claims against the Company for indemnification related to such third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. -31- The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the entered value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. Although the Company may be refunded such deposits in the future (see Item 3 - Legal Proceedings, above), the deposit requirement, and the potential that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 1999 will be liquidated at the bond rate or deposit rate in effect at the time of entry, may materially adversely affect the Company's ability to sell in the United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company manufactures (wafer fabrication) SRAMs in Singapore (and has manufactured SRAMs in the United States as well), and may be able to support its U.S. customers with such products, which are not subject to antidumping duties. There can be no assurance, however, that the Company will be able to do so. The Company, through Alliance Venture Management, invests in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company invested. As a result of the foregoing factors, as well as other factors affecting the Company's results of operations, past performance should not be considered to be a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. In addition, stock prices for many technology companies are subject to significant volatility, particularly on a quarterly basis. If revenues or earnings fail to meet expectations of the investment community, there could be an immediate and significant impact on the market price of the Company's common stock. Due to the foregoing factors, it is likely that in some future quarter or quarters the Company's results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially and adversely affected. Liquidity and Capital Resources At March 31, 2001, the Company had approximately $6.1 million in cash and cash equivalents, a decrease of $28.7 million from March 31, 2000; and approximately $289.7 million in net working capital, a decrease of approximately $326.2 million from approximately $615.9 million at March 31, 2000. Additionally, the Company had short-term investments in marketable securities whose fair value at March 31, 2001 was $384.4 million. Refer to Notes 2-8 of Notes to the Consolidated Financial Statements for further details. During fiscal year 2001, operating activities used cash of approximately $26.3 million. This was primarily the result of net loss, the impact of non-cash items such as depreciation and amortization and the growth of inventory and accounts payable, offset by the non-cash investment losses. Cash used in operating activities of approximately $3.5 million in fiscal year 2000 was primarily the result of net income, the impact of non-cash items such as depreciation and amortization, non-cash investment gains related primarily to the merger of USC and USIC into UMC and Broadcom, net of deferred taxes, offset in part by growth in inventory and accounts receivable, accounts payable and taxes payable. Cash used in operating activities of approximately $23.6 million in fiscal year 1999 was primarily due to the operating loss of $22.0 million. Investing activities used cash in the amount of approximately $16.9 million in fiscal 2001 as result of proceeds from sale of the Company's holdings in Chartered in the amount of $45.5 million and Broadcom's $39.0 million, offset in part, by the Company's purchase of other investments of $66.0 million and investment in Tower and related wafer credits of approximately $31.0 million. In addition, the Company purchased $4.4 million of capital equipment during fiscal 2001. Investing activities during fiscal 2000 provided cash in the amount of approximately $38.9 million. This was the result of the proceeds from the sale of a portion of the Company's holdings in Broadcom of $48.9 million, additional proceeds from the April 1998 sale of USC stock of $21.5 million, offset in -32- part, by investments made by Alliance Ventures of $28.7 million. Investing activities in fiscal 1999 provided cash in the amount of approximately $25.0 million as the result of proceeds from the sale of a portion of the Companies holdings in USC, which were offset, in part, by additional investments in USIC and other start-up companies and purchases of equipment. Net cash provided by financing activities in fiscal 2001 was approximately $14.6 million as a result of borrowings from the Company's credit line of $22.2 million, offset in part, by the Company repurchasing its shares of common stock of $10.3 million. Net cash used in financing activities in fiscal 2000 was approximately $6.8 million. The use of cash for financing activities in fiscal 2000 was primarily the result of repurchase of 720,000 shares of the Company's common stock for $12.5 million offset, by a decrease in restricted cash of approximately $2.3 million, and proceeds from sale of common stock of approximately $4.7 million. Cash provided by financing activities of approximately $1.8 million in fiscal 1999 primarily reflects a decrease in restricted cash of approximately $1.3 million and net proceeds from the issuance of common stock, offset, in part, by principal lease payments of $1.5 million. The Company believes these sources of liquidity, and financing opportunities available to it will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. However, it is possible that we may need to raise additional funds to finance our activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. We could raise such funds by selling some our short-term investments, selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on terms that would be favorable to our shareholders and us, or at all. If we raise additional funds by issuing additional equity, the ownership percentages of existing shareholders would be reduced. In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has entered into and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production capacity, the formation of joint ventures to own and operate foundries, as was the case with Chartered Semiconductor, UMC or Tower, or the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional equity or debt financing. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on satisfactory terms. Additionally, the Company has entered into and will continue to enter into various transactions, including the licensing of its integrated circuit designs in exchange for royalties, fees or guarantees of manufacturing capacity. Refer to Part I, Item 1- Investments and Notes 4 and 5 in the Notes to the Consolidated Financial Statements. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to the impact of foreign currency fluctuations and changes in market values of our investments. These investments operate in markets that have experienced significant exchange rate and market price fluctuations over the year ended March 31, 2001. These entities, in which we hold varying percentage interests, operate and sell their products in various global markets; however, the majority of their sales are denominated in U.S. dollars, and therefore, their foreign currency risk is reduced. We did not hold any derivative financial instruments for trading purposes as of March 31, 2001. Investment Risk As of March 31, 2001, our short-term investment portfolio consisted of marketable equity securities in Chartered Semiconductor, UMC, Broadcom Corporation, PMC-Sierra and Vitesse Semiconductor, the future value of which is subject to market value fluctuations. Refer to Notes 2, 3, 4, 5, 6, 7 and 8 for further details. In the past six months, marketable securities held by the Company have experienced significant declines in their market value primarily due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their value. Such evaluation included researching commentary from industry experts, analysts and other companies, all of whom were not optimistic that the semiconductor sector would recover in the quarter or two or three. Based on the continuing depression in the in investments' stock prices from those originally used to record the investment -33- and coupled with the expectation that the stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for the companies in the semiconductor industry in general (including lower Fab capacity utilization at UMC), management determined that a write down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax loss of $506.8 million during the fourth quarter of fiscal 2001 based on the quote market price of the respective marketable securities as of March 31, 2001 Foreign Currency Risk Based on our overall currency rate exposure at March 31, 2001, a near term 10.0% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance that there will not be a material impact in the future. As of June 22, 2001, the Company owned approximately 340.0 million shares of UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable in the United States they are subject to foreign currency risk. The market value of these holdings on June 22, 2001 based on the price per share of NTD 47.40 and the NTD/US dollar exchange rate of NTD 34.45 per US$ is US$467.8 million. The value of these investments could be impacted by foreign currency fluctuations which could have a material impact on the financial condition and results of operations of the Company in the future. ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS The index to the Company's Consolidated Financial Statements and Schedules, and the report of the independent accountants appear in Part III of this Form 10-K. Selected quarterly financial data appears in Item 6 above. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -34- ================================================================================ PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Other than the information required pursuant to Item 405 of Regulation S-K, the information required by this item concerning executive officers of the Company is set forth in Part I of this Form 10-K after Item 4. The information required by this item with respect to directors is incorporated by reference to the section captioned "Election of Directors" in the proxy statement. ITEM 11 EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the section captioned "Executive Compensation" contained in the Proxy Statement. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section captioned "Certain Transactions" contained in the Proxy Statement. ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) (I) Financial Statements - See Index to Consolidated Financial Statements on page F-1 of this Form 10-K Annual Report. (II) Report of Independent Accountants - See Index to Consolidated Financial Statements on F-1 of this Form 10-K Annual Report. (2) (I) Schedule II: Valuation and Qualifying Accounts - See Index to Consolidated Financial Statements on F-1 of this Form 10-K Annual Report. (3) Exhibits - See Exhibit Index on page 36 of this Form 10-K Annual Report. -35- ================================================================================ EXHIBIT INDEX Exhibit Document Description Number ----------- -------------------------------------------------------------- 3.01(A) Registrant's Certificate of Incorporation 3.02(A) Registrant's Certificate of Elimination of Series A Preferred Stock 3.03(F) Registrant's Certificate of Amendment of Certificate of Incorporation 3.04(A) Registrant's Bylaws 4.01(A) Specimen of Common Stock Certificate of Registrant 10.01+(K) Registrant's 1992 Stock Option Plan adopted by Registrant on April 7, 1992 and amended through September 19, 1996, and related documents 10.02+(A) Registrant's Directors Stock Option Plan adopted by Registrant on October 1, 1993 and related documents 10.03+(A) Form of Indemnity Agreement used between Registrant and certain of its officers and directors 10.04+(K) Form of Indemnity Agreement used between the Registrant and certain of its officers 10.05(B) Sublease Agreement dated February 1994 between Registrant and Fujitsu America, Inc. 10.06(B) Net Lease Agreement dated February 1, 1994 between Registrant and Realtec Properties I L.P. 10.07*I Subscription Agreement dated February 17, 1995, by and among Registrant, Singapore Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. 10.8*I Manufacturing Agreement dated February 17, 1995, between Registrant and Chartered Semiconductor Manufacturing Pte. Ltd. 10.9(D) Supplemental Subscription Agreement dated March 15, 1995, by and among Registrant, Singapore Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. 10.10*(D) Supplemental Manufacturing Agreement dated March 15, 1995, between Registrant and Chartered Semiconductor Manufacturing Pte. Ltd. 10.11*(E) Foundry Venture Agreement dated July 8, 1995, by and among Registrant, S3 Incorporated and United Microelectronics Corporation 10.12*(E) Foundry Capacity Agreement dated July 8, 1995, by and among Registrant, Fabco, S3 Incorporated and United Microelectronics Corporation 10.13*(F) Foundry Venture Agreement dated September 29, 1995, between Registrant and United Microelectronics Corporation 10.14*(F) Foundry Capacity Agreement dated September 29, 1995, by and among Registrant, FabVen and United Microelectronics Corporation 10.15*(F) Written Assurances Re: Foundry Venture Agreement dated September 29, 1995 by and among Registrant, FabVen and United Microelectronics Corporation 10.16*(G) Letter Agreement dated June 26, 1996 by and among Registrant, S3 Incorporated and United Microelectronics Corporation 10.17(H) Stock Purchase Agreement dated as of June 30, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.18*(H) Amendment to Fabco Foundry Capacity Agreement dated as of July 3, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.19(H) Side Letter dated July 11, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.20+(I) 1996 Employee Stock Purchase Plan 10.21(J) Letter Agreement dated December 23, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.22(K) Trademark License Agreement dated as of October 17, 1996 between Registrant and Alliance Semiconductor International Corporation, a Delaware corporation, as amended through May 31, 1997 10.23(K) Restated Amendment to FabCo Foundry Venture Agreement dated as of February 28, 1997 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.24(K) Letter Agreement dated April 25, 1997 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.25*(K) Restated DRAM Agreement dated as of February 28, 1996 between Registrant and United Microelectronics Corporation 10.26*(K) First Amendment to Restated DRAM Agreement dated as of March 26, 1996 between Registrant and United Microelectronics Corporation 10.27*(K) Second Amendment to Restated DRAM Agreement dated as of July 10, 1996 between Registrant and United Microelectronics Corporation 10.28(K) Promissory Note and Security Agreement dated March 28, 1997 between Registrant and Matrix Funding Corporation 10.29*(L) Sale and Transfer Agreement dated as of March 4, 1998 10.30(M) Alliance Venture Management, LLC Limited Liability Company Operating Agreement dated October 15, 1999 10.31(M) Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated February 28, 2000 10.32(M) Alliance Ventures I, LP Agreement of Limited Partnership dated November 12, 1999 10.33(M) Alliance Ventures II, LP Agreement of Limited Partnership dated November 12, 1999 10.34(M) Alliance Ventures III, LP Agreement of Limited Partnership dated February 28, 2000 10.35(N) Share Purchase Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower Semiconductor Ltd. 10.36(N) Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower Semiconductor Ltd. 10.37(N) Registration Rights Agreement, dated as of January 18, 2001, by and between Tower Semiconductor Ltd., SanDisk Corporation, The Israel Corporation, Registrant, Macronix International Co., Ltd. and QuickLogic Corporation. -36- 10.38(N) Consolidated Shareholders Agreement, dated as of January 18, 2001 by and among SanDisk Corporation, The Israel Corporation, Registrant and Macronix International Co., Ltd. 10.39(N) Alliance / Tower Joinder Agreement, dated August 29, 2000, by and between Registrant and Tower Semiconductor Ltd. 10.40(N) Alliance / TIC Joinder Agreement, dated August 29, 2000, by and between Registrant and The Israel Corporation 10.41(O) Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated January 23, 2001 10.42(O) Alliance Ventures IV, LP Agreement of Limited Partnership dated January 23, 2001 10.43(O) Alliance Ventures V, LP Agreement of Limited Partnership dated January 23, 2001 10.44(O) Loan Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A. 10.45(O) Share Pledge Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A. 21.01(O) Subsidiaries of Registrant 23.01(O) Consent of PricewaterhouseCoopers LLP (San Jose, California) + Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K. * Confidential treatment has been granted with respect to certain portions of this document. ** Confidential treatment has been requested with respect to certain portions of this document. (A)The document referred to is hereby incorporated by reference from Registrant's Registration Statement on Form SB-2 (File No. 33-69956-LA) declared effective by the Commission on November 30, 1993. (B)The document referred to is hereby incorporated by reference from Registrant's Annual Report on Form 10-KSB filed with the Commission on June 29, 1994. (C)The document referred to is hereby incorporated by reference from Registrant's Registration Statement on Form SB-2 (File No. 33-90346-LA) declared effective by the Commission on March 28, 1995. (D)The document referred to is hereby incorporated by reference from Registrant's Current Report on Form 8-K filed with the Commission on April 28, 1995. (E)The document referred to is hereby incorporated by reference from Registrant's Current Report on Form 8-K filed with the Commission on July 24, 1995. (F)The document referred to is hereby incorporated by reference from Registrant's Current Report on Form 8-K filed with the Commission on October 23, 1995. (G)The document referred to is hereby incorporated by reference from Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 13, 1996. (H)The document referred to is hereby incorporated by reference from Registrant's Quarterly Report on Form 10-Q filed with the Commission on November 12, 1996. (I)The document