SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[ x ] Quarterly report pursuant to section 13 or 15(d) of the securities
exchange act of 1934 For the quarterly period ended September 30, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the securities
exchange act of 1934
For the transition period from __________ to __________.
Commission file number: 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0057842
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2575 Augustine Drive
Santa Clara, California 95054-2914
(Address of principal executive offices)
Registrant's telephone number, including area code is (408) 855-4900
Registrant's website address is http://www.alsc.com
-------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which
------------------- ------------------------------
Common Stock, par value $0.01 registered
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 November 9, 2001, there were 42,880,230 shares of Registrant's Common
Stock outstanding.
-1-
ALLIANCE SEMICONDUCTOR CORPORATION
Form 10-Q
for the Quarter Ended September 30, 2001
INDEX
Page
Part I Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of September 30,
2001 and March 31, 2001................................................3
Condensed Consolidated Statements of Operations (unaudited) for the
three and six months ended September 30, 2001 and 2000.................4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
six months ended September 30, 2001 and 2000...........................5
Notes to Condensed Consolidated Financial Statements (unaudited).......6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................15
Part II Other Information
Item 1 Legal Proceedings.....................................................25
Item 4 Submission of Matters to a Vote of Security Holders...................25
Item 5 Other Information.....................................................25
Item 6 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)
September 30 March 31,
2001 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $2,699 $6,109
Restricted cash 1,775 1,925
Short term investments 190,969 384,374
Accounts receivable, net 2,322 18,001
Inventory 52,729 84,797
Related party receivables 2,403 2,369
Other current assets 6,676 1,079
----------- ------------
Total current assets 259,573 498,654
Property and equipment, net 9,166 10,183
Investment in United Microelectronics 87,484 228,633
Corp. (excluding short term portion)
Investment in Tower Semiconductor 16,278 16,327
Alliance Ventures and other investments 73,931 80,461
Other assets 5,387 14,981
----------- ------------
Total assets $451,819 $849,239
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $60,446 $22,234
Accounts payable 6,817 76,130
Accrued liabilities 5,913 5,415
Income taxes payable - 3,215
Deferred income taxes 26,685 101,143
Current portion of long-term capital 705 858
lease obligation
----------- ------------
Total current liabilities 100,566 208,995
Long term obligations 436 11,882
Long term capital lease obligation 321 686
Deferred income taxes 23,502 80,387
----------- ------------
Total liabilities 124,825 301,950
----------- ------------
Stockholders' equity:
Common stock 429 427
Additional paid-in capital 198,252 197,350
Treasury stock (30,430) (22,762)
Retained earnings 160,847 372,274
Accumulated other comprehensive loss (2,104) -
----------- ------------
Total stockholders' equity 326,994 547,289
----------- ------------
Total liabilities $451,819 $849,239
and stockholders' equity
=========== ============
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
ALLIANCE SEMICONDUCTOR CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended Six months ended
September 30, September 30,
------------------ -------------------
2001 2000 2001 2000
--------- -------- --------- ---------
Net revenues $5,111 $64,466 $17,179 $111,870
Cost of revenues 22,628 39,943 39,807 69,826
--------- -------- --------- ---------
Gross profit (loss) (17,517) 24,523 (22,628) 42,044
--------- -------- --------- ---------
Operating expenses:
Research and development 2,124 3,467 5,185 7,058
Selling, general and 4,410 5,260 8,426 9,774
administrative
--------- -------- --------- ---------
Total operating expenses 6,534 8,727 13,611 16,832
--------- -------- --------- ---------
Income (loss) from operations (24,051) 15,796 (36,239) 25,212
Gain (loss) on investments (7,855) 13,485 (7,811) 61,002
Write-down of marketable securities (290,568) - (295,096) -
and other investments
Other income (expense), net (2,065) 333 (2,166) 673
--------- -------- --------- ---------
Income (loss) before income taxes,
equity in loss of investees and (324,539) 29,614 (341,312) 86,887
cumulative effect of change in
accounting principle
Provision (benefit) for income (126,589) 12,053 (132,460) 35,363
taxes
--------- -------- --------- ---------
Income (loss) before equity in (197,950) 17,561 (208,852) 51,524
loss of investees and cumulative
effect of change in accounting
principle
Equity in loss of investees (2,497) (1,093) (4,630) (1,791)
--------- -------- --------- ---------
Income (loss) before cumulative
effect of change in accounting (200,447) 16,468 (213,482) 49,733
principle
--------- -------- --------- ---------
Cumulative effect of change in - - 2,055 -
accounting principle
--------- -------- --------- ---------
Net income (loss) ($200,447)$16,468 ($211,427) $49,733
========= ======== ========= =========
Income (loss) per share before
cumulative effect of change in
accounting principle
Basic ($4.85) $0.40 ($5.15) $1.20
========= ======== ========= =========
Diluted ($4.85) $0.39 ($5.15) $1.17
========= ======== ========= =========
Cumulative effect of change in
accounting principle
Basic $- $- $0.05 $-
========= ======== ========= =========
Diluted $- $- $0.05 $-
========= ======== ========= =========
Net income (loss) per share
Basic ($4.85) $0.40 ($5.10) $1.20
========= ======== ========= =========
Diluted ($4.85) $0.39 ($5.10) $1.17
========= ======== ========= =========
Weighted average number of
common shares
Basic 41,293 41,326 41,450 41,433
========= ======== ========= =========
Diluted 41,293 42,537 41,450 42,665
========= ======== ========= =========
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)
Six months ended
September 30,
--------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income (loss) ($211,427) $49,733
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 1,534 2,075
Equity in loss of investees, net 4,630 1,791
of tax
(Gain) loss on investments 7,811 (61,002)
Other income (2,044) -
Accrued interest 1,317 -
Write down of investments 295,096 -
Cumulative effect of accounting (2,055) -
change, net of tax
Inventory write down 16,428 -
Changes in assets and liabilities:
Accounts receivable 15,679 (17,850)
Inventory 15,640 (40,313)
Related party receivables (34) (872)
Other assets (1,475) 198
Accounts payable (69,313) 24,647
Accrued liabilities 1,520 (3,493)
Deferred income tax (129,862) -
Income tax payable (3,215) 583
--------- --------
Net cash used in operating (59,770) (44,503)
activities
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (517) (2,335)
Proceeds from sale of marketable 48,405 70,029
securities
Investment in Tower Semiconductor (11,001) -
Corporation
Purchase of Alliance Venture and (11,607) (40,647)
other investments
--------- --------
Net cash provided by investing 25,280 27,047
activities
--------- --------
Cash flows from financing activities:
Net proceeds from issuance of common 904 922
stock
Principal payments on lease (518) (470)
obligation
Repurchase of common stock (7,668) (10,294)
Short term borrowings 38,212 10,000
Restricted cash 150 22
--------- --------
Net cash provided by financing 31,080 180
activities
--------- --------
Net decrease in cash and cash (3,410) (17,276)
equivalents
Cash and cash equivalents at beginning 6,109 34,770
of the period
--------- --------
Cash and cash equivalents at end of $2,699 $17,494
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 condensed consolidated financial statements have been
prepared by Alliance Semiconductor Corporation ("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, consisting only of normal, recurring
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 for the fiscal
years ended March 31, 2001 and 2000 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on June 29, 2001.
