SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(MARKONE)
[x] Quarterly report pursuant to section 13 or 15(d) of the securities
exchange act of 1934 For the quarterly period ended DECEMBER 30, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the securities
exchange act of 1934
For the transition period from __________ to __________.
Commission file number: 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0057842
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2575 AUGUSTINE DRIVE
SANTA CLARA, CALIFORNIA 95054-2914
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (408) 855-4900
-------------------
Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- ------------------------------
Common Stock, par value $0.01 REGISTERED
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NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of February 12, 2001, there were 42,671,116 shares of Registrant's Common
Stock outstanding.
-1-
ALLIANCE SEMICONDUCTOR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 30, 2000
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed unaudited Consolidated Balance Sheets as of December
31, 2000 and March 31, 2000..........................................3
Condensed unaudited Consolidated Statements of Operations for
the three and nine months ended December 31, 2000 and 1999...........4
Condensed unaudited Consolidated Statements of Cash Flows for
the nine months ended December 31, 2000 and 1999.....................5
Notes to Condensed unaudited Consolidated Financial Statements.......6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................14
PART II OTHER INFORMATION
Item 1 Legal Proceedings...................................................23
Item 2 Other Information...................................................23
Item 4 Exhibits and Reports on Form 8-K....................................27
SIGNATURES...................................................................28
-2-
================================================================================
Part I - Financial Information
ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, March 31,
2000 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $13,892 $34,770
Restricted cash 1,882 2,804
Short term investments 359,152 883,300
Accounts receivable, net 27,130 15,858
Inventory 129,495 37,439
Related party receivables 2,651 1,778
Other current assets 2,690 1,958
----------- ------------
Total current assets 536,892 977,907
Property and equipment, net 10,060 9,990
Investment in United Microelectronics 505,478 505,478
Corp. (excluding short term portion)
Alliance Ventures and other investments 72,895 26,646
Other assets 319 421
----------- ------------
Total assets $1,125,644 $1,520,442
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $16,000 $-
Accounts payable 85,652 27,133
Accrued liabilities 5,283 10,388
Income taxes payable - 6,641
Deferred income taxes 109,357 316,903
Current portion of capital lease and 959 905
long-term obligations
----------- ------------
Total current liabilities 217,251 361,970
Long term obligations 1,415 1,517
Long term capital lease obligation 863 1,197
Deferred income taxes 191,803 191,803
----------- ------------
Total liabilities 411,332 556,487
----------- ------------
Stockholders' equity:
Common stock 426 424
Additional paid-in capital 197,169 193,260
Treasury stock (22,762) (12,468)
Retained earnings 705,277 644,595
Accumulated other comprehensive income (165,798) 138,144
(loss)
----------- ------------
Total stockholders' equity 714,312 963,955
----------- ------------
Total liabilities and $1,125,644 $1,520,442
stockholders' equity
=========== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended Nine months ended
December 31, December 31,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenue:
Net revenues $63,815 $23,497 $175,685 $60,320
Cost of revenues 42,530 15,412 112,357 40,186
--------- --------- --------- ---------
Gross Profit 21,285 8,085 63,328 20,134
--------- --------- --------- ---------
Operating expenses:
Research and development 3,109 3,330 10,167 10,779
Selling, general and 4,777 6,753 14,550 12,607
administrative
--------- --------- --------- ---------
Total operating expenses 7,886 10,083 24,717 23,386
--------- --------- --------- ---------
Income (loss) from operations 13,399 (1,998) 38,611 (3,252)
Gain on investments 5,258 5,111 66,260 60,413
Other income (expense), net (200) (56) 473 (204)
--------- --------- --------- ---------
Income before income taxes 18,457 3,057 105,344 56,957
Provision (benefit) for income 5,654 (963) 41,017 (596)
taxes
--------- --------- --------- ---------
Income before equity in income 12,803 4,020 64,327 57,553
(loss) of investees
Equity in income (loss) of (1,854) 5,134 (3,645) 9,462
investees
--------- --------- --------- ---------
Net income $10,949 $9,154 $60,682 $67,015
========= ========= ========= =========
Net income per share
Basic $0.27 $0.22 $1.47 $1.60
========= ========= ========= =========
Diluted $0.26 $0.21 $1.43 $1.56
========= ========= ========= =========
Weighted average number of
common shares
Basic 41,296 41,858 41,380 41,989
========= ========= ========= =========
Diluted 42,221 42,944 42,511 43,003
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
ALLIANCE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
Dec 31,
--------------------
2000 1999
--------- --------
Cash flows from operating activities:
Net income $60,682 $67,015
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 3,196 2,669
Equity in (income) loss of investees 3,645 (9,462)
Inventory write down 3,890 -
Non-recurring compensation charge - 3,655
Gain on investments (66,260) (60,413)
Changes in assets and liabilities:
Accounts receivable (11,272) (7,122)
Inventory (95,946) (13,619)
Related party receivables (873) (73)
Other assets (630) (835)
Accounts payable 58,519 14,256
Accrued liabilities (53) 3,751
Deferred income tax and income (6,989) (3,509)
taxes payable
--------- --------
Net cash used in operating (52,091) (3,687)
activities
--------- --------
Cash provided by investing activities:
Purchase of property and equipment (2,851) (3,321)
Proceeds from sale of marketable 80,075 29,099
securities
Purchase of Alliance Ventures and (53,442) (19,423)
other investments
--------- --------
Net cash provided by investing 23,782 6,355
activities
--------- --------
Cash provided by financing activities:
Net proceeds from issuance of common 1,498 6,555
stock
Principal payments on lease (695) (866)
obligation
Repurchase of common stock (10,294) -
Borrowings from credit line 16,000 1,018
Restricted cash 922 1,500
--------- --------
Net cash provided by financing 7,431 8,207
activities
--------- --------
Net increase (decrease) in cash and (20,878) 10,875
cash equivalents
Cash and cash equivalents at beginning 34,770 6,219
of the period
--------- --------
Cash and cash equivalents at end of $13,892 $17,094
the period
========= ========
Schedule of non-cash financing activities:
Property and equipment leases $415 $-
========= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
ALLIANCE SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Alliance Semiconductor Corporation (the "Company") in accordance with the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosure, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted in accordance with such rules and regulations. In the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly the consolidated
financial position of the Company and its subsidiaries, and their consolidated
results of operations and cash flows. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's March 31, 2001 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on June 30, 2000.
For purposes of presentation, the Company has indicated the first nine months of
fiscal 2001 and 2000 as ending on December 31, respectively; whereas, in fact,
the Company's fiscal quarters ended on December 30, 2000 and January 2, 2000,
respectively. The financial results for the third quarter of fiscal 2001 and
2000 were reported on a 13-week quarter.
The results of operations for the three months ended December 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2001 and the Company makes no representations related thereto.
Note 2. BALANCE SHEET COMPONENTS
December March 31,
31, 2000 2000
------------ -----------
Inventory:
Work in process $86,278 $20,737
Finished goods 43,217 16,702
------------ -----------
$129,495 $37,439
============ ===========
Note 3. INVESTMENTS
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States. At March 31, 2000, the Company
owned approximately 21.4 million ordinary shares or approximately 2.14 million
American Depository Shares or "ADSs."
These shares were subject to a six-month "lock-up", or no trade period, which
expired in April 2000. In May 2000, Chartered completed a secondary public
offering, in which Alliance decided not to participate, and as a result, the
Company's shares were to be subject to an additional three-month "lock-up,"
which was to expire in August 2000. However, in June 2000, the underwriter of
the secondary offering released the Company from the lock-up, and the Company
sold some of its shares. The Company does not own a material percentage of the
equity of Chartered. If the Company sells more than 50% of its original holdings
in Chartered, the Company will lose a proportionate share of its wafer
production capacity rights, which could materially affect its ability to conduct
its business. Additionally, because of the potential loss of its wafer
production capacity rights, if the Company sells more than 50% of its original
holdings in Chartered, there can be no assurance that the Company can realize
its value on its investment in Chartered.
-6-
In June 2000, the Company sold 500,000 shares of Chartered, recording a realized
gain of approximately $33.5 million. As a result of the sale, at June 30, 2000,
the Company owned approximately 16.4 million ordinary shares or approximately
1.64 million American Depository Shares or "ADSs."
Prior to the fiscal third quarter of fiscal year 2000, the Company recorded its
investment in Chartered as a long-term investment using the cost method of
accounting. The Company currently accounts for its investment in Chartered as an
available-for-sale marketable security in accordance with SFAS 115. At December
31, 2000, the Company owned approximately 16.4 million ordinary shares or
approximately 1.64 million American Depository Shares or "ADSs." At December 31,
2000, the Company has recorded an unrealized gain of approximately $2.2 million,
which is net of deferred tax of approximately $1.5 million, as part of
accumulated other comprehensive income in the stockholder's equity section of
the balance sheet.
In July 1995, the Company entered into an agreement with United Microelectronics
Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese
company, United Semiconductor Corporation ("USC"), for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between
September 1995 and July 1997 the Company invested approximately $70.4 million in
USC in exchange for 190 million shares or 19.0% of the outstanding shares and
25% of the total wafer capacity. In April 1998, the Company sold 35 million
shares of USC to an affiliate of UMC and received approximately US$31.7 million.
In connection with the sale, the Company had the right to receive an additional
NTD 665 million upon the occurrence of certain potential future events, which
included the sale or transfer of USC shares by USC in an arms length
transaction, or by a public offering of USC stock, or by the sale of all or
substantially all of the assets of USC. In March 2000, Alliance received
approximately NTD 665 million (US$21.5 million) as a result of the merger
between USC and UMC, described below.
