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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
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FORM 10-K
COMMISSION FILE NUMBER: 0-18032
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM APRIL 4, 1999 TO JANUARY 1, 2000
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 93-0835214
(State of Incorporation) (I.R.S Employer Identification No.)
5555 NE MOORE COURT, HILLSBORO, OREGON 97124-6421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 268-8000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE
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Common Stock, $.01 par value NASDAQ
Preferred Share Purchase Rights None
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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 the 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.
Yes / / No /X/
As of March 16, 2000, the aggregate market value of the shares of voting
stock of the Registrant held by non-affiliates was approximately $2.33 billion.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 16, 2000, 49,163,765 shares of the Registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal period
ended January 1, 2000 are incorporated by reference in Part II hereof.
2. Portions of the definitive proxy statement of the Registrant to be filed
pursuant to Regulation 14A for the Fiscal Period 1999 Annual Meeting of
Stockholders to be held on May 2, 2000 are incorporated by reference in
Part III hereof.
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LATTICE SEMICONDUCTOR CORPORATION
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
ITEM OF
FORM 10-K PAGE
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PART I
Item 1 -- Business................................................ 2
Item 2 -- Properties.............................................. 9
Item 3 -- Legal Proceedings....................................... 9
Item 4 -- Submission of Matters to a Vote of Security Holders..... 9
Item 4(a) -- Executive Officers of the Registrant.................... 10
PART II
Item 5 -- Market for the Registrant's Common Stock and Related
Stockholder Matters..................................... 12
Item 6 -- Selected Financial Data................................. 13
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14
Item 7(a) -- Quantitative and Qualitative Disclosures About Market
Risk.................................................... 22
Item 8 -- Financial Statements and Supplementary Data............. 26
Item 9 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 51
PART III
Item 10 -- Directors and Executive Officers of the Registrant...... 51
Item 11 -- Executive Compensation.................................. 51
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management.............................................. 51
Item 13 -- Certain Relationships and Related Transactions.......... 51
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 51
Signatures.............................................................. 54
Report on Financial Statement Schedule.................................. S-1
Financial Statement Schedule............................................ S-2
1
ITEM 1. BUSINESS
Lattice Semiconductor Corporation, ("Lattice"), founded in 1983 and based in
Hillsboro, Oregon, designs, develops and markets the broadest range of high
performance ISP-TM- programmable logic devices ("PLDs") and offers total
solutions for today's advanced logic designs. We introduced in-system
programmability to the logic industry in 1992. Our products are sold worldwide
through an extensive network of independent sales representatives and
distributors primarily to OEM customers in the communications, computing,
industrial and military end markets. Approximately one-half of our revenue is
derived from export sales, mainly to Europe and Asia.
In June 1999, we acquired Vantis Corporation, Advanced Micro Device, Inc.'s
("AMD's") PLD division, for approximately $500 million in cash. The transaction
is being accounted for under the purchase method in our consolidated financial
statements beginning with the period ended July 3, 1999. We have also agreed
with AMD to sign a mutual election under the Internal Revenue Code that will
allow us to deduct the purchase price for tax purposes over a 15-year period. We
believe this acquisition will enable us to increase our share of the PLD market,
accelerate development of new products and technologies and provide us with
access to a complementary customer base. While Vantis remains a wholly-owned
subsidiary, its business, which was substantially similar to our business, has
been integrated into our operations. Prior to the acquisition, Vantis relied
upon AMD for most manufacturing services. As a part of our acquisition
agreement, AMD has agreed to continue to perform these services for a specific
time period.
CHANGE IN FISCAL REPORTING PERIOD
In the fourth quarter of calendar 1999, we changed our reporting period to a
52 or 53 week year ending on the Saturday closest to December 31 from a 52 or 53
week fiscal year ending on the Saturday closest to March 31. This Form 10-K
covers the nine-month transition period from April 4, 1999 to January 1, 2000.
For purposes of this report and for ease of presentation, December 31 or
March 31 has been utilized as the fiscal year end date for all financial
statement captions contained herein. Additionally, for purposes of this report
the nine month fiscal period ended January 1, 2000 is referred to as "the nine
months ended December 31, 1999 or "fiscal period 1999". The fiscal periods ended
April 3, 1999 and March 28, 1998, respectively, are referred to as "the fiscal
year ended March 31, 1999" and "the fiscal year ended March 31, 1998", or
"fiscal year 1999" and "fiscal year 1998", respectively.
PLD MARKET BACKGROUND
Three principal types of digital integrated circuits are used in most
electronic systems: microprocessors, memory and logic. Microprocessors are used
for control and computing tasks, memory is used to store programming
instructions and data, and logic is employed to manage the interchange and
manipulation of digital signals within a system. Logic contains interconnected
groupings of simple logical "AND" and logical "OR" functions, commonly described
as "gates." Typically, complex combinations of individual gates are required to
implement the specialized logic functions required for systems applications.
While system designers use a relatively small number of standard architectures
to meet their microprocessor and memory needs, they require a wide variety of
logic circuits in order to achieve end product differentiation.
Logic circuits are found in a wide range of today's digital electronic
equipment including communication, computing, industrial and military systems.
According to World Semiconductor Trade Statistics, a semiconductor industry
association, logic accounted for approximately 27% of the estimated
$130 billion worldwide digital integrated circuit market in 1999. The logic
market encompasses, among other segments, standard logic, custom-designed ASICs,
which include conventional gate-arrays, standard cells and full custom logic
circuits, and PLDs.
Manufacturers of electronic equipment are increasingly challenged to bring
differentiated products to market quickly. These competitive pressures often
preclude the use of custom-designed ASICs, which generally entail significant
design risks and time delay. Standard logic products, an alternative to custom-
2
designed ASICs, limit a manufacturer's flexibility to adequately customize an
end system. PLDs address this inherent dilemma. PLDs are standard products,
purchased by systems manufacturers in a "blank" state, that can be custom
configured into a virtually unlimited number of specific logic functions by
programming the device with electrical signals. PLDs give system designers the
ability to quickly create their own custom logic functions to provide product
differentiation without sacrificing rapid time to market. Certain PLD products,
including our own, are reprogrammable, meaning that the logic configuration can
be modified, if needed, after the initial programming. ISP PLDs, pioneered by
us, extend the flexibility of standard reprogrammable PLDs by allowing the
system designer to configure and reconfigure the logic functions of the PLD with
standard 5-volt or 3.3-volt power supplies without removing the PLD from the
system board.
The PLD market has two primary segments: low-density PLDs (less than 1,000
logic gates) and high-density PLDs (greater than 1,000 logic gates).
High-density PLD devices include devices based on both the CPLD and field
programmable gate array, or FPGA, architectures.
Products based on these alternative high-density PLD architectures are
generally optimal for different types of logic functions, although many logic
functions can be implemented using either architecture. CPLDs are characterized
by a regular building block structure of wide-input logic cells, called
macrocells, and use of a centralized logic interconnect scheme. CPLDs are
optimal for control logic applications, such as state machines, bus arbitration,
encoders, decoders and sequencers. FPGAs are characterized by a narrow-input
logic cell and use a distributed interconnect scheme. FPGAs are optimal for
register intensive and data path logic applications such as interface logic and
arithmetic functions. We believe that a substantial portion of high-density PLD
customers utilize both CPLD and FPGA architectures within a single system
design, partitioning logic functions across multiple devices to optimize overall
system performance and cost.
TECHNOLOGY
We believe that our proprietary E(2)CMOS-Registered Trademark- technology is
the preferred process technology for PLD products due to its inherent
performance, reprogrammability and testability benefits. E(2)CMOS technology,
through its fundamental ability to be programmed and erased electronically,
serves as the foundation for our ISP products.
We pioneered the development of ISP products which utilize 5-volt or
3.3-volt programming signals and, as a result, can be configured and
reconfigured by a system designer without being removed from the printed circuit
board. Standard E(2)CMOS PLDs require a 12-volt programming signal and therefore
must be removed from the printed circuit board and programmed using specialized
hardware. ISP devices offer enhanced flexibility versus standard PLDs and
provide significant customer benefits. ISP devices can allow customers to reduce
design cycle times, accelerate time to market, reduce prototyping costs, reduce
manufacturing costs and lower inventory requirements. ISP devices can also
provide customers the opportunity to perform simplified and cost-effective field
reconfiguration through a data file transferred by computer disk or serial data
signal.
PRODUCTS
ISP PRODUCTS
We first entered the ISP market in 1992 and currently offer eleven distinct
families of proprietary ISP products, each consisting of multiple devices. We
are currently shipping over 300 performance, package
3
and temperature range combinations of ISP products. The key features of our CPLD
product families are described in the table below:
SPEED PROPAGATION DELAY SURFACE
(MHZ) (NANOSECONDS) GATES MOUNT PINS
-------- ----------------- ------------- ----------
ispLSI-Registered Trademark-
1000/E/EA................. 200 4.0 2,000-8,000 44-128
ispLSI 2000E/VE............. 225 3.5 1,000-8,000 44-208
ispLSI 3000/E............... 125 7.5 7,000-20,000 160-432
ispLSI 5000V................ 125 7.5 12,000-24,000 208-388
ispLSI 8000/V............... 125 8.5 25,000-50,000 272-492
MACH-Registered Trademark-
1/2....................... 180 5.0 1,000-5,000 44-100
MACH 4/LV/A................. 180 5.0 1,000-10,000 44-256
MACH 5/LV................... 180 5.5 5,000-20,000 100-352
Our newest product families, the MACH 4A, ispLSI 2000VE, ispLSI 5000V and
ispLSI 8000V, use new innovative architectures and are targeted towards the
emerging 3.3 volt CPLD market.
We offer three additional ISP product families:
ISPGAL-REGISTERED TRADEMARK-: This proprietary family combines in-system
programmability with the industry standard 22V10 low-density PLD architecture.
Offered with performance of up to 200 MHz (5.0 nanosecond propagation delay),
the ispGAL family is available in both 5-volt and 3.3-volt operating supply
versions.
ISPGDX-REGISTERED TRADEMARK-: This family extends in-system programmability
to the circuit board level using an innovative digital cross-point switch
architecture. Offered with propagation delays as low as 5.0 nanoseconds, up to
160 I/O and complete pin-to-pin signal routing, the ispGDX is targeted towards
digital signal interconnect and interface applications.
ISPPAC-REGISTERED TRADEMARK-: First introduced in 1999, this three device
family extends in-system programmability to the analog market. The innovative
architecture of the ispPAC allows designers to quickly and easily program
resistor and capacitor values, gain and signal polarity and circuit interconnect
to implement a wide variety of analog circuits. The initial ispPAC products are
targeted towards filtering and signal conditioning applications and can replace
numerous discrete analog components. ispPAC designs are implemented and
programmed via a PC using our intuitive software development tool, PAC-Designer.
We plan to continue to introduce new families of ISP products, as well as
improve the performance and reduce the manufacturing cost of our existing
product families based on market needs.
SOFTWARE DEVELOPMENT TOOLS
All Lattice ISP products are supported by ispDesignEXPERT-TM-, our fourth
generation software development tool suite. Supporting both the PC and UNIX
platforms, ispDesignEXPERT allows a customer to enter, verify and synthesize a
design, perform logic simulation and timing analysis, assign I/O pins and
critical speed paths, debug and floorplan a design, execute automatic place and
route tasks and download a program to an ISP device. Seamlessly integrated with
third-party electronic design automation, or EDA, environments, ispDesignEXPERT
leverages customers' prior investments in products offered by Aldec, Cadence,
Mentor Graphics, OrCAD, Synopsys, Synplicity, Viewlogic and Veribest. In the
future, we plan to continue to enhance and expand the capability of our software
development tool suite.
We also provide a variety of software algorithms that support in-system
programming of our ISP devices via multiple formats and mechanisms. These
software products include ispCODE-Registered Trademark-, Turbo
ispDOWNLOAD-Registered Trademark-, ispREMOTE-TM-, ispATE-TM-, ispSVF-TM- and
ispVM-TM-.
4
NON-ISP PRODUCTS
We offer the industry's broadest line of low-density CMOS PLDs based on our
20 families of GAL-Registered Trademark-and PALCE-Registered Trademark- products
offered in over 200 speed, power, package and temperature range combinations.
PALCE products were originally introduced by Vantis and are generally compatible
with GAL products. GAL and PALCE devices range in complexity from approximately
200 to 1,000 logic gates and are typically assembled in 20-, 24- and 28-pin
standard dual in-line packages and in 20- and 28-pin standard plastic leaded
chip carrier packages. We offer standard 610, 16V8, 20V8 and 22V10 architectures
in a variety of speed grades, with propagation delays as low as 3.5 nanoseconds,
the highest performance in the industry. In addition, we offer several
proprietary extension architectures, the 6001/2, 16VP8, 16V8Z, 18V10, 20VP8,
20V8Z, 22V10Z, 24V10, 29M16, 20RA10, 20XV10 and 26V12, each of which is
optimized for specific applications. We also offer a full range of 3.3-volt
standard architectures, the 16LV8, 20LV8, 22LV10 and 26CLV12, in a variety of
speed grades, with propagation delays as low as 3.5 nanoseconds, the highest
performance in the industry.
Our non-ISP products are supported by industry standard software and
hardware development tools marketed by independent manufacturers specifically
for PLD applications.
PRODUCT DEVELOPMENT
We place substantial emphasis on new product development and believe that
continued investment in this area is required to maintain our competitive
position. Our product development activities emphasize new proprietary ISP
products, enhancement of existing products and process technologies and
improvement of software development tools. Product development activities occur
in Hillsboro, Oregon; Silicon Valley, California; Austin, Texas; Colorado
Springs, Colorado; Corsham, England and Shanghai, China.
Research and development expenses were $32.0 million in fiscal year 1998,
$33.2 million in fiscal year 1999 and $45.9 million for fiscal period 1999. We
expect to continue to make significant future investments in research and
development and expect our research and development expenses to approximately
double with the acquisition of Vantis.
OPERATIONS
We do not manufacture our own silicon wafers and maintain strategic
relationships with large semiconductor manufacturers to source our finished
silicon wafers. This strategy allows us to focus our internal resources on
product, process and market development, and eliminates the fixed cost of owning
and operating manufacturing facilities. We are also able to take advantage of
the ongoing advanced process technology dedicated development efforts of
semiconductor manufacturers. In addition, all of our assembly operations are
performed by outside suppliers. We perform certain test operations and
reliability and quality assurance processes internally. We have achieved an ISO
9001 quality certification, an indication of our high internal operational
standards.
WAFER FABRICATION
The majority of our silicon wafer requirements have historically been
supplied by Seiko Epson in Japan pursuant to an agreement with EEA, an
affiliated U.S. distributor of Seiko Epson. We negotiate wafer volumes, prices
and terms with Seiko Epson and EEA on a periodic basis. We also receive silicon
wafers from the UMC Group in Taiwan pursuant to a series of agreements entered
into in 1995. Wafer prices and other purchase terms related to this commitment
are subject to periodic adjustment. Currently, the substantial majority of the
silicon wafers for Vantis products are manufactured by AMD pursuant to an
agreement first entered into in 1996 and subsequently amended and restated at
the time of our acquisition of Vantis. A significant interruption or shortage in
our wafer supply or a significant or unexpected deterioration in wafer quality
or yield levels achieved could have a material adverse effect on our business.
See "--Licenses and Agreements."
5
ASSEMBLY
After wafer fabrication and initial testing, we ship wafers to independent
subcontractors for assembly. During assembly, wafers are separated into
individual die and encapsulated in plastic or ceramic packages. Presently, we
have qualified long-term assembly partners in Hong Kong, Malaysia, the
Philippines, Singapore, South Korea, Taiwan and Thailand.
TESTING
We electrically test the die on each wafer prior to shipment for assembly.
Following assembly, prior to customer shipment, each product undergoes final
testing and quality assurance procedures. Final testing on certain products is
performed by independent contractors in Malaysia, the Philippines, South Korea,
Taiwan, Thailand and the United States.
MARKETING, SALES AND CUSTOMERS
We sell our products directly to end customers through a network of
independent manufacturers' representatives and indirectly through a network of
independent distributors. We also employ a direct sales management and field
applications engineering organization to support our end customers and indirect
sales resources. Our end customers are primarily OEMs in the fields of
communication, computing, industrial and military systems.