For purposes of presentation, the Company has indicated the first six months of
fiscal 2002 and 2001 as ending on September 30; whereas, in fact, the Company's
fiscal quarters ended on September 29, 2001 and September 30, 2000,
respectively. The financial results for the second quarter of fiscal 2002 and
2001 were reported on a 13-week quarter.
The results of operations for the six months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2002, and the Company makes no representations related thereto.
Note 2. Balance Sheet Components
September 30, March 31, 2001
2001
---------------- ---------------
Work in $25,960 $41,350
process
Finished 26,769 43,447
goods
---------------- ---------------
$52,729 $84,797
================ ===============
NOTE 3. Investment in Chartered Semiconductor Manufacturing Ltd. ("Chartered")
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab 2," if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States.
The Company does not own a material percentage of the equity of Chartered. In
the first quarter of fiscal 2001, the Company sold 500,000 shares of Chartered,
recording a realized gain of approximately $33.5 million. At September 30, 2001,
the Company owned approximately 1.6 million American Depository shares or
"ADSs". During the second quarter of fiscal 2002, the Company wrote down its
investment in Chartered and recognized a pre-tax, non-operating loss of
approximately of $12.2 million.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more than 50% of its original holdings of Chartered, the Company will start to
lose a proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
-6-
NOTE 4. Investment in United Microelectronics Corporation ("UMC")
At September 30, 2001, the Company owned approximately 298.0 million shares of
UMC, representing approximately 3% ownership. The portion of the investment in
UMC for which sale of shares is restricted beyond twelve months (approximately
38% of the Company's holdings at September 30, 2001) is accounted for as a cost
method investment and is presented as a long-term investment. As this long-term
portion becomes current over time, the investment will be transferred to
short-term investments and will be accounted for as an available-for-sale
marketable security in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"). The long-term portion of the investment becomes
unrestricted between 2002 and 2004.
In the second quarter of fiscal 2002, the Company sold 42,006,000 shares of UMC
stock and recorded a pre-tax non-operating loss of approximately $34.7 million.
The Company sold the stock in order to comply with the restrictions on its loan
agreement with Citibank, due to the decline in the stock price of UMC over the
quarter.
At the end of the fourth quarter of fiscal 2001, the Company wrote down its
investment in UMC and recognized a pre-tax, non-operating loss of approximately
$460.0 million. At September 30, 2001, the Company wrote down its investment in
UMC and recognized a pre-tax, non-operating loss of approximately $250.9
million.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more that 50% of its original holdings of UMC, the Company will start to lose a
proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Note 5. Investment in Broadcom Corporation
Prior to April 2001, the Company accounted for its investment in Broadcom as an
available-for-sale marketable security in accordance with SFAS 115. In July
2001, the Company sold 125,000 shares of Broadcom, recognizing a pre-tax,
non-operating gain of approximately $1.6 million. In August 2001, the Company
entered into a "cashless collar" derivative contract with a brokerage firm. The
Company accounts for its derivative contract as a derivative instrument in
accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133")
(see Note 12). At September 30, 2001, the Company owned 75,000 shares of
Broadcom and recorded an unrealized gain of approximately $810,000, net of
taxes, as part of accumulated other comprehensive loss in the stockholders'
equity section of the balance sheet.
At the end of the fourth quarter fiscal 2001, the Company wrote down its
investment in Broadcom and recognized a pre-tax, non-operating loss of
approximately $3.8 million.
Note 6. Investment in Vitesse Semiconductor Corporation
Prior to January 2001, the Company accounted for its investment in Vitesse as an
available-for-sale marketable security in accordance with SFAS 115. In January
2001, the Company entered into two derivative contracts ("Agreements") with a
brokerage firm and received aggregate cash proceeds of $31.5 million. The
Agreements have repayment provisions that incorporate a collar arrangement with
respect to 490,000 shares of Vitesse Semiconductor common stock. The Company
accounts for its derivative contracts as a derivative instrument in accordance
with SFAS 133 (see Note 12). Vitesse shares not subject to the derivative
contracts are accounted for as an available-for-sale marketable security in
accordance with SFAS 115. At September 30, 2001, the Company wrote down its
investment in Vitesse and recognized a pre-tax, non-operating loss of
approximately $3.8 million.
Vitesse's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Vitesse's and the Company's, sometimes move as
a group, it is likely that Vitesse's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in fiscal 2001.
Thus, there can be no assurance that the Company's investment in Vitesse will
increase in value or even maintain its value.
-7-
Note 7. Investment in PMC-Sierra Corporation
The Company records its investment in PMC-Sierra, Inc. ("PMC") as an available
for sale marketable security in accordance with SFAS 115. At the end of the
fourth quarter fiscal 2001, the Company wrote down its investment in PMC and
recognized a pre-tax, non-operating loss of approximately $10.8 million. At
September 30, 2001, the Company owns 68,152 shares of PMC-Sierra and wrote down
its investment, recognizing a non-operating pre-tax loss of approximately $1.0
million.
PMC's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like PMC's and the Company's, sometimes move as a
group, it is likely that PMC's stock and the Company's stock can both suffer
significant loss in value at the same time, as occurred in fiscal 2001. Thus,
there can be no assurance that the Company's investment in PMC will increase in
value or even maintain its value.
Note 8. Investment in Adaptec Inc.
In June 2000, the Company through its venture arm Alliance Venture Management,
LLC, made an investment in Platys Communications, Inc. ("Platys"), a developer
and marketer of advanced storage networking products. On August 25, 2001,
Adaptec, Inc. ("Adaptec") acquired Platys. In connection with the acquisition,
the Company received 1,386,517 shares of Adaptec and $14.2 million in cash, of
which $4.1 million is held in an escrow account and is disclosed on the balance
sheet in current assets. In the second quarter of fiscal 2002, the Company
recorded a pre-tax non-operating gain of approximately $25.5 million based on
the closing price of Adaptec of $11.38 on August 25, 2001, the closing date of
the acquisition. At September 30, 2001, the Company had recorded an unrealized
loss of $2.9 million, net of tax, as part of accumulated other comprehensive
loss in the stockholders equity section of the balance sheet.
Adaptec's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Adaptec's and the Company's, sometimes move as
a group, it is likely that Adaptec's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in fiscal 2001.
Thus, there can be no assurance that the Company's investment in Adaptec will
increase in value or even maintain its value.
Note 9. Alliance Venture Management, LLC
In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee out of the net profits of
the investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds, by allowing them limited participation in the profits of the
various investment funds, through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Ventures Management acts as the general
partner of these partnerships and receives a management fee of 15% of the
profits from these partnerships for its managerial efforts.