referred to is hereby incorporated by reference from Registrant's Registration Statement on Form S-8 (File No. 333-13461) filed with the Commission on October 4, 1996. (J)The document referred to is hereby incorporated by reference from Registrant's Quarterly Report on Form 10-Q filed with the Commission on February 11, 1997. (K)The document referred to is hereby incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Commission on June 27, 1997. (L)The document referred to is hereby incorporated by reference from Registrant's Current Report on Form 8-K filed with the Commission on March 19, 1998. (M)The document referred to is hereby incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Commission on June 30, 2000. (N)The document referred to is hereby incorporated by reference from Registrant's Quarterly Report on Form 10-Q filed with the Commission on February 13, 2000. (O)The document referred to is filed herewith. -37- ================================================================================ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Alliance Semiconductor Corporation June 29, 2001 By: /s/ N. Damodar Reddy ------------------------------------ N. Damodar Reddy Chairman of the Board, President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer, and Principal Financial and Accounting Officer) Power of Attorney KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints N. Damodar Reddy and Bradley A. Perkins or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ N. Damodar Reddy Director, Chairman of the Board, June 29, 2001 ------------------------ President, Chief Executive N. Damodar Reddy Officer and Acting Chief Financial Officer /s/ C. N. Reddy Director, Executive Vice June 29, 2001 ------------------------ President for Investments C. N. Reddy /s/ Sanford L. Kane Director June 29, 2001 ------------------------ Sanford L. Kane /s/ Jon B. Minnis Director June 29, 2001 ------------------------ Jon B. Minnis -38- ALLIANCE SEMICONDUCTOR CORPORATION Index to Consolidated Financial Statements Pages Consolidated Financial Statements: Report of Independent Accountants.......................................F-2 Consolidated Balance Sheets as of March 31, 2001 and 2000...............F-3 Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999...........................................F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2000 and 1999.....................................F-5 Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999...........................................F-6 Notes to Consolidated Financial Statements..............................F-7 Financial Statement Schedule: Report of Independent Accountants.......................................F-23 Schedule II - Valuation and Qualifying Accounts.........................F-24 F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Alliance Semiconductor Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Alliance Semiconductor Corporation and its subsidiaries at March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California April 25, 2001 F-2
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Balance Sheets (in thousands) March 31, ------------------------- 2001 2000 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $6,109 $34,770 Restricted cash 1,925 2,804 Short term investments (Notes 384,374 883,300 2,3,4,5, 6, 7 and 8) Accounts receivable, net (Note 2) 18,001 15,858 Inventory (Note 2) 84,797 37,439 Related party receivables (Note 18) 2,369 1,778 Other current assets 1,079 1,958 ----------- ------------ Total current assets 498,654 977,907 Property and equipment, net (Note 2) 10,183 9,990 Investment in United Microelectronics Corp. (excluding short term portion) 228,633 505,478 (Notes 2 and 5) Investment in Tower Semiconductor 16,327 - Corporation (Note 2 and 11) 80,461 26,646 Alliance Ventures and other investments (Note 2, 9 and 10) Other assets 14,981 421 ----------- ------------ Total assets $849,239 $1,520,442 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short term borrowings (Note 2) $22,234 $- Accounts payable 76,130 27,133 Accrued liabilities 5,415 10,388 Income taxes payable 3,215 6,641 Deferred income taxes (Note 13) 101,143 316,903 Current portion of capital lease 858 905 obligation (Note 12) ----------- ------------ Total current liabilities 208,995 361,970 Long term obligations (Note 12) 11,882 1,517 Long term capital lease obligation (Note 686 1,197 12) Deferred income taxes (Note 13) 80,387 191,803 ----------- ------------ Total liabilities 301,950 556,487 ----------- ------------ Commitments and contingencies (Notes 12,16 and 17) Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares authorized; none issued - - and outstanding Common stock, $0.01 par value; 100,000 shares authorized; 42,725 and 42,406 427 424 shares issued and 41,440 and 41,686 shares outstanding Additional paid-in capital 197,350 193,260 Treasury stock (1,285 and 720 shares (22,762) (12,468) at cost) Retained earnings (deficit) 372,274 644,595 Accumulated other comprehensive - 138,144 income (Note 2) ----------- ------------ Total stockholders' equity 547,289 963,955 ----------- ------------ Total liabilities and stockholders' equity $849,239 $1,520,442 =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-3
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Statements of Operations (in thousands, except per share data) Year Ended March 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Net revenues $208,678 $89,153 $47,783 Cost of revenues 187,913 58,428 60,231 ------------ ------------ ------------ Gross profit (loss) 20,765 30,725 (12,448) Operating expenses: Research and development 13,766 14,568 14,099 Selling, general and 19,691 15,962 12,652 administrative ------------ ------------ ------------ Income (loss) from (12,692) 195 (39,199) operations Gain on investments 75,801 1,049,130 15,823 Write-down of marketabl (509,449) - - securities and other investments Other income (loss), net (200) 29 (1,126) ------------ ------------ ------------ Income (loss) before (446,540) 1,049,354 (24,502) income taxes Provision (benefit) for (179,956) 410,348 8,397 income taxes ------------ ------------ ------------ Income (loss) before equity in income (loss) (266,584) 639,006 (32,899) of investees Equity in income (loss) of (5,737) 9,094 10,856 investees ------------ ------------ ------------ Net income (loss) $(272,321) $648,100 $(22,043) ============ ============ ============ Net income (loss) per share: Basic $(6.58) $15.49 $(0.53) ============ ============ ============ Diluted $(6.58) $15.07 $(0.53) ============ ============ ============ Weighted average number of common shares: Basic 41,376 41,829 41,378 ============ ============ ============ Diluted 41,376 42,992 41,378 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Statements of Stockholders' Equity (in thousands) Accumulated Common Stock Additional Other Retained Total -------------------------- Paid in Treasury Comprehensive Earnings Stockholder's Shares Amount Capital Stock Income (loss) (Deficit) Equity ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 40,449,988 $404 $183,099 $- $(12,930) $18,538 $189,111 31, 1998 Issuance of common 1,158,635 12 1,926 - - - 1,938 stock under employee stock plans Cumulative - - - - (5,436) - translation adjustments Net loss - - - - - (22,043) Total - - - - - - (27,479) comprehensive loss ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 41,608,623 416 185,025 - (18,366) (3,505) 163,570 31, 1999 Issuance of common 797,482 8 4,719 - - - 4,727 stock under employee stock plans Repurchase of - - - (12,468) - - (12,468) common stock (1) Tax benefit on - - 3,516 - - - 3,516 exercise of stock options Cumulative - - - - 18,366 - translation adjustments Unrealized gain on - - - - 138,144 - investments (net of tax, $94,814) Net income - - - - - 648,100 Total - - - - - - 804,610 comprehensive income ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 42,406,105 424 193,260 (12,468) 138,144 644,595 963,955 31, 2000 Issuance of common stock under 319,246 3 2,349 - - - 2,352 employee stock plans Repurchase of - - - (10,294) - - (10,294) common stock (1) Tax benefit on - - 1,741 - - - 1,741 exercise of stock options Unrealized loss on - - - - (138,144) - investments Net income - - - - - (272,321) Total - - - - - - (410,465) comprehensive income ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 42,725,351 $427 $197,350 $(22,762) $- $372,274 $547,289 31, 2001 ============ ============ ============ ============ ============ ============ ============
(1) At March 31, 2000 and 2001, the Company held 720,000 and 1,285,000 shares in treasury, which have not been retired. After taking into account these treasury shares, the net outstanding shares at March 31, 2000 and 2001 was 41,686,105 and 41,440,351, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-5