Subsequent to the April 1998 USC stock sale, the Company owned approximately
15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million
shares to the Company by way of a dividend distribution. Additionally, USC also
made a stock distribution to its employees, thereby reducing the Company's
ownership in USC to 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was
entitled to 25% of the output capacity of the wafer fabrication facility
operated by USC, as well as a seat on the board of directors of USC. As a result
of the capacity rights, the board seat, and certain contractual rights, Alliance
had participated in both strategic and operating decisions of USC on a routine
basis, had rights of approval with respect to major business decisions and
concluded that it had significant influence on financial and operating decisions
of USC. Accordingly, the Company accounted for its investment in USC using the
equity method with a ninety-day lag in reporting the Company's share of results
for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its
proportionate share of equity income of USC of $9.5 million, $10.9 million, and
$15.5 million, net of tax, respectively.
In October 1995, the Company entered into an agreement with UMC, and other
parties, to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and owned approximately 3.2% of the outstanding
shares of USIC and had the right to purchase approximately 3.7% of the
manufacturing capacity of the facility. The Company accounted for its investment
in USIC using the cost method of accounting prior to the merger with UMC in
January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Through its representation on USC's board,
the Company had the right to choose whether to consent to the merger and
concluded it to be in the Company's best interest to do so. Alliance received
247.7 million shares of UMC stock for its 247.7 million shares, or 14.8%
ownership of USC, and approximately 35.6 million shares of UMC stock for its
48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000, Alliance
Semiconductor owned approximately 283.3 million shares, or approximately 3.2% of
UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the
former USC and USIC foundries, respectively. As a result of the merger in
January 2000, the Company no longer recorded its proportionate share of equity
income in USC, as the Company no longer has an ability to exercise significant
influence over UMC's operations. The investment in UMC is accounted for as a
cost method investment.
-7-
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax, non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US$
3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued approximately
$2.8 million for the Taiwan securities transaction tax in connection with the
shares received by the Company. This transaction tax will be paid, on a per
share basis, when the securities are sold.
In May 2000, the Company received an additional 20% or 56.7 million shares of
UMC by way of a stock dividend. At December 31, 2000, the Company owned
approximately 340 million shares of UMC.
According to Taiwanese laws and regulations, 50% of Alliance's 340 million UMC
shares are subject to a six-month "lock-up" or no trade period. This lock-up
period expired in July 2000. Of the remaining 50%, or 170 million shares,
approximately 34 million shares will become eligible for sale two years from the
closing date of the transaction (i.e. January 2002), with approximately 34
million shares becoming eligible for sale every six months thereafter, during
years three and four (i.e.2002-2004).
Subsequent to the completion of the merger, the Company accounts for the portion
(approximately 50% at December 31, 2000) of its investment in UMC, which becomes
unrestricted within twelve months as an available-for-sale marketable security
in accordance with SFAS 115. At December 31, 2000, the Company has recorded an
unrealized loss of approximately $157.0 million, which is net of deferred tax of
$107.7 million, as part of accumulated other comprehensive income (loss) in the
stockholders' equity section of the balance sheet with respect to the short-term
portion of the investments. The portion of the investment in UMC which is
restricted beyond twelve months (approximately 50% of the Company's holdings at
December 31, 2000) is accounted for as a cost method investment and is
classified as a long-term investment. As this long-term portion becomes current
over time, the investment will be transferred to short-term investments and will
be accounted for as an available-for-sale marketable security in accordance with
SFAS 115. The long-term portion of the investment becomes unrestricted between
2002 and 2004.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported.
In 1998, the Company was approached by a startup company, Maverick Networks,
Inc. ("Maverick"), regarding their need for embedded memory in a internet router
semiconductor that Maverick was designing. Because the Company was also
interested in eventually entering the internet router semiconductor market, the
Company entered into an agreement with Maverick which called for the Company to
provide memory technology access to the Company's wafer production rights, and
cash to Maverick, in exchange for certain rights to Maverick's technology and
stock in Maverick. On May 31, 1999, Maverick completed a transaction with
Broadcom Corporation, resulting in the Company selling its 39% ownership
interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common
stock. Based on Broadcom's closing share price on the date of sale, the Company
recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of
approximately $51.6 million based on the closing share price of Broadcom at the
date of the merger. During fiscal 2000, the Company sold 275,600 shares of
Broadcom stock and realized an additional pre-tax, non-operating gain of
approximately $23.7 million. In February 2000, Broadcom Corporation announced a
two for one stock split.
In the December 2000 quarter, the Company sold 100,000 shares of Broadcom
recording a gain of approximately $5.3 million. For the first nine months of
fiscal 2001, the Company has recorded approximately $21.9 million in realized
gains on the sale of 250,891 shares of Broadcom stock.
The Company records its investment in Broadcom as an available-for-sale
marketable security in accordance with SFAS 115. At December 31, 2000, the
Company owned 236,631 shares of Broadcom and recorded an unrealized gain of
approximately $10.7 million, which is net of deferred tax of approximately $7.4
million, as part of accumulated other comprehensive income (loss) in the
stockholders equity section of the balance sheet.
In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee and a percentage of the
net profits of the investment funds. This management company structure was
created to provide incentives to the individuals who participate in the
-8-
management of the investment funds by allowing such individuals limited
participation in the profits of the various investment funds through the
management fee and percentage of the net profits paid by the investment funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Venture Management acts as the general
partner of these partnerships and receives a management fee of 0.5% of the total
committed capital and 15% of the net profits from these partnerships for its
managerial efforts. In February 2000, the Company formed Alliance Ventures III,
LP ("Alliance Ventures III"), a California limited partnership. The Company, as
the sole limited partner, owns 100% of the shares of this partnership. Alliance
Venture Management acts as the general partner of this partnership and receives
a management fee of 0.5% of the total committed capital and 16% of the profits
from this partnership for its managerial efforts. In January 2001, the Company
formed Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures
V, LP ("Alliance Ventures V"), both California limited partnerships. The
Company, as the sole limited partner, owns 100% of the shares of each
partnership. Alliance Venture Management acts as the general partner of these
partnerships and receives a management fee of 0.5% of the total committed
capital and 15% of the net profits from these partnerships for its managerial
efforts. Several members of the Company's senior management hold a majority of
the units of Alliance Venture Management.
After Alliance Ventures I was formed, the Company contributed all its then
current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I
to allow Alliance Venture Management to manage these investments. As of December
31, 2000, Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested approximately $20.1 million in 9
companies with a total fund allocation of $20 million, and Alliance Ventures II,
whose focus is in investing in internet start-up ventures has approximately $9.0
million in 10 companies, with a total fund allocation of $15 million. As of
December 31, 2000, Alliance Ventures III, whose focus is investing in emerging
companies in the networking and communication market areas, has invested
approximately $38.0 million in 14 companies, with a total fund allocation of
$100 million.
Several of these investments are accounted for on the equity method due to the
Company's ability to exercise significant influence on the operations of
investees resulting primarily from ownership interest and/or board
representation. The total equity in the net losses of the equity investees of
these venture funds was approximately $1.9 million, net of tax, for the quarter
ended December 31, 2000. For the nine months ended December 31, 2000 the total
equity in the net losses of the equity investees was approximately, $3.6
million, net of tax.
In August 1999, the Company made an investment in Orologic Corporation
("Orologic"), a fabless semiconductor company that develops high performance
system on a chip solutions. In November 1999, the Company transferred its
interest in Orologic to Alliance Ventures I, to allow it to be managed by
Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor
Corporation ("Vitesse") acquired Orologic. In connection with this merger, the
Company received 728,293 shares of Vitesse for its equity interest in Orologic,
after distribution of the management fee to Alliance Venture Management. As a
result of the merger, the Company recognized a $69 million pre-tax,
non-operating gain in its fiscal fourth quarter ending March 31, 2000, based on
the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date
of the merger. In May 2000, Alliance Ventures I made a distribution of the
shares received from Vitesse to Alliance Venture Management and the Company.
The Company records its investment in Vitesse Semiconductor Corporation
("Vitesse") as an available-for-sale marketable security in accordance with SFAS
115. At December 31, 2000, the Company owned 728,293 shares of Vitesse and
recorded an unrealized loss of approximately $17.6 million, which is net of
deferred tax of approximately $12.1 million, as part of accumulated other
comprehensive income (loss) in the stockholders equity section of the balance
sheet.
In July 1999, the Company made an investment in Malleable Technologies, Inc.
("Malleable"), a fabless semiconductor company whose focus is in developing high
density, voice over packet digital signal processors. In November 1999, the
Company transferred its interest in Malleable to Alliance Ventures I, to allow
it to be managed by Alliance Venture Management. On June 27, 2000, PMC-Sierra,
Inc. ("PMC"), acquired Malleable. In connection with the merger, the Company
received 68,152 shares of PMC for its 7% interest in Malleable, after
distribution of the management fee to Alliance Venture Management. In the first
fiscal quarter of 2001, the Company reported a pre-tax non-operating gain of
approximately $11.0 million based on the closing share price of PMC of $182.875
on June 27, 2000, the closing date of the merger. In November 2000, Alliance
Ventures I made a distribution of the shares received from Vitesse to Alliance
Venture Management and the Company.
-9-
The Company records its investment in PMC-Sierra, Inc. as an available-for-sale
marketable security in accordance with SFAS 115. At December 31, 2000, the
Company owned 68,152 shares of PMC-Sierra and recorded an unrealized loss of
approximately $4.2 million, which is net of deferred tax of $2.9 million, as
part of accumulated other comprehensive income (loss) in the stockholders equity
section of the balance sheet.
In August 2000, the Company agreed to invest $20 million in Solar Venture
Partners, LP. ("Solar"), a venture capital partnership whose focus is in
investing in early stage companies in the following areas: networking,
telecommunications, wireless, software infrastructure enabling efficiencies of
the Web and e-commerce, semiconductors for emerging markets and design
automation. As of December 31, 2000, the Company has invested, in the form of
promissory notes and cash, a total of $12.5 million in Solar. Of the $12.5
million invested, $9.5 million is in the form of three promissory notes bearing
an interest rate of 6% per annum and are due on March 31, 2001.