At Alliance Venture Management's inception in November 1999, series A member
units and series B member units in Alliance Venture Management were created. The
unit holders of series A units and series B units receive management fees of 15%
of investment gains realized by Alliance Ventures I and Alliance Ventures II,
respectively. In February 2000, upon the creation of Alliance Ventures III, LP
("Alliance Ventures III"), the management agreement for Alliance Venture
Management was amended to create series C member units which are entitled to
receive a management fee of 16% of investment gains realized by Alliance
Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP
("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"),
the management agreement for Alliance Venture Management was amended to create
-8-
series D and E member units which are entitled to receive a management fee of
15% of investment gains realized by Alliance Ventures IV and Alliance Ventures
V, respectively.
Each of the owners of the series A, B, C, D and E member units paid the initial
carrying value for their shares of the member units. While the Company owns 100%
of the common units in Alliance Venture Management, it does not hold any series
A, B, C, D or E member units and does not participate in the management fees
generated by the management of the investment funds. Several of the Company's
senior management hold the majority of the series A, B, C, D or E member units
of Alliance Venture Management.
As of September 30, 2001, Alliance Ventures I, whose focus is investing in
networking and communication start-up companies, has invested approximately
$23.1 million in nine companies, with a fund allocation of $20.0 million.
Alliance Ventures II, whose focus is in investing in internet start-up ventures
has invested approximately $9.1 million in 10 companies, with a total fund
allocation of $15.0 million. As of September 30, 2001, Alliance Ventures III,
whose focus is investing in emerging companies in the networking and
communication market areas, has invested $38.6 million in 14 companies, with a
total fund allocation of $100.0 million. Alliance Ventures IV, whose focus is
investing in emerging companies in the semiconductor market areas, has invested
$13.0 million in four companies, with a total fund allocation of $40.0 million.
Alliance Ventures V, whose focus is investing in emerging companies in the
networking and communication market areas, has invested $9.0 million in six
companies, with a total fund allocation of $60.0 million.
Several of the investments made by Alliance Venture Management through Alliance
Ventures I, II, III, IV and V ("Alliance Ventures") are accounted for under the
equity method due to the Company's ability to exercise significant influence on
the operations of the investees resulting primarily from ownership interest
and/or board representation. For the quarters ended September 30, 2000 and 2001,
respectively, the total equity in the loss of equity investees was approximately
$1.1 million and $2.5 million, net of tax. For the six months ended September
30, 2000 and 2001, the total equity in the loss of equity in investees was
approximately $1.8 million and $4.6 million, net of tax, respectively. In the
first and second quarters of fiscal 2002, the Company wrote down Alliance
Ventures investments and recognized a pre-tax, non-operating loss of
approximately $4.5 million and $2.0 million, respectively.
Certain of the Company's officers have formed private venture funds, which
invest in some of the same investments as the Company.
Alliance Venture Management generally directs the individual funds to invest in
startup, pre-IPO (initial public offering) companies. These types of investments
are inherently risky and many venture funds have a large percentage of
investments decrease in value or fail. Most of these startup companies fail, and
the investors lose their entire investment. Successful investing relies on the
skill of the investment managers, but also on market and other factors outside
the control of the managers. While the Company has been successful in some of
its recent investments, there can be no assurance as to any future or continued
success. It is possible there will be a downturn in the success of these types
of investments in the future and the Company will suffer significant diminished
success in these investments. It is possible that many or most, and maybe all of
the Company's venture type investments may fail, resulting in the complete loss
of some or all the money the Company has invested in these types of investments.
Note 10. Investment in Solar Venture Partners, LP
In August 2000, the Company agreed to invest $20.0 million in Solar Venture
Partners, LP ("Solar"), a venture capital partnership whose focus is in
investing in early stage companies in the areas of networking,
telecommunications, wireless, software infrastructure enabling efficiencies of
the Web and e-commerce, semiconductors for emerging markets and design
automation. As of September 30, 2001, the Company has invested $12.5 million.
Due to changes in the venture capital market, the Company has decided to limit
its investment in Solar to $12.5 million already invested.
Certain of the Company's officers and employees have also invested in Solar.
Solar has made investments in some of the same companies as Alliance Ventures.
-9-
Note 11. Investment in Tower Semiconductor Corporation
In August 2000, the Company entered into a share purchase agreement with Tower
Semiconductor ("Tower") under which Alliance committed to make a $75 million
strategic investment in Tower as part of Tower's plan to build its new
fabrication facility ("fab"). In return for its investment, Alliance will
receive equity, corresponding representation on Tower's Board of Directors and
committed production capacity in the advanced fab, which Tower intends to build.
Pursuant to the agreement, the Company purchased 1,233,241 ordinary shares of
Tower and future wafer purchase credits for an aggregate purchase price of $31.0
million in the fourth quarter of fiscal 2001. In the first quarter of fiscal
2002, the Company purchased an additional 366,690 ordinary shares of Tower and
future wafer purchase credits for an aggregate purchase price of $11.0 million.
The Company has an obligation to purchase an additional 1,100,070 ordinary
shares in three equal increments upon occurrence of events relating to Tower's
construction of FAB 2 as specified in the agreement. These additional shares are
expected to be purchased by the Company during fiscal 2002 and 2003. On August
11, 2001, approximately $16.0 million of the Company's wafers purchase credits
were converted to approximately 1.3 million ordinary shares in Tower at a per
share price of $12.75. As of September 30, 2001, the Company has purchased a
total of 2.9 million ordinary shares of Tower and future wafer purchase credits
for an aggregate purchase price of $42.0 million. At September 30, 2001, due to
"other-than-temporary" decline in the value of the stock, the Company wrote down
its investment in Tower, recording a pre-tax, non-operating loss of $20.6
million.
In connection with the share purchase agreement, the Company entered into a
foundry agreement under which the Company is entitled to a certain amount of
credits towards future wafer purchases from Tower. The amount of credits is
determined upon each share purchase transaction by Alliance and is calculated
based on the difference between Tower's average stock price for 30 days
preceding a purchase transaction and Alliance's share purchase exercise price.
At September 30, 2001, such wafer credits from Tower totaled $5.1 million and
are included in other assets on the balance sheet. The wafer purchase credits
will be utilized as the Company purchases wafers from Tower in the future where
15% of order value will be applied against the wafer purchase credits. Under the
terms of the foundry agreement, the Company is guaranteed a capacity of up to
15% of available wafers but not to exceed 5,000 wafers starts per month. The
guaranteed capacity may be reduced if the Company elects not to exercise its
additional share purchase obligation. The Company accounts for its investment in
Tower under the cost method based on the Company's inability to exercise
significant influence over Tower's operations.
Note 12. Derivative Instruments and Hedging Activities
The Company has investments in the common stock of Vitesse Semiconductor and
Broadcom Corporation (see Notes 2 and 6 above). The Company's investments
exposes it to a risk related to the effects of changes in the price of Vitesse
Semiconductor and Broadcom Corporation common stock. The financial exposure is
monitored and managed by the Company. The Company's risk management focuses on
the unpredictability of financial markets and seeks to reduce the potentially
adverse effects that the volatility of these markets may have on its operating
results. The Company uses cashless collars, which are combinations of option
contracts to hedge this risk.