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Statements of Cash Flows (in thousands) Year Ended March 31, --------------------------------- 2001 2000 1999 ---------- --------- ---------- Cash flows from operating activities: Net Income (loss) $(272,321) $648,100 $(22,043) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,202 4,417 3,789 Inventory write-downs 53,945 742 20,437 Non-recurring compensation - 3,655 - charge Equity in income of investees 5,737 (9,094) (10,856) (Gain)/ loss on investments (75,801 (1,049,130) (15,823) Write-down of marketable 509,449 - - securities and other investments Changes in assets and liabilities: Accounts receivable (2,143) (6,915) 6,773 Inventory (101,303) (25,254) (989) Related party receivables (591) 37 (1,815) Other assets 993 (99) 1,622 Accounts payable 48,997 19,087 (27,668) Accrued liabilities (4,973) 92 (2,446) Deferred income taxes (221,877) 399,168 25,466 Income tax payable (1,685) 10,157 - Long-term obligations 31,035 1,517 - ---------- --------- ---------- Net cash provided by (used in) (26,336) (3,520) (23,553) operating activities ---------- --------- ---------- Cash provided by (used in) investing activities: Purchase of property and (4,395) (2,816) (2,609) equipment Proceeds from sale of securities of United - 21,481 31,662 Semiconductor Corporation Proceeds from sale of 38,965 48,911 - securities of Broadcom Proceeds from sale of securities of Chartered 45,500 - - Semiconductor, Co. Purchase of securities of - - (3,098) United Silicon, Inc. Investment in Tower (16,327) - - Semiconductor Corporation Other assets (14,674) - - Purchase of Alliance Venture (66,007) (28,696) (1,000) and other investments ---------- --------- ---------- Net cash provided by (used in) (16,938) 38,880 24,955 investing activities ---------- --------- ---------- Cash flows from financing activities: Net proceeds from the issuance 2,352 4,727 1,938 of common stock Principal payments on lease (558) (1,439) (1,468) obligation Repurchase of common stock (10,294) (12,468) - Short-term borrowings 22,234 - - Restricted cash 879 2,371 1,337 ---------- --------- ---------- Net cash provided by (used in) 14,613 (6,809) 1,807 financing activities ---------- --------- ---------- Net increase (decrease) in cash (28,661) 28,551 3,209 and cash equivalents Cash and cash equivalents at 34,770 6,219 3,010 beginning of the period ---------- --------- ---------- Cash and cash equivalents at end $6,109 $34,770 $6,219 of the period ========== ========= ========== Supplemental disclosures of cash flow information: Cash paid (refunded) for income $29,501 $355 $(17,736) taxes ========== ========= ========== Cash paid for interest $733 $99 $214 ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 ALLIANCE SEMICONDUCTOR CORPORATION Notes to Consolidated Financial Statements (in thousands, except per share data) NOTE 1. The Company and Its Significant Accounting Policies Alliance Semiconductor Corporation (the "Company" or "Alliance"), a Delaware corporation, designs, develops and markets high performance memory products and memory intensive logic products. The Company sells its products to the desktop and portable computing, networking, telecommunications, instrumentation and consumer markets. The semiconductor industry is highly cyclical and has been subject to significant rapid technological changes at various times that have been characterized by diminished product demand, production overcapacity, product shortages due to production under-capacity and accelerated erosion of selling prices. The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience rapid erosion in product pricing (such as that occurred with SRAM and DRAM pricing during the fourth quarter of fiscal year 2001, as well as, fiscal years 1999, 1998 and 1997), which is not within the control of the Company and which could have an adverse material effect on the Company's results of operations. The Company is unable to predict future prices for its products. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries, including Alliance Venture Management, LLC, Alliance Ventures, LP I, II, III, IV and V. (See Note 9). All significant inter-company accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Basis of Presentation For purposes of presentation, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal years ended March 31, 2001 and 2000 contained 52 weeks, while March 31, 1999 contained 53 weeks. Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal year 2001 presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash on deposit and highly liquid money market instruments with banks and financial institutions. The Company considers all highly liquid debt investments with maturity from the date of purchase of three months or less to be cash equivalents. Restricted Cash Restricted cash, in the form of certificates of deposit, support stand-by letters of credit, which in turn are used to secure customs duties and other purchase commitments. Short term Investments The Company accounts for its short term investments in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate categorization of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2001, all short-term investment securities were designated as available-for-sale in accordance with SFAS 115. F-7 Available-for-sale securities are carried at fair value using available market information. Unrealized gains and losses are generally reported in accumulated other comprehensive income (loss) in the balance sheet. Inventories Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on the estimated net realizable value or current replacement cost. The Company also evaluates its open purchase order commitments on an on-going basis and accrues for any expected loss if appropriate. Property and Equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated economic useful lives of the assets, which range from three to seven years. Upon disposal, the cost of the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Long-Lived Assets Long-lived assets held by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of carrying amounts to future net cash flows an asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount to which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset. Revenue Recognition Revenue from product sales, including sales to distributors, is recognized upon shipment, net of accruals for estimated sales returns and allowances. Research and Development Costs Costs incurred in the research and development of semiconductor devices are expensed as incurred, including the cost of prototype wafers and new production mask sets. Income Taxes The Company accounts for its income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of the assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Concentration of Risks Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short and long term investments and accounts receivable. Cash is deposited with one major bank in the United States while cash equivalents are deposited with two major financial institutions in the United States. The Company attempts to limit its exposure to these investments by placing such investments with several financial institutions and performs periodic evaluations of these institutions. Short and long term investments are subject to declines in market as well as risk associated with the underlying investment. The Company evaluates its investments from time to time in terms of credit risk since a substantial portion of its assets are now in the form of investments, not all of which are liquid, and may enter into full or partial hedging strategies involving financial derivative instruments to minimize market risk. During fiscal years 2000 and 2001, the Company entered into a number of "cashless collar" and "covered call" option transactions to partially hedge its holdings in Broadcom Corporation. In addition, during fiscal 2001, the Company entered into an "indexed debt" transaction to partially hedge its holdings in Vitesse Semiconductor Corporation. The Company may enter into other similar transactions in the future. F-8 Since Chartered, UMC, Broadcom, Vitesse and PMC-Sierra are in the semiconductor business, as is the Company, they will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to these companies. In addition, because they are semiconductor manufacturers, they are subject to additional risks, such as fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurances that the Company's investment in these companies will increase in value or even maintain their value. Because of the cyclical nature of the semiconductor industry, it is possible that these investments, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of these stocks. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered or UMC, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in them. The Company sells its products to original equipment manufacturers and distributors throughout the world. The Company performs ongoing credit evaluations of its customers and, on occasion, may require letters of credit from its non-US customers. Sales to the Company's customers are typically made pursuant to specific purchase orders, which may be canceled by the customer without enforceable penalties. For the fiscal year ended March 31, 2001, no customers accounted for 10% or more of the Company's net revenues. For the fiscal year ended March 31, 2000, one customer accounted for approximately 10% of the Company's net revenues. For the fiscal year ended March 31, 1999, two customers accounted for approximately 15% and 13% of the Company's net revenues. The Company conducts the majority of its business in U.S. dollars and foreign currency translation gains and losses have not been material in any one year. International sales accounted for approximately $131.5 million, $53.0 million, and $24.0 million of net revenues for the years ended March 31, 2001, 2000 and 1999, respectively. Stock-Based Compensation The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company's policy is to grant options with an exercise price equal to the fair market value of the Company's stock on the date of grant. Accordingly, no compensation expense has been recognized in the Company's statements of operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Net Income (Loss) Per Share Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below:
Year Ended March 31, ------------------------------ 2001 2000 1999 -------- -------- -------- Net income/(loss) available to $(272,321) $648,100 $(22,043) common shareholders ======== ======== ======== Weighed average common shares 41,376 41,829 41,378 outstanding (basic) Effect of dilutive options - 1,163 - -------- -------- -------- Weighed average common shares 41,376 42,992 41,378 outstanding (diluted) ======== ======== ======== Net income/(loss) per share: Basic $(6.58) $15.49 $(0.53) ======== ======== ======== Diluted $(6.58) $15.07 $(0.53) ======== ======== ========
F-9 Due to the Company incurring a net loss in 2001 and 1999, a calculation of EPS assuming dilution is not required for those years. At March 31, 2001 and 1999 there were 2,720,687 and 2,741,298 options outstanding to purchase common stock with respective weighted average purchase price of $11.11 and $5.37 that were excluded from the diluted loss per share computations because their effect would be anti-dilutive. Comprehensive Income In 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. Total accumulated comprehensive loss for fiscal year 2001 and 1999 was $410.5 million and $27.5 million, respectively, compared to total accumulated comprehensive income of $804.6 million for fiscal 2000. The components of accumulated comprehensive income (loss) are shown in the consolidated statements of shareholders' equity. Segment Reporting In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The Company operates in one reportable segment, memory products. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The Company has adopted SFAS No. 133 effective April 2, 2001 and as a result, the Company is required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gains or losses as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. NOTE 2. Balance Sheet Components Short-term Investments Short-term investments include the following available-for-sale securities at March 31, 2001 and 2000 (in thousands):
March 31, 2001 March 31, 2000 -------------------------- ------------------------ Number of Market Number of Market Shares Value Shares Value ------------- ----------- ------------ ---------- UMC 198,315 $320,086 141,650 $548,752 Chartered 1,642 39,481 2,141 201,789 Semiconductor Broadcom 200 5,780 488 62,831 Corporation Vitesse 728 17,341 852 69,928 Semiconductor PMC-Sierra 68 1,686 - - ----------- ---------- Total $384,374 $883,300 =========== ==========
Long-term Investments At March 31, 2001 and 2000, the Company's long-term investments were as follows (in thousands):
March 31, 2001 March 31, 2000 ------------------------- ------------------------- Number of Cost Number of Cost Shares basis Shares basis ------------- ---------- ------------ ---------- UMC 141,653 $228,633 141,650 $505,478 Tower Semiconductor 1,233 16,327 - - Alliance Venture 67,961 26,646 Investments Solar Venture 12,500 - Partners, LP ---------- ---------- Total $325,421 $532,124 ========== ==========
F-10 Accounts Receivable
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Accounts receivable: Trade receivables $21,582 $16,812 Less allowance for (3,581) (954) doubtful accounts and sales related reserves ----------- ----------- $18,001 $15,858 =========== ===========
Inventories
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Inventory: Work in process $41,350 $20,737 Finished goods 43,447 16,702 ----------- ----------- $84,797 $37,439 =========== ===========
Property and Equipment
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Engineering and test $16,715 $13,756 equipment Computers and software 11,769 9,474 Furniture and office 689 1,599 equipment Leasehold improvements 1,350 1,299 Land 288 288 ----------- ----------- 30,811 26,416 Less: Accumulated (20,628) (16,426) depreciation and amortization ----------- ----------- $10,183 $9,990 =========== ===========
Depreciation and amortization expense for fiscal yeFars 2001, 2000 and 1999 were $4.2 million, $4.4 million and $3.8 million, respectively. Property and equipment includes $2.2 million and $2.5 million of assets under capital leases at March 31, 2001 and 2000, respectively. Accumulated depreciation of assets under capital leases totaled $1,048,000 and $700,000 at March 31, 2001 and 2000, respectively. Accumulated Other Comprehensive Income Components of accumulated other comprehensivFe income at March 31, 2000 were as follows:
Unrealized Tax Effect Net Gain Unrealized Gain ---------- ----------- ------------- UMC $43,274 $(17,613) $ 25,661 Chartered 150,194 (61,129) 89,065 Semiconductor Broadcom 39,490 (16,072) 23,418 Corporation ---------- ----------- ------------- $232,958 $(94,814) $138,144 ========== =========== =============
Short-term borrowings At March 31, 2001, the Company had short-term borrowings from a brokerage firm of approximately $22.2 million dollars secured by a portion of its holdings in Chartered Semiconductor, bearing interest at a rate of 6.5% per annum. NOTE 3. Write-Down of Marketable Securities In the past six months, marketable securities held by the Company have experienced significant declines in their market value primary due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their fair F-11 value. Such evaluation included researching commentary from industry experts, analysts, and other companies, all of whom were not optimistic that the semiconductor sector would recover in the next quarter or two or three. Based on the continuing depression in the investments' stock prices from those originally used to record the investment and coupled with the expectation that stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for companies in the semiconductor industry in general, management determined that a write-down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax, non-operating loss of approximately $509.4 million during the fourth quarter of fiscal 2001 based on the quoted price of the respective marketable securities as of March 31, 2001 as follows:
Pre-Tax Write-Down -------- (in thousands) UMC $460,014 Broadcom 3,778 Corporation Vitesse 32,298 PMC-Sierra 10,777 Other 2,582 -------- Total $509,449 ========
At the end of the fourth quarter fiscal 2001, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. This was recorded in the write-down of marketable securities and other investments. NOTE 4. Investment in Chartered Semiconductor Manufacturing Ltd. ("Chartered") In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2," if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up," or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, in which the Company decided not to participate. The Companies shares were subject to an additional three-month "lock-up" which expired in August 2000. In June 2000, the underwriter of the secondary offering released the Company from the lockup, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered. During fiscal 2001, the Company sold 500,000 shares and recognized a pre-tax non-operating gain of approximately $33.5 million. At March 31, 2001, the Company owned approximately 16.4 million ordinary shares or 1.64 million ADSs of Chartered. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more than 50% of its original holdings of Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. NOTE 5. Investment in United Microelectronics Corporation ("UMC") In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19% of the outstanding shares and 25% of the total wafer capacity. In April 1998, the Company received approximately US$31.7 million In connection with the sale of 35 million shares of USC, and the Company had the right to receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence of certain potential future events, including the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, this right resulted in Alliance's receipt of approximately NTD 665 million (US$ 21.5 million) as a result of the merger between USC and UMC. F-12 Following the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC made a stock distribution to its employees; thereby the Company's ownership in USC was reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million shares to the Company by way of dividend distribution as well as distributions to other entities. As a result of these distributions, the Company owned approximately 14.8% of the outstanding shares. Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights and the board seat, Alliance had participated in both strategic and operating decisions of USC on a routine basis and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000 and 1999 the Company reported its proportionate share of equity income of USC of $9.5 million and $10.9 million net of tax, respectively. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC has the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. The Company received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the Company owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively,. As the Company does not have an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expired in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger, the Company accounted for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which became unrestricted on January 3, 2001, as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short-term portion of the investments. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% and 42% of the Company's holdings at March 31, 2000 and 2001, respectively), is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. F-13 At the end of the fourth quarter of fiscal 2001 the Company wrote-down its investment in UMC and recognized a pre-tax, non-operating loss of approximately $460.0 million. (See Note 3). At March 31, 2001, the Company owned approximately 340.0 million shares of UMC. (See Note 2). Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of UMC, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Note 6. Investment in Broadcom Corporation In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for embedded memory in an internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split. During fiscal 2001, the Company sold 287,522 shares and realized a pre-tax, non-operating gain of approximately $31.3 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8 million. (See Note 3). At March 31, 2001, the Company owned approximately 200,000 shares of Broadcom. (See Note 2). Note 7. Investment in Vitesse Semiconductor Corporation In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under current accounting practice, the Company offsets the gain on the contracts with the loss on the Vitesse stock, both of which were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax, non-operating gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Vitesse and recognized a pre-tax, non-operating loss of approximately $52.9 million. (See Note 3). At March 31, 2001, the Company owned 728,293 shares of Vitesse. (See Note 2). Vitesse's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Vitesse's and the Company's, sometimes move as a group, it is likely that Vitesse's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in F-14 fiscal 2001. Thus, there can be no assurance that the Company's investment in Vitesse will increase in value or even maintain its value. Note 8. Investment in PMC-Sierra Corporation In 1999, the Company made an investment in a start-up called Malleable Technologies, Inc. ("Malleable"). This investment was transferred to Alliance Venture I, LP, upon its creation. On June 27, 2000, PMC-Sierra, Inc. ("PMC") acquired Malleable. PMC exchanged 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC did not already own. In connection with the merger, Alliance Ventures I received 68,152 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company reported a gain of approximately $11.0 million based on the closing share price of $182.875 of PMC on the date of the merger. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in PMC and recognized a pre-tax, non-operating loss of approximately $10.8 million. (See Note 3). At March 31, 2001, the Company owned 68,152 shares of PMC. (See Note 2). PMC's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like PMC's and the Company's, sometimes move as a group, it is likely that PMC's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value. Note 9. Alliance Venture Management, LLC In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds, by allowing them limited participation in the profits of the various investment funds, through the management fees paid by the investment funds. In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts. At Alliance Venture Management's inception in November 1999, series A member units and series B member units in Alliance Venture Management were created. The unit holders of series A units and series B units receive management fees of 15% of investment gains realized by Alliance Ventures I and Alliance Ventures II, respectively. In February 2000, upon the creation of Alliance Ventures III, LP ("Alliance Ventures III"), the management agreement for Alliance Venture Management was amended to create series C member units which are entitled to receive a management fee of 16% of investment gains realized by Alliance Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"), the management agreement for Alliance Venture Management was amended to create series D and E member units which are entitled to receive a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively. Each of the owners of the series A, B, C, D and E member units paid the initial carrying value for their shares of the member units. While the Company owns 100% of the common units in Alliance Venture Management, it does not hold any series A, B, C, D or E member units and does not participate in the management fees generated by the management of the investment funds. Several of the Company's senior management hold the majority of the series A, B, C, D or E member units of Alliance Venture Management. After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2001, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures has invested approximately $9.1 million in ten F-15 companies, with a total fund allocation of $15.0 million. As of March 31, 2001, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $38.6 million in 14 companies, with a total fund allocation of $100.0 million. As of March 31, 2001, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $4.0 million in two companies, with a total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $6.5 million in three companies, with a total fund allocation of $60.0 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down certain of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. (See Note 3). Also, several of the Alliance Venture investments are accounted for under the equity method due to the Company's ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of Alliance Ventures was approximately $5.7 million for the year ended March 31, 2001. Certain of the Company's officers have formed private venture funds, which invest in some of the same investments as the Company. Additionally, an outside venture fund has been formed in which certain of the Company's officers and employees, as well as the Company itself, has made similar venture investments, including investment in some of the same companies as Alliance Ventures. Alliance Venture Management generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. The market for these types of investments has, in the past, been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is possible there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. It is possible that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these types of investments. Note 10. Investment in Solar Venture Partners, LP In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company has invested $12.5 million, $9.5 million is in the form of three promissory notes, which on March 31, 2001 were converted into a limited partnership interest in Solar. Due to changes in the venture capital market, Alliance has decided to limit its investment in Solar to $12.5 million already invested. Certain of the Company's officers and employees have also invested in Solar. Solar has made investments in some of the same companies as Alliance Ventures. Note 11. Investment in Tower Semiconductor Corporation In August 2000, the Company entered into a share purchase agreement with Tower Semiconductor ("Tower") under which Alliance committed to make a $75 million strategic investment in Tower as part of Tower's plan to build its new fab. In return for its investment, Alliance will receive equity, corresponding representation on Tower's Board of Director and committed production capacity in the advanced fab, which Tower intends to build. Pursuant to the agreement, the Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase price of $31 million in the fourth quarter of fiscal 2001. The Company has an obligation to purchase an additional 1,466,760 ordinary shares in four equal increments upon occurrence of events relating to Tower's construction of FAB 2 as specified in the agreement. These additional shares are expected to be purchased by the Company during fiscal 2002 and 2003. In connection with the share purchase agreement, the Company entered into a foundry agreement under which the Company is entitled to a certain amount of credits towards future wafer purchases from Tower. The amount of credits is determined upon each share purchase transaction by Alliance and is calculated based on the F-16 difference between Tower's average stock price for 30 days preceding a purchase transaction and Alliance's share purchase exercise price. At March 31, 2001, such wafer credits from Tower totaled $14.7 million and are included in other assets on the balance sheet. The wafer credits will be utilized as the Company purchases wafers from Tower in the future where 15% of order value will be applied against the wafer credits. Under the terms of the foundry agreement, the Company is guaranteed a capacity of up to 15% of available wafer starts but not to exceed 5,000 wafers starts per month. The guaranteed capacity may be reduced if the Company elects not to exercise its additional share purchase obligation. The Company accounts for its investment in Tower under the cost method based on the Company's inability to exercise significant influence over Tower's operations. NOTE 12. Long Term Obligations, Leases and Commitments In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date and pre-tax, non-operating gain on the contracts of $20.6 million, representing their intrinsic value at March 31, 2001, was recorded. As a result, the Company's obligations under the Agreements were reduced to $10.9 million, which was included in long-term obligations at March 31, 2001. Operating Leases The Company leases its headquarters facility under an operating lease that expires in June 2006. Under the terms of the lease, the Company is required to pay property taxes, insurance and maintenance costs. In addition, the Company also leases sales and design center offices under operating leases, which expire between 2001 and 2007. Future minimum fiscal rental payments under non-cancelable leases are as follows:
Fiscal Year (in thousands) ----------- -------------- 2002 $1,645 2003 1,607 2004 1,636 2005 1,696 2006 1,754 Thereafter 550 ------------- Total payments $8,888 =============
Rent expense for fiscal 2001, 2000, and 1999 was $1,799,000, $1,386,000 and $635,000 respectively. Capital Leases At March 31, 2001, equipment under capital leases amounted to approximately $2.2 million compared to $2.5 million at March 31, 2000. The original lease terms ranged from three to five years. The following is a schedule of future minimum fiscal lease payments under capital leases:
Fiscal Year (in thousands) ------------------------- ---------- 2002 $908 2003 686 2004 100 ---------- Total payments minimum 1,694 lease payments Amount representing (150) interest ---------- 1,544 Less current portion (858) ---------- Long-term capital lease $686 obligations ==========
F-17 Letters of Credit At March 31, 2001, approximately $1.9 million in standby letters of credit were outstanding and expire through April 1, 2002, secured by restricted cash. NOTE 13. Provision (benefit) for income taxes The provision (benefit) for income taxes is comprised of the following:
March 31, ------------------------------ 2001 2000 1999 -------- --------- --------- (in thousands) Current: Federal $28,969 $14,340 $- State 5,291 228 - Foreign 34 - - -------- --------- --------- 34,294 14,568 - -------- --------- --------- Deferred: Federal (185,070) 340,351 8,397 State (29,180) 55,429 - -------- --------- --------- (214,250) 395,780 8,397 -------- --------- --------- Total $(179,956) $410,348 $8,397 provision (benefit) ======== ========= =========
Deferred tax assets (liabilities) comprise the following:
March 31, ------------------ 2001 2000 ------- --------- (in thousands) Inventory reserves $14,743 $1,982 Accrued expenses and 1,839 4,198 reserves Other 3,866 - ------- --------- Gross deferred tax 20,448 6,180 assets Investment in UMC (193,102) (398,851) Investment in Broadcom (2,254) (25,127) Investment in Chartered - (61,129) Investment in Vitesse (6,549) (27,952) Investment in PMC-Sierra (73) - Other - (1,827) ------- --------- Gross deferred tax (201,978) (514,886) liabilities ------- --------- $(181,530) $(508,706) ======= =========
The provision (benefit) for income taxes differs from the amount obtained by applying the U.S. federal statutory rate to income before income taxes as follows:
Year Ended March 31, ----------------------------------- 2001 2000 1999 ---------- ---------- ----------- (in thousands, except percentages) Federal statutory rate 35% 35% 35% Tax at federal $(156,289) $367,274 $(8,531) statutory rate State taxes, net of (25,893) 59,813 - federal benefit Change in valuation - (17,815) 8,397 allowance Current year losses and timing differences - - 8,531 with no tax benefit recognized Other, net 2,226 1,076 - ---------- ---------- ----------- Total $(179,956) $410,348 $8,397 ========== ========== ===========
The tax benefit associated with the exercises of non-qualified stock options and disqualifying dispositions of incentive stock options reduced taxes currently payable by $1.7 million and $3.5 million in fiscal years 2001 and 2000, respectively. F-18 Note 14. Stock Option Plans 1992 Stock Option Plan In April 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") and reserved 5,625,000 shares of common stock for issuance to employees and consultants of the Company. The Board of Directors may terminate the Plan at any time at its discretion. On September 30, 1993, the number of shares of common stock reserved for issuance under the Plan was increased to 7,875,000 and on September 14, 1995, the number of shares reserved for issuance under the Plan was increased to 9,000,000. On August 31, 1999, the number of shares reserved for issuance under the Plan was increased by 2,000,000 to 11,000,000. On September 8, 2000, the number of shares reserved for issuance under the Plan was increased by 2,000,000 to 13,000,000. The Option Plan, which has a term of ten years, provides for incentive as well as nonqualified stock options. Incentive stock options may not be granted at less than 100 percent of the estimated fair value, as determined by the Board of Directors, of the Company's Common Stock at the date of grant and the option term may not exceed 10 years. For holders of more than 10 percent of the total combined voting power of all classes of the Company's stock, options may not be granted at less than 110 percent of the estimated fair value of the common stock at the date of grant and the option term may not exceed five years. Directors' Stock Option Plan On September 30, 1993, the Company adopted its 1993 Directors' Stock Option Plan ("Directors' Plan"), under which 900,000 shares of common stock have been reserved for issuance. The Directors' Plan provides for the automatic grant to each non-employee director of the Company (but excluding persons on the Company's Board of Directors in November 1993) of an option to purchase 22,500 shares of common stock on the date of such director's election to the Company's Board of Directors. Thereafter, such director will receive an automatic annual grant of an option to purchase 11,250 shares of common stock on the date of each annual meeting of the Company's stockholders at which such director is re-elected. The maximum number of shares that may be issued to any one director under this plan is 90,000. Such options will vest ratably over four years from their respective dates of grant. The following table summarizes grant and stock option activity under the Plan and the Directors' Plan for fiscal years 2001, 2000, and 1999:
Options Options Outstanding ------------ -------------------------- Available Shares Weighted for Grant Average Prices ------------ ---------- --------------- Balance at March 31, 1998 1,358,489 3,675,431 $5.81 Options granted (1,405,150) 1,405,150 3.52 Options canceled 1,352,324 (1,352,324) 7.23 Options exercised - (986,959) 1.56 ------------ ---------- --------------- Balance at March 31, 1999 1,305,663 2,741,298 $5.37 Options authorized 2,000,000 - Options granted (1,150,950) 1,150,950 $11.91 Options canceled 925,374 (925,374) $5.49 Options exercised - (677,717) $5.85 ------------ ---------- --------------- Balance at March 31, 2000 3,080,087 2,289,157 $8.44 Options authorized 2,000,000 - Options granted (627,250) 627,250 $19.46 Options canceled 267,850 (267,850) $13.93 Options exercised - (274,195) $5.51 ------------ ---------- --------------- Balance at March 31, 2001 4,720,687 2,374,362 $11.11 ============ ========== ===============
As of March 31, 2001, options to purchase approximately 523,772 shares of common stock were exercisable. Options granted vest over a period of four to five years. The weighted average estimated fair value at the date of grant, as defined by SFAS 123, for options granted in fiscal 2001, 2000,and 1999 was $14.69, $8.57, and $2.44 per option, respectively. The estimated grant date fair value disclosed above was calculated using the Black-Scholes model. This model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, F-19 which greatly affect the calculated values. Significant option groups outstanding at March 31, 2001, and related weighted average exercise price and contractual life information are as follows:
Outstanding and Exercisable by Price Range Number Weighted Weighted Number Weighted Range of Outstanding Average Average Vested and Average Exercise As of Remaining Exercise Exercisable Exercise Prices March 31, Contractual Price As of March Price 2001 Life 31, 2001 ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 573,230 3.66 $2.94 189,710 $3.18 $4.06 $4.50 - 475,082 2.56 $6.97 175,862 $7.08 $10.94 $11.06 - 270,620 4.41 $11.18 54,124 $11.18 $11.19 $11.25 - 551,430 4.84 $13.06 80,776 $12.98 $17.25 $17.94 - 275,500 5.11 $19.71 1,000 $18.50 $20.50 $20.75 - 228,500 5.18 $25.07 22,300 $25.52 $29.13 ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 2,374,362 4.11 $11.11 523,772 $7.81 $29.13 ============= ============ ============ ========== ============= =========
The following assumptions are included in the estimated grant date fair value calculations for stock options:
2001 2000 1999 --------- ---------- ------------ Expected life 5.00 5.00 5.00 years years years Risk-free 4.8% 6.7% 5.7% interest rate Volatility 87.6% 86.0% 88.0% Dividend 0.0% 0.0% 0.0% yield
Employee Stock Purchase Plan In September 1996, the Company and its shareholders approved an Employee Stock Purchase Plan ("ESPP"), which allows eligible employees of the Company and its designated subsidiaries to purchase shares of common stock through payroll deductions. The ESPP consists of a series of 12-month offering periods composed of two consecutive 6-month purchase periods. The purchase price per share is 85% of the fair market value of the common stock, at the date of commencement of the offering period, or at the last day of the respective 6-month purchase period, whichever is lower. Purchases are limited to 10% of an eligible employee's compensation, subject to a maximum annual employee contribution and limited to a $25,000 fair market value. Of the 750,000 shares of common stock authorized under the ESPP, 45,051, 119,765, and 171,676 shares were issued during fiscal 2001, 2000, and 1999, respectively. At March 31, 2001, there were 280,579 shares available under the ESPP. Compensation costs (included in pro forma net income (loss) and pro forma net income (loss) per share amounts) for the grant date fair value, as defined by SFAS 123, of the purchase rights granted under the ESPP, were calculated using the Black-Scholes model. The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the ESPP:
2001 2000 1999 --------- ----------- ----------- Expected life 6 months 6 months 6 months Risk-free 3.6% 6.4% 4.9% interest rate Volatility 87.6% 78.0% 88.0% Dividend 0.0% 0.0% 0.0% yield
The weighted average estimated grant date fair value, as defined by SFAS 123, or rights to purchase common stock under the ESPP granted in fiscal 2001, 2000, and 1999 was $8.43, $2.24, and $2.55 per share, respectively. Pro Forma Net Income (Loss) and Pro Forma Net Income (Loss) Per Share Had the Company recorded compensation expense based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under the Plan, the Directors' Plan and its ESPP, the Company's pro forma net income (loss) and pro forma net income (loss) per share for the years ended March 31, 2001, 2000, and 1999, would have been as follows (in thousands, except per share data): F-20
March 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Pro forma income $(274,635) $646,905 $(23,231) (loss): Pro forma net loss per share: Basic $(6.64) $15.47 $(0.56) Diluted $(6.64) $15.05 $(0.56)
NOTE 15. 401(k) Salary Savings Plan Effective May 1992, the Company adopted the Salary Savings Plan (the "Savings Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby eligible employees may contribute up to 15% of their earnings, not to exceed amounts allowed under the Code. Effective April 1999, the Company agreed to match up to 50% of the first 6% of the employee contribution to a maximum of two thousand dollars annually per employee. The Company's matching contribution vests over five years. In fiscal year 2001, 2000 and 1999 the Company contributed approximately $115,000, $131,000 and $0, respectively. NOTE 16. Legal Matters In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately $170 million (USD), in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. The plaintiffs appealed the setting aside of the default judgment against the Company to the Canadian Supreme Court. In June 2001, the Canadian Supreme Court refused to hear the appeal of the setting aside of the default judgment against the Company. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. NOTE 17. Antidumping Proceeding (Taiwan-manufactured SRAMs and DRAMs) In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999, the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is unsuccessful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is successful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. F-21 On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. At March 31, 2001, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. NOTE 18. Related Party Transactions On May 18, 1998, the Company provided loans to two of its officers and a director aggregating $1,735,000. The officers' loans were used for the payment of taxes resulting from the gain on the exercise of non-qualified stock options. The loan to a director was used for the exercise of stock options. Under these loans, both principal and accrued interest were due on December 31, 1999, with accrued interest at rates ranging from 5.50% to 5.58% per annum. The loan to the director was paid at December 31, 1999. The officer loans were extended to December 31, 2001. As of March 31, 2001, $1,616,000 was outstanding under these loans with accrued interest of $252,000. In fiscal year 2000, the Company made wafer purchases from USC of approximately $15.1 million prior to the merger with UMC in January 2000. After the completion of the merger in January 2000, the Company purchased $1.5 million of wafers from UMC. In fiscal year 1999, the Company made wafer purchases $8.8 million from USC. NOTE 19. Segment and Geographic Information The Company operates in one reportable segment, memory products. The memory products segment includes; Static Random Access Memories ("SRAMs"), Dynamic Random Access Memories ("DRAMs"), and Flash Memories ("Flash"). The following illustrates revenues by geographic locations. Revenues are attributed to countries based on the customer's location.
Year Ended March 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) United States $77,114 $36,088 $23,770 Taiwan 35,666 11,310 6,061 Japan 36,775 10,251 3,269 Asia (except 19,069 6,211 5,807 Taiwan and Japan) Europe (except UK) 18,724 15,042 8,196 UK 20,363 10,251 371 Rest of world 967 - 309 --------- --------- --------- Total $208,678 $89,153 $47,783 ========= ========= =========
International net revenues in fiscal 2001 increased by 148% over fiscal 2000. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest increase in international net revenues was to customers in Asia, which increased approximately 236% over fiscal year 2000. This increase was due to an overall increase in product demand and higher average selling prices during the first three fiscal quarters of the year. International revenues increased 195% in fiscal 2000 compared to fiscal 1999. The largest increase in international net revenues was to customers in Europe, which was attributable to overall increase in product demand and higher average selling prices. NOTE 20. Subsequent Events (unaudited) In May 2001, the Company paid $11.0 million to Tower Semiconductor, in accordance with the terms of the share purchase agreement between the two companies. In May 2001, the Company entered into a secured loan agreement (the "Loan Agreement") with Citibank, N.A for up to $60 million. Under the terms of the Loan Agreement, the loan will mature on November 19, 2001 and bears interest at a per annum rate equal to LIBO Rate plus one percent. Both the principal and accrued interest are payable upon maturity. The borrowings under the Loan Agreement are secured by 181,670,000 shares of UMC common stock held by the Company. F-22 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Alliance Semiconductor Corporation: Our audits of the consolidated financial statements referred to in our report dated April 25, 2001, appearing in this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(2)(I) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California April 25, 2001 F-23 ALLIANCE SEMICONDUCTOR CORPORATION Schedule II: Valuation and Qualifying Accounts (in thousands)
Balance at Balance Description beginning Additions Reduction at end of period of period --------------------------------- ---------- --------- --------- --------- Year ended March 31, 2001 Allowance for doubtful $954 $3,310 $(683) $3,581 accounts and sales-related reserves Inventory related reserves for $8,270 $37,886 $(8,216) $37,940 excess and obsolescence; and lower of cost or market issues Year ended March 31, 2000 Allowance for doubtful $2,527 $6,209 $(7,782) $954 accounts and sales-related reserves Inventory related reserves for $15,701 $5,862 $(13,293) $8,270 excess and obsolescence; and lower of cost or market issues Year ended March 31, 1999 Allowance for doubtful $2,010 $3,193 $(2,676) $2,527 accounts and sales-related reserves Inventory related reserves for $14,967 $20,437 $(19,703) $15,701 excess and obsolescence; and lower of cost or market issues
F-24