As summary of short-term investments in marketable securities held by the
Company at December 31, 2000 is as follows (in thousands):
Number of
Shares Market Value
------------- --------------
UMC 169,984 (1) $240,762
Chartered 1,642 43,303
Broadcom 237 29,445
Vitesse 728 40,284
PMC Sierra 68 5,358
--------------
Total $359,152
==============
(1) Excludes 170 million shares of UMC which are classified as
long-term investments and are carried at cost.
In August 2000, the Company entered into an agreement with Tower Semiconductor
Ltd.("Tower") under which Alliance will make a $75 million strategic investment
in Tower as part of Tower's plan to build its new fabrication facility in
Israel. Under the terms of the agreement, Alliance will receive equity and/or
prepaid credits to be used against future semiconductor wafer purchases,
corresponding representation on Tower's Board of Directors and committed
production capacity in the advanced fabrication facility, which Tower commenced
building in January 2001.
In January 2001, Tower announced the closing of its agreement with its equity
partners, including the Company, and the Company made its first installment
payment of $20 million according to the terms of the agreement. Alliance is
committed to making five equal payments for the balance of $55 million during
the next twelve to fifteen months based on Tower's achievement of certain
payment milestones.
In January 2001, the Company entered into a variable forward sales contract with
Bear Stearns that gives the Company the right to sell up to 490,000 shares of
Vitesse in January 2003 at prices ranging from $74.32 to $105.84. The Company
has received an advance payment from Bear Sterns of approximately $31 million
against the future delivery of Vitesse shares.
-10-
Note 4. COMPREHENSIVE INCOME
The following are the components of comprehensive income:
Three months Nine months
ended ended
December 31, December 31,
------------------ ------------------
2000 1999 2000 1999
--------- ------- -------- --------
Net income $10,949 $9,154 $60,682 $67,015
Unrealized gain (130,673) 82,687 (303,942) 86,632
(loss) on
marketable
securities, net of
deferred taxes of
($89,686) and
($208,608) for the
three and nine
months ended
December 31, 2000,
respectively and
$56,751 and $59,459
for the three and
nine months ended
December 31, 1999,
respectively
Cumulative translation - 1,936 - 2,986
adjustments
--------- ------- -------- --------
Comprehensive income $(119,724)$162,523 $(243,260) $93,777
(loss)
========= ======= ======== ========
The components of accumulated other comprehensive income (loss) are as follows:
December March 31,
31, 2000 2000
----------- ------------
Unrealized gain (loss) on $(165,798) $138,144
marketable securities, net of
deferred taxes of ($113,794) at
December 31, 2000 and $94,814 at
March 31, 2000
----------- ------------
Accumulated other comprehensive $(165,798) $138,144
income (loss)
=========== ============
Note 5. LETTERS OF CREDIT
As of December 31, 2000, $150,000 of standby letters of credit were outstanding
and expire on or before September 1, 2001, which are secured by restricted cash
and short-term investments.
Note 6. SHORT-TERM BORROWINGS
At December 31, 2000, the Company borrowed $16 million under an open-ended line
of credit, against a portion of its holdings in Chartered Semiconductor, bearing
interest at a rate of 7.5% per annum.
Note 7. NET INCOME PER SHARE
Basic Earnings Per Share (EPS) is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method. In computing Diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the proceeds obtained upon exercise of stock options.
-11-
The computations for basic and diluted EPS are presented below:
Three months ended Nine months ended
December 31, December 31,
------------------ -------------------
2000 1999 2000 1999
--------- ------- --------- ---------
Net income $10,949 $9,154 $60,682 $67,015
========= ======= ========= =========
Weighted average shares 41,296 41,858 41,380 41,989
outstanding
Effect of dilutive employee 925 1,086 1,131 1,014
stock options
--------- ------- --------- ---------
Average shares outstanding 42,221 42,944 42,511 43,003
assuming dilution
========= ======= ========= =========
Net income per share:
Basic $0.27 $0.22 $1.47 $1.60
========= ======= ========= =========
Diluted $0.26 $0.21 $1.43 $1.56
========= ======= ========= =========
The following are not included in the above calculation as they were considered
anti-dilutive:
Three months ended Nine months ended
December 31, December 31,
--------------------- -------------------
2000 1999 2000 1999
--------- ---------- --------- --------
Employee stock options 611 17 325 289
outstanding
========= ========== ========= ========
Note 8. LEGAL MATTERS
In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a
wholly-owned subsidiary of the Company, was served with a complaint filed in
Federal Court alleging that ASIC had infringed two patents owned by AMD related
to flash memory devices, and seeking injunctive relief and damages. In March
1997, the Company was added as a defendant. In April 1996, the Court allowed AMD
to expand its claims to include several new flash products which had been
recently announced by the Company. In January and February 2000, both parties
filed for motions for summary judgment. Each defendant has denied the
allegations of the complaint and asserted a counterclaim for declaration that
each of the AMD patents is invalid and not infringed by such defendant. In
December 2000, the Company and AMD entered into a settlement agreement. Under
terms of the settlement, both the Company and AMD dropped their claims and
counterclaims against each other and the Company paid AMD an undisclosed sum for
past damages. The Company enter into a royalty bearing license agreement with
AMD for future sales of two existing flash memory products, the LV400 (4-Mbit)
and LV800 (8-Mbit). The Company and AMD have submitted to the San Jose District
Court a consent judgment that finds the two AMD patents are both valid and
enforceable, and that certain of the Company's Flash memory devices infringed
AMD's patents.
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately US$170 million, in a case
filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v.
Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805
(Victoria Registry). The Company, which had previously not participated in the
case, believes that it never was properly served with process in this action,
and that the Canadian court lacks jurisdiction over the Company in this matter.
In addition to jurisdictional and procedural arguments, the Company also
believes it may have grounds to argue that the claims against the Company should
be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the
court set aside the default judgment against the Company. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. Oral
arguments were made before the Court of Appeals in June 2000. In July 2000 the
Court of Appeals instructed the lower Court to allow the parties to take
depositions regarding the issue of service of process, while also setting aside
the default judgment against the Company. The plaintiffs have appealed the
setting aside of the default judgment against the Company to the Canadian
Supreme Court.
In February 1997, Micron Technology, Inc. filed an antidumping petition with the
United States International In February 1997, Micron Technology, Inc. filed an
antidumping petition with the United States International Trade Commission
("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs
fabricated in Taiwan were being sold in the United States at less than fair
value, and that the United States industry producing SRAMs was materially
injured or threatened with material injury by reason of imports of SRAMs
fabricated in Taiwan. After a final affirmative DOC determination of dumping and
a final affirmative ITC determination of injury,
-12-
DOC issued an antidumping duty order in April 1998. Under that order, the
Company's imports into the United States on or after approximately April 16,1998
of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of
50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The
Company posted a bond in the amount of 59.06% (the preliminary margin) with
respect to its importation, between approximately October 1997 and April 1998,
of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an
appeal in the United States Court of International Trade (the "CIT"),
challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs
were causing material injury to the U.S. industry. On June 30, 1999, the CIT
issued a decision remanding the ITC's affirmative material injury determination
to the ITC for reconsideration. The ITC's remand determination reaffirmed its
original determination. The CIT considered the remand determination and remanded
it back to the ITC for further reconsideration. On June 12, 2000, in its second
remand determination the ITC voted negative on injury, thereby reversing its
original determination that Taiwan-fabricated SRAMs were causing material injury
to the U.S. industry. The second remand determination was transmitted to the CIT
on June 26, 2000 for consideration. Micron has appealed the decision of the CIT
to the Court of Appeals for the Federal Circuit. The Company cannot predict
either the timing or the eventual results of the appeal, although it is expected
to take a year or more to conclude. Until a final judgment is entered in the
appeal, no final duties will be assessed on the Company's entries of SRAMs from
Taiwan covered by the DOC antidumping duty order. If the appeal is successful,
the antidumping order will be terminated and cash deposits will be refunded with
interest. If the appeal is unsuccessful, the Company's entries of
Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be
liquidated at the deposit rate in effect at the time of entry. On subsequent
entries of Taiwan-fabricated SRAMs, the Company will continue to make cash
deposits in the amount of 50.15% of the entered value. In April 2001, the
Company will have an opportunity to request a review of its sales of
Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review
Period"). If it does so, the amount of antidumping duties, if any, owed on
imports from April 2000 through March 2001 will remain undetermined until the
conclusion of the review in early 2002. If the DOC found, based upon analysis of
the Company's sales during the Review Period, that antidumping duties either
should not be imposed or should be imposed at a lower rate than the Antidumping
Margin, the difference between the cash deposits made by the Company, and the
deposits that would have been made had the lower rate (or no rate, as the case
may be) been in effect, would be returned to the Company, plus interest. If, on
the other hand, the DOC found that higher margins were appropriate, the Company
would have to pay difference between the cash deposits paid by the Company and
the deposits that would have been made had the higher rate been in effect. At
December 31, 2000, the Company had posted a bond secured by a letter of credit
in the amount of approximately $1.7 million and made cash deposits in the amount
of $1.7 million relating to the Company's importation of Taiwan-manufactured
SRAMs.
-13-
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WHEN USED IN THIS REPORT, THE WORDS "EXPECTS," ANTICIPATES," "BELIEVES,"
"ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
SUCH FORWARD-LOOKING STATEMENTS, ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
INCLUDE THE FOLLOWING STATEMENTS CONCERNING THE TIMING OF NEW PRODUCT
INTRODUCTIONS; THE FUNCTIONALITY AND AVAILABILITY OF PRODUCTS UNDER DEVELOPMENT;
TRENDS IN THE PERSONAL COMPUTER, NETWORKING, TELECOMMUNICATIONS, INSTRUMENTATION
AND CONSUMER MARKETS, IN PARTICULAR AS THEY MAY AFFECT DEMAND FOR OR PRICING OF
THE COMPANY'S PRODUCTS; AND THE PERCENTAGE OF EXPORT SALES AND SALES TO
STRATEGIC CUSTOMERS; THE PERCENTAGE OF REVENUE BY PRODUCT LINE; THE AVAILABILITY
AND COST OF PRODUCTS FROM THE COMPANY'S SUPPLIERS. ADDITIONALLY, THESE RISKS AND
UNCERTAINTIES INCLUDE SUCH FACTORS, AMONG OTHERS, AS THE POTENTIAL FOR PRICE
EROSION OF THE COMPANY'S PRODUCTS; CANCELLATION OF ORDERS IN THE COMPANY'S
BACKLOG; SLOWDOWNS IN THE ELECTRONICS INDUSTRY, DECREASED DEMAND OR INCREASED
COMPETITIVE ENVIRONMENT FOR THE COMPANY'S PRODUCTS, INCLUDING, WITHOUT
LIMITATION, CHANGES IN THE STATUS OF THE SRAM, DRAM, FLASH, COMMUNICATIONS AND
EMBEDDED MEMORY AND LOGIC MARKETS AND THE DEMAND FOR THE COMPANY'S SRAM, DRAM,
FLASH, COMMUNICATIONS AND EMBEDDED MEMORY AND LOGIC PRODUCTS; INABILITY OF THE
COMPANY TO OBTAIN NECESSARY CAPACITY, TIMELY DELIVERY OR ACCEPTABLE YIELDS FROM
THE ENTITIES THAT PROVIDE WAFER FABRICATION, WAFER SORT, ASSEMBLY AND/OR TEST
SERVICES TO THE COMPANY; INCREASES IN PRICES SUCH ENTITIES CHARGE THE COMPANY
FOR WAFER FABRICATION, WAFER SORT, ASSEMBLY AND/OR TEST SERVICES; OBSOLESCENCE
OF THE COMPANY'S PRODUCTS; ACCUMULATION OF EXCESS INVENTORY OR PRICE EROSION OR
OBSOLESCENCE OF EXISTING INVENTORY, ANY OF WHICH MAY RESULT IN CHARGES AGAINST
THE COMPANY'S EARNINGS; INABILITY TO TIMELY RAMP UP PRODUCTION OF AND DELIVER
NEW OR ENHANCED SRAM, DRAM PRODUCTS; INABILITY TO SUCCESSFULLY DEVELOP AND
INTRODUCE FLASH OR COMMUNICATIONS AND EMBEDDED MEMORY AND LOGIC PRODUCTS;
INABILITY TO SUCCESSFULLY RECRUIT AND RETAIN QUALIFIED TECHNICAL AND OTHER
PERSONNEL; THE ABILITY OF THE COMPANY TO SUCCESSFULLY ENTER THE COMMUNICATIONS
PRODUCT MARKET, WHICH IS DIFFERENT FROM THE COMPANY'S CORE MARKET OF
SEMICONDUCTOR MEMORY; ADVERSE DEVELOPMENTS IN CURRENT OR FUTURE LITIGATION OR
ADMINISTRATIVE PROCEEDINGS, INCLUDING; AS WELL AS LIQUIDATION OF ANTIDUMPING
DUTIES IMPOSED ON THE COMPANY'S IMPORTATION OF TAIWAN-MANUFACTURED SRAMS;
CHANGES IN STOCK PRICE OF VITESSE SEMICONDUCTOR CORPORATION, PMC-SIERRA, INC.,
BROADCOM CORPORATION, CHARTERED SEMICONDUCTOR AND UMC; ADVERSE CHANGES IN VALUE
OF INVESTMENTS MADE BY ALLIANCE VENTURE MANAGEMENT, LLC; THE COMPANY'S POTENTIAL
STATUS AS AN INVESTMENT ACT OF 1940 REPORTING COMPANY. THESE RISKS AND
UNCERTAINTIES INCLUDE THOSE SET FORTH IN ITEM 2 (ENTITLED "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") OF
THIS REPORT, AND IN ITEM 1 (ENTITLED "BUSINESS") OF PART I AND IN ITEM 7
(ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS") OF PART II OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 1, 2000 FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 30, 2000, AND THE SUBSEQUENT QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERS ENDING JULY 1, 2000 AND SEPTEMBER 30, 2000. THESE RISKS AND
UNCERTAINTIES, OR THE OCCURRENCE OF OTHER EVENTS, COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR TO
REFLECT ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH
FORWARD-LOOKING STATEMENT IS BASED, IN WHOLE OR IN PART.
-14-
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
data as a percentage of net revenue:
Three months ended Nine months ended
December 31, December 31,
--------------------- ------------------
2000 1999 2000 1999
---------- --------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 66.6 65.6 64.0 66.6
---------- --------- -------- --------
Gross profit 33.4 34.4 36.0 33.4
Operating expenses:
Research and development 4.9 14.2 5.8 17.9
Selling, general and 7.5 28.7 8.3 20.9
administrative
---------- --------- -------- --------
Total operating expenses 12.4 42.9 14.1 38.8
---------- --------- -------- --------
Income (loss) from operations 21.0 (8.5) 21.9 (5.4)
Gain on investments 8.2 21.8 37.7 100.1
Other income (expense), net (0.3) (0.2) 0.3 (0.3)
---------- --------- -------- --------
Income before income taxes 28.9 13.1 59.9 94.4
Provision (benefit) for income 8.9 (4.1) 23.3 (1.0)
taxes
---------- --------- -------- --------
Income before equity in income 20.0 17.2 36.6 95.4
of investees
Equity in income (loss) of (2.9) 21.8 (2.1) 15.7
investees
---------- --------- -------- --------
Net income 17.1% 39.0% 34.5% 111.1%
========== ========= ======== ========
NET REVENUES
Net revenues increased by 172% to approximately $63.8 million for the three
months ended December 2000 from approximately $23.5 million for the similar
period in 1999. The increase in revenues was mainly due to an increase of
approximately 107% in unit shipments of dynamic random access memory ("DRAM")
and static random access memory ("SRAM") products, combined with an overall
increase of approximately 35% in the overall average selling prices of the
Company's products. During this comparison period, the overall blended average
selling prices ("ASP") for SRAMs increased by 41% and DRAMS by 28%.
Revenues from the Company's SRAM products contributed approximately 43% of the
Company's net revenues for the December 2000 quarter and approximately 45% of
the Company's net revenues for the December 1999 quarter. The SRAM revenues
increased by approximately 154% to $27.1 million in the December 2000 quarter
from approximately $10.6 million for the December 1999 quarter. Sales from the
Company's new 4-Mbit 5V Fast Asynchronous and 4-Mbit 3.3V Fast Asynchronous
SRAMS accounted for approximately 41% of the total SRAM sales during the
December 2000 quarter and nothing in the December 1999 quarter Also, the Company
experienced higher average selling prices and higher unit shipments on other
SRAM products
Revenues from the Company's DRAM products contributed approximately 57% of the
Company's net revenues for the December 2000 quarter and approximately 55% of
the Company's net revenues for the December 1999 quarter. The DRAM revenues
increased by approximately 187% to $36.6 million in the December 2000 quarter
from approximately $12.8 million for the December 1999 quarter. The revenue
growth in DRAM's during this period was primarily related to increased shipments
of 4-Mbit and 16-Mbit products, which increased approximately 182% over the
December 1999 quarter. A significant portion of these shipments were sold in the
non-PC market segments (i.e. communications, networking and consumer OEMs).
In the December 2000 quarter, sales to the computing market segment accounted
for approximately 10% of the total sales, with approximately 90% attributable to
sales in the communication, networking and consumer markets, whereas in the
December 1999 quarter approximately 49% of the Company's sales were in the
computing market segment and approximately 51% in the non-PC market segments
(i.e. communications, networking and consumer).
In the December 2000 quarter, sales by geographic areas were as follows; North
America. 37%, Asia 42% and Europe 21%, whereas during the December 1999 quarter,
U.S., Asia and Europe accounted for 44%, 27% and 29% respectively. Sales in
Taiwan accounted for 7% (which is included in Asia's total) during the December
2000
-15-
quarter compared to 13% during the December 1999 quarter. Asia sales, excluding
Taiwan, during the December 2000 quarter increased 22% over the December 1999
quarter.
One customer accounted for approximately 8.2% of the Company's net revenues in
the December 2000 quarter, whereas one customer accounted for 17.8% of the
Company's net revenues in the December 1999 quarter.
Net revenues for the first nine months of fiscal year 2001 increased by
approximately 191% to $175.7 million compared to approximately $60.3 million
during the same period last year. The revenue increase during the first nine
months of fiscal year 2001 was primarily due to a higher demand for SRAM and
DRAM products and an increase to the average selling prices. Unit shipments of
SRAM and DRAM products increased approximately 103%, while the overall average
selling price increased approximately 43%. The blended average selling prices
for SRAMs increased by approximately 74% while the DRAM average selling price
increased by approximately 55% during the nine-month comparison period.
Revenues from the Company's SRAM products during the first nine months of fiscal
year 2001 accounted for approximately $74.3 million or 43% of the total net
revenues with DRAMs accounting for approximately $101.1 million or 57%. The
revenue growth in the SRAM product line was primarily due to sales from the
Company's new 4-Mbit 5V Fast Asynchronous and 4-Mbit 3.3V Fast Asynchronous
SRAMS. The revenue growth in the DRAM product line was primarily due to sale of
4-Mbit and 16-Mbit products.
For the first nine months of fiscal year 2001, sales to the computing market
segment accounted for approximately 16% of total sales, with 84% attributable to
sales in the communication, networking and consumer markets whereas during the
first nine months of fiscal year 2000, approximately 46% of the Company's sales
were in the computing market segment and 54% in the non-PC market segments (i.e.
communications, networking and consumer). The Company's sales and marketing
focus today is primarily in the communications, networking, wireless and
consumer markets.
The geographic breakdown of sales for the first nine months of fiscal 2001 was
37% in North America, 45% in Asia, and 18% in Europe whereas during the first
nine months of fiscal year 2000 North America, Asia and European sales accounted
for approximately 39%, 37% and 24%, respectively.
The largest customer accounted for approximately 6.4% of the Company's net
revenues during the first nine months of fiscal 2001 whereas one customer
accounted for approximately 9.7% of total revenues during the first nine months
of fiscal 2000.
Generally, the markets for the Company's products are characterized by volatile
supply and demand conditions, numerous competitors, rapid technological change
and product obsolescence. These conditions could require the Company to make
significant shifts in its product mix in a relatively short period of time.
These changes involve several risks, including, among others, constraints or
delays in timely deliveries of products from the Company's suppliers; lower than
anticipated wafer manufacturing yields; lower than expected throughput from
assembly and test suppliers; and less than anticipated demand and selling
prices. The occurrence of any problems resulting from these risks could have a
material adverse effect on the Company's operating results.
GROSS PROFIT
Gross profit for the December 2000 quarter was approximately $21.3 million, or
33.4 % of net revenues compared to a gross profit of approximately $8.1 million
or 34.4% for the December 1999 quarter. The decrease in the gross profit
percentage was due to a $4 million write down in slow moving inventory which
accounted for approximately 6.3% of margin. During the same comparison periods,
the Company experienced higher overall average selling prices for DRAM and SRAM
products, higher unit shipments and an increased mix of higher margin, higher
density SRAM products.
The gross profit was approximately $63.3 million or 36.0% of net revenues for
the first nine months of fiscal 2001 compared to a gross profit of approximately
$20.1 million, or 33.4% for the first nine months of fiscal 2000. The increase
in the gross profits for the first nine months primarily resulted from higher
average selling prices coupled with higher units shipments as well as an
increased mix of higher margin, higher density SRAM products.
The Company is subject to a number of factors which may have an adverse impact
on gross margins including the availability and cost of products from the
Company's suppliers; increased competition and related decreases in
-16-
average unit selling prices; changes in the mix of products sold; product
obsolescence; excess inventory due to decreased product demand; timing of new
product introductions and volume shipments; and antidumping duties related to
the importation of products from Taiwan. In addition, the Company may seek to
add additional foundry suppliers and transfer existing and newly developed
products to more advanced manufacturing processes. The commencement of
manufacturing at a new foundry is often characterized by lower yields as the
manufacturing process is refined. There can be no assurance that one or more of
the factors set forth in this paragraph will not have a material adverse effect
on the Company's gross margins in future periods.
RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of salaries and benefits
for engineering design, contracted development efforts, facilities costs,
equipment and software depreciation and amortization, wafer masks and tooling
costs, test wafers and other expense items.
Research and development expenses were approximately $3.1 million, or 4.9% of
net revenue in the December 2000 quarter of fiscal 2001 compared to
approximately $3.3 million, or 14.2% of net revenue in the December 1999
quarter. Research and development expenses in the first nine months of fiscal
2001 were approximately $10.2 million, or 5.8% of net revenues compared to
approximately $10.8 million, or 17.9% for the same period one year ago. The
small reduction in expenses for the December 2000 quarter as compared to the
December 1999 quarter as well as the reduction during the first nine months of
fiscal year 2001 versus 2000 was primarily the result of reduction in wafer
masks and tooling costs and other supplies.
During December 2000 quarter and first nine months of fiscal 2000, the Company's
development efforts focused on advanced process and design technology involving
SRAM's, DRAM's and Flash memory products.
The Company believes that investments in research and development are necessary
to remain competitive in the marketplace and accordingly, research and
development expenses may increase in absolute dollars and may also increase as a
percentage of net revenue in future periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses generally include salaries and
benefits for the Company's sales, marketing, customer support and administrative
personnel, sales commissions, marketing costs, travel, equipment depreciation
and software amortization, facilities costs, bad debt expense as well as
insurance and legal costs.
Selling, general and administrative expenses were approximately $4.8 million, or
7.5% of net revenue in the December 2000 quarter compared to approximately $6.8
million, or 28.7% of net revenue in the December 1999 quarter. For the first
nine months of fiscal 2001, expenses were approximately $14.6 million, or 8.3%
compared to approximately $12.6 million, or 20.9% one year ago.
The decrease in selling, general and administrative expenses for the December
quarter 2000 versus December 1999 quarter was the result of a non-recurring
compensation expense charge of $3.7 million recorded in the December 1999
quarter. Excluding this one time only charge, selling, general and
administrative expenses increased approximately $1.7 million during the December
2000 quarter compared to the December 1999 quarter and approximately $5.6
million for the first nine months of fiscal year 2001 as compared to the first
nine months of fiscal year 2000. This increase was primarily due to increased
sales commissions related to the increased revenues as well as higher employee
salaries and related expenses..
Selling, general and administrative expenses may increase in absolute dollars
and may also fluctuate as a percentage of net revenues in the future primarily
due to higher commissions, which are dependent on the level of revenues as well
as increased headcount and personnel related costs.
GAIN ON INVESTMENTS
In the December 2000 quarter, the Company recorded a gain on investments of
approximately $5.3 million as a result of selling 100,000 shares of the
Company's Broadcom Corporation marketable securities. During the December 1999
quarter, the Company recorded a gain of approximately $5.1 million, resulting
from the sale of 50,600 shares of Broadcom.
-17-
During the first nine months of fiscal year 2001, the Company has sold 236,631
shares of Broadcom and recorded a gain of approximately $21.9 million, sold
500,000 shares of Chartered Semiconductor and reported a gain of $33.5 million
and reported a gain of approximately $11.0 million as a result of the
PMC-Sierra, Inc. ("PMC") acquisition of Malleable Technologies, Inc.
("Malleable"). As a result of the Malleable acquisition the Company received
68,152 shares of PMC, after of the management fee distribution to Alliance
Venture Management.
During the first nine months of fiscal year 2000, the Company recorded a gain of
approximately $51.6 million on the sale of Maverick Networks to Broadcom in
exchange for 538,961 shares and sold 200,600 of these shares for an additional
gain of $8.8 million
OTHER INCOME (EXPENSE), NET
Other Income (Expense), Net represents interest income from short-term
investments and interest expense on short and long-term obligations. Other
expense, net was approximately $200,000 in the December 2000 quarter compared
Other expense, net of approximately $56,000 in the December 1999 quarter. For
the nine months of fiscal 2001, Other income, net was approximately $473,000
compared to Other expense, net of approximately $204,000 for the first nine
months of fiscal 2000. The change from fiscal 2000 to fiscal 2001 was attributed
to higher interest expense.
PROVISION FOR INCOME TAXES
Income tax expense for the December 2000 quarter was approximately $5.6 million
and $41.0 million for the first nine months of fiscal 2001, for an overall
effective tax rate of 38.9%. The Company expects the overall effective tax rate
to be approximately 39% during fiscal 2001.
During the December 1999 quarter the Company recorded tax benefit of
approximately $963,000 and $596,000 for the first nine months of fiscal year
2000. During the June 1999 quarter the Company was able to utilize existing loss
carryforwards and tax credits, which were available to offset the gain on
marketable securities related to the Broadcom shares.
EQUITY IN INCOME OF INVESTEES
The Company, through Alliance Venture Management, invested approximately $7.3
million during the third quarter of fiscal 2001 and a total of $40.9 million
during the first nine months of fiscal 2001. A total of $67.0 million have been
invested in three Alliance ventures funds, Alliance Ventures I, Alliance
Ventures II and Alliance Ventures III. Several of these investments are
accounted for on the equity method due to the Company's ability to exercise
significant influence on the operations of investees resulting primarily from
ownership interest and/or board representation. The Company's proportionate
share in the net losses of the equity investees of these venture funds was
approximately $1.9 million net of deferred tax, for the quarter ended December
31, 2000 and approximately $3.6 million, net of deferred tax for the nine months
ended December 31, 2000.
Prior to the UMC merger discussed elsewhere, the Company had made several
investments with other parties to form a separate Taiwanese company, USC. This
investment was accounted for under the equity method of accounting with a
ninety-day lag in reporting the Company's share of results for the entity.
Equity in income of USC reflects the company's share of income earned by USC for
the previous quarter. During the first nine months of fiscal 2000, the Company
reported its share in the income of USC in the amount of $9.5 million. As a
result of the UMC merger in January 2000, the Company no longer recorded its
proportionate share of equity income in USC, as the Company no longer has an
ability to exercise significant influence over UMC's operations. The investment
in UMC is accounted for as a cost method investment.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual operating results have historically been, and
will continue to be, subject to quarterly and other fluctuations due to a
variety of factors, including: general economic conditions; changes in pricing
policies by the Company, its competitors or its suppliers; anticipated and
unanticipated decreases in unit average selling prices of the Company's
products; fluctuations in manufacturing yields, availability and cost of
products from the Company's suppliers; the timing of new product announcements
and introductions by the Company or its competitors; changes in the mix of
products sold; the cyclical nature of the semiconductor industry;
-18-
the gain or loss of significant customers; increased research and development
expenses associated with new product introductions; market acceptance of new or
enhanced versions of the Company's products; seasonal customer demand; and the
timing of significant orders. Results of operations could also be adversely
affected by economic conditions generally or in various geographic areas, other
conditions affecting the timing of customer orders and capital spending, a
downturn in the market for personal computers, or order cancellations or
rescheduling. Additionally, because the Company is continuing to increase its
operating expenses for personnel and new product development to be able to
support increased sales levels, the Company's results of operations will be
adversely affected if such increased sales levels are not achieved.
The markets for the Company's products are characterized by rapid technological
change, evolving industry standards, product obsolescence and significant price
competition and, as a result, are subject to decreases in average selling
prices. The Company experienced significant deterioration in the average selling
prices for its SRAM and DRAM products during fiscal years 1999, 1998 and 1997.
The Company is unable to predict the future prices for its products.