By using derivative financial instruments to hedge exposures to changes in share
prices, the Company exposes itself to credit risk and market risk. Credit risk
is a risk that the counterparty might fail to fulfill its performance
obligations under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Company, which
creates repayment risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and, therefore, does not
assume any repayment risk. The Company minimizes its credit (or repayment) risk
in derivative instruments by (1) entering into transactions with high-quality
counterparties, (2) limiting the amount of its exposure to each counterparty,
and (3) monitoring the financial condition of its counterparties.
All derivatives are recognized on the balance sheet at their fair market value.
On the date that the Company enters into a derivative contract, it designates
the derivative as (1) a hedge of the fair value of a recognized asset or
liability, or (2) an instrument that is held for trading or non-hedging purposes
(a "trading" or "non-hedging" instrument). Since April 1, 2001, the Company has
designated all derivative contracts as a fair value hedge and has not entered
into derivatives for purposes of trading. Changes in the fair value of a
derivative that is highly effective and is designated and qualifies as a fair
value hedge, along with changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, are recorded in the current
period earnings.
-10-
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value hedges to specific assets on the
balance sheet. The Company also formally assesses (both at the hedge's inception
and on an ongoing basis) whether the derivatives that are used in the hedging
transactions have been highly effective in offsetting changes in fair value of
the hedged items and whether those derivatives may be expected to remain highly
effective in future periods. When it is determined that a derivative is not (or
has ceased to be) highly effective as a hedge, the Company discontinues hedge
accounting prospectively. The Company discontinues hedge accounting
prospectively when (1) it determines that the derivative is no longer effective
in offsetting changes in the fair value of a hedged item, (2) that the
derivative expires or is sold, terminated or exercised, or (3) management
determines that designating the derivative as a hedging instrument is no longer
appropriate.
In January 2001, the Company entered into two derivative contracts ("Derivative
Agreements") with a brokerage firm and received aggregate cash proceeds of
approximately $31.0 million. The Derivative Agreements have repayment provisions
that incorporate a collar arrangement with respect to 490,000 shares of Vitesse
Semiconductor common stock. The Company, at its option, may settle the contracts
by either delivering Vitesse shares or making a cash payment to the brokerage
firm in January 2003, the maturity date of the Derivative Agreements. The number
of Vitesse shares to be delivered or the amount of cash to be paid is determined
by a formula in the Derivative Agreements based upon the market price of the
Vitesse shares on the settlement date. Under the Derivative Agreements, if the
stock price of Vitesse exceeds the ceiling of the collar, then the settlement
amount also increases by an amount determined by a formula included in the
Derivative Agreements (generally equal to the excess of the value of the stock
over the ceiling of the collar.) If the stock price of Vitesse declines below
the floor of the collar, then the settlement amount also decreases by an amount
determined by a formula included in the Derivative Agreements (generally equal
to the excess of the floor of the collar over the value of the stock.)
In August 2001, the Company entered into a cashless collar arrangement with a
brokerage firm with respect to 75,000 shares of Broadcom common stock. The
collar arrangement consists of written call option to buy 75,000 shares of
Broadcom common stock at a price of $64.72 and a purchased put option to sell
75,000 shares at a price of $36.72 through August 2002.
The Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by the
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133 and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133 (herein referred to as "SFAS 133"), on April 1, 2001. In accordance with
transaction provisions of SFAS 133, the Company recorded an approximate $2.1
million cumulative effect adjustment in earnings during the quarter ended June
30, 2001. At the end of the September 2001, the Company recorded a gain of $6.9
million relating to the Vitesse hedged instrument, offset by a loss of $6.5
million, on the Vitesse investments. The Company also recognized a gain of $1.3
million for the Broadcom hedged instrument offset by a loss of $2.0 million, on
the Broadcom investment.
Note 13. Short-term borrowings
During fiscal 2001, the Company borrowed approximately $22.2 million from a
brokerage firm, secured by a portion of its holdings in Chartered Semiconductor,
bearing interest at a rate of 5.0% per annum. The outstanding balance on the
loan at September 30, 2001, was approximately $20.3 million.
During the first quarter of fiscal 2002, the Company entered into a secured loan
agreement ("Loan Agreement") with Citibank, N.A. for up to $60.0 million. Under
the terms of the Loan Agreement, the loan will mature on November 19, 2001 and
bears interest at a per annum rate equal to LIBO Rate plus one percent. Both the
principal and accrued interest are payable upon maturity. The borrowings under
the Loan Agreement were secured by approximately 181.7 million shares of UMC
common stock held by the Company. At September 30, 2001 the Company had borrowed
$25.7 million with accrued interest of approximately $340,000.
-11-
During the second quarter of fiscal 2002, the Company converted an account
payable of $14.4 million, to UMC and a subsidiary of UMC, to a secured loan that
matures in August 2002. The loan bears an interest rate of 7.5%, and is
collateralized by 16.7 million shares of UMC.
At September 30, 2001, the Company had short-term borrowings totaling $60.4
million.
Note 14. Comprehensive Income
The following are the components of comprehensive income:
Three months Six months ended
ended September 30,
September 30,
------------------- -------------------
2001 2000 2001 2000
-------- --------- -------- ---------
Net income (loss) ($200,447) $16,468 ($211,427)$49,733
Unrealized loss on
marketable
securities, net of
deferred taxes of
($48,755) and
($69,867) at
September 30, 2001 (2,104) (92,295) (2,104) (173,269)
and ($63,346) and
($118,922) at
September 30, 2000
-------- --------- -------- ---------
Comprehensive ($202,551) ($75,828) ($213,551)($123,536)
income (loss)
========= ========= ======== =========
Note 15. Net Income (Loss) 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.
The computations for basic and diluted EPS are presented below:
Three months Six months
ended ended
September September
30, 30,
-------------------- --------------------
2001 2000 2001 2000
---------- -------- ---------- ---------
Net income (loss) ($200,447) $16,468 ($211,427) $49,733
========== ======== ========== =========
Weighted average shares 41,293 41,326 41,450 41,433
boutstanding
Effect of dilutive employee - 1,211 - 1,232
stock options
---------- -------- ---------- ---------
Average shares outstanding 41,293 42,537 41,450 42,665
assuming dilution
========== ======== ========== =========
Net income (loss) per share:
Basic ($4.85) $0.40 ($5.10) $1.20
========== ======== ========= =========
Diluted ($4.85) $0.39 ($5.10) $1.17
========== ======== ========= =========
The following are not included in the above calculation, as they were considered
anti-dilutive:
Three months ended Six months ended
September 30, September 30,
--------------------- -------------------
2001 2000 2001 2000
--------- ---------- --------- --------
Employee stock options 476 173 441 162
outstanding
========= ========== ========= ========
-12-
Note 16. Recently Issued Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company believes that the
adoption of SFAS 141 will not have a significant impact on its financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company believes that the adoption of SFAS 142 will
not have a significant impact on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for Impairment or Disposal of Long-Lived Assets,"
which supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" and the accounting and reporting
provision of Accounting Principles Board ("APB") No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 addresses financial accounting and reporting for impairment or disposal
of long-lived assets, including amortizable intangibles, and is effective for
the fiscal years beginning December 15, 2001 as well as interim periods within
those fiscal years. SFAS 144 will address the impairment of goodwill and
non-amortizable intangibles. The Company is currently reviewing these statements
to determine its effect on the Company's financial position and results of
operations.