At January 1, 2000 we utilized 23 manufacturers' representatives and three
distributors in North America. Arrow Electronics and Avnet provide full
distribution coverage. We have also established export sales channels in over 30
foreign countries through a network of over 30 sales representatives and
distributors. Approximately one-half of our North American sales and the
majority of our export sales are made through distributors.
We protect each of our North American distributors and some of our foreign
distributors against reductions in published prices, and expect to continue this
policy in the foreseeable future. We also allow returns from these distributors
of unsold products under certain conditions. For these reasons, we do not
recognize revenue until products are resold by these distributors to an end
customer.
We provide technical and marketing support to our end customers with
engineering staff based at our headquarters, design centers and selected field
sales offices. We maintain numerous domestic and international field sales
offices in major metropolitan areas.
Export sales as a percentage of our total revenue were 51% in fiscal year
1998, 50% in fiscal year 1999 and 53% in fiscal period 1999. Both export and
domestic sales are denominated in U.S. dollars, with the exception of sales to
Japan, which are dominated in yen. If our export sales decline significantly
there would be a material adverse impact on our business.
Our products are sold to a large and diverse group of customers. No
individual end customer accounted for more than 10% of total revenue in fiscal
year 1998 or 1999 or fiscal period 1999. No export sales to any individual
country accounted for more than 10% of total revenue in fiscal years 1998 or
1999 or fiscal period 1999.
BACKLOG
Our backlog of scheduled and released orders as of January 1, 2000 was
approximately $83.4 million as compared to approximately $63.5 million as of
April 3, 1999. This backlog consists of direct OEM and distributor orders
scheduled for delivery within the next 90 days. Distributor orders accounted for
the majority of the backlog in both periods. Direct OEM customer orders may be
changed, rescheduled or cancelled under certain circumstances without penalty
prior to shipment. Additionally, distributor orders generally may be changed,
rescheduled or cancelled without penalty prior to shipment. Furthermore,
6
distributor shipments are subject to rights of return and price adjustment.
Revenue associated with distributor shipments is not recognized until the
product is resold to an end customer. Typically, the majority of our revenue
results from orders placed and filled within the same period. Such orders are
referred to as "turns orders". By definition, turns orders are not captured in a
backlog measurement made at the beginning of a period. We do not anticipate a
significant change in this business pattern. For all these reasons, backlog as
of any particular date should not be used as a predictor of revenue for any
future period.
COMPETITION
The semiconductor industry is intensely competitive and characterized by
rapid rates of technological change, product obsolescence and price erosion. Our
current and potential competitors include a broad range of semiconductor
companies from large, established companies to emerging companies, many of which
have greater financial, technical, manufacturing, marketing and sales resources.
The principal competitive factors in the PLD market include product
features, price, customer support, and sales, marketing and distribution
strength. The availability of competitive software development tools is also
critical. In addition to product features such as density, speed, power
consumption, reprogrammability, design flexibility and reliability, competition
in the PLD market occurs on the basis of price and market acceptance of specific
products and technology. We believe that we compete favorably with respect to
each of these factors. We intend to continue to address these competitive
factors by working to continually introduce product enhancements and new
products, by seeking to establish our products as industry standards in their
respective markets, and by working to reduce the manufacturing cost of our
products.
In the ISP PLD market, we primarily compete directly with Altera and Xilinx,
both of whom offer competing products. We also compete indirectly with other PLD
suppliers as well as other semiconductor companies who provide non-PLD based
logic solutions. Although to date we have not experienced significant
competition from companies located outside the United States, such companies may
become a more significant competitive factor in the future. Competition may also
increase as we and our current competitors seek to expand our markets. Any such
increases in competition could have a material adverse effect on our operating
results.
PATENTS
We seek to protect our products and wafer fabrication process technologies
primarily through patents, trade secrecy measures, copyrights, mask work
protection, trademark registrations, licensing restrictions, confidentiality
agreements and other approaches designed to protect proprietary information.
There can be no assurance that others may not independently develop competitive
technology not covered by our intellectual property rights or that measures we
take to protect our technology will be effective.
We hold numerous domestic, European and Japanese patents and have patent
applications pending in the United States, Japan and Europe. There can be no
assurance that pending patent applications or other applications that may be
filed will result in issued patents, or that any issued patents will survive
challenges to their validity. Although we believe that our patents have value,
there can be no assurance that our patents, or any additional patents that may
be issued in the future, will provide meaningful protection from competition. We
believe that our success will depend primarily upon the technical expertise,
experience, creativity and the sales and marketing abilities of our personnel.
Patent and other proprietary rights infringement claims are common in our
industry. There can be no assurance that, with respect to any claim made against
us, we could obtain a license on terms or under conditions that would not have a
material adverse effect on our business.
7
LICENSES AND AGREEMENTS
SEIKO EPSON/EPSON ELECTRONICS AMERICA (EEA)
EEA, an affiliated U.S. distributor of Seiko Epson, has agreed to provide us
with manufactured wafers in quantities based on six-month rolling forecasts. We
have committed to buy certain minimum quantities of wafers per month. Wafers for
our products are manufactured in Japan at Seiko Epson's wafer fabrication
facilities and are delivered to us by EEA. Prices for the wafers obtained from
EEA are reviewed and adjusted periodically.
In March 1997, we entered into an advance production payment agreement with
Seiko Epson and EEA under which we agreed to advance approximately
$85.0 million, payable upon completion of specific milestones, to Seiko Epson to
finance construction of an eight-inch sub-micron semiconductor wafer
manufacturing facility. The timing of the payments is related to certain
milestones in the development of the facility. Under the terms of the agreement,
the advance is to be repaid with semiconductor wafers over a multi-year period.
The agreement calls for wafers to be supplied by Seiko Epson through EEA
pursuant to purchase agreements concluded with EEA. We also have an option under
the agreement to advance Seiko Epson an additional $60.0 million for additional
wafer supply under similar terms. The first payment under this agreement,
approximately $17.0 million, was made during fiscal 1997. During fiscal 1998, we
made two additional payments aggregating approximately $34.2 million.
UMC GROUP
In September 1995, we entered into a series of agreements with UMC pursuant
to which we agreed to join UMC and several other companies to form a separate
Taiwanese company, UICC, for the purpose of building and operating an advanced
semiconductor manufacturing facility in Taiwan. Under the terms of the
agreement, we invested approximately $49.7 million between fiscal 1996 and
fiscal 1998 for an approximate 10% equity interest in UICC and the right to
purchase a percentage of the facility's wafer production at market prices.
In October 1996, we entered into an agreement with Utek Corporation, a
public Taiwanese company in the wafer foundry business that became affiliated
with the UMC Group in 1998, pursuant to which we agreed to make a series of
equity investments in Utek under specific terms. In exchange for these
investments we received the right to purchase a percentage of Utek's wafer
production. Under this agreement we have invested approximately $17.5 million in
three separate installments and currently own approximately 2.5 percent of the
outstanding equity of Utek.
In June 1999, the board of directors of UICC and Utek and the board of
directors of UMC voted in favor of merging UICC and Utek into UMC. These mergers
became effective on January 3, 2000. After the mergers we own approximately
61 million shares of UMC common stock and have retained our capacity rights. Due
to regulatory restrictions, the majority of our UMC shares may not be sold until
July 2000. These regulatory restrictions will gradually expire between July 2000
and January 2004.
AMD
In June 1999, as part of our acquisition of Vantis, we entered into a series
of agreements with AMD to support the continuing operations of Vantis.
AMD has agreed to provide us with finished silicon wafers through September
2003 in quantities based either on a rolling six-month or an annual forecast. We
have committed to buy certain minimum quantities of wafers and AMD has committed
to supply certain quantities of wafers during this period. Wafers for our
products are manufactured in the United States at multiple AMD wafer fabrication
facilities. Prices for these wafers will be reviewed and adjusted periodically.
8
We have also entered into an agreement with AMD pursuant to which we have
cross-licensed Vantis patents with AMD patents, having an effective filing date
on or before June 15, 1999, related to PLD products. This cross-license was made
on a worldwide, non-exclusive and royalty-free basis.
As part of our acquisition of Vantis Corporation, we have acquired certain
third-party license rights held by Vantis prior to the acquisition. Included are
rights to use certain Xilinx patents to manufacture, market and sell products.
EMPLOYEES
As of January 1, 2000 we had 916 full-time employees. We believe that our
future success will depend, in part, on our ability to continue to attract and
retain highly skilled technical and management personnel. None of our employees
is subject to a collective bargaining agreement. We have never experienced a
work stoppage and consider our employee relations good.
ITEM 2. PROPERTIES
Our corporate headquarters are located in three connected buildings we own
in Hillsboro, Oregon, comprising a total of approximately 200,000 square feet.
We also own a 13,000 square foot research and development facility and
approximately 6,000 square feet of dormitory facilities in Shanghai, China. We
lease a 133,000 square foot facility in San Jose, California (through 2008); we
expect to occupy this facility in 2000 in order to consolidate our existing
Silicon Valley product development centers as described following. We currently
lease a 80,000 square foot product development facility in Sunnyvale, California
(through 2006), a 41,000 square foot product development facility in Milpitas,
California (through February 14, 2001), a 40,000 square foot product development
facility in Austin, Texas (through 2004) and a 7,000 square foot product
development facility in Colorado Springs, Colorado (through 2004). We also
lease, on a short-term basis, office facilities for our product development
facility in the United Kingdom and for our domestic and international sales
offices.
ITEM 3. LEGAL PROCEEDINGS
In connection with our acquisition of Vantis, we have agreed to assume both
the claims against Altera and the claims by Altera against AMD in the case
captioned ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE
NO. C-94-20567-RMW) proceeding in the United States District Court for the
Northern District of California. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to Vantis and
Altera programmable logic devices and both parties are seeking damages and
injunctive relief.
In April 1999, the United States Court of Appeals for the Federal Circuit
reversed earlier jury and District Court decisions and held that Altera is not
licensed to the eight AMD patents-in-suit. These eight AMD patents were
subsequently assigned to Vantis. Also in April 1999, following the decision of
the Court of Appeals, Altera filed a petition for rehearing. In June 1999, the
Court of Appeals denied Altera's petition for rehearing.
Although there can be no assurance as to the results of such litigation,
based upon information presently known to management, we do not believe that the
ultimate resolution of this lawsuit will have a material adverse effect on our
business. The foregoing statement constitutes a forward-looking statement and
the actual results may differ materially depending on a number of factors,
including new court decisions and additional counterclaims made by other parties
to such litigation.
Except as described above, we are not currently a party to any material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
9
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive
officers and directors:
NAME AGE POSITION
- ---- -------- --------------------------------------------
Cyrus Y. Tsui........... 54 President, Chief Executive Officer and
Chairman of the Board
Steven A. Laub.......... 41 Senior Vice President and Chief Operating
Officer
Stephen A. Skaggs....... 37 Senior Vice President, Chief Financial
Officer and Secretary
Frank J. Barone......... 60 Corporate Vice President, Product Operations
Stephen M. Donovan...... 49 Corporate Vice President, Sales
Jonathan K. Yu.......... 59 Corporate Vice President, Business
Development
Martin R. Baker......... 44 Vice President and General Counsel
Randy D. Baker.......... 41 Vice President, Manufacturing
Albert L. Chan.......... 50 Vice President and General Manager, Lattice
Silicon Valley
Thomas J. Kingzett...... 53 Vice President, Reliability and Quality
Assurance
Stanley J. Kopec........ 49 Vice President, Corporate Marketing
Andrew D. Robin......... 47 Vice President, New Venture Business
Rodney F. Sloss......... 56 Vice President, Finance
James V. Tortolano...... 50 Vice President and Co-General Counsel
Kenneth K. Yu........... 52 Vice President and Managing Director,
Lattice Asia
Mark O. Hatfield........ 77 Director
Daniel S. Hauer......... 63 Director
Harry A. Merlo.......... 75 Director
Larry W. Sonsini........ 59 Director
Douglas C. Strain....... 80 Director
CYRUS Y. TSUI joined Lattice in September 1988 as President, Chief Executive
Officer and Director, and in March 1991 was named Chairman of the Board. From
1987 until he joined, Mr. Tsui was Corporate Vice President and General Manager
of the Programmable Logic Division of AMD. He was Vice President and General
Manager of the Commercial Products Divisions of Monolithic Memories Incorporated
(MMI) from 1983 until its merger with AMD in 1987. Mr. Tsui has held technical
and managerial positions in the semiconductor industry for over 30 years. He has
worked in the programmable logic industry since its inception.
STEVEN A. LAUB joined Lattice in June 1990 as Vice President and General
Manager. He was elected Senior Vice President and Chief Operating Officer in
August 1996.
STEPHEN A. SKAGGS joined Lattice in December 1992 as Director, Corporate
Development. He was elected Senior Vice President, Chief Financial Officer and
Secretary in August 1996.
FRANK J. BARONE joined Lattice in June 1999 as a Corporate Vice President as
a result of the Vantis acquisition. From September 1997 until he joined,
Mr. Barone was Chief Operating Officer of Vantis. Prior thereto, Mr. Barone held
various technical and managerial positions at AMD. He has worked in the
programmable logic industry since 1978.
STEPHEN M. DONOVAN joined Lattice in October 1989 and has served as Director
of Marketing and Director of International Sales. He was elected Vice President,
International Sales in August 1993. He was
10
elected Corporate Vice President, Sales, in May 1998. Mr. Donovan has worked in
the programmable logic industry since 1982.
JONATHAN K. YU joined Lattice in February 1992 as Vice President,
Operations. He was elected Corporate Vice President, Business Development in
August 1996. Mr. Yu has held technical and managerial positions in the
semiconductor industry for over 30 years.
MARTIN R. BAKER joined Lattice in January 1997 as Vice President and General
Counsel. From 1991 until he joined, Mr. Baker held legal positions with Altera
Corporation.
RANDY D. BAKER joined Lattice in April 1985 as Manager, Manufacturing and
was promoted in 1988 to Director, Manufacturing. He was elected Vice President,
Manufacturing in August 1996.
ALBERT L. CHAN joined Lattice in May 1989 as California Design Center
Manager and was promoted in 1991 to Director, California Product Development
Center. He was elected Vice President, California Product Development in August
1993. He was elected Vice President and General Manager, Lattice Silicon Valley,
in August 1997. Mr. Chan has worked in the programmable logic industry since
1983.
THOMAS J. KINGZETT joined Lattice in July 1992 as Director, Reliability and
Quality Assurance. He was elected Vice President, Reliability and Quality
Assurance in May 1998. Mr. Kingzett has worked in the semiconductor industry for
over 25 years.
STANLEY J. KOPEC joined Lattice in August 1992 as Director, Marketing. He
was elected Vice President, Corporate Marketing in May 1998. Mr. Kopec has
worked in the programmable logic industry since 1985.
ANDREW D. ROBIN joined Lattice in June 1999 as Vice President, New Venture
Business as a result of the Vantis acquisition. From March 1998 until he joined,
Mr. Robin was Vice President, Marketing at Vantis. Prior thereto, Mr. Robin held
various marketing and managerial positions at AMD and MMI. Mr. Robin has worked
in the programmable logic industry since 1984.
RODNEY F. SLOSS joined Lattice in May 1994 as Vice President, Finance.
JAMES V. TORTOLANO joined Lattice in June 1999 as a Vice President as a
result of the Vantis acquisition. From November 1998 until he joined,
Mr. Tortolano was Vice President, General Counsel of Vantis. Prior thereto,
Mr. Tortolano held various legal positions at AMD. He has worked in the
semiconductor industry since 1983.
KENNETH K. YU joined Lattice in January 1991 as Director of Process
Technology. He has served as Managing Director, Lattice Asia since November 1992
and was elected Vice President, Lattice Asia in August 1993. Mr. Yu has held
technical and managerial positions in the semiconductor industry for over
25 years.
MARK O. HATFIELD has been a member of our board of directors since 1997.
Mr. Hatfield is a former U.S. Senator from Oregon.
DANIEL S. HAUER has been a member of our board of directors since 1987.
Mr. Hauer is the former Chairman and Chief Executive Officer of Epson
Electronics America.
HARRY A. MERLO has been a member of our board of directors since 1983.
Mr. Merlo is the President of Merlo Corporation and is the former President and
Chairman of Louisiana-Pacific Corporation.
LARRY W. SONSINI has been a member of our board of directors since 1991.
Mr. Sonsini is Chairman of the Executive Committee of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, a law firm based in Palo Alto, California.
DOUGLAS C. STRAIN has been a member of our board of directors since 1986.
Mr. Strain is the founder and former Vice Chairman of Electro Scientific
Industries, Inc.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the over-the-counter market and prices are
quoted on the Nasdaq National Market under the symbol "LSCC". The following
table sets forth the low and high sale prices for our common stock for the last
two fiscal years and for the period since January 1, 2000. On March 16, 2000,
the last reported sale price of our common stock was $68.063. As of March 16,
2000, we had approximately 370 stockholders of record.
LOW HIGH
-------- --------
Fiscal Year 1999:
First Quarter........................................... $12.813 $27.313
Second Quarter.......................................... 11.625 18.313
Third Quarter........................................... 9.438 23.250
Fourth Quarter.......................................... 18.875 28.156
Fiscal Period 1999:
First Quarter........................................... $19.031 $31.156
Second Quarter.......................................... 26.938 34.625
Third Quarter........................................... 27.250 54.375
Fiscal 2000:
First Quarter (through March 16, 2000).................. $40.875 $79.063
All share amounts have been adjusted retroactively to reflect the
two-for-one stock split effected in the form of a stock dividend of one share of
common stock for each share of our outstanding common stock which was paid on
September 16, 1999.
The payment of dividends on our common stock is within the discretion of the
our Board of Directors. We intend to retain earnings to finance the growth of
our business. We have not paid cash dividends and our Board of Directors does
not expect to declare a cash dividend in the near future.
12
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS YEAR ENDED
ENDED ---------------------------------------------
DEC. 31, MAR. 31, MAR. 31, MAR. 31, MAR. 31,
1999 1999 1998 1997 1996
----------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $269,699 $200,072 $245,894 $204,089 $198,167
Costs and expenses:
Cost of products sold.................. 108,687 78,440 98,883 83,736 82,216
Research and development............... 45,903 33,190 32,012 27,829 26,825
Selling, general and administrative.... 50,676 36,818 39,934 33,558 31,323
In-process research and development.... 89,003 -- -- -- --
Amortization of intangible assets...... 45,780 -- -- -- --
-------- -------- -------- -------- --------
340,049 148,448 170,829 145,123 140,364
-------- -------- -------- -------- --------
(Loss) income from operations............ (70,350) 51,624 75,065 58,966 57,803
Interest and other (expense) income,
net.................................... (4,120) 10,668 10,643 8,712 5,442
-------- -------- -------- -------- --------
(Loss) income before (benefit) provision
for income taxes....................... (74,470) 62,292 85,708 67,678 63,245
(Benefit) provision for income taxes..... (27,989) 20,246 29,141 22,673 21,461
-------- -------- -------- -------- --------
(Loss) income before extraordinary
item................................... (46,481) 42,046 56,567 45,005 41,784
Extraordinary item, net of income
taxes.................................. (1,665) -- -- -- --
-------- -------- -------- -------- --------
Net (loss) income........................ $(48,146) $ 42,046 $ 56,567 $ 45,005 $ 41,784
======== ======== ======== ======== ========
Basic (loss) income per share, before
extraordinary item..................... $ (0.97) $ 0.90 $ 1.22 $ 1.00 $ 1.03
======== ======== ======== ======== ========
Diluted (loss) income per share, before
extraordinary item..................... $ (0.97) $ 0.88 $ 1.18 $ 0.98 $ 1.00
======== ======== ======== ======== ========
Basic net (loss) income per share........ $ (1.01) $ 0.90 $ 1.22 $ 1.00 $ 1.03
======== ======== ======== ======== ========
Diluted net (loss) income per share...... $ (1.01) $ 0.88 $ 1.18 $ 0.98 $ 1.00
======== ======== ======== ======== ========
Shares used in per share calculations:
Basic.................................. 47,714 46,974 46,478 44,920 40,654
======== ======== ======== ======== ========
Diluted................................ 47,714 47,638 47,788 45,946 41,958
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital.......................... $152,758 $324,204 $283,678 $267,669 $244,649
Total assets............................. 916,155 540,896 489,066 403,462 342,935
Stockholders' equity..................... 482,773 483,734 434,686 360,491 298,768
13
NINE MONTHS ENDED
DEC. 31, 1999 YEAR ENDED MARCH 31, 1999
------------------------------ -----------------------------------------
THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- --------
UNAUDITED QUARTERLY DATA:
Revenue.................................. $114,988 $94,973 $ 59,738 $53,788 $50,168 $48,088 $48,028
Gross profit............................. $ 68,953 $55,202 $ 36,857 $33,045 $30,623 $29,045 $28,919
Income (loss) before extraordinary
item................................... $ 9,652 $(4,970) $(51,163) $11,848 $10,513 $ 9,870 $ 9,816
Extraordinary item....................... $ (1,665) -- -- -- -- -- --
Net income (loss)........................ $ 7,987 $(4,970) $(51,163) $11,848 $10,513 $ 9,870 $ 9,816
Net income per share:
Basic income (loss) per share, before
extraordinary item................... $ 0.20 $ (0.10) $ (1.08) $ 0.25 $ 0.22 $ 0.21 $ 0.21
Diluted net income (loss) per share
before extraordinary item............ $ 0.19 $ (0.10) $ (1.08) $ 0.24 $ 0.22 $ 0.21 $ 0.20
Basic net income (loss) per share...... $ 0.17 $ (0.10) $ (1.08) $ 0.25 $ 0.22 $ 0.21 $ 0.21
Diluted net income (loss) per share.... $ 0.16 $ (0.10) $ (1.08) $ 0.24 $ 0.22 $ 0.21 $ 0.20
- --------------------------
All share and per share amounts have been adjusted retroactively to reflect the
two-for-one stock split effected in the form of a stock dividend and paid on
September 16, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenue represented by selected items reflected in our consolidated statement of
operations:
NINE MONTHS YEAR ENDED
ENDED -------------------------------
DEC. 31, 1999 MAR. 31, 1999 MAR. 31, 1998
-------------- -------------- --------------
Revenue....................................... 100% 100% 100%
Costs and expenses:
Cost of products sold....................... 40 39 40
Research and development.................... 17 17 13
Selling, general and administrative......... 19 18 16
In-process research and development......... 33 -- --
Amortization of intangible assets........... 17 -- --
--- --- ---
Total costs and expenses.................. 126 74 69
--- --- ---
(Loss) income from operations................. (26) 26 31
Other (expense) income, net................... (2) 5 4
--- --- ---
(Loss) income before (benefit) provision for
income taxes................................ (28) 31 35
(Benefit) provision for income taxes.......... (11) 10 12
--- --- ---
(Loss) income before extraordinary item....... (17) 21 23
Extraordinary item, net of income taxes....... (1) -- --
--- --- ---
Net (loss) income............................. (18) 21 23
=== === ===
14
ACQUISITION OF VANTIS As discussed in Note 4 to the Consolidated Financial
Statements, we completed the acquisition of Vantis Corporation ("Vantis") from
AMD on June 15, 1999. We paid approximately $500.1 million in cash for all of
the outstanding capital stock of Vantis, plus $10.8 million in indirect
acquisition costs, we accrued $5.4 million for preacquistion contingencies,
$8.3 million for exit costs, and recorded normal accruals of $34.5 million for
the Vantis business. In addition, we exchanged Company stock options for all of
the outstanding stock options under the former Vantis employee stock plans with
a calculated Black-Scholes value of $24.0 million. Our aggregate purchase price
for Vantis was $583.1 million. The purchase was financed using a combination of
cash reserves and a new credit facility that was replaced with Convertible Notes
in November 1999 (see Note 8 to the Consolidated Financial Statements.) The
purchase price was allocated to the estimated fair value of assets acquired and
liabilities assumed based on an independent appraisal and management estimates.
In process research & development (IPR&D) costs were appraised at $89 million at
the acquisition date using a methodology consistent with current views of the
staff of the SEC. These IPR&D costs were charged to operations on the
acquisition date. Remaining intangible asset costs of $422.6 million at the
acquisition date are being amortized to operations over five years using the
straight-line method. The purchase price and related allocation are subject to
further refinement and change over the period covering one year from the
acquisition date.
We have taken certain actions to integrate the Vantis operations and, in
certain instances, to consolidate duplicative operations. Accrued exit costs
related to Vantis were recorded as an adjustment to the fair value of net assets
in the purchase price allocation. Accrued exit costs include $4.2 million
related to Vantis office closures, $2.5 million related to separation benefits
for Vantis employees and $1.1 million in other exit costs primarily relating to
the termination of Vantis foreign distributors. Separation benefits relate
primarily to twenty Vantis senior managers. At December 31, 1999, five employees
from this group had terminated. As of December 31, 1999, an additional 55 Vantis
employees had terminated for other merger-related reasons. Payments of
approximately $747,000 have been charged to this accrued liability. If these
employees had not terminated, substantially all of the related costs would have
been charged to selling, general and administrative expenses. Charges to other
exit cost accrued liabilities were not significant for the period from June 15,
1999 through December 31, 1999. There have been no non-cash charges or credits
to accrued exit costs. These accruals are based upon our current estimates and
are in accordance with Emerging Issues Task Force ("EITF") No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."
REVENUE. Revenue was $269.7 million in fiscal period 1999, an increase of
35% from fiscal year 1999. Fiscal year 1999 revenue of $200.1 million
represented a decrease of 19% from the $245.9 million recorded in fiscal year
1998.
In addition to our acquisition of Vantis, the revenue increase in fiscal
period 1999 as compared to fiscal year 1999 was attributable to increased sales
of ISP products and recovering demand from Asia. Fiscal year 1999 revenue as
compared to fiscal 1998 was negatively impacted by a decline in demand from Asia
due to the economic crisis in that region. Furthermore, revenue in all
geographies was negatively impacted by a decline in demand for our non-ISP
product families.
15
Our sales by geographic area were as follows:
NINE MONTHS YEAR ENDED
ENDED -------------------------------
DEC. 31, 1999 MAR. 31, 1999 MAR. 31, 1998
-------------- -------------- --------------
(IN THOUSANDS)
United States........................... $126,333 $100,778 $120,278
Export sales:
Europe................................ 70,641 53,649 61,243
Asia.................................. 55,003 34,680 55,853
Other................................. 17,722 10,965 8,520
-------- -------- --------
$269,699 $200,072 $245,894
======== ======== ========
Revenue from export sales as a percentage of total revenue was approximately
53% for fiscal period 1999, 50% for fiscal year 1999 and 51% for fiscal year
1998. We expect export sales to continue to represent a significant portion of
revenue.
The average selling price of our products decreased slightly in fiscal
period 1999 as compared to fiscal year 1999. The average selling price of our
products was flat in fiscal year 1999 as compared to fiscal year 1998. The
decrease in fiscal period 1999 was due primarily to changes in product mix.
Although selling prices of mature products generally decline over time, this
decline is at times offset by higher selling prices of new products. Our ability
to maintain or increase the level of our average selling price is dependent on
the continued development, introduction and market acceptance of new products.
GROSS MARGIN. Our gross margin was 60% for fiscal period 1999, 61% for
fiscal year 1999 and 60% for fiscal year 1998. The gross margin decline in
fiscal period 1999 as compared to fiscal year 1999 is attributable to our
acquisition of Vantis on June 15, 1999. The decline was partially offset by an
improvement in product mix and reductions in our manufacturing costs. The
improvement in fiscal year 1999 as compared to fiscal year 1998 was primarily
due to an improvement in product mix and reductions in our manufacturing costs.
Reductions in manufacturing costs resulted primarily from yield improvements,
migration of products to more advanced technologies and smaller die sizes, and
wafer price reductions.
RESEARCH AND DEVELOPMENT. Research and development expense was
$45.9 million in fiscal period 1999, $33.2 million in fiscal year 1999 and
$32.0 million in fiscal year 1998. For fiscal period 1999, in addition to our
acquisition of Vantis, spending increases resulted primarily from the increased
development of new products. Spending increases in fiscal year 1999 as compared
to fiscal year 1998 resulted primarily from the increased development of new
products. We believe that a continued commitment to research and development is
essential in order to maintain product leadership in our existing product
families and provide innovative new product offerings, and therefore we expect
to continue to make significant future investments in research and development.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was $50.7 million in fiscal period 1999, $36.8 million in fiscal year
1999 and $39.9 million in fiscal year 1998. The increase in the 1999 fiscal
period as opposed to fiscal year 1999 was primarily due to our Vantis
acquisition and to a lesser extent attributable to increased variable costs
associated with higher revenue levels. The decrease in fiscal year 1999 expense
as compared to fiscal year 1998 was primarily due to decreased variable costs
associated with lower revenue levels.
IN-PROCESS RESEARCH AND DEVELOPMENT. On June 15, 1999, we bought from AMD
all of the outstanding capital stock of Vantis Corporation for approximately
$500 million in cash in a transaction accounted for under the purchase method of
accounting. Including liabilities assumed and purchase accounting reserves
established, the total purchase cost was $583.1 million, of which
$511.6 million was allocated to
16
intangible assets. A portion of the intangible asset value was in-process
research and development, or IPR&D, with a value of approximately $89 million
which was charged to expense on the acquisition date as required by generally
accepted accounting principles. The remaining $422.6 million of intangible asset
value consisting of existing technology, assembled workforce, customer lists,
patents, trademarks and goodwill, is being amortized to operations over 5 years
using the straight-line method.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
acquired in the Vantis acquisition was $45.8 million for fiscal period 1999. The
estimated weighted average useful life of the intangible assets for current
technology, assembled workforce, customer lists, trademarks, patents and
residual goodwill, created as a result of the acquisition, is approximately five
years.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, was ($4.1)
million for fiscal period 1999, a $14.8 million decrease as compared to fiscal
year 1999. This was primarily due to interest expense of approximately
$9.7 million from acquisition related debt and reduced interest income resulting
from lower cash and investment balances in conjunction with the acquisition.
Other income (expense), net, was approximately flat for fiscal year 1999 as
compared to fiscal year 1998, as higher cash and investment balances were offset
by lower interest rates for invested balances, particularly in the second half
of the fiscal year.
PROVISION FOR INCOME TAXES. The benefit for income taxes for fiscal period
1999 was 37.6% of the loss before benefit for income taxes. This reflects the
estimated rate at which income taxes would be recoverable if a loss tax return
were filed. The loss before benefit for income taxes is attributable to the
IPR&D charge during the period of approximately $89.0 million and intangible
asset amortization of $45.8 million. If these charges were not present, we would
have had taxable income and an income tax rate of approximately 36.5%. Our
effective tax rate was 32.5% for fiscal year 1999 and 34.0% for fiscal year
1998. The rate change in fiscal year 1999 as compared to fiscal year 1998 was
due primarily to changes in the proportion of tax-exempt interest income
included in our overall net income. The fiscal 1999 rate was also favorably
impacted by reduced state taxes resulting from the increased realization of tax
credits.
EXTRAORDINARY ITEM, NET OF INCOME TAXES. The extraordinary item, net of
income taxes, represents the writeoff of unamortized loan fees related to the
$220 million Term Loan repaid in conjunction with the financing of our
acquisition of Vantis.
FACTORS AFFECTING FUTURE RESULTS
OUR WAFER SUPPLY COULD BE INTERRUPTED OR REDUCED AND RESULT IN A SHORTAGE OF
FINISHED PRODUCTS AVAILABLE FOR SALE
We do not manufacture finished silicon wafers. Currently all of our silicon
wafers are manufactured by Seiko Epson in Japan, AMD in the United States and
the UMC Group, a group of affiliated companies, in Taiwan. If Seiko Epson,
through its U.S. affiliate Epson Electronics America, AMD or the UMC Group
significantly interrupts or reduces our wafer supply, our operating results
would be adversely affected.
In the past, we have experienced delays in obtaining wafers and in securing
supply commitments from our foundries. At present, we anticipate that our supply
commitments are adequate. However, these existing supply commitments may not be
sufficient for us to satisfy customer demand in future periods. Additionally,
notwithstanding our supply commitments we may still have difficulty in obtaining
wafer deliveries consistent with the supply commitments. We negotiate wafer
prices and supply commitments from our suppliers on at least an annual basis. If
Seiko Epson, Epson Electronics America, AMD or the UMC Group reduces our supply
commitment or increases our wafer prices, and we cannot find alternative sources
of wafer supply, our operating results could be adversely affected.
Many other factors that could disrupt our wafer supply are beyond our
control. Since worldwide manufacturing capacity for silicon wafers is limited
and inelastic, we could be adversely affected by
17
significant industry-wide increases in overall wafer demand or interruptions in
wafer supply. Additionally, a future disruption of Seiko Epson's, AMD's or the
UMC Group's foundry operations as a result of a fire, earthquake or other
natural disaster could disrupt our wafer supply and could have an adverse effect
on our operating results.
IF OUR FOUNDRY PARTNERS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE MAY FACE A
SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE
We depend on our foundries to deliver reliable silicon wafers with
acceptable yields in a timely manner. As is common in our industry, we have
experienced wafer yield problems and delivery delays in the past. If our
foundries are unable to produce silicon wafers that meet our specifications,
with acceptable yields, for a prolonged period, our operating results could be
adversely affected.
Substantially all of our revenue is derived from products based on a
specialized silicon wafer manufacturing process technology called E(2)CMOS. The
reliable manufacture of high performance E(2)CMOS semiconductor wafers is a
complicated and technically demanding process requiring:
- a high degree of technical skill;
- state-of-the-art equipment;
- the absence of defects in the masks used to print circuits on a wafer;
- the elimination of minute impurities and errors in each step of the
fabrication process; and
- effective cooperation between the wafer supplier and the circuit designer.
As a result, our foundries may experience difficulties in achieving
acceptable quality and yield levels when manufacturing our silicon wafers.
WE MAY BE UNSUCCESSFUL IN DEFINING, DEVELOPING OR SELLING NEW PRODUCTS REQUIRED
TO MAINTAIN OR EXPAND OUR BUSINESS
As a semiconductor company, we operate in a dynamic environment marked by
rapid product obsolescence. Our future success depends on our ability to
introduce new or improved products that meet customer needs while achieving
acceptable margins. If we fail to introduce these new products in a timely
manner or these products fail to achieve market acceptance, our business and
financial condition will be adversely affected.
The introduction of new products in a dynamic market environment presents
significant business challenges. Product development commitments and
expenditures must be made well in advance of product sales. The success of a new
product depends on accurate forecasts of long-term market demand and future
technology developments.
Our future revenue growth is dependent on market acceptance of our new
proprietary ISP product families and the continued market acceptance of our
proprietary software development tools. The success of these products is
dependent on a variety of specific technical factors including:
- successful product definition;
- timely and efficient completion of product design;
- timely and efficient implementation of wafer manufacturing and assembly
processes;
- product performance; and
- the quality and reliability of the product.
18
If, due to these or other factors, our new products do not achieve market
acceptance, our business and financial condition will be adversely affected.
OUR PRODUCTS MAY NOT BE COMPETITIVE IF WE ARE UNSUCCESSFUL IN MIGRATING OUR
MANUFACTURING PROCESSES TO MORE ADVANCED TECHNOLOGIES
In order to develop new products and maintain the competitiveness of
existing products, we need to migrate to more advanced wafer manufacturing
processes that utilize larger wafer sizes and smaller device geometries. We may
also utilize additional foundries. Since we depend upon foundries to provide
their facilities and support for our process technology development, we may
experience delays in the availability of advanced wafer manufacturing process
technologies at existing or new wafer fabrication facilities. As a result,
volume production of our advanced E(2)CMOS process technologies at the new fabs
of Seiko Epson, the UMC Group or future foundries may not be achieved. This
could have an adverse effect on our operating results.
IF OUR ASSEMBLY AND TEST SUBCONTRACTORS EXPERIENCE QUALITY OR YIELD PROBLEMS, WE
MAY FACE A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE
We rely on subcontractors to assemble and test our devices with acceptable
quality and yield levels. As is common in our industry, we have experienced
quality and yield problems in the past. If we experience prolonged quality or
yield problems in the future, there could be an adverse effect on our operating
results.
The majority of our revenue is derived from semiconductor devices assembled
in advanced packages. The assembly of advanced packages is a complex process
requiring:
- a high degree of technical skill;
- state-of-the-art equipment;
- the absence of defects in lead frames used to attach semiconductor devices
to the package;
- the elimination of raw material impurities and errors in each step of the
process; and
- effective cooperation between the assembly subcontractor and the device
manufacturer.
As a result, our subcontractors may experience difficulties in achieving
acceptable quality and yield levels when assembling and testing our
semiconductor devices.
WE MAY EXPERIENCE UNEXPECTED DIFFICULTIES DUE TO THE INTEGRATION OF VANTIS
We acquired Vantis on June 15, 1999, and at present have completed the
integration of this business with our other operations. As a result of this
acquisition and subsequent integration, we may incur unexpected disruptions to
our ongoing business. These disruptions may have an adverse effect on our
operations and financial results. Further, the following specific factors may
adversely affect our ability to successfully operate the business of Vantis:
- we may experience unexpected losses of key employees or customers;
- we may experience unexpected costs and discover unexpected liabilities;
- we may not achieve historical levels of revenue growth, cost reduction and
profitability improvement; and
- we may not be able to coordinate our new product and process development
in a way which enables us to bring new technologies to the market in a
timely manner.
In addition, as part of our acquisition of Vantis, we entered into
arrangements with Vantis' former parent, AMD, for AMD to provide certain
manufacturing support and services. In the event AMD fails to
19
provide these services, or provides such services at a level of quality and
timeliness inconsistent with the historical delivery of such services, our
ability to successfully operate Vantis will be severely hampered and our
business may suffer.
DETERIORATION OF CONDITIONS IN ASIA MAY DISRUPT OUR EXISTING SUPPLY ARRANGEMENTS
AND RESULT IN A SHORTAGE OF FINISHED PRODUCTS AVAILABLE FOR SALE
Two of our three silicon wafer suppliers operate fabs located in Asia. Our
finished silicon wafers are assembled and tested by independent subcontractors
located in Hong Kong, Malaysia, the Philippines, South Korea, Taiwan and
Thailand. A prolonged interruption in our supply from any of these
subcontractors could have an adverse effect on our operating results.
Although we have not experienced significant supply interruptions, the
economic, financial, social and political situation in Asia has in the past been
volatile. Financial difficulties, governmental actions or restrictions,
prolonged work stoppages or any other difficulties experienced by our suppliers
may disrupt our supply and could have an adverse effect on our operating
results.
Our wafer purchases from Seiko Epson are denominated in Japanese yen. The
value of the dollar with respect to the yen has fluctuated in the past and may
not remain stable in the future. Future substantial deterioration of dollar-yen
exchange rates could have an adverse effect on our operating results.
EXPORT SALES ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES AND MAY DECLINE
IN THE FUTURE DUE TO ECONOMIC AND GOVERNMENTAL UNCERTAINTIES
Our export sales are affected by unique risks frequently associated with
foreign economies including:
- changes in local economic conditions;
- exchange rate volatility;
- governmental controls and trade restrictions;
- export license requirements and restrictions on the export of technology;
- political instability;
- changes in tax rates, tariffs or freight rates;
- interruptions in air transportation; and
- difficulties in staffing and managing foreign sales offices.
For example, our export sales have in the past been affected by regional
economic crises. Significant changes in the economic climate in the foreign
countries where we derive our export sales could have an adverse effect on our
operating results.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LIMIT OUR ABILITY TO
MAINTAIN OR INCREASE REVENUE AND PROFIT LEVELS DURING FUTURE INDUSTRY DOWNTURNS
The semiconductor industry is highly cyclical, to a greater extent than
other less dynamic or less technology-driven industries. In the past, our
financial performance has been negatively affected by significant downturns in
the semiconductor industry as a result of:
- the cyclical nature of the demand for the products of semiconductor
customers;
- general reductions in inventory levels by customers;
20
- excess production capacity; and
- accelerated declines in average selling prices.
If these or other conditions in the semiconductor industry occur in the
future, there could be an adverse effect on our operating results.
OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND THEREFORE MAY FAIL TO
MEET EXPECTATIONS
Our quarterly operating results have fluctuated in the past and may continue
to fluctuate in the future. Consequently, our operating results may fail to meet
the expectations of analysts and investors. As a result of industry conditions
and the following specific factors, our quarterly operating results are more
likely to fluctuate and are more difficult to predict than a typical
non-technology company of our size and maturity:
- general economic conditions in the countries where we sell our products;
- the timing of our and our competitors' new product introductions;
- product obsolescence;
- the scheduling, rescheduling and cancellation of large orders by our
customers;
- the cyclical nature of demand for our customers' products;
- our ability to develop new process technologies and achieve volume
production at the new fabs of Seiko Epson and the UMC Group or at another
foundry;
- changes in manufacturing yields;
- adverse movements in exchange rates, interest rates or tax rates; and
- the availability of adequate supply commitments from our wafer foundries
and assembly and test subcontractors.
As a result of these factors, our past financial results are not necessarily a
good predictor of our future results.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE
SEMICONDUCTOR INDUSTRY
The semiconductor industry is intensely competitive and many of our direct
and indirect competitors have substantially greater financial, technological,
manufacturing, marketing and sales resources. If we are unable to compete
successfully in this environment, our future results will be adversely affected.
The current level of competition in the programmable logic market is high
and may increase as our market expands. We currently compete directly with
companies that have licensed our products and technology or have developed
similar products. We also compete indirectly with numerous semiconductor
companies that offer products and solutions based on alternative technologies.
These direct and indirect competitors are established multinational
semiconductor companies as well as emerging companies. We also may experience
significant competition from foreign companies in the future.
WE MAY FAIL TO RETAIN OR ATTRACT THE SPECIALIZED TECHNICAL AND MANAGEMENT
PERSONNEL REQUIRED TO SUCCESSFULLY OPERATE OUR BUSINESS
To a greater degree than most non-technology companies or larger technology
companies, our future success depends on our ability to attract and retain
highly qualified technical and management personnel. As a mid-sized company, we
are particularly dependent on a relatively small group of key employees.
Competition for skilled technical and management employees is intense within our
industry. As a result,
21
we may not be able to retain our existing key technical and management
personnel. In addition, we may not be able to attract additional qualified
employees in the future. If we are unable to retain existing key employees or
are unable to hire new qualified employees, our operating results could be
adversely affected.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
FINANCIAL RESULTS AND COMPETITIVE POSITION MAY SUFFER
Our success depends in part on our proprietary technology. However, we may
fail to adequately protect this technology. As a result, we may lose our
competitive position or face significant expense to protect or enforce our
intellectual property rights.
We intend to continue to protect our proprietary technology through patents,
copyrights and trade secrets. Despite this intention, we may not be successful
in achieving adequate protection. Claims allowed on any of our patents may not
be sufficiently broad to protect our technology. Patents issued to us also may
be challenged, invalidated or circumvented. Finally, our competitors may develop
similar technology independently.
Companies in the semiconductor industry vigorously pursue their intellectual
property rights. If we become involved in protracted intellectual property
disputes or litigation we may utilize substantial financial and management
resources, which could have an adverse effect on our operating results. We may
also be subject to future intellectual property claims or judgements. If these
were to occur, we may not be able to obtain a license on favorable terms or
without our operating results being adversely affected.
YEAR 2000 COMPLIANCE
During 1999 we completed our planned Year 2000 compliance activities with
respect to our products, internal systems, software, equipment and facilities.
In aggregate we spent approximately $2.0 million to fund Year 2000 compliance
activities and related system and software upgrades. To date, we have not
encountered any material Year 2000 problems with respect to our products,
internal systems, software, equipment and facilities nor have we encountered any
vendor supply disruptions related to Year 2000 problems.
OUR STOCK PRICE MAY CONTINUE TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS
In recent years, the price of our common stock has fluctuated greatly. These
price fluctuations have been rapid and severe and have left investors little
time to react. The price of our common stock may continue to fluctuate greatly
in the future due to a variety of company specific factors, including:
- quarter to quarter variations in our operating results;
- shortfalls in revenue or earnings from levels expected by securities
analysts; and
- announcements of technological innovations or new products by other
companies.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999 and March 31, 1999 the Company's investment
portfolio consisted of fixed income securities of $182.1 million and
$293.4 million respectively. As with all fixed income instruments, these
securities are subject to interest rate risk and will decline in value if market
interest rates increase. If market rates were to increase immediately and
uniformly by 10% from levels as of January 1, 2000 and April 3, 1999, the
decline in the fair value of the portfolio would not be material. Further, the
Company has the ability to hold its fixed income investments until maturity and,
therefore, the Company would not expect to recognize such an adverse impact in
income or cash flows.
22
The Company has international subsidiary and branch operations.
Additionally, the majority of the Company's silicon wafer purchases are
denominated in Japanese yen. The Company is therefore subject to foreign
currency rate exposure. To mitigate rate exposure with respect to
yen-denominated wafer purchases, the Company maintains yen-denominated bank
accounts and bills its Japanese customers in yen. The yen bank deposits are
utilized to hedge yen-denominated wafer purchases against specific and firm
wafer purchases. If the foreign currency rates fluctuate by 10% from rates at
January 1, 2000 and April 3, 1999, the effect on the company's consolidated
financial statements would not be material. However, there can be no assurance
that there will not be a material impact in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, our principal source of liquidity was
$214.1 million of cash and short-term investments, a decrease of $105.3 million
from the balance of $319.4 million at March 31, 1999. The decrease was due to
use of cash for our acquisition of Vantis partially offset by cash generated
from operations and exercises of stock options. Working capital decreased
$171.4 million to $152.8 million at December 31, 1999 from $324.2 million at
March 31, 1999. This decrease in working capital was primarily a result of use
of cash for our acquisition. During the nine months of fiscal period 1999, we
generated approximately $80.9 million of cash and cash equivalents from our
operating activities compared with $63.7 million during the twelve months of
fiscal year 1999. In addition to the cash and cash equivalents generated, other
changes in assets and liabilities are described below.
Accounts receivable at December 31, 1999 increased by $9.9 million, or 42%,
as compared to the balance at March 31, 1999. This increase was primarily due to
increased product shipments and revenue levels related to our acquisition.
Inventories increased by $8.4 million, or 47%, as compared to the balance at
March 31, 1999 primarily due to increased production in response to higher
revenue levels and the inclusion of inventories related to our acquisition.
Current deferred income taxes increased $15.3 million, or 106%, as compared to
the balance at March 31, 1999 primarily due to the increase in deferred income
for sales to distributors which is recognized currently for income tax purposes,
and to a lesser extent the timing of deductions for certain expenses and
allowances. Net property and equipment increased by $14.7 million, or 33%, as
compared to the balance at March 31, 1999 primarily due to acquired assets.
Long-term deferred income taxes increased $39.1 million versus the balance at
March 31, 1999 and primarily represent future income tax benefits to be derived
from the amortization for income tax purposes of the IPR&D charges which were
written off in the first quarter of fiscal period 1999 for financial reporting
purposes and the amortization of other intangible assets for tax purposes.
Accounts payable and accrued expenses increased by $66.1 million, or 355%,
as compared to the balance at March 31, 1999 due primarily to the inclusion of
liabilities related to our acquisition. Accrued payroll obligations increased by
$5.3 million, or 39% as compared to the balance at March 31, 1999, due primarily
to the inclusion of liabilities related to our acquisition. The $7.5 million, or
150% increase in income taxes payable as compared to the balance at March 31,
1999 is primarily attributable to the timing of tax deductions and payments.
Deferred income increased by $25.2 million, or 126%, as compared to the balance
at March 31, 1999, due primarily to increased billings to distributors
associated with our acquisition.
On October 28, 1999, we issued $260 million in 4 3/4% convertible
subordinated notes due on November 1, 2006. These notes require that we pay
interest semi-annually on May 1 and November 1. Holders of these notes may
convert them into shares of our common stock at any time on or before
November 1, 2006, at a conversion price of $41.44 per share, subject to
adjustment in certain events. Beginning on November 6, 2002 and ending on
October 31, 2003, we may redeem the notes in whole or in part at a redemption
price of 102.71% of the principal amount. In the subsequent three twelve-month
periods, the redemption price declines to 102.04%, 101.36% and 100.68% of
principal, respectively. The notes are subordinated in right of payment to all
of our senior indebtedness, and are subordinated to all liabilities of our
subsidiaries. At December 31, 1999, we had no senior indebtedness and our
subsidiaries
23
had $26.5 million of other liabilities. Issuance costs relative to the
convertible subordinated notes are included in other assets and aggregated
approximately $6.9 million and are being amortized to expense over the lives of
the notes. Accumulated amortization amounted to approximately $333,000 at
December 31, 1999.
On June 15, 1999, we entered into a credit agreement with a group of lenders
and ABN AMRO Bank N.V. ("ABN AMRO") as administrative agent for the lender
group. The credit agreement consisted of two credit facilities: a $60 million
unsecured revolving credit facility ("Revolver"), and a $220 million unsecured
reducing term loan ("Term Loan"), both expiring and due on June 30, 2002. On
June 15, 1999, we borrowed $220 million under the Term Loan and approximately
$33 million under the Revolver. The credit facilities allowed for borrowings at
adjustable rates with interest payments due quarterly. The $33 million Revolver
was repaid in full during the third calendar quarter of 1999. In conjunction
with the issuance of the convertible subordinated notes, we repaid the
$220 million Term Loan in full during the fourth calendar quarter of fiscal
1999. Remaining unamortized loan fees at the time of repayment, aggregating
approximately $2.6 million ($1.665 million net of income taxes or a charge of
$0.04 for basic and diluted earnings per share), were written off and are
reflected in our Consolidated Statement of Operations as an Extraordinary Item,
Net of Income Taxes.
Capital expenditures were approximately $15.7 million, $18.4 million and
$18.8 million for fiscal period 1999, and fiscal years 1999 and 1998,
respectively. We expect to spend approximately $25 million to $30 million for
the fiscal year ending December 31, 2000.
In March 1997, we entered into an advance payment production agreement with
Seiko Epson and its affiliated U.S. distributor, Epson Electronics America,
under which we agreed to advance approximately $85 million, payable upon
completion of specific milestones, to Seiko Epson to finance construction of an
eight-inch sub-micron wafer manufacturing facility. Under the terms of the
agreement, the advance is to be repaid with semiconductor wafers over a
multi-year period. The agreement calls for wafers to be supplied by Seiko Epson
through Epson Electronics America, pursuant to purchase agreements with Epson
Electronics America. We also have an option under this agreement to advance
Seiko Epson an additional $60 million for additional wafer supply under similar
terms. The first payment pursuant to this agreement, approximately
$17.0 million, was made during fiscal 1997. During fiscal 1998, we made two
additional payments aggregating approximately $34.2 million. The balance of the
advance payment is currently anticipated to be made in two future installments.
We entered into a series of agreements with UMC, in September 1995 pursuant
to which we agreed to join UMC and several other companies to form a separate
Taiwanese company, UICC, for the purpose of building and operating an advanced
semiconductor manufacturing facility in Taiwan. Under the terms of the
agreements, we invested approximately $49.7 million for an approximate 10%
equity interest in UICC and the right to receive a percentage of the facility's
wafer production at market prices.
In October 1996, we entered into an agreement with Utek, a public Taiwanese
company in the wafer foundry business that became affiliated with the UMC Group
in 1998, pursuant to which we agreed to make a series of equity investments in
Utek under specific terms. In exchange for these investments we received the
right to purchase a percentage of Utek's wafer production. Under this agreement,
we invested approximately $17.5 million in three separate installments.
In June 1999, the board of directors of UICC and board of directors of UMC
voted in favor of merging UICC into UMC. These mergers became effective on
January 3, 2000. After the mergers we own approximately 61 million shares of UMC
common stock and have retained our capacity rights. Due to regulatory
restrictions, the majority of our UMC shares may not be sold until July 2000.
These regulatory restrictions will gradually expire between July 2000 and
January 2004.
In June 1999, as part of our acquisition of Vantis, we entered into a series
of agreements with AMD to support the continuing operations of Vantis. AMD has
agreed to provide us with finished silicon wafers
24
through September 2003 in quantities based either on a rolling six-month or an
annual forecast. We have committed to buy certain minimum quantities of wafers
and AMD has committed to supply certain quantities of wafers during this period.
Wafers for our products are manufactured in the United States at multiple AMD
wafer fabrication facilities. Prices for these wafers will be reviewed and
adjusted periodically.
We believe that our existing liquid resources, expected cash generated from
operations and existing credit facilities combined with our ability to borrow
additional funds will be adequate to meet our operating and capital requirements
and obligations for the next 12 months.
In an effort to secure additional wafer supply, we may from time to time
consider various financial arrangements including joint ventures, equity
investments, advance purchase payments, loans, or similar arrangements with
independent wafer manufacturers in exchange for committed wafer capacity. To the
extent that we pursue any such additional financing arrangements, additional
debt or equity financing may be required. We may in the future seek new or
additional sources of funding. There can be no assurance that such additional
financing will be available when needed or, if available, will be on favorable
terms. Any future equity financing will decrease existing stockholders' equity
percentage ownership and may, depending on the price at which the equity is
sold, result in dilution.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES
PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet, December 31, 1999 and March 31,
1999...................................................... 27
Consolidated Statement of Operations, nine months ended
December 31, 1999 and years ended March 31, 1999 and
1998...................................................... 28
Consolidated Statement of Stockholders' Equity, nine months
ended December 31, 1999 and years ended March 31, 1999 and
1998...................................................... 29
Consolidated Statement of Cash Flows, nine months ended
December 31, 1999 and years ended March 31, 1999 and
1998...................................................... 30
Notes to Consolidated Financial Statements.................. 31
Report of Independent Accountants........................... 50
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Schedule VIII--Valuation and Qualifying Accounts............ S-2
26
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
DEC. 31, MARCH 31,
1999 1999
--------- ----------
(Note 1)
ASSETS
Current assets:
Cash and cash equivalents................................. $113,824 $ 79,301
Short-term investments.................................... 100,316 240,133
Accounts receivable, net.................................. 33,676 23,788
Inventories (note 2)...................................... 26,036 17,683
Prepaid expenses and other current assets................. 10,407 6,061
Deferred income taxes (note 7)............................ 29,727 14,400
-------- --------
Total current assets.................................... 313,986 381,366
Foundry investments, advances and other assets (notes 5 and
15)....................................................... 130,274 114,537
Property and equipment, less accumulated depreciation
(note 3).................................................. 59,689 44,993
Intangible assets, less accumulated amortization of $45,780
(note 4).................................................. 373,117 --
Deferred income taxes (note 7).............................. 39,089 --
-------- --------
$916,155 $540,896
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 84,675 $ 18,611
Accrued payroll obligations............................... 18,906 13,573
Income taxes payable (note 7)............................. 12,459 4,985
Deferred income........................................... 45,188 19,993
-------- --------
Total current liabilities............................... 161,228 57,162
-------- --------
4 3/4% Convertible notes due in 2006 (note 8)............... 260,000 --
Other long-term liabilities................................. 12,154 --
Commitments and contingencies (notes 4,5,6,10,11 and 15).... -- --
Stockholders' equity (note 9):
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized; 48,285,719 and 47,194,472 shares issued and
outstanding............................................. 483 472
Paid-in capital........................................... 270,228 223,054
Retained earnings......................................... 212,062 260,208
-------- --------
482,773 483,734
-------- --------
$916,155 $540,896
======== ========
The accompanying notes are an integral part of this statement.
27
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE
MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
--------- ---------- ----------
(Notes 1
and 14)
Revenue..................................................... $269,699 $200,072 $245,894
Costs and expenses:
Cost of products sold..................................... 108,687 78,440 98,883
Research and development.................................. 45,903 33,190 32,012
Selling, general and administrative (note 12)............. 50,676 36,818 39,934
In-process research and development (note 4).............. 89,003 -- --
Amortization of intangible assets (note 4)................ 45,780 -- --
-------- -------- --------
340,049 148,448 170,829
-------- -------- --------
(Loss) income from operations............................... (70,350) 51,624 75,065
Other income (expense), net:
Interest income........................................... 6,057 11,279 10,277
Interest expense (note 8)................................. (9,732) (274) --
Other (expense) income, net............................... (445) (337) 366
-------- -------- --------
(Loss) income before (benefit) provision for income taxes... (74,470) 62,292 85,708
(Benefit) provision for income taxes (note 7)............... (27,989) 20,246 29,141
-------- -------- --------
(Loss) income before extraordinary item..................... (46,481) 42,046 56,567
Extraordinary item, net of income taxes (note 8)............ (1,665) -- --
-------- -------- --------
Net (loss) income........................................... $(48,146) $ 42,046 $ 56,567
======== ======== ========
Basic (loss) income per share, before extraordinary item.... $ (0.97) $ 0.90 $ 1.22
======== ======== ========
Diluted (loss) income per share, before extraordinary
item...................................................... $ (0.97) $ 0.88 $ 1.18
======== ======== ========
Basic net (loss) income per share........................... $ (1.01) $ 0.90 $ 1.22
======== ======== ========
Diluted net (loss) income per share......................... $ (1.01) $ 0.88 $ 1.18
======== ======== ========
Shares used in per share calculations:
Basic..................................................... 47,714 46,974 46,478
======== ======== ========
Diluted................................................... 47,714 47,638 47,788
======== ======== ========
The accompanying notes are an integral part of this statement.
28
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PAR VALUE)
COMMON STOCK
-------------------
($.01 PAR VALUE) PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- -------- -------- --------
Balances, March 31, 1997...................... 45,756 $458 $198,438 $161,595 $360,491
Common stock issued........................... 1,100 11 12,540 -- 12,551
Tax benefit of option exercises............... -- -- 5,225 -- 5,225
Other comprehensive loss...................... -- -- (148) -- (148)
Net income for fiscal year 1998............... -- -- -- 56,567 56,567
------ ---- -------- -------- --------
Balances, March 31, 1998...................... 46,856 469 216,055 218,162 434,686
Common stock issued........................... 1,014 10 11,202 -- 11,212
Repurchase of common stock.................... (676) (7) (9,151) -- (9,158)
Tax benefit of option exercises............... -- -- 4,888 -- 4,888
Other comprehensive income.................... -- -- 60 -- 60
Net income for fiscal year 1999............... -- -- -- 42,046 42,046
------ ---- -------- -------- --------
Balances, March 31, 1999...................... 47,194 472 223,054 260,208 483,734
Common stock issued........................... 1,092 11 14,198 -- 14,209
Fair value of options issued to Vantis
employees................................... -- -- 23,982 -- 23,982
Tax benefit of option exercises............... -- -- 8,937 -- 8,937
Other comprehensive income.................... -- -- 57 -- 57
Net loss for fiscal period 1999............... -- -- -- (48,146) (48,146)
------ ---- -------- -------- --------
Balances, December 31, 1999................... 48,286 $483 $270,228 $212,062 $482,773
====== ==== ======== ======== ========
The accompanying notes are an integral part of this statement.
29
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS YEAR ENDED
ENDED ---------------------
DEC. 31, MAR. 31, MAR. 31,
1999 1999 1998
----------- --------- ---------
Cash flow from operating activities:
Net (loss) income......................................... $(48,146) $42,046 $56,567
Adjustments to reconcile net (loss) income to net cash
provided (used) by operating activities:
Depreciation and amortization........................... 57,842 10,064 9,558
In-process research and development costs............... 89,003 -- --
Deferred income taxes pertaining to intangible assets... (37,684) -- --
Extraordinary item, net of income taxes................. (1,665) -- --
Changes in assets and liabilities (net of purchase
accounting adjustments)
Accounts receivable................................... (5,206) 4,441 (2,289)
Inventories........................................... (884) 4,964 5,162
Prepaid expenses and other current assets............. (387) (489) (2,654)
Deferred income taxes................................. (15,327) 100 (2,775)
Foundry investments, advances and other assets........ 769 (199) (25,154)
Accounts payable and accrued expenses................. 2,054 415 3,920
Accrued payroll obligations........................... 443 2,342 1,583
Income taxes payable.................................. 7,474 775 3,428
Deferred income....................................... 25,195 (750) 2,478
Other liabilities..................................... 7,443 -- --
-------- ------- -------
Net cash provided by operating activities........... 80,924 63,709 49,824
-------- ------- -------
Cash flow from investing activities:
Proceeds from (purchase of) short-term investments, net... 139,817 (33,367) (32,068)
Acquisition of Vantis Corporation, net of cash acquired... (439,258) -- --
Foundry investments....................................... (4,593) -- (10,164)
Capital expenditures...................................... (15,675) (18,387) (18,825)
-------- ------- -------
Net cash used by investing activities............... (319,709) (51,754) (61,057)
-------- ------- -------
Cash flow from financing activities:
Proceeds from bank borrowings and convertible notes....... 513,000 -- --
Payments on bank borrowings............................... (253,000) -- --
Debt issuance costs....................................... (9,895) -- --
Repurchase of common stock, net........................... -- (9,158) --
Net proceeds from issuance of common stock................ 23,203 16,160 17,628
-------- ------- -------
Net cash provided by financing activities........... 273,308 7,002 17,628
-------- ------- -------
Net increase in cash and cash equivalents................... 34,523 18,957 6,395
Beginning cash and cash equivalents......................... 79,301 60,344 53,949
-------- ------- -------
Ending cash and cash equivalents............................ $113,824 $79,301 $60,344
======== ======= =======
Supplemental disclosure of non-cash investing and financing
activities:
Fair value of options issued to Vantis employees
(note 4)................................................ $ 23,982 -- --
The accompanying notes are an integral part of this statement.
30
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Lattice Semiconductor Corporation, ("Lattice"), founded in 1983 and based in
Hillsboro, Oregon, designs, develops and markets the broadest range of high
performance ISP-TM- programmable logic devices ("PLDs") and offers total
solutions for today's advanced logic designs. We introduced in-system
programmability to the logic industry in 1992. Our products are sold worldwide
through an extensive network of independent sales representatives and
distributors, primarily to OEM customers in the communications, computing,
industrial and military end markets. Approximately one-half of our revenue is
derived from export sales, mainly to Europe and Asia.
FISCAL REPORTING PERIOD
In the fourth quarter of calendar 1999, we changed our reporting period to a
52 or 53 week year ending on the Saturday closest to December 31 from a 52 or 53
week fiscal year ending on the Saturday closest to March 31. For ease of
presentation, December 31 or March 31 has been utilized as the fiscal year end
date for all financial statement captions. Additionally, for purposes of these
consolidated financial statements, the nine-month fiscal period ended
January 1, 2000 is referred to as "the nine months ended December 31, 1999" or
"fiscal period 1999". The fiscal periods ended on April 3, 1999 and March 28,
1998, respectively, are referred to as "the fiscal year ended March 31, 1999"
and "the fiscal year ended March 31, 1998", or "fiscal year 1999" and "fiscal
year 1998", respectively. The fiscal year ended April 3, 1999 was a 53-week
fiscal year. The nine-month period ended December 31, 1999 is not indicative of
a full year (see note 14).
PRINCIPLES OF CONSOLIDATION
On June 15, 1999, we completed the acquisition of all of the outstanding
capital stock of Vantis Corporation ("Vantis") from Advanced Micro
Devices, Inc. ("AMD"). The transaction was accounted for as a purchase, and
accordingly, the results of operations of Vantis and estimated fair value of
assets acquired and liabilities assumed were included in our consolidated
financial statements beginning June 16, 1999. The acquisition of Vantis is
discussed further in note 4. There are no significant differences between our
accounting policies and those of Vantis. The accompanying consolidated financial
statements include the accounts of Lattice Semiconductor Corporation and its
wholly owned subsidiaries after the elimination of all significant intercompany
balances and transactions.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider all highly liquid investments, which are readily convertible
into cash and have original maturities of three months or less, to be cash
equivalents. Short-term investments, which are relatively less liquid and have
maturities of less than one year, are composed of corporate auction preferred
stocks ($38.6 million), municipal and local government obligations
($17.8 million), Federal agency obligations ($8.1 million), time deposits
($16.8 million) and commercial paper ($19.0 million) at December 31, 1999.
We account for our short-term investments as held-to-maturity, which are
stated at amortized cost with corresponding premiums or discounts amortized over
the life of the investment to interest income. Amortized cost approximates
market value at December 31, 1999.
31
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1)--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL INSTRUMENTS
All of our significant financial assets and liabilities are recognized in
the Consolidated Balance Sheet as of December 31, 1999 and March 31, 1999. The
carrying value of our financial instruments approximate current market value
except foundry equity investments in Taiwan which were either not readily
marketable or where market prices were not necessarily indicative of realizable
value (see notes 5 and 15). We estimate the fair value of cash and cash
equivalents, short-term investments, accounts receivable, other current assets
and current liabilities based upon existing interest rates related to such
assets and liabilities compared to the current market rates of interest for
instruments of similar nature and degree of risk.
DERIVATIVE FINANCIAL INSTRUMENTS
In order to minimize exposure to foreign exchange risk with respect to
long-term investments made with foreign currencies as further described in
note 5 of notes to consolidated financial statements, we have at times entered
into foreign forward exchange contracts in order to hedge these transactions.
These contracts are accounted for as identifiable hedges against firm Lattice
commitments. Realized gain or loss with respect to these contracts for the
fiscal periods presented was not material. As of December 31, 1999, we had no
open foreign exchange contracts for the purchase or sale of foreign currencies.
We do not enter into derivative financial instruments for trading purposes.
FOREIGN EXCHANGE
The majority of our silicon wafer purchases are denominated in Japanese yen.
We maintain yen-denominated bank accounts and bill our Japanese customers in
yen. The yen bank deposits utilized to hedge yen-denominated wafer purchases are
accounted for as identifiable hedges against specific and firm wafer purchases.
Gains or losses from foreign exchange rate fluctuations on unhedged balances
denominated in foreign currencies are reflected in other income. Realized and
unrealized gains or losses were not significant for the fiscal periods
presented.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose us to concentrations of
credit risk consist primarily of short-term investments and trade receivables.
We place our investments through several financial institutions and mitigate the
concentration of credit risk by placing percentage limits on the maximum portion
of the investment portfolio which may be invested in any one investment
instrument. Investments consist primarily of A1 and P1 or better rated U.S.
commercial paper, U.S. government agency obligations and other money market
instruments, "AA" or better rated municipal obligations, money market preferred
stocks and other time deposits. Concentrations of credit risk with respect to
trade receivables are mitigated by a geographically diverse customer base and
our credit and collection process. We perform credit evaluations for all
customers and secure transactions with letters of credit or advance payments
where necessary. Writeoffs for uncollected trade receivables have not been
significant to date.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue from sales to OEM customers is recognized upon shipment. Certain of
our sales are made to distributors under agreements providing price protection
and right of return on unsold merchandise. Revenue and cost relating to such
distributor sales are deferred until the product is sold by the distributor
32
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1)--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and related revenue and costs are then reflected in income. Accounts receivable
are shown net of allowances for doubtful accounts of $1,583,000 and $881,000 at
December 31, 1999 and March 31, 1999, respectively.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market.
LONG-LIVED ASSETS
We account for our long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires us to review the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Impairment is measured by comparing the estimated
undiscounted cash flows to the carrying amount.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes over the estimated
useful lives of the related assets, generally three to five years for equipment
and software and thirty years for buildings. Accelerated methods of computing
depreciation are generally used for income tax purposes.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and other intangibles related to our
acquisition of Vantis Corporation (see note 4) which are being amortized over
five years on a straight-line basis, and fifteen years for income tax purposes.
The undiscounted cash flows method is used to assess the carrying value of
goodwill.
TRANSLATION OF FOREIGN CURRENCIES
We translate accounts denominated in foreign currencies in accordance with
SFAS 52, "Foreign Currency Translation." Translation adjustments related to the
consolidation of foreign subsidiary financial statements have not been
significant to date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
We account for our employee and director stock options and employee stock
purchase plan in accordance with provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Additional pro forma disclosures as required under SFAS 123, "Accounting for
Stock-Based Compensation," are presented in note 9.
33
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1)--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
shares of common stock and common stock equivalents assumed to be outstanding
during the period using the treasury stock method. Common stock equivalents
consist of stock options and warrants to purchase common stock. The convertible
notes issued in October 1999 (see note 8) are potentially dilutive securities.
The incremental shares from assumed convertible note conversions are not
included in computing the diluted per share amounts for fiscal period 1999
because there was a loss in this period. Thus, the inclusion of these shares
would be antidilutive.
On August 11, 1999 our Board of Directors approved a two-for-one stock split
of our common stock to be effected in the form of a stock dividend of one share
of common stock for each share of our outstanding common stock. All share and
per share amounts presented in the accompanying audited consolidated financial
statements and notes thereto have been adjusted retroactively to reflect the
two-for-one split.
The most significant difference between basic and diluted net income per
share is that basic net income per share does not treat potentially dilutive
securities such as convertible notes, options and warrants as outstanding.
Diluted loss per common share for fiscal period 1999 is based only on the
weighted average number of common shares outstanding during the period, as the
inclusion of convertible notes, options and warrants would have been
antidilutive. A reconciliation of the numerators and denominators of basic and
diluted net income per share is presented below (in thousands, except for per
share data):
NINE MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
----------- ---------- ----------
Basic and diluted net (loss) income.......... $(48,146) $42,046 $56,567
======== ======= =======
Shares used in basic net income per share
calculations............................... 47,714 46,974 46,478
Dilutive effect of stock options and
warrants................................... -- 664 1,310
-------- ------- -------
Shares used in diluted net income per share
calculations............................... 47,714 47,638 47,788
======== ======= =======
Basic net (loss) income per share............ $ (1.01) $ .90 $ 1.22
======== ======= =======
Diluted net (loss) income per share.......... $ (1.01) $ .88 $ 1.18
======== ======= =======
STATEMENT OF CASH FLOWS
Income taxes paid approximated $10.1 million, $16.4 million and
$23.1 million in fiscal period 1999 and fiscal years 1999 and 1998,
respectively. Interest paid aggregated approximately $6,871,000, $273,000 and
$83,000 in fiscal period 1999 and fiscal years 1999 and 1998, respectively.
34
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1)--NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 fiscal
periods presented. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivatives
Instruments and Hedging Activities." SFAS 133 establishes new accounting
treatment for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. For Lattice, this pronouncement will be
effective in 2001, and is not anticipated to have a material effect on the
consolidated financial statements.
(2)--INVENTORIES (IN THOUSANDS):
DEC. 31, MARCH 31,
1999 1999
--------- ----------
Work in progress......................................... $14,009 $10,956
Finished goods........................................... 12,027 6,727
------- -------
$26,036 $17,683
======= =======
(3)--PROPERTY AND EQUIPMENT (IN THOUSANDS):
DEC. 31, MARCH 31,
1999 1999
--------- ----------
Land.................................................... $ 2,099 $ 2,099
Buildings............................................... 28,902 7,135
Construction in progress................................ -- 18,768
Computer and test equipment............................. 85,056 68,017
Office furniture and equipment.......................... 3,612 3,116
Leasehold and building improvements..................... 6,625 2,643
-------- --------
126,294 101,778
Accumulated depreciation and amortization............... (66,605) (56,785)
-------- --------
$ 59,689 $ 44,993
======== ========
(4)--ACQUISITION OF VANTIS:
On June 15, 1999, we paid approximately $500.1 million in cash to AMD for
all of the outstanding capital stock of Vantis Corporation. Additionally, we
paid approximately $10.8 million in direct acquisition costs, accrued an
additional $5.4 million of pre-acquisition contingencies, accrued $8.3 million
in exit costs and assumed certain liabilities of $34.5 million related to the
Vantis business. This purchase was financed using a combination of cash reserves
and a new credit facility bearing interest at adjustable rates (see note 8). In
addition, we exchanged Lattice stock options for all of the options outstanding
under the
35
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)--ACQUISITION OF VANTIS: (CONTINUED)
former Vantis employee stock plans with a calculated Black-Scholes value of
approximately $24.0 million. The total purchase price of Vantis was
$583.1 million. The purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on an independent appraisal and
management estimates. The purchase price and the related allocation are subject
to further refinement and change during the first half of 2000. The total
purchase price was allocated as follows (in millions):
Current technology.......................................... $210.3
Excess of purchase price over net assets assumed............ 158.8
In-process research and development......................... 89.0
Fair value of other tangible net assets..................... 61.3
Assembled workforce, customer list, patents and
trademarks................................................ 53.5
Fair value of property, plant and equipment................. 10.2
------
Total....................................................... $583.1
======
VANTIS INTEGRATION
We have taken certain actions to integrate the Vantis operations and, in
certain instances, to consolidate duplicative operations. Accrued exit costs
related to Vantis were recorded as an adjustment to the fair value of net assets
in the purchase price allocation. Accrued exit costs include $4.2 million
related to Vantis office closures, $2.5 million related to separation benefits
for Vantis employees and $1.1 million in other exit costs primarily relating to
the termination of Vantis foreign distributors. Separation benefits relate
primarily to twenty Vantis senior managers. At December 31, 1999, five employees
from this group had terminated. As of December 31, 1999, an additional 55 Vantis
employees had terminated for other merger-related reasons. Payments of
approximately $747,000 have been charged to this accrued liability. If these
employees had not terminated, substantially all of the related costs would have
been charged to selling, general and administrative expenses. Charges to other
exit cost accrued liabilities were not significant for the period from June 15,
1999 through December 31, 1999. These accruals are based upon our current
estimates and are in accordance with Emerging Issues Task Force ("EITF")
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D")
The value assigned to IPR&D was determined by identifying individual
research projects for which technological feasibility had not been established.
These include semiconductor projects with a value after application of the SEC's
IPR&D valuation methodology of $77.2 million and a process technology project
with a value of $11.8 million. The value of each project was determined by
estimating the expected cash flows from the projects once commercially viable,
applying a factor based on the stage of completion of each project so as to
include only those cash flows that relate to development efforts prior to the
acquisition date, and discounting the resulting net cash flows back to their
present value. The percentage of completion for each project was determined
using proportionate cost incurred and technical milestones achieved to date. The
percentage of completion varied by individual project ranging from 50% to 69%
for semiconductors on June 15, 1999. The process technology project was
estimated to be 90% complete on June 15, 1999. Since June 15, 1999, there have
been no significant changes in the assumptions underlying these valuations.
36
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)--ACQUISITION OF VANTIS: (CONTINUED)
The nature of the efforts to develop the in-process research and development
into commercially viable products for semiconductors principally relate to the
completion of design, simulation, verification, documentation, test program
development, prototyping, reliability testing and qualification, hardware and
software integration as well as customer system-level testing and acceptance.
For the process technology, the nature of the efforts required to establish the
commercial viability of the in-process research and development project
principally relate to transistor design, lithography and metalization process
development, process integration, transistor size reduction plans, development
of packaging integration technology, achievement of manufacturability goals,
satisfaction of reliability standards and completion of qualification testing.
The semiconductor projects are related to new PLD products (requiring new
architectures and process technologies) and have the attendant risks associated
with development of advanced semiconductor circuit designs such as achievement
of speed, power, density, reliability and cost goals. All of the semiconductor
projects have remaining risks related to achievement of these design goals and
effective software integration. In addition, certain projects have basic circuit
design and layout activities which had not been completed as of June 15, 1999.
These semiconductor projects are scheduled for market release during 2000 and
continuing through 2001. Estimated costs to complete all in-process
semiconductor projects total $19.0 million and range from $0.2 million to
$16.5 million.
The process technology project is related to the development of a new
advanced manufacturing process to reduce transistor size, improve speed and
lower power consumption. Through June 15, 1999, transistor design, lithography
and metalization process development, process integration and certain transistor
size reduction plans had been achieved. Development of packaging integration
technology, achievement of manufacturability yield objectives, satisfaction of
reliability standards and qualification testing had not been accomplished at
June 15, 1999. The process was qualified for initial production in the first
quarter of 2000 with approximately $450,000 of costs incurred after June 15,
1999 out of a total of $4 million of estimated costs. This process technology,
is expected to remain in production through 2004.
If the projects discussed above are not successfully developed, the future
sales and profitability of the combined company may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
Management believes that the IPR&D charge of $89 million is valued consistently
with the SEC staff's current views regarding valuation methodologies. There can
be no assurances, however, that the SEC staff will not take issue with any
assumptions used in our valuation model and require a revision in the amount
allocated to IPR&D.
The estimated costs to develop the in-process research and development into
commercially viable products at June 15, 1999 are approximately $19.4 million in
aggregate--$4.7 million in 1999 subsequent to the transaction date,
$10.0 million in 2000, and $4.7 million in 2001.
The net cash flows from each project are based on management's estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from such projects. These estimates are
based on the below mentioned assumptions.
The estimated revenues are based on projected average compounded annual
revenue growth rates for semiconductor products that are in line with industry
analysts' forecasts of growth in the markets in which Vantis competes. Estimated
total revenues from the in-process research and development product areas are
expected to peak in the year 2005 and decline rapidly thereafter as replacement
products are expected to enter the market. These projections are based on
management estimates of market size and growth,
37
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)--ACQUISITION OF VANTIS: (CONTINUED)
expected trends in technology, and the nature and expected timing of new product
introductions by Vantis and its competitors.
In developing cash flow estimates, gross margins, research and development
costs and selling general and administrative expenses were consistent with
Vantis historical experience adjusted for expected changes in its stand-alone
performance.
Vantis' management estimated a profit split from the in-process projects to
the current products to account for the fact that Vantis' in-process projects
are partially dependent on technology that has already established its
feasibility. The profit split from each in-process product was estimated as a
percentage of the total value of the in-process product which was attributable
to existing Vantis core technology.
The net cash flows were discounted back to their present value based on the
weighted average cost of capital (WACC). The WACC calculation estimates the rate
of return required on an investment in an operating enterprise and considers the
rates of return required from investments in various areas of that enterprise.
The WACC assumed for Vantis, as a corporate business enterprise, is
approximately 16%. The discount rate used in discounting the net cash flows from
in-process research and development is 20% to 22%, which is 4% to 6% higher than
the discount rate used in discounting the net cash flows from current
technology. This discount rate is higher than the WACC due to the inherent
uncertainties in the estimates described above including uncertainty surrounding
the successful development of the in-process research and development projects,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.
USEFUL LIVES OF INTANGIBLE ASSETS
The estimated weighted average useful life of the intangible assets for
current technology, assembled workforce, customer lists, trademarks, patents and
residual goodwill, created as a result of the acquisition, is approximately five
years.
PRO FORMA RESULTS
The following pro forma results of operations information is provided for
illustrative purposes only and do not purport to be indicative of the
consolidated results of operations for future periods or that actually would
have been realized had Lattice and Vantis been a consolidated entity during the
periods presented. These pro forma results do not include the effect of
non-recurring purchase accounting adjustments. The pro forma results combine the
results of operations as if Vantis had been acquired as of the beginning of the
periods presented. The results include the impact of certain adjustments such as
goodwill amortization, estimated changes in interest income (expense) related to
cash outlays and
38
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)--ACQUISITION OF VANTIS: (CONTINUED)
borrowings associated with the transaction (see note 8) and income tax benefits
related to the aforementioned adjustments. Additionally, an in-process research
and development charge of $89.0 million discussed above has been excluded from
the periods presented due to its non-recurring nature:
PRO FORMA RESULTS
(UNAUDITED)
---------------------
NINE MONTHS ENDED
---------------------
DEC. 31, DEC. 31,
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
Revenue................................................. $314,394 $295,057
Income (loss) before extraordinary item................. $ 2,017 $(15,545)
Net income (loss)....................................... $ 352 $(15,545)
Basic net income (loss) per share....................... $ 0.01 $ (0.33)
Diluted net income (loss) per share..................... $ 0.01 $ (0.33)
(5)--FOUNDRY INVESTMENTS, ADVANCES AND OTHER ASSETS (IN THOUSANDS):
DECEMBER 31, MARCH 31,
1999 1999
------------- ----------
Foundry investments and other assets.................. $ 83,512 $ 63,275
Wafer supply advances................................. 46,762 51,262
-------- --------
$130,274 $114,537
======== ========
We entered into a series of agreements with United Microelectronics
Corporation ("UMC") in September 1995 pursuant to which we agreed to join UMC
and several other companies to form a separate Taiwanese corporation, ("UICC"),
for the purpose of building and operating an advanced semiconductor
manufacturing facility in Taiwan, Republic of China. Under the terms of the
agreements, we invested approximately $49.7 million between fiscal year 1996 and
fiscal year 1998 for an approximate 10% equity interest in the corporation and
the right to receive a percentage of the facility's wafer production at market
prices. This investment is accounted for at cost.
In October 1996, we entered into an agreement with Utek Corporation, a
public Taiwanese company in the wafer foundry business that became affiliated
with the UMC group in 1998, pursuant to which we agreed to make a series of
equity investments in Utek under specific terms. In exchange for these
investments, we received the right to purchase a percentage of Utek's wafer
production. Under this agreement, we have invested approximately $17.5 million
in three separate installments and owned approximately 2.5% of the outstanding
equity of Utek at December 31, 1999.
In June 1999, the Board of Directors of UICC and Utek and the Board of
Directors of UMC voted in favor of merging UICC and Utek into UMC. These mergers
became effective on January 3, 2000 (see note 15).
39
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5)--FOUNDRY INVESTMENTS, ADVANCES AND OTHER ASSETS (IN THOUSANDS): (CONTINUED)
In July 1994, we signed an agreement with Seiko Epson Corporation ("Seiko
Epson") and its affiliated U.S. distributor, Epson Electronics America, Inc.
("EEA"), under which we advanced $44 million to be used to finance additional
sub-micron wafer manufacturing capacity and technological development. The
advance was completely repaid in the form of semiconductor wafers over a
multi-year period ended in fiscal 1998.
In March 1997, we entered into a second advance payment production agreement
with Seiko Epson and EEA under which we agreed to advance approximately
$86 million, payable upon completion of specific milestones, to Seiko Epson to
finance construction of an eight-inch sub-micron semiconductor wafer
manufacturing facility. Under the terms of the agreement, the advance is to be
repaid with semiconductor wafers over a multi-year period. No interest income is
recorded. The agreement calls for wafers to be supplied by Seiko Epson through
EEA pursuant to purchase agreements with EEA. We also have an option under the
agreement to advance Seiko Epson an additional $60 million for additional wafer
supply under similar terms. The first payment under this agreement,
approximately $17.0 million, was made during fiscal 1997. During fiscal 1998, we
made two additional payments aggregating approximately $34.2 million.
Approximately $4.5 million of these advances are expected to be repaid with
semiconductor wafers during fiscal year 2000 and are thus reflected as part of
"Prepaid expenses and other current assets" in the accompanying Consolidated
Balance Sheet.
(6)--LEASE OBLIGATIONS:
Certain of our facilities and equipment are leased under operating leases,
which expire at various times through 2006. Rental expense under the operating
leases was approximately $2,822,000, $1,200,000 and $1,026,000 for fiscal period
1999, and fiscal years 1999 and 1998, respectively. Future minimum lease
commitments at December 31, 1999 are as follows (in thousands):
YEAR
- ----
2000........................................................ $ 4,110
2001........................................................ 2,921
2002........................................................ 2,570
2003........................................................ 2,434
2004........................................................ 2,332
Later years................................................. 2,269
-------
$16,636
=======
See note 15 describing a new operating lease commitment entered into in January
2000.
40
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7)--INCOME TAXES:
The components of the (benefit) provision for income taxes for fiscal period
1999, and fiscal years 1999 and 1998 are presented in the following table:
NINE MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
----------- ---------- ----------
(IN THOUSANDS)
Current:
Federal.................................... $ 25,321 $18,678 $29,204
State...................................... 1,106 1,468 2,712
-------- ------- -------
26,427 20,146 31,916
-------- ------- -------
Deferred:
Federal.................................... (52,180) 93 (2,539)
State...................................... (2,236) 7 (236)
-------- ------- -------
(54,416) 100 (2,775)
-------- ------- -------
$(27,989) $20,246 $29,141
======== ======= =======
Foreign income taxes were not significant for the fiscal periods presented.
The (benefit) provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as a result of the following differences:
NINE MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
----------- ---------- ----------
(IN THOUSANDS)
Computed income tax (benefit) expense at the
statutory rate............................. $(26,064) $21,802 $29,998
Adjustments for tax effects of:
State taxes, net........................... (1,133) 1,478 2,402
Research and development credits........... (400) (270) (154)
Nontaxable investment income............... (1,113) (3,037) (3,009)
Other...................................... 721 273 (96)
-------- ------- -------
$(27,989) $20,246 $29,141
======== ======= =======
41
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7)--INCOME TAXES: (CONTINUED)
The components of our net deferred tax assets are as follows (in thousands):
DEC. 31, MARCH 31,
1999 1999
--------- ----------
Current deferred tax asset:
Deferred income........................................ $16,946 $ 7,547
Expenses and allowances not currently deductible....... 12,781 8,508
------- -------
Total deferred tax assets.............................. 29,727 16,055
Valuation allowance.................................... -- (1,655)
------- -------
$29,727 $14,400
======= =======
DEC. 31, MARCH 31,
1999 1999
--------- ----------
Non-current deferred tax asset:
Intangible asset charges not currently deductible...... $37,684 $ --
Expenses and allowances not currently deductible....... 1,405 --
------- -------
Total deferred tax assets............................ $39,089 $ --
======= =======
Prior to fiscal period 1999, we recorded valuation allowances to reduce
deferred tax assets which could only be realized by earning taxable income in
distant future years. We established the valuation allowances because we could
not determine if it was more likely than not that such income would be earned.
Management now believes that it is more likely than not that such taxable income
will be earned, and therefore, no valuation allowance has been provided. The
effect of this change in estimate was recorded in the first quarter of fiscal
period 1999, and is included in the deferred tax benefit of $54.4 million for
fiscal period 1999.
(8)--LONG-TERM DEBT:
On October 28, 1999, we issued $260 million in 4 3/4% convertible
subordinated notes due on November 1, 2006. These notes pay interest
semi-annually on May 1 and November 1. Holders of these notes may convert them
into shares of our common stock at any time on or before November 1, 2006, at a
conversion price of $41.44 per share, subject to adjustment in certain events.
Beginning on November 6, 2002 and ending on October 31, 2003, we may redeem the
notes in whole or in part at a redemption price of 102.71% of the principal
amount. In the subsequent three twelve-month periods, the redemption price
declines to 102.04%, 101.36% and 100.68% of principal, respectively. The notes
are subordinated in right of payment to all of our senior indebtedness, and are
subordinated by operation of law to all liabilities of our subsidiaries. At
December 31, 1999, we had no senior indebtedness and our subsidiaries had
$26.5 million of debt and other liabilities outstanding. Issuance costs relative
to the convertible subordinated notes are included in other assets and
aggregated approximately $6.9 million and are being amortized to expense over
the lives of the notes. Accumulated amortization amounted to approximately
$333,000 at December 31, 1999.
On June 15, 1999, we entered into a credit agreement with a group of lenders
and ABN AMRO Bank N.V. ("ABN AMRO") as administrative agent for the lender
group. The credit agreement consisted of two credit facilities: a $60 million
unsecured revolving credit facility ("Revolver"), and a $220 million
42
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8)--LONG-TERM DEBT: (CONTINUED)
unsecured reducing term loan ("Term Loan"), both expiring and due on June 30,
2002. On June 15, 1999, we borrowed $220 million under the Term Loan and
approximately $33 million under the Revolver. The credit facilities allowed for
borrowings at adjustable rates with interest payments due quarterly. The
$33 million Revolver was repaid in full during the third calendar quarter of
1999.
In conjunction with the issuance of the convertible subordinated notes, we
repaid the $220 million Term Loan in full during the fourth calendar quarter of
fiscal 1999. Remaining unamortized loan fees at the time of repayment,
aggregating approximately $2.6 million ($1.665 million net of income taxes or a
charge of $0.04 for basic and diluted earnings per share), were written off and
are reflected in the accompanying Consolidated Statement of Operations as an
Extraordinary Item, Net of Income Taxes.
9)--STOCKHOLDERS' EQUITY:
COMMON STOCK
On June 12, 1998, our Board of Directors authorized management to repurchase
up to 2.4 million shares of our common stock. As of December 31, 1999, we had
repurchased 675,000 shares at an aggregate cost of approximately $9.2 million.
STOCK WARRANTS
As of December 31, 1999, we issued warrants to purchase 1,376,484 shares of
common stock to a vendor. Of this amount, 1,063,088 warrants were issued and
681,000 exercised prior to fiscal year 1998. During fiscal 1998, a warrant was
issued to purchase 103,100 shares of common stock, earned ratably from March
1997 through February 1998. Additionally, the vendor exercised warrants for
247,250 shares at an average exercise price of $9.39 per share. During fiscal
year 1999, a warrant was issued to purchase 100,196 shares of common stock,
earned ratably from March 1998 to February 1999. During fiscal period 1999, a
warrant was issued to purchase 110,100 shares of common stock, earned ratably
from March 1999 to February 2000. Additionally, the vendor exercised warrants
for 134,838 shares at $17.00 per share. Expense recorded in conjunction with the
exercise of these warrants was not material.
STOCK OPTION PLANS
As of December 31, 1999, we had reserved 8,600,000 and 11,550,000 shares of
common stock for issuance to officers and key employees under the 1996 Stock
Option Plan and 1988 Stock Option Plan, respectively. The 1996 Plan options are
granted at fair market value at the date of grant, generally vest over four
years in increments as determined by the Board of Directors and have terms up to
ten years. The 1988 Plan options are exercisable immediately and have terms up
to ten years. The transfer of certain shares of common stock acquired through
the exercise of 1988 Plan stock options is restricted under stock vesting
agreements that grant us the right to repurchase unvested shares at the exercise
price if employment is terminated. Generally, our repurchase rights lapse
quarterly over four years. Additionally, on June 16, 1999, we exchanged
2,360,272 Lattice stock options for all of the options outstanding under the
former Vantis stock option plans. These options generally vest over four years
and have terms of ten years.
The 1993 Directors' Stock Option Plan provides for the issuance of stock
options to members of our Board of Directors who are not employees of Lattice;
450,000 shares of our Common Stock are reserved for issuance thereunder. These
options are granted at fair market value at the date of grant and generally
43
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9)--STOCKHOLDERS' EQUITY: (CONTINUED)
become exercisable quarterly over a four year period beginning on the date of
grant and expire five years from the date of grant.
The following table summarizes our stock option activity and related
information for the past three fiscal periods (number of shares in thousands):
YEAR ENDED
NINE MONTHS ENDED ---------------------------------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1999 1999 1998
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES UNDER EXERCISE SHARES UNDER EXERCISE SHARES UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------------ --------- ------------ --------- ------------ ---------
Options outstanding at
beginning of fiscal year..... 5,874 $15.71 5,512 $20.19 4,580 $13.75
Options granted.............. 3,852 24.08 3,376 15.98 1,966 31.57
Options canceled............. (536) 19.88 (2,136) 29.41 (268) 19.89
Options exercised............ (968) 13.74 (878) 11.54 (766) 10.88
----- ------ -----
Options outstanding at end of
fiscal year.................. 8,222 $19.59 5,874 $15.71 5,512 $20.19
===== ====== =====
The following table summarizes information about stock options outstanding
at December 31, 1999 (number of shares in thousands):
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACT LIFE EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- ------------------------ --------- ------------- --------- --------- ---------
$14.06-$15.49............................. 973 0.61 $14.06 767 $14.06
$15.50-$15.74............................. 1,737 2.86 15.50 419 15.50
$15.75-$18.49............................. 1,916 1.65 16.23 1,048 16.55
$18.50-$29.74............................. 2,131 3.30 20.92 511 20.08
$29.75-$42.75............................. 1,465 3.42 30.57 157 31.49
----- -----
8,222 2.53 $19.59 2,902 $17.17
===== =====
On November 10, 1998, we offered employees the choice of exchanging certain
previously granted stock options for new stock options. The new stock options
had an exercise price of $15.50, the fair value of our common stock on the date
of exchange, and vest over four years. As a result, approximately 1,883,940
options were exchanged. The exchanged stock options had a weighted average
exercise price of $30.73.
STOCK PURCHASE PLAN
Our employee stock purchase plan, most recently approved by the stockholders
in August 1997, permits eligible employees to purchase shares of common stock
through payroll deductions, not to exceed 10% of the employee's compensation.
The purchase price of the shares is the lower of 85% of the fair
44
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9)--STOCKHOLDERS' EQUITY: (CONTINUED)
market value of the stock at the beginning of each six-month period or 85% of
the fair market value at the end of such period, but in no event less than the
book value per share at the mid-point of each offering period. Amounts
accumulated through payroll deductions during the offering period are used to
purchase shares on the last day of the offering period. Of the 1,400,000 shares
authorized to be issued under the plan, 98,614, 128,018 and 69,890 shares were
issued during fiscal period 1999, fiscal years 1999 and 1998, respectively, and
319,096 shares were available for issuance at December 31, 1999.
PRO FORMA DISCLOSURES
We account for our stock options and employee stock purchase plan in
conformity with APB 25 and have adopted the additional proforma disclosure
provisions of SFAS 123. The fair value, as defined by SFAS 123, for stock
options and employee stock plan purchase rights was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
GRANTS FOR PERIODS ENDED
-----------------------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
--------- ---------- ----------
Stock options:
Expected volatility....................... 41.4% 43.9% 48.6%
Risk-free interest rate................... 5.9% 4.7% 5.6%
Expected life from vesting date........... 1.6 years 1.3 years 1.2 years
Dividend yield............................ 0% 0% 0%
Stock purchase rights:
Expected volatility....................... 52.8% 43.6% 36.0%
Risk-free interest rate................... 5.3% 4.8% 5.9%
Expected life............................. 6 months 6 months 6 months
Dividend yield............................ 0% 0% 0%
The Black-Scholes option pricing model was developed for use in estimating
the fair value of freely tradable, fully transferable options without vesting
restrictions. Our stock options have characteristics which differ significantly
from those of freely tradable, fully transferable options. The Black-Scholes
option pricing model also requires highly subjective assumptions, including
expected stock price volatility and expected stock option term which greatly
affect the calculated fair value of an option. Our actual stock price volatility
and option term may be materially different from the assumptions used herein.
The resultant grant date weighted-average fair values calculated using the
Black-Scholes option pricing model and the noted assumptions for stock options
granted was $11.41, $5.19 and $12.60, and for stock purchase rights $7.74, $4.77
and $6.15, for fiscal period 1999, and fiscal years 1999 and 1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to
45
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9)--STOCKHOLDERS' EQUITY: (CONTINUED)
expense over the options' vesting period. Our pro forma information is as
follows (in thousands, except per share data):
NINE MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
----------- ---------- ----------
Pro forma net (loss) income.................. $(56,337) $32,425 $48,777
Pro forma basic (loss) earnings per share.... $ (1.18) $ .69 $ 1.05
Pro forma diluted (loss) earnings per
share...................................... $ (1.18) $ .68 $ 1.02
Because the SFAS 123 pro forma disclosure applies only to options granted
subsequent to April 1, 1995, its pro forma effect will not be fully reflected
until 2000.
SHAREHOLDER RIGHTS PLAN
A shareholder rights plan approved on September 11, 1991 provides for the
issuance of one right for each share of outstanding common stock. With certain
exceptions, the rights will become exercisable only in the event that an
acquiring party accumulates beneficial ownership of 20% or more of the Company's
outstanding common stock or announces a tender or exchange offer, the
consummation of which would result in ownership by that party of 20% or more of
the Company's outstanding common stock. The rights expire on September 11, 2001
if not previously redeemed or exercised. Each right entitles the holder to
purchase, for $60.00, a fraction of a share of our Series A Participating
Preferred Stock with economic terms similar to that of one share of our common
stock. We will generally be entitled to redeem the rights at $0.01 per right at
any time on or prior to the tenth day after an acquiring person has acquired
beneficial ownership of 20% or more of our common stock. If, prior to the
redemption or expiration of the rights, an acquiring person or group acquires
beneficial ownership of 20% or more of the Company's our common stock, each
right not beneficially owned by the acquiring person or group will entitle its
holder to purchase, at the rights' then current exercise price, that number of
shares of common stock having a value equal to two times the exercise price.
(10)--EMPLOYEE BENEFIT PLANS:
PROFIT SHARING PLAN
We initiated a profit sharing plan effective April 1, 1990. Under the
provisions of this plan, as approved by the Board of Directors, a percentage of
our operating income, as defined and calculated at the end of March and
September for the prior six-month period, is paid to qualified employees. In
fiscal period 1999, and fiscal years 1999 and 1998, approximately $2.6 million,
$2.1 million and $3.0 million, respectively, was charged against operations in
connection with the plan.
QUALIFIED INVESTMENT PLAN
In 1990, we adopted a 401(k) plan, which provides participants with an
opportunity to accumulate funds for retirement. Under the terms of the plan,
eligible participants may contribute up to 15% of their eligible earnings to the
plan Trust. The plan allows for us to make discretionary matching contributions;
no such contributions occurred through fiscal 1996. Beginning in fiscal 1997, we
matched eligible employee
46
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10)--EMPLOYEE BENEFIT PLANS: (CONTINUED)
contributions of up to 5% of base pay. These matching contributions are
discretionary and fully vest four years from the participants' hire date.
(11)--COMMITMENTS AND CONTINGENCIES:
We are exposed to certain asserted and unasserted potential claims. Patent
and other proprietary rights infringement claims are common in the semiconductor
industry. There can be no assurance that, with respect to potential claims made
against us, that we could obtain a license on terms or under conditions that
would not have a material adverse effect.
ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE NO. C-94-20567-RMW,
N.D. CAL.).
This litigation, which began in 1994, involves multiple claims and
counterclaims for patent infringement relating to Vantis and Altera programmable
logic devices. We assumed this litigation as part of our acquisition of Vantis.
In April 1999, the Federal Court of Appeal reversed earlier jury and Court
decisions and held that Altera is not licensed to the eight AMD patents-in-suit.
These eight AMD patents were subsequently assigned to Vantis. Also in April
1999, following the decision of the Federal Court of Appeal, Altera filed a
petition for rehearing. In June 1999, the Federal Court of Appeal denied
Altera's petition for rehearing.
In connection with our acquisition of Vantis, we have agreed to assume both
the claims against Altera and the claims by Altera against AMD. Although there
can be no assurance as to the results of such litigation, based upon information
presently known to management, we do not believe that the ultimate resolution of
this lawsuit will have a material adverse effect on our consolidated results of
operations, financial position, or cash flows.
(12)--RELATED PARTY:
Larry W. Sonsini is a member of our Board of Directors and is presently the
Chairman of the Executive Committee of Wilson Sonsini Goodrich & Rosati, a law
firm that provides us with corporate legal services. Legal services billed to
Lattice aggregated approximately $1,086,000, $61,000 and $51,000, respectively,
for fiscal period 1999, and fiscal years 1999 and 1998. Amounts payable to the
law firm were not significant at December 31, 1999 or March 31, 1999.
47
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13)--SEGMENT AND GEOGRAPHIC INFORMATION:
We operate in one industry segment, programmable logic. Our sales by major
geographic area were as follows:
NINE MONTHS YEAR ENDED
ENDED -----------------------
DEC. 31, MARCH 31, MARCH 31,
1999 1999 1998
----------- ---------- ----------
(IN THOUSANDS)
United States................................ $126,333 $100,778 $120,278
Export sales:
Europe..................................... 70,641 53,649 61,243
Asia....................................... 55,003 34,680 55,853
Other...................................... 17,722 10,965 8,520
-------- -------- --------
143,366 99,294 125,616
-------- -------- --------
$269,699 $200,072 $245,894
======== ======== ========
No individual customer accounted for more than 10% of revenue in fiscal
period 1999, or fiscal years 1999 or 1998. Export sales to any individual
country did not account for more than 10% of revenue in any of the fiscal
periods presented. More than 90% of our property and equipment is located in the
United States. Other long-lived assets located outside the United States consist
primarily of foundry investments and advances (see note 5).
(14)--TRANSITION REPORTING:
The following table of selected consolidated financial data below provides a
nine-month comparison of the results of operations through December 31, 1999 and
1998 (the transition period). The 1998 transition period figures are unaudited,
however, we believe that all necessary adjustments have been made to make the
periods comparable. Condensed consolidated results of operations for the
comparable 1999 and 1998 nine-month periods are as follows:
NINE MONTHS ENDED
-----------------------
DEC. 31, DEC. 31,
1999 1998
--------- -----------
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
(UNAUDITED)
Revenue................................................ $269,699 $146,284
Gross margin........................................... $161,012 $ 88,587
(Benefit) provision for income taxes................... $(27,989) $ 14,541
Extraordinary item, net of income taxes................ $ (1,665) $ --
Net (loss) income...................................... $(48,146) $ 30,199
Basic net (loss) income per share...................... $ (1.01) $ 0.65
Diluted net (loss) income per share.................... $ (1.01) $ 0.64
(15)--SUBSEQUENT EVENTS:
On January 4, 2000, we announced that we will recognize a $150 million
pre-tax ($92 million after-tax) gain in our Consolidated Statement of Operations
for the first calendar quarter of 2000. The gain
48
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15)--SUBSEQUENT EVENTS: (CONTINUED)
represents appreciation of foundry investments made in two Taiwanese companies,
UICC and Utek (see note 5). Effective January 3, 2000, UICC and Utek merged with
UMC, a publicly traded Taiwanese company. As a result of this merger, Lattice
now owns approximately 61 million shares of UMC common stock. Due to regulatory
restrictions, the majority of our UMC shares may not be sold until July 2000.
These regulatory restrictions will gradually expire between July 2000 and
January 2004. As the regulatory restrictions expire and if we liquidate our UMC
shares, it is likely that the amount of any future realized gain will be
different from the accounting gain to be reported in the first calendar quarter
of 2000.
In January 2000, we signed an agreement to lease and occupy two buildings,
comprising approximately 133,000 square feet, in San Jose, California. This
space will house our Silicon Valley product and software development groups as
well as certain administrative services. The lease term commences in May 2000
and ends in December 2008. The lease agreement provides specified allowances for
tenant improvements. Future minimum lease commitments related to this agreement
aggregate approximately $25.6 million, payable in monthly installments.
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lattice Semiconductor Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Lattice Semiconductor Corporation and its subsidiaries at December 31, 1999 and
March 31, 1999, and the results of their operations and their cash flows for the
nine months ended December 31, 1999 and for each of the two years in the period
ended March 31, 1999 in conformity with accounting principles generally accepted
in the United States. 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, 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 the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
January 19, 2000
50
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
With the exception of the information expressly incorporated by reference
from the Annual Report to Stockholders into Parts II and IV of this Form 10-K,
the Company's Annual Report to Stockholders is not to be deemed filed as part of
this Report.
PART III
Certain information required by Part III is omitted from this Report in that
the Company will file its definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 2, 2000, pursuant to Regulation 14A of the
Securities Exchange Act of 1934 (the "Proxy Statement"), not later than
120 days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
With the exception of the information expressly incorporated by reference from
the Proxy Statement, the Company's Proxy Statement is not to be deemed filed as
a part of this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to directors of the
Company is included under "Proposal 1: Election of Directors" in the Company's
Proxy Statement, which information is incorporated herein by reference.
Information with respect to executive officers of the Company is included under
Item 4(a) of Part I of this Report and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item with respect to executive compensation
is included under "Proposal 1: Election of Directors--Directors," "Executive
Compensation" and "Comparison of Total Cumulative Stockholder Return" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is included in the Company's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management", which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is included under "Proposal 1:
Election of Directors--Transactions with Management" in the Company's Proxy
Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The information required by this Item is included under Item 8 of this
Report.
51
(a)(3) EXHIBITS.
3.1 The Company's Certificate of Incorporation, as amended
(including (i) the Company's Certificate Eliminating Matters
set forth in Certificates of Designation with respect to
Series A, Series B, Series D and Series E dated
February 15, 1990; (ii) the Company's Restated Certificate
of Incorporation, as amended, incorporated by reference to
Exhibit 3.1 filed with the Company's Annual Report on
Form 10-K for the fiscal year ended March 31,1990;
(iii) the Company's Certificate of Designation of Rights,
Preferences and Privileges of Series A participating
Preferred Stock incorporated by reference to Exhibit 1
filed with the Company's Registration Statement on Form 8-A
on September 13, 1991; and (iv) the Certificate of
Amendment, dated September 8, 1993, of the Company's
Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 filed with the Company's Annual Report on
Form 10-K for the fiscal year ended April 3, 1999).
3.2 The Company's Bylaws, as amended (including (i) the
Company's Amended Bylaws, incorporated by reference to
Exhibit 3.2 filed with the Company's Annual Report on
Form 10-K for the fiscal year ended March 30, 1991;
(ii) Amendment to the Company's Bylaws authorized by the
Board of Directors on May 24, 1991 (Incorporated by
reference to Exhibit 3.1 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended April 3,
1999); (iii) Amendment to the Company's Bylaws authorized by
the Board of Directors on May 16, 1995 (Incorporated by
reference to Exhibit 3.1 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended April 3,
1999); and (iv) Amendment to the Company's Bylaws authorized
by the Board of Directors on February 4, 1997 (Incorporated
by reference to Exhibit 3.1 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended April 3,
1999).
4.1 Preferred Shares Rights Agreement dated as of September 11,
1991 between Lattice Semiconductor Corporation and First
Interstate Bank of Oregon, N.A., as Rights Agent
(Incorporated by reference to Exhibit 1 filed with the
Company's Registration Statement on Form 8-A on
September 13, 1991).
10.9* Lattice Semiconductor Corporation 1988 Stock Incentive Plan,
as amended (Incorporated by reference to Exhibit 10.9 filed
with the Company's Annual Report on Form 10-K for the fiscal
year ended March 28, 1992).
10.10* Form of Stock Option Agreement (Incorporated by reference to
Exhibit 10.9, File No. 33-31231).
10.11* Employment Letter dated September 2, 1988 from Lattice
Semiconductor Corporation to Cyrus Y. Tsui (Incorporated by
reference to Exhibit 10.10, File No. 33-31231).
10.12 Form of Proprietary Rights Agreement (Incorporated by
reference Exhibit 10.11, File No. 33-31231).
10.13* Outside Directors Compensation Plan (Incorporated by
reference to Exhibit 10.12, File No. 33-31231).
10.15* 1993 Outside Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.15 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended April 3,
1993).
10.16* Employee Stock Purchase Plan, as amended (Incorporated by
reference to Exhibit 10.16 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended April 3,
1993).
10.19 Bridge Capacity Letter dated September 12, 1995 between
Lattice Semiconductor Corporation and United
Microelectronics Corporation. (Incorporated by reference to
Exhibit 10.1 filed with the Company's Current Report on
Form 8-K dated September 28, 1995)(1).
52
10.20 Foundry Venture Side Letter dated September 13, 1995 among
Lattice Semiconductor Corporation, United Microelectronics
Corporation and FabVen (Incorporated by reference to
Exhibit 10.2 filed with the Company's Current Report on
Form 8-K dated September 28, 1995)(1).
10.21 FabVen Foundry Capacity Agreement dated as of August ,
1995 among FabVen, United Microelectronics Corporation and
Lattice Semiconductor Corporation (Incorporated by reference
to Exhibit 10.3 filed with the Company's Current Report on
Form 8-K dated September 28, 1995)(1).
10.22 Foundry Venture Agreement dated as of August , 1995,
between Lattice Semiconductor Corporation and United
Microelectronics Corporation (Incorporated by reference to
Exhibit 10.4 filed with the Company's Current Report on
Form 8-K dated September 28, 1995)(1).
10.23 Advance Production Payment Agreement dated March 17, 1997
among Lattice Semiconductor Corporation and Seiko Epson
Corporation and S MOS Systems, Inc. (Incorporated by
reference to Exhibit 10.23 filed with the Company's Annual
Report on Form 10-K for the fiscal year ended March 29,
1997)(1).
10.24* Lattice Semiconductor Corporation 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 4.1 filed on Form S-8
dated November 7, 1996).
10.26 Stock Purchase Agreement dated as of April 21, 1999 by and
between Lattice Semiconductor Corporation and Advanced Micro
Devices, Inc. (Incorporated by reference to Exhibit 2.1
filed with the Company's Current Report on Form 8-K dated
April 21, 1999).
10.27 First Amendment to Stock Purchase Agreement dated as of
June 7, 1999 entered into by and between Lattice
Semiconductor Corporation and Advanced Micro Devices, Inc.
(Incorporated by reference to Exhibit 10.27 filed with the
Company's Annual Report on Form 10-K for the fiscal year
ended April 3, 1999).
10.28 Second Amendment to Stock Purchase Agreement dated as of
June 15, 1999 entered into by and between Lattice
Semiconductor Corporation and Advanced Micro Devices, Inc.
(Incorporated by reference to Exhibit 10.28 filed with the
Company's Annual Report on Form 10-K for the fiscal year
ended April 3, 1999).
10.29 Amended and Restated Wafer Fabrication Agreement dated
April 21, 1999 (and subsequently amended on September 24,
1999 and February 18, 2000) by and between Advanced Micro
Devices, Inc. and Vantis Corporation(1).
11.1 Computation of Net Income Per Share(2).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 54).
27.1 Financial Data Schedule for Fiscal Period Ended January 1,
2000.
- ------------------------
(1) Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
confidential treatment has been granted to portions of this exhibit, which
portions have been deleted and filed separately with the Securities and
Exchange Commission.
(2) Incorporated by reference to Note 1 to the Consolidated Financial Statements
in the Company's Annual Report to Stockholders for the fiscal period ended
January 1, 2000.
* Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Annual Report on Form 10-K pursuant to Item 14(c)
thereof.
53
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, in the City of
Hillsboro, State of Oregon, on the 27th of March, 2000.
LATTICE SEMICONDUCTOR CORPORATION
By: /s/ STEPHEN A. SKAGGS
-----------------------------------------
Stephen A. Skaggs,
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cyrus Y. Tsui and Stephen A. Skaggs, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on the 27th day of March,
2000 on behalf of the Registrant and in the capacities indicated:
SIGNATURE TITLE
--------- -----
/s/ CYRUS Y.TSUI President, Chief Executive Officer
- ------------------------------------ and Chairman of the Board
Cyrus Y. Tsui (Principal Executive Officer)
/s/ STEPHEN A. SKAGGS Senior Vice President, Chief
- ------------------------------------ Financial Officer and Secretary
Stephen A. Skaggs (Principal Financial Officer)
/s/ MARK O. HATFIELD
- ------------------------------------ Director
Mark O. Hatfield
/s/ DANIEL. S HAUER
- ------------------------------------ Director
Daniel S. Hauer
/s/ HARRY A. MERLO
- ------------------------------------ Director
Harry A. Merlo
/s/ LARRY W. SONSINI
- ------------------------------------ Director
Larry W. Sonsini
/s/ DOUGLAS C. STRAIN
- ------------------------------------ Director
Douglas C. Strain
54
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Lattice Semiconductor Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 19, 2000 appearing in the 1999 Transition Report to
Stockholders of Lattice Semiconductor Corporation and subsidiaries (which report
and consolidated financial statements are incorporated in this Transition Report
on Form 10-K) also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, the 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
Portland, Oregon
January 19, 2000
S-1
SCHEDULE VIII
LATTICE SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
CHARGED TO
BALANCE AT CHARGED TO OTHER WRITE-OFFS BALANCE
BEGINNING OF COSTS AND ACCOUNTS NET OF AT END OF
CLASSIFICATION PERIOD EXPENSES (DESCRIBE) RECOVERIES PERIOD
- -------------- ------------ ---------- ---------- ---------- ---------
Fiscal year ended March 31, 1998:
Allowance for deferred tax asset...... $1,996 $(205) -- -- $1,791
Allowance for doubtful accounts....... 874 3 -- (80) 797
------ ----- ---- ------- ------
$2,870 $(202) $ -- $ (80) $2,588
====== ===== ==== ======= ======
Fiscal year ended March 31, 1999:
Allowance for deferred tax asset...... $1,791 $(136) -- -- $1,655
Allowance for doubtful accounts....... 797 70 -- 14 881
------ ----- ---- ------- ------
$2,588 $ (66) $ -- $ 14 $2,536
====== ===== ==== ======= ======
Fiscal period ended December 31, 1999:
Allowance for deferred tax asset...... $1,655 $ -- -- $(1,655) $ --
Allowance for doubtful accounts....... 881 75 650 -- 1,606
------ ----- ---- ------- ------
$2,536 $ 75 $650(1) $(1,655) $1,606
====== ===== ==== ======= ======
- ------------------------
(1) Balance acquired in conjunction with our acquisition of Vantis Corporation
on June 15, 1999.
S-2