Historically, average selling prices for semiconductor memory products have
declined and the Company expects that average-selling prices will decline in the
future. Accordingly, the Company's ability to maintain or increase revenues will
be highly dependent on its ability to increase unit sales volume of existing
products and to successfully develop, introduce and sell new products. Declining
average selling prices will also adversely affect the Company's gross margins
unless the Company is able to significantly reduce its cost per unit in an
amount to offset the declines in average selling prices. There can be no
assurance that the Company will be able to increase unit sales volumes of
existing products, develop, introduce and sell new products or significantly
reduce its cost per unit. There also can be no assurance that even if the
Company were to increase unit sales volumes and sufficiently reduce its costs
per unit, the Company would be able to maintain or increase revenues or gross
margins.
The Company usually ships more product in the third month of each quarter than
in either of the first two months of the quarter, with shipments in the third
month higher at the end of the month. This pattern, which is common in the
semiconductor industry, is likely to continue. The concentration of sales in the
last month of the quarter may cause the Company's quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Company's production or shipping near the end of a quarter could materially
reduce the Company's net sales for that quarter. The Company's reliance on
outside foundries and independent assembly and testing houses reduces the
Company's ability to control, among other things, delivery schedules.
The cyclical nature of the semiconductor industry periodically results in
shortages of advanced process wafer fabrication capacity such as the Company has
experienced from time to time. The Company's ability to maintain adequate levels
of inventory is primarily dependent upon the Company obtaining sufficient supply
of products to meet future demand, and any inability of the Company to maintain
adequate inventory levels may adversely affect its relations with its customers.
In addition, the Company must order products and build inventory substantially
in advance of products shipments, and there is a risk that because demand for
the Company's products is volatile and subject to rapid technology and price
change, the Company will forecast incorrectly and produce excess or insufficient
inventories of particular products. This inventory risk is heightened because
certain of the Company's key customers place orders with short lead times. The
Company's customers' ability to reschedule or cancel orders without significant
penalty could adversely affect the Company's liquidity, as the Company may be
unable to adjust its purchases from its independent foundries to match such
customer changes and cancellations. The Company has in the past produced excess
quantities of certain products, which has had a material adverse effect on the
Company's results of operations. There can be no assurance that the Company in
the future will not produce excess quantities of any of its products. To the
extent the Company produces excess or insufficient inventories of particular
products, the Company's results of operations could be adversely affected, as
was the case in fiscal 1999, 1998 and 1997, when the Company recorded pre-tax
charges totaling approximately $20 million, $15 million and $17 million,
respectively, primarily to reflect a decline in market value of certain
inventory.
The Company currently relies on independent foundries to manufacture all of the
Company's products. Reliance on these foundries involves several risks,
including constraints or delays in timely delivery of the Company's products,
reduced control over delivery schedules, quality assurance and costs and loss of
production due to seismic activity, weather conditions and other factors. In or
about October 1997, a fire caused extensive damage to United Integrated Circuits
Corporation ("UICC"), a foundry joint venture between UMC and various companies.
UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where
Company has products manufactured. UICC suffered an additional fire in January
1998, and since October 1996, there have been at least two other fires at
semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial
Park. There can be no assurance that fires or other disasters will not have a
material adverse affect on UMC in the
-19-
future. In addition, as a result of the rapid growth of the semiconductor
industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity could adversely affect the Company's
foundries' ability to supply the Company's products, which could have a material
adverse effect on the Company's results of operations or financial condition.
Although the Company continuously evaluates sources of supply and may seek to
add additional foundry capacity, there can be no assurance that such additional
capacity can be obtained at acceptable prices, if at all. The occurrence of any
supply or other problem resulting from these risks could have a material adverse
effect on the Company's results of operations, as was the case during the third
quarter of fiscal 1996, during which period manufacturing yields of one of the
Company's products were materially adversely affected by manufacturing problems
at one of the Company's foundry suppliers. There can be no assurance that other
problems affecting manufacturing yields of the Company's products will not occur
in the future.
There is an ongoing risk that the suppliers of wafer fabrication, wafer sort,
assembly and test services to the Company may increase the price charged to the
Company for the services they provide, to the point that the Company may not be
able to profitably have its products produced at such suppliers. The occurrence
of such price increases could have a material adverse affect on the Company's
results of operations.
The Company conducts a significant portion of its business internationally and
is subject to a number of risks resulting from such operations. Such risks
include political and economic instability and changes in diplomatic and trade
relationships, foreign currency fluctuations, unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the burdens
of complying with a variety of foreign laws. With the Company's commitment to
invest in a new fabrication facility of Tower Semiconductor Ltd. in Israel,
there will additional risks at that facility because of the political
instability in that region. Current or potential customers of the Company in
Asia, for instance, may become unwilling or unable to purchase the Company's
products, and the Company's Asian competitors may be able to become more
price-competitive relative to the Company due to declining values of their
national currencies. There can be no assurance that such factors will not
adversely impact the Company's results of operations in the future or require
the Company to modify its current business practices.
Additionally, other factors may materially adversely affect the Company's
results of operations. The Company relies on domestic and offshore
subcontractors for die assembly and testing of products, and is subject to risks
of disruption in adequate supply of such services and quality problems with such
services. The Company is subject to the risks of shortages of goods or services
and increases in the cost of raw materials used in the manufacture or assembly
of the Company's products. The Company faces intense competition, and many of
its principal competitors and potential competitors have substantially greater
financial, technical, marketing, distribution and other resources, broader
product lines and longer-standing relationships with customers than does the
Company, any of which factors may place such competitors and potential
competitors in a stronger competitive position than the Company. The Company's
corporate headquarters are located near major earthquake faults, and the Company
is subject to the risk of damage or disruption in the event of seismic activity.
There can be no assurance that any of the foregoing factors will not materially
adversely affect the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Upon adoption of SFAS No. 133, we will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle. We
believe the adoption of this statement will not have a significant effect on our
results of operations.
Current pending litigation, administrative proceedings and claims are set forth
in Item 1- Legal Proceedings. The Company intends to vigorously defend itself in
the litigation and claims and, subject to the inherent uncertainties of
litigation and based upon discovery completed to date, management believes that
the resolution of these matters will not have a material adverse effect on the
Company's financial position. However, should the outcome of any of these
actions be unfavorable, the Company may be required to pay damages and other
expenses, or may be enjoined from manufacturing or selling any products deemed
to infringe the intellectual property rights of others, which could have a
material adverse effect on the Company's financial position or results of
operations.
-20-
Moreover, the semiconductor industry is characterized by frequent claims and
litigation regarding patent and other intellectual property rights. The Company
has from time to time received, and believes that it likely will in the future
receive, notices alleging that the Company's products, or the processes used to
manufacture the Company's products, infringe the intellectual property rights of
third parties, and the Company is subject to the risk that it may become party
to litigation involving such claims (the Company currently is involved in patent
litigation). In the event of litigation to determine the validity of any
third-party claims (such as the current patent litigation), or claims against
the Company for indemnification related to such third-party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from other matters. In the event of an
adverse ruling in such litigation, the Company might be required to cease the
manufacture, use and sale of infringing products, discontinue the use of certain
processes, expend significant resources to develop non-infringing technology or
obtain licenses to the infringing technology. In addition, depending upon the
number of infringing products and the extent of sales of such products, the
Company could suffer significant monetary damages. In the event of a successful
claim against the Company and the Company's failure to develop or license a
substitute technology, the Company's results of operations could be materially
adversely affected.
The Company also, as a result of an antidumping proceeding commenced in February
1997, must pay a cash deposit equal to 50.15% of the entered value of any SRAMs
manufactured (wafer fabrication) in Taiwan, in order to import such goods into
the U.S. Although the Company may be refunded such deposits in the future (see
Item 1- Legal Proceedings), the deposit requirement, and the potential that all
entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 1999
will be liquidated at the bond rate or deposit rate in effect at the time of
entry, may materially adversely affect the Company's ability to sell in the
United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company
currently manufactures SRAMs in Singapore and the United States, and may be able
to support its U.S. customers with products that are not subject to antidumping
duties. There can be no assurance, however, that the Company will be able to do
so.
The Company, through Alliance Venture Management, generally directs the
individual funds to invest in startup, pre-IPO (initial public offering)
companies. These types of investments are inherently risky, and many venture
funds have a large percentage of investments decrease in value or fail.
Successful investing relies on the skill of the investment managers, but also on
market and other factors outside the control of the managers. Over the last few
years, the market for these types of investments has been successful and many
venture capital funds have been profitable. More recently, the market has
weakened, so while the Company has been successful in its recent investments,
there can be no assurance as to any future or continued success. It is likely
there will be a downturn in the success of these types of investments in the
future and the Company will suffer significant diminished success in these
investments. There can be no assurance, and in fact it is likely, that many or
most, and perhaps all of the Company's venture type investments may fail,
resulting in the complete loss of some or all the money the Company has invested
in these early stage companies.
As a result of the foregoing factors, as well as other factors affecting the
Company's results of operations, past performance should not be considered to be
a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, stock prices for many technology companies are subject to significant
volatility, particularly on a quarterly basis. If revenues or earnings fail to
meet expectations of the investment community, there could be an immediate and
significant impact on the market price of the Company's Common Stock.
Due to the foregoing factors, it is likely that in some future quarter or
quarters the Company's results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition at December 31, 2000 remained strong. Total
current assets exceeded current liabilities by 2.5 times, compared to 2.7 times
at March 31, 2000. The Company has used a combination of marketable securities
and cash flow from operations to support on-going business activities, secure
manufacturing capacity from its foundry partners, make investments in small
start-up companies that compliment its technologies, purchase capital equipment,
and finance inventory and accounts receivable.
-21-
At December 31, 2000, the Company had approximately $13.9 million in cash and
cash equivalents, a decrease of approximately $20.9 million from March 31, 2000,
and approximately $319.6 million in working capital, a decrease of approximately
$296.3 million from approximately $615.9 million at March 31, 2000.
Additionally, the Company had short-term investments in marketable securities
whose fair value at December 31, 2000 was approximately $359.2 million.
The Company's operating activities utilized cash of $52.1 million in first nine
months of fiscal 2001 compared to $3.7 million in the first nine months of
fiscal 2000. Cash utilized in operating activities in the first nine months of
fiscal 2001 was primarily the result of increased levels of inventories and
accounts receivable.
Investing activities provided cash in the amount of $23.8 million during the
first nine months of fiscal 2001 as the result of the proceeds from the sale of
marketable securities of $80.1 million, offset in part, by $53.4 million in
investments made by Alliance Ventures and in Solar Venture Partners, and
purchases of equipment of $2.9 million.
Net cash provided by financing activities during the first nine months of fiscal
2001 was the result of $16.0 million short-term borrowing, net proceeds from the
exercise of employee stock options of $1.5 million, offset by the repurchase of
565,000 shares of the Company's common stock at a cost of $10.3 million.
The Company believes these sources of liquidity, and financing opportunities
available to it will be sufficient to meet its projected working capital and
other cash requirements for the foreseeable future. However, it is possible that
the Company may need to raise additional funds to fund its activities beyond the
next year or to consummate acquisitions of other businesses, products, wafer
capacity or technologies. The Company could raise such funds by selling some its
short-term investments, selling more stock to the public or to selected
investors, or by borrowing money. The Company may not be able to obtain
additional funds on terms that would be favorable to its shareholders and the
Company, or at all. If the Company raises additional funds by issuing additional
equity, the ownership percentages of existing shareholders would be reduced.
In order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process technologies, the Company has entered into and will
continue to consider various possible transactions, including equity investments
in or loans to foundries in exchange for guaranteed production capacity, the
formation of joint ventures to own and operate foundries, as was the case with
Chartered Semiconductor, UMC and the planned investment in Tower (please see
"Note 3-Investments" for details), or the usage of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods. Manufacturing arrangements such as these may require substantial
capital investments, which may require the Company to seek additional equity or
debt financing. There can be no assurance that such additional financing, if
required, will be available when needed or, if available, will be on
satisfactory terms. Additionally, the Company has entered into and will continue
to enter into various transactions, including the licensing of its integrated
circuit designs in exchange for royalties, fees or guarantees of manufacturing
capacity.
-22-
================================================================================
Part I - Other Information
ITEM 1
LEGAL PROCEEDINGS
In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a
wholly-owned subsidiary of the Company, was served with a complaint filed in
Federal Court alleging that ASIC had infringed two patents owned by AMD related
to flash memory devices, and seeking injunctive relief and damages. In March
1997, the Company was added as a defendant. In April 1996, the Court allowed AMD
to expand its claims to include several new flash products which had been
recently announced by the Company. In January and February 2000, both parties
filed for motions for summary judgment. Each defendant has denied the
allegations of the complaint and asserted a counterclaim for declaration that
each of the AMD patents is invalid and not infringed by such defendant. In
December 2000, the Company and AMD entered into a settlement agreement. Under
terms of the settlement, both the Company and AMD dropped their claims and
counterclaims against each other and the Company paid AMD an undisclosed sum for
past damages. The Company entered into a royalty bearing license agreement with
AMD for future sales of two existing flash memory products, the LV400 (4-Mbit)
and LV800 (8-Mbit). The Company and AMD have submitted to the San Jose District
Court a consent judgment that finds the two AMD patents are both valid and
enforceable, and that certain of the Company's Flash memory devices infringed
AMD's patents.
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately US$170 million, in a case
filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v.
Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805
(Victoria Registry). The Company, which had previously not participated in the
case, believes that it never was properly served with process in this action,
and that the Canadian court lacks jurisdiction over the Company in this matter.
In addition to jurisdictional and procedural arguments, the Company also
believes it may have grounds to argue that the claims against the Company should
be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the
court set aside the default judgment against the Company. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. Oral
arguments were made before the Court of Appeals in June 2000. In July 2000 the
Court of Appeals instructed the lower Court to allow the parties to take
depositions regarding the issue of service of process, while also setting aside
the default judgment against the Company. The plaintiffs have appealed the
setting aside of the default judgment against the Company to the Canadian
Supreme Court.
ITEM 2
OTHER INFORMATION
SRAM ANTIDUMPING ACTION
In February 1997, Micron Technology, Inc. filed an antidumping petition with the
United States International In February 1997, Micron Technology, Inc. filed an
antidumping petition with the United States International Trade Commission
("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs
fabricated in Taiwan were being sold in the United States at less than fair
value, and that the United States industry producing SRAMs was materially
injured or threatened with material injury by reason of imports of SRAMs
fabricated in Taiwan. After a final affirmative DOC determination of dumping and
a final affirmative ITC determination of injury, DOC issued an antidumping duty
order in April 1998. Under that order, the Company's imports into the United
States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are
subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of
the entered value of such SRAMs. (The Company posted a bond in the amount of
59.06% (the preliminary margin) with respect to its importation, between
approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In
May 1998, the Company and others filed an appeal in the United States Court of
International Trade (the "CIT"), challenging the determination by the ITC that
imports of Taiwan-fabricated SRAMs were causing material injury to the U.S.
industry. On June 30, 1999, the CIT issued a decision remanding the ITC's
affirmative material injury determination to the ITC for reconsideration. The
ITC's remand determination reaffirmed its original determination. The CIT
considered the remand determination and remanded it back to the ITC for further
reconsideration. On June 12, 2000, in its second remand determination the ITC
voted negative on injury, thereby reversing its original determination that
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The
second remand determination was transmitted to the CIT on June 26, 2000 for
consideration. Micron has appealed the decision of the CIT to the Court of
Appeals
-23-
for the Federal Circuit. The Company cannot predict either the timing or the
eventual results of the appeal, although it is expected to take a year or more
to conclude. Until a final judgment is entered in the appeal, no final duties
will be assessed on the Company's entries of SRAMs from Taiwan covered by the
DOC antidumping duty order. If the appeal is successful, the antidumping order
will be terminated and cash deposits will be refunded with interest. If the
appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from
October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in
effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs,
the Company will continue to make cash deposits in the amount of 50.15% of the
entered value. In April 2001, the Company will have an opportunity to request a
review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March
31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties,
if any, owed on imports from April 2000 through March 2001 will remain
undetermined until the conclusion of the review in early 2002. If the DOC found,
based upon analysis of the Company's sales during the Review Period, that
antidumping duties either should not be imposed or should be imposed at a lower
rate than the Antidumping Margin, the difference between the cash deposits made
by the Company, and the deposits that would have been made had the lower rate
(or no rate, as the case may be) been in effect, would be returned to the
Company, plus interest. If, on the other hand, the DOC found that higher margins
were appropriate, the Company would have to pay difference between the cash
deposits paid by the Company and the deposits that would have been made had the
higher rate been in effect. At December 31, 2000, the Company had posted a bond
secured by a letter of credit in the amount of approximately $1.7 million and
made cash deposits in the amount of $1.7 million relating to the Company's
importation of Taiwan-manufactured SRAMs.
THE INVESTMENT COMPANY ACT OF 1940
Following a special study after the stock market crash of 1929 and the ensuing
Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The
Act was primarily meant to regulate mutual funds, such as the families of funds
offered by the Fidelity and Vanguard organizations (to pick two of many), and
the smaller number of closed-end investment companies that are traded on the
public stock markets. In those cases the funds in question describe themselves
as being in the business of investing, reinvesting and trading in securities and
generally own relatively diversified portfolios of publicly traded securities
that are issued by companies that the investment companies do not control. The
fundamental intent of the Act is to protect the interests of public investors
from fraud and manipulation by the people who establish and operate such
investment companies, which constitute large pools of liquid assets that could
be used improperly, or be not properly safeguarded, by the persons in control of
them.
When the Act was written, its drafters (and Congress) also felt that a company
could, either deliberately or inadvertently, come to have the defining
characteristics of an investment company without proclaiming that fact or being
willing to voluntarily submit itself to regulation as an acknowledged investment
company, and that investors in such a company could be just as much in need of
protection as are investors in companies that are openly and deliberately
established as investment companies. In order to deal with this perceived
potential abuse, the Act and rules under it contain provisions and set forth
principles that are designed to differentiate "true" operating companies from
companies that may be considered to have sufficient investment-company-like
characteristics to require regulation by the Act's complex procedural and
substantive requirements. These provisions apply to companies that own or hold
securities, as well as companies that invest, reinvest and trade in securities,
and particularly focus on determining the primary nature of a company's
activities, including whether an investing company controls and does business
through the entities in which it invests or, instead, holds its securities
investments passively and not as part of an operating business. For instance,
under what is, for most purposes, the most liberal of the relevant tests, a
company may become subject to the Act's registration requirements if it either
holds more than 45% of its assets in, or derives more than 45% of its income
from, investments in companies that the investor does not primarily control or
through which it does not actively do business. In making these determinations
the Act generally requires that a company's assets be valued on a current fair
market value basis, determined on the basis of securities' public trading price
or, in the case of illiquid securities and other assets, in good faith by the
company's board of directors.
The Company viewed its investments in Chartered, USC and USIC as operating
investments primarily intended to secure adequate wafer manufacturing capacity;
as previously noted, the Company's access to the manufacturing resources that it
obtained in conjunction with those investments will decrease if the Company
ceases to own at least 50% of its original investments in the enterprises, as
modified, in the cases of USC and USIC, by their merger into UMC. In addition,
the Company believes that, before USC's merger into UMC, the Company's
investment in USC constituted a joint venture interest that the staff of the
Securities and Exchange Commission (the "SEC") would not regard as a security
for purposes of determining the proportion of the Company's assets
-24-
that might be viewed as having been held in passive investment securities.
However, because of the success during the last year of the Company's
investments, including its strategic wafer manufacturing investments, at least
from the time of the completion of the merger of USC and USIC into UMC in
January 2000 the Company believes that it could be viewed as holding a much
larger portion of its assets in investment securities than is presumptively
permitted by the Act for a company that is not registered under it.
On the other hand, the Company also believes that the investments that it
currently holds in Chartered and UMC, even though in companies that the Company
does not control, should be regarded as strategic deployments of Company assets
for the purpose of furthering the Company's memory chip business, rather than as
the kind of financial investments that generally are considered to constitute
investment securities. Applying certain other tests that the SEC utilizes in
determining investment company status, the Company has never held itself out as
an investment company; its historical development has focused almost exclusively
on the memory chip business; the activities of its officers and employees have
been overwhelmingly addressed to achieving success in the memory chip business;
and until the past year, its income (and losses) have derived almost exclusively
from the memory chip business. Accordingly, the Company believes that it should
be regarded as being primarily engaged in a business other than investing,
reinvesting, owning, holding or trading in securities, and has applied to the
SEC for an order under section 3(b)(2) of the Act confirming its
non-investment-company status. However, if the Company's investments in
Chartered and UMC are now viewed as investment securities, it must be conceded
that an unusually large proportion of the Company's assets could be viewed as
invested in assets that would, under most circumstances, give rise to investment
company status. Therefore, while the Company believes that it has meritorious
arguments as to why it should not be considered an investment company and should
not be subject to regulation under the Act, there can be no assurance that the
SEC will agree. And even if the SEC grants some kind of exemption from
investment company status to the Company, it may place significant restrictions
on the amount and type of investments the Company is allowed to hold, which
might force the Company to divest itself of many of its current investments.
Significant potential penalties may be imposed upon a company that should be
registered under the Act but is not, and the Company intends to proceed
expeditiously to resolve its status.
If the Company does not receive an exemption from the SEC, the Company would be
required to register under the Act as a closed-end management investment
company. In the absence of exemptions granted by the SEC (if it determines to do
so in its discretion after an assessment of the public interest), the Act
imposes a number of significant requirements and restrictions upon registered
investment companies that do not normally apply to operating companies. These
would include, but not be limited to, a requirement that at least 40% of the
Company's board of directors not be "interested persons" of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain qualified employees); and broad prohibitions on
affiliate transactions, such as the compensation arrangements applicable to the
management of Alliance Venture Management, many kinds of incentive compensation
arrangements for management employees and joint investment by persons who
control the Company in entities in which the Company is also investing (which
could require the Company to abandon or significantly restructure its management
arrangements, particularly with respect to its investment activities). While the
Company could apply for individual exemptions from these restrictions, there
could be no guarantee that such exemptions would be granted, or granted on terms
that the Company would deem practical. Additionally, the Company would be
required to report its financial results in a different form from that currently
used by the Company, which would have the effect of turning the Company's
Statement of Operations "upside down" by requiring that the Company report its
investment income and the results of its investment activities, instead of its
operations, as its primary sources of revenue.
While the Company is working diligently to deal with these investment company
issues, there can be no assurance that a manageable solution will be found. The
SEC may be hesitant to grant an exemption from investment company status in the
Company's situation, and it may not be feasible for the Company to operate in
its present manner as a registered investment company. As a result, the Company
might be required to divest itself of assets that it considers strategically
necessary for the conduct of its operations, to reorganize as two or more
separate companies, or both. Such divestitures or reorganizations could have a
material adverse effect upon the Company's business and results of operations.
-25-
INVESTMENT IN TOWER SEMICONDUCTOR LTD.
In January 2001, Tower Semiconductor Ltd. ("Tower") satisfied the closing
conditions of the share purchase agreements (as described below) it entered into
with each of the Company, The Israel Corporation ("TIC"), SanDisk Corporation,
Inc. ("SanDisk") and Macronix International Co., Ltd. ("Macronix) (each a
"Shareholder" and collectively the "Shareholders"), pursuant to which the
Shareholders purchased an aggregate of 3,629,873 Tower Shares. In January 2001,
pursuant to a purchase agreement ("Purchase Agreement," as described below) the
Company transferred $20 million to Tower to purchase 866,551 Tower Shares and
pre-paid wafer credits in the amount of $8,786,827 from Tower. In July 2000,
SanDisk entered into a share purchase agreement with Tower to purchase 866,551
Tower Shares and pre-paid wafer credits in the amount of $8,786,827 from Tower
for an aggregate purchase price of $20 million in cash. In December 2000,
Macronix entered into a share purchase agreement with Tower to purchase 866,551
Tower Shares for an aggregate purchase price of $20 million. In December 2000,
TIC entered into a share purchase agreement with Tower to purchase 1,030,220
Tower Shares for an aggregate purchase price of $13,333,300.
The Company entered into two joinder agreements ("Alliance / Tower Joinder
Agreement" and "Alliance / TIC Joinder Agreement," together the "Joinder
Agreements"), both in August 2000, by and between the Company, Tower, and TIC,
to join a Share Purchase Agreement entered into by and between Tower and SanDisk
("Purchase Agreement") as of July 2000, for the Company to make a $20 million
strategic investment in Tower, and thereby acquire 866,551 Tower Shares and
pre-paid wafer credits in the amount of $8,786,827 from Tower. The Company made
such investment and received the pre-paid wafer credits in January 2001. The
Joinder Agreements also allowed the Company to join Tower and SanDisk in the
Additional Purchase Obligation Agreement ("Additional Purchase Agreement") as of
July 2000. In January 2001, the Company entered into the Registration Rights
Agreement ("Registration Rights Agreement") by and between Tower, The Company,
SanDisk, TIC, Macronix and QuickLogic Corporation and the Consolidated
Shareholders Agreement ("Consolidated Shareholders Agreement") by and among The
Company, SanDisk, TIC and Macronix. The Purchase Agreement and Joinder
Agreements included as Exhibits hereto and incorporated herein in their entirety
by reference.
Under the terms of Section 2 of the Additional Purchase Agreement and pursuant
to the Joinder Agreements, Tower will deliver to The Company warrants that must
be exercised by the Company within thirty (30) days after the satisfaction of
the milestones specified in Section 5 of the Additional Purchase Agreement for
the purchase, in the aggregate, of up to 1,833,450 additional Tower Shares at an
exercise price of $30 per share, as adjusted pursuant to Section 4 thereof
("Warrants"). The Company has the right to exercise the Warrants immediately and
to purchase up to 1,833,450 Tower Shares thereunder. The Additional Purchase
Agreement and the Joinder Agreements included as Exhibits hereto and
incorporated herein in their entirety by reference.
Under the terms of the Registration Rights Agreement by and between the Tower,
the Company, TIC, SanDisk, Macronix and QuickLogic, each of the Company, TIC,
SanDisk, Macronix and QuickLogic has demand and piggy-back registration rights
with respect to Tower Shares purchased by it pursuant to each party's respective
share purchase agreement and additional purchase obligation agreement. The
Registration Rights Agreement included as an Exhibit hereto and incorporated
herein in its entirety by reference.
Under the terms of the Consolidated Shareholders Agreement, the Shareholders
have agreed to vote (or cause to be voted) at general meetings of shareholders
all of their respective Tower Shares, in the manner set forth in Section 2
thereof, (i) for the election to the board of directors of Tower ("Board") of
(a) nominees designated by each Shareholder, (b) nominees recommended by the
Board, (c) a member of management of Tower, and (d) such other directors as
agreed to by Shareholders; (ii) for the election of a TIC nominee, who will be
one of the nominees in clause (i)(a) above, as chairman of the Board; (iii) for
any other resolution which is necessary in order to facilitate the matters
specified in clauses (i) through (iii) of this paragraph; and (iv) against the
election of any other person to the Board. In addition, pursuant to Section 3 of
the Consolidated Shareholders Agreement, and subject to certain exceptions as
set forth therein, each Shareholder has agreed to certain restrictions on its
ability to transfer Tower Shares for three years, and has agreed to retain a
minimum number of Tower Shares for a period of five years. Furthermore, pursuant
to Section 4 thereof, each Shareholder has a right of first offer with respect
to any Tower Shares any Shareholder proposes to transfer. Moreover, subject to
the provisions of Section 3 thereof, the proposed transfer by any Shareholder of
Tower Shares to certain specified parties is subject to a right of first
refusal, as provided in Section 5 thereof. Finally, to the extent the right of
first refusal with respect to the proposed transfer of Tower Shares pursuant to
Section 4 or Section 5, as described above, is not fully
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exercised, each Shareholder shall have a right of co-sale as provided in Section
6. The Consolidated Shareholders Agreement included as an Exhibit hereto and
incorporated herein in its entirety by reference.
ITEM 4
EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Document Description
------------ ------------------------------------------------
10.35 Share Purchase Agreement, dated as of July 4, 2000, by
and between SanDisk Corporation and Tower Semiconductor
Ltd.
10.36 Additional Purchase Obligation Agreement, dated as of
July 4, 2000, by and between SanDisk Corporation and
Tower Semiconductor Ltd.
10.37 Registration Rights Agreement, dated as of
January 18, 2001, by and between Tower
Semiconductor Ltd., SanDisk Corporation, The
Israel Corporation, The Company Semiconductor
Ltd., Macronix International Co., Ltd. and
QuickLogic Corporation.
10.38 Consolidated Shareholders Agreement, dated as
of January 18, 2001 by and among SanDisk
Corporation, The Israel Corporation, The
Company Semiconductor Ltd. and Macronix
International Co., Ltd.
10.39 Alliance / Tower Joinder Agreement, dated
August 29, 2000, by and between The Company
Semiconductor Corporation and Tower Semiconductor Ltd.
10.40 Alliance / TIC Joinder Agreement, dated August
29, 2000, by and between The Company
Semiconductor Corporation and The Israel
Corporation
(b) No reports on Form 8-K were filed during quarter ended December 30,
2000.
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================================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE SEMICONDUCTOR CORPORATION
February 13, 2001 By: /S/ N. DAMODAR REDDY
-------------------------------------
N. Damodar Reddy
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
February 13, 2001 By: /S/ DAVID EICHLER
-------------------------------------
David Eichler
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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