Note 17. Legal Matters
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately $170.0 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 appealed the setting
aside of the default judgment against the Company to the Canadian Supreme Court.
In June 2001, the Canadian Supreme Court refused to hear the appeal of the
setting aside of the default judgment against the Company. The Company believes
the resolution of this matter will not have a material adverse effect on its
financial conditions and its results of operations.
In February 1997, Micron Technology, Inc. filed an antidumping petition with the
United States International Trade Commission ("ITC") and United States
Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were
being sold in the United States at less than fair value, and that the United
States industry producing SRAMs was materially injured or threatened with
material injury by reason of imports of SRAMs fabricated in Taiwan. After a
final affirmative DOC determination of dumping and a final affirmative ITC
determination of injury, DOC issued an antidumping duty order in April 1998.
Under that order, the Company's imports into the United States on or after
approximately April 16, 1998 of SRAMs fabricated in Taiwan are subject to a cash
deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value
of such SRAMs. (The Company posted a bond in the amount of 59.06% (the
preliminary margin) with respect to its importation, between approximately
October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the
Company and others filed an appeal in the United States Court of International
Trade (the "CIT"), challenging the determination by the ITC that imports of
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry.
Following two remands from the CIT, the ITC, on June 12, 2000, reversed its
original determination that Taiwan-fabricated SRAMs were causing material injury
to the U.S. industry. The CIT affirmed the ITC's negative determination on
August 29, 2000,
-13-
and Micron appealed to the U.S. Court of Appeals for the Federal Circuit
("CAFC"). On September 21, 2001, the CAFC affirmed the ITC's negative injury
determination. Micron has until December 20, 2001 to seek review by the U.S.
Supreme Court. If it does not, or if the Court denies review, DOC will revoke
the order and instruct the U.S. Customs Service to refund the Company's cash
deposits with interest. As of September 30, 2001, the Company had made cash
deposits in the amount of $1.7 million and had posted a bond secured by a letter
of credit in the amount of approximately $1.7 million relating to the Company's
importation of Taiwan-manufactured SRAMs.
Note 18. Subsequent Events
In October 2001, Solar made a distribution to the Company for its investment in
Platys Communications. The non-operating pre-tax gain will be approximately $2.3
million in the third quarter of fiscal 2002.
On October 29, 2001, the Company agreed upon terms for the acquisition of
PulseCore, Inc. PulseCore is a fabless semiconductor company specializing in
high speed and low power mixed signal design. Pulsecore currently provides
electromagnetic interference (EMI) suppression integrated circuits to
manufacturers of computer peripherals and digital consumer products. The
expected acquisition cost is approximately $5 million. After completing the
necessary due diligence, the parties expect to complete the acquisition within
60 days. After the close of the acquisition, the Company intends to operate
PulseCore as a separate logic products division within Alliance.
In November 2001, the Company expects to entered into a secured loan agreement
(the "Loan Agreement") with ChinaTrust Commercial Bank, Ltd., for up to $30
million. Under the terms of the Loan Agreement, the loan will mature on November
16, 2002 and bears an interest rate at a per annum rate equal to LIBOR Rate
determined by the Bank to be equal to the quotient of the London Interbank Rate
for such loan for suchinterest period divided by one minus the Eurocurrency
Reserve Requirement for such interest period. Both the principal and accrued
interest are payable upon maturity. The borrowings under the Loan Agreement are
secured by a figure equal to 2.5 times of shares of UMC common stock held by the
Company. A portion of this loan will be used to pay off the Citibank Bank loan.
The remaining will be used for working capital.
-14-
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: the potential for further price erosion of the
Company's products; additional cancellation of orders in the Company's backlog;
continuing slowdown in the electronics industry; further decreased demand and
increased competitive environment for the Company's products, including, without
limitation, obsolescence of the Company's products; continued accumulation of
excess inventory and price erosion or obsolescence of existing inventory, any of
which may result in additional charges against the Company's earnings; inability
to timely ramp up production of and deliver new or enhanced SRAM, DRAM or flash
products; inability to successfully develop and introduce new products;
inability to successfully recruit and retain qualified technical and other
personnel; further adverse changes in the value of securities held by the
Company, including those of Adaptec, Inc., Vitesse Semiconductor Corporation,
PMC-Sierra, Inc., Broadcom Corporation, Chartered Semiconductor, United
Microelectronics Corporation and Tower Semiconductor; further adverse changes in
value of investments made by Alliance's venture funds managed by Alliance
Venture Management, LLC; the Company's potential status as an Investment Act of
1940 reporting company. These risks and uncertainties include those set forth in
Item 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 March 31, 2001 filed with
the Securities and Exchange Commission on June 29, 2001, and the subsequent
Quarterly Report on Form 10-Q for the quarter ending June 30, 2001. These risks
and uncertainties, or the occurrence of other events, could cause actual results
to differ materially from those projected in 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.
-15-
Results of Operations
The percentage of net revenues represented by certain line items in the
Company's consolidated statements of operations for the years indicated, are set
forth in the table below.
Three months ended Six months ended
September 30, September 30,
--------------------- ------------------
2001 2000 2001 2000
---------- --------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 442.7 62.0 231.7 62.4
---------- --------- -------- --------
Gross profit (loss) (342.7) 38.0 (131.7) 37.6
Operating expenses:
Research and development 41.6 5.4 30.2 6.3
Selling, general and 86.3 8.2 49.0 8.7
administrative
---------- --------- -------- --------
Total operating expenses 127.8 13.6 79.2 15.0
---------- --------- -------- --------
Income (loss) from operations (470.5) 24.4 (210.9) 22.6
Gain on investments (153.7) 20.9 (45.5) 54.5
Write-down of marketable
securities and other investments (5,685.1) - (1,717.8) -
Other income (expense), net (40.4) .5 (12.6) 0.6
---------- --------- -------- --------
Income (loss) before income (6,349.7) 45.8 (1,986.8) 77.7
taxes, equity in loss of
investees and cumulative
effect of change in
accounting principle
Provision (benefit) for income (2,476.8) 18.7 (771.1) 31.6
taxes
---------- --------- -------- --------
Income (loss) before equity in
loss of investees and (3,872.9) 27.1 (1,215.7) 46.1
cumulative effect of change in
accounting principle
Equity in loss of investees (48.9) (1.7) (27.0) (1.6)
---------- --------- -------- --------
Income (loss) before cumulative
effect of change in accounting (3,921.8) 25.4 (1,242.7) 44.5
principle
Cumulative effect of changes in
accounting principle - - 12.0 -
---------- --------- -------- --------
Net income (loss) (3,921.8%) 25.4% (1,230.7%) 44.5%
========== ========= ======== ========
Net revenues decreased by 92% to $5.1 million for the three months ended
September 2001 from $64.5 million for the similar period in 2000. As a result of
inventory reduction efforts by our customers and a slowdown in demand that
started in the September 30, 2000 quarter. Unit sales for the quarter ended
September 30, 2001, fell approximately 35% from the prior quarter and
approximately 82% from the same quarter one year ago. During this comparison
period, blended average selling prices ("ASP") decreased approximately 35% from
the June 2001 quarter and approximately 57% from the September 2001 quarter.
Revenues from the Company's DRAM products contributed approximately 49% of the
Company's net revenues for the September 2001 quarter and approximately 54% of
the Company's net revenues for the September 2000 quarter. The DRAM revenues
decreased by approximately 93% to $2.5 million in the September 2001 quarter
from $37.9 million for the September 2000 quarter. The decrease in revenue for
DRAMs for the September 2001 quarter was attributable to an approximate 29%
decrease in units and an approximate 35% decreased in ASPs from the prior
quarter and an approximate 82% decrease in units and an approximate 64% decrease
in ASPs from the same quarter one year ago.
Revenues from the Company's SRAM products contributed approximately 50% of the
Company's net revenues for the September 2001 quarter and approximately 41% of
the Company's net revenues for the September 2000 quarter. The SRAM revenues
decreased by approximately 90% to $2.6 million in the September 2001 quarter
from $26.3 million for the September 2000 quarter. The decrease in revenue for
SRAMs for the September 2001 quarter was attributable to an approximate 42%
decrease in units and an approximate 33% decreased in ASPs from the June 2001
quarter and an approximate 82% decrease in units and an approximate 47% decrease
in ASPs from the September 2001 quarter.
-16-
In the September 2001 quarter, sales to the computing market segment accounted
for approximately 21% of the total sales, with 79% attributable to sales in the
communication, networking and consumer markets, whereas in the September 2000
quarter approximately 18% of the Company's sales were in the computing market
segment and 82 % in the non-PC market segments (i.e. communications, networking
and consumer).
In the September 2001 quarter, sales by geographic areas were as follows: U.S.
26%, Asia 39% and Europe 35%, whereas during the September 2000 quarter U.S.,
Asia and Europe accounted for 36%, 47% and 17%, respectively.
No customers accounted for net revenues greater than 10% in the September 2001
quarter, whereas one customer accounted for approximately 11.6% of the Company's
net revenues in the September 2000 quarter.
Net revenues for the six months ending September 30, 2001 decreased by 85% to
$17.2 million from $111.9 million during six months ending September 30, 2000.
The revenue decrease during the six months ending September 30, 2001 compared to
the six months ending September 30, 2001, was primarily due to a significant
decreases in unit volumes and ASPs.
Revenues from the Company's SRAM products during the six months ending September
30, 2001 accounted for approximately $9.1 million or 53% of the total net
revenues, with DRAMs accounting for approximately $7.9 million or 47%. This
compares to SRAM products during the six months ending September 30, 2001 of
approximately $47.1 million or 42% of the total revenues, with DRAMs accounting
for approximately $64.4 million or 58%.
For the six months ending September 30, 2001, sales to the computing market
segment accounted for approximately 23% of total sales, with 77% attributable to
sales in the communication, networking and consumer markets whereas during the
six months ending September 30, 2000, approximately 18% of the Company's sales
were in the computing market segment and 82% in the non-PC market segments (i.e.
communications, networking and consumer). The Company's sales and marketing
focus is primarily in the communications, networking, wireless and consumer
markets.
The geographic breakdown of sales for the six months ending September 30, 2001,
was 30% in U.S., 40% in Asia, and 30% in Europe, whereas during the six months
ending September 30, 2000, U.S., Asia and European sales accounted for
approximately 36%, 46% and 18%, respectively, of net revenues.
The largest customer accounted for approximately 6.3% of the Company's net
revenues during the first six months ending September 30, 2001, whereas the
largest customer for the first six months ending September 30, 2000, accounted
for approximately 8.4%.
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 (Loss)
Gross loss for the September 2001 quarter was $17.5 million, or 343% of net
revenues compared to a gross profit of $24.5 million or 38% for the September
2000. The decrease in gross profits was primarily related to the significant
decrease in unit shipments and the reduction in the ASP driven by the weak
market demand. The Company took an approximate $10.4 million write-down of its
inventory as a result of this weak market condition. The inventory write-down
accounted for 204% of the 343% gross loss reported in the September 2001
quarter.
The gross loss was approximately $22.6 million, or 132% of the net revenues, for
the first six months ending September 30, 2001. This compares to a gross profit
of approximately $42.0 million or 38% of net revenues for the first six months
ending September 30, 2000. The Company took an approximate $16.4 million
inventory write
-17-
down for the weak market demand as well as the erosion of its ASPs for the six
months ended September 30, 2001.
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 average unit
selling prices; changes in the mix of products sold; 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 $2.1 million, or 42% of net revenue in
the September 2001 quarter, compared to $3.5 million, or 5% of net revenue, for
the September 2000 quarter. In absolute dollars, expenses fell approximately
$1.4 million or 40% from the September 2000 quarter. Research and development
expenses in the first six months ending September 30, 2001, were $5.2 million,
or 30% of net revenues compared to $7.1 million, or 6% for the first six months
ending September 30, 2000. The reduction in expenses for the September 2001
quarter as compared to the September 2000 quarter, as well as during the six
months ending September 30, 2001 versus the first six months ending September
30, 2000, was due to a decrease in mask and tooling costs.
During the September 2001 quarter and the first six months ending September 30,
2001, the Company's development efforts focused on advanced process and design
technology involving SRAMs, DRAMs and Flash memory products.
The Company believes that investments in research and development are necessary
to remain competitive in the marketplace and accordingly, research and
development expenses may increase in absolute dollars and may also increase as a
percentage of net revenue in future periods.
Selling, General and Administrative
Selling, general and administrative expenses generally include salaries and
benefits, sales commissions, marketing costs, travel, equipment depreciation and
software amortization, facilities costs, bad debt expense as well as insurance
and legal costs for the Company's sales, marketing, customer support and
administrative personnel.
Selling, general and administrative expenses were $4.4 million, or 86% of net
revenue in the September 2001 quarter compared to $5.3 million, or 8% of net
revenue in the September 2000 quarter. In absolute dollars, expenses fell
approximately $900,000 or 17% from the September 2000 quarter. For the six
months ending September 30, 2001, expenses were $8.4 million, or 49%, compared
to $9.8 million, or 9%, for the six months ending September 30, 2000. The
decrease in selling, general and administrative expenses for the September 2001
quarter versus September 2000 quarter, as well as the six months ending
September 30, 2001, versus the six months ending September 30, 2000, was
primarily the result of decreased sales commissions due to the decrease in
revenues, as well as decreased headcount and personnel related costs.
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 higher commissions, which are dependent on the level of revenues as well as
increased headcount and personnel related costs.
-18-
Gain (Loss) on Investments
On August 25, 2001, Adaptec, Inc. ("Adaptec") acquired Platys Communications,
Inc. In connection with the acquisition, the Company received 1,386,517 shares
of Adaptec and $14.2 million in cash. In the September 2001 quarter, the Company
recorded a pre-tax non-operating gain of approximately $25.5 million based on
the closing price of Adaptec of $11.38 on August 25, 2001, the closing date of
the acquisition. Also in the September 2001 quarter, the Company sold 125,000
shares of Broadcom, recording a pre-tax gain of approximately $1.6 million. In
addition, the Company sold 42 million shares of UMC and recorded a pre-tax loss
of approximately $34.7 million. At the end of the September 2001 quarter, the
Company recorded a gain of $6.9 million relating to the Vitesse hedged
instrument, offset by a loss of $6.5 million, on the Vitesse investments. The
Company also recognized a gain of $1.3 million for the Broadcom hedged
instrument offset by a loss of $2.0 million, on the Broadcom investment.
In the September 2000 quarter, the Company sold 150,891 shares of Broadcom,
recording a gain of approximately $13.5 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 $2.1 million in the September 2001 quarter
compared to Other Income, net of approximately $333,000 in the September 2000
quarter. For the six months ending September 30, 2001, Other expense, net was
approximately $2.2 million as compared to Other Income, net of approximately
$673,000 for the six months ending September 30, 2000. The change from six
months ending September 30, 2001 to six months ending September 30, 2000, was
attributed to higher interest expense for loans that were initiated in that time
frame.
Write-Down of Marketable Securities and Other Investments
In the past six months, marketable securities held by the Company have
experienced significant declines in their market value primarily due to the
downturn in the semiconductor sector and general market conditions. Management
has evaluated the marketable securities for potential "other-than-temporary"
declines in their value. Such evaluation included researching commentary from
industry experts, analysts and other companies, all of whom were not optimistic
that the semiconductor sector would recover in the next quarter or two or three.
Based on the continuing depression in the investments' stock prices from those
originally used to record the investment and coupled with the expectation that
the stock prices will not significantly recover in the next six to nine months,
as well as the unfavorable business conditions for the companies in the
semiconductor industry in general (including lower fabrication facility capacity
at UMC), management determined that a write down was necessary as of September
30, 2001. As the result, the Company recorded a pre-tax loss of $287.5 million
during the September 2001 quarter, based on the quoted market price of the
respective marketable securities as of September 30, 2001.
At the end of the June 2001 quarter, the Company wrote down one of its
investments in Alliance Ventures, and recognized a pre-tax, non-operating loss
of approximately $4.5 million. At the end of the September 2001 quarter, the
Company wrote down another investment in Alliance Ventures, and recognized a
pre-tax, non-operating loss of approximately $2.0 million. These write-downs are
recorded in the Write-down of Marketable Securities and other investments.
Provision for Income Taxes
Income tax benefit for the September 2001 quarter was approximately $126.6
million and $132.5 million for the first six months ending September 30, 2001,
for an overall effective tax rate of 38.8%. These income tax benefits were
largely the result of the write down in marketable securities in the September
2001 quarter .
Income tax expense for the September 2000 quarter was approximately $12.1
million and $35.4 million for the first six months ending September 30, 2000,
for an overall effective tax rate of 40.7%.
-19-
Equity in Loss of Investees
Several of the Alliance Ventures investments are accounted for under the equity
method due to the Company's ability to exercise significant influence on the
operations of the investees resulting primarily from ownership interest and/or
board representation. For the quarters ended September 30, 2001 and 2000,
respectively, the total equity in the loss of equity investees was approximately
$2.5 million and $1.1 million, net of tax. For the six months ended September
30, 2001 and 2000, the total equity in the loss of equity investees was
approximately $4.6 million and $1.8 million, respectively.
Cumulative Effect of Change in Accounting Principle - Adoption of SFAS 133
The Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by the
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133 and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133 (referred to hereafter as "SFAS 133"), on April 1, 2001. In the fourth
quarter of fiscal 2001, the Company entered in various option arrangements known
as a cashless collar, to hedge its investment in Vitesse Semiconductor common
stock. The Company has designated these option arrangements as fair value hedges
under SFAS 133. In accordance with the transition provisions of SFAS 133, the
Company recorded approximately $2.1 million cumulative effect adjustment in
earnings for the quarter ending June 30, 2001.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of interests-method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company believes that the adoption of SFAS 142 will
not have a significant impact on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS No. 144"), "Accounting for Impairment or Disposal of Long-Lived Assets",
which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of" and the accounting and
reporting provision of Accounting Principles Board ("APB") No. 30, "Reporting
the Results of Operations, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 addresses financial accounting and reporting for
impairment or disposal of long-; lived assets including amortizable intangibles
and is effective for the fiscal years beginning December 15, 2001 as well as
interim periods within those fiscal years. SFAS No. 144 will address the
impairment of goodwill and non-amortizable intangibles. The Company is currently
reviewing this statement to determine its effect on the Company's financial
position and results of operations.
Factors That May Affect Future Results
The Company's quarterly and annual results of operations have historically been,
and will continue to be, subject to quarterly and other fluctuations due to a
variety of factors, including general economic conditions; changes in pricing
policies by the Company, its competitors or its suppliers; anticipated and
unanticipated decreases in unit average selling prices of the Company's
products; fluctuations in manufacturing yields, availability and cost of
products from the Company's suppliers; the timing of new product announcements
and introductions by the Company or its competitors; changes in the mix of
products sold; the cyclical nature of the semiconductor industry; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; market acceptance of new or enhanced
versions of the Company's products; seasonal
-20-
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 the first two quarters of fiscal
2002 and during fiscal years 2001, 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 was 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 products 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 the first two quarters of fiscal 2002 and in fiscal 2001, 1999,
1998 and 1997, when the Company recorded pre-tax charges totaling approximately
$16.0 million, $54.0 million, $20.0 million, $15.0 million and $17.0 million,
respectively, primarily to reflect a decline in market value of certain
inventory.
The Company currently relies on independent foundries to manufacture all of the
Company's products. Reliance on these foundries involves several risks,
including constraints or delays in timely delivery of the Company's products,
reduced control over delivery schedules, quality assurance and costs and loss of
production due to seismic activity, weather conditions and other factors. In or
about October 1997, a fire caused extensive damage to United Integrated Circuits
Corporation ("UICC"), a foundry joint venture between UMC and various companies.
UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where
Company has products manufactured. UICC suffered an additional fire in January
1998, and since October 1996, there have been at least two other fires at
semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial
Park. There can be no assurance that fires or other disasters will not have a
material adverse affect on UMC in the
-21-
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. 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.
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. Moreover, the semiconductor industry is characterized by frequent
claims and litigation regarding patents 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
-22-
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
Part II, Item 1 - Legal Proceedings, below), the deposit requirement, and the
potential that all entries of Taiwan-fabricated SRAMs from October 1, 1997
through March 31, 1999 will be liquidated at the bond rate or deposit rate in
effect at the time of entry, may materially adversely affect the Company's
ability to sell in the United States SRAMs manufactured (wafer fabrication) in
Taiwan. The Company manufactures (wafer fabrication) SRAMs in Singapore (and has
manufactured SRAMs in the United States as well), and may be able to support its
U.S. customers with such products, which are not subject to antidumping duties.
There can be no assurance, however, that the Company will be able to do so.
The Company, through Alliance Venture Management, invests in startup, pre-IPO
(initial public offering) companies. These types of investments are inherently
risky and many venture funds have a large percentage of investments decrease in
value or fail. Most of these startup companies fail, and the investors lose
their entire investment. Successful investing relies on the skill of the
investment managers, but also on market and other factors outside the control of
the managers. While the Company has been successful in some of its recent
investments, there can be no assurance as to any future or continued success. It
is likely there will be a downturn in the success of these types of investments
in the future and the Company will suffer significant diminished success in
these investments. There can be no assurance, and in fact it is likely, that
many or most, and maybe all of the Company's venture type investments may fail,
resulting in the complete loss of some or all the money the Company invested.
As a result of the foregoing factors, as well as other factors affecting the
Company's results of operations, past performance should not be considered to be
a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, stock prices for many technology companies are subject to significant
volatility, particularly on a quarterly basis. If revenues or earnings fail to
meet expectations of the investment community, there could be an immediate and
significant impact on the market price of the Company's common stock.
Due to the foregoing factors, it is likely that in some future quarter or
quarters, the Company's results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
common stock would likely be materially and adversely affected.
Liquidity and Capital Resources
At September 30, 2001, the Company had approximately $2.7 million in cash and
cash equivalents, a decrease of approximately $3.4 million from March 31, 2001
and approximately $166.1 million in working capital, a decrease of approximately
$123.6 million from $289.7 million at March 31, 2001.
Additionally, the Company had short-term investments in marketable securities
whose fair value at September 30, 2001 was approximately $191 million.
During the first six months ending September 30, 2001, operating activities used
cash of $59.8 million. This was primarily the result of net loss, the impact of
non-cash items such as depreciation and amortization, a decrease in accounts
payable, a decrease in deferred taxes offset by a cumulative effect of
accounting change, write-down of investments, and decreases in inventory and
accounts receivable.
Cash used in operating activities of $44.5 million in the six months ending
September 30, 2001 was primarily due to the net income, the impact of non-cash
items such as depreciation and amortization, offset in part by gains on
investments, and growth in inventory and accounts receivable, accounts payable
and taxes payable.
-23-
Net cash provided by investing activities was $25.3 million during the first six
months ending September 30, 2001 as the result of proceeds from the sale of
marketable securities for $38.3 million and in connection with the acquisition
of Platys by Adaptec, the Company received $10.1 million, offset in part, by
$11.6 million in investments by Alliance Ventures, an investment made in Tower
Semiconductor for $11.0 million, and purchases of equipment of $517,000.
Investing activities provided cash in the amount of $27.0 million during the
first six months ending September 30, 2000 as the result of the proceeds from
the sale of marketable securities of $70.0 million, offset in part, by $40.6
million in investments made by Alliance Ventures and in Solar Venture Partners,
and purchases of equipment of $2.3 million.
Net cash provided by financing activities during the first six months ending
September 30, 2001 was approximately $31.1 million and was primarily due to an
increase in short-term borrowings of $38.2 million and in part by proceeds from
the sale of common stock through stock option exercises, of approximately
$904,000 offset by the repurchase of the Company's stock of approximately $7.7
million and capital lease payments of $517,000. During the first quarter of
fiscal 2002, the Company entered into a secured loan agreement (the "Loan
Agreement") with Citibank, N.A. for up to $60 million. Under the terms of the
Loan Agreement, the loan will mature on November 19, 2001 and bears interest at
a per annum rate equal to LIBO Rate plus one percent. Both the principal and
accrued interest are payable upon maturity. The borrowings under the Loan
Agreement are secured by 139,662,000 shares of UMC common stock held by the
Company. At September 30, 2001, the Company had borrowed $58.5 million with
accrued interest of approximately $557,666. Through the sale of approximately 42
million shares of UMC, the Company paid down its loan by approximately $35.0
million.
Net cash provided by financing activities during the first six months ending
September 30, 2000 was the result of $10.0 million short-term borrowing, net
proceeds from the exercise of employee stock options of $0.9 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 Tower, or the usage of "take or pay" contracts
that commit the Company to purchase specified quantities of wafers over extended
periods. Manufacturing arrangements such as these may require substantial
capital investments, which may require the Company to seek additional equity or
debt financing. There can be no assurance that such additional financing, if
required, will be available when needed or, if available, will be on
satisfactory terms. Additionally, the Company has entered into and will continue
to enter into various transactions, including the licensing of its integrated
circuit designs in exchange for royalties, fees or guarantees of manufacturing
capacity.
-24-
===============================================================================
Part II - Other Information
ITEM 1
Legal Proceedings
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately $170.0 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 appealed the setting
aside of the default judgment against the Company to the Canadian Supreme Court.
In June 2001, the Canadian Supreme Court refused to hear the appeal of the
setting aside of the default judgment against the Company. The Company believes
the resolution of this matter will not have a material adverse effect on its
financial conditions and its results of operations.
ITEM 4
Submission of Matters to a Vote of Security Holders
An annual meeting of the stockholders of the Company was held on September 7,
2001. Company's stockholders elected the Board's nominees as directors by the
votes indicated:
Nominee Votes For Votes Withheld
N. Damodar Reddy 32,195,764 7,316,915
C. N. Reddy 34,383,126 5,129,553
Juan Benitez 36,245,827 3,266,852
Jon B. Minnis 36,246,127 3,266,552
Stanford L. Kane 36,246,627 3,266,052
The proposal to approve the Company's 2002 Stock Plan was passed with 13,777,913
votes in favor, 12,828,050 against, 89,643 abstentions, and 12,817,073 broker
non-votes.
The selection of PricewaterhouseCoopers LLP as the Company's independent
auditors was ratified with 39,212,654 votes in favor, 250,380 against and 49,645
abstentions.
ITEM 5
Other Information
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.
Following two remands from the CIT, the ITC, on June 12, 2000, reversed its
original determination that Taiwan-fabricated SRAMs were
-25-
causing material injury to the U.S. industry. The CIT affirmed the ITC's
negative determination on August 29, 2000, and Micron appealed to the U.S. Court
of Appeals for the Federal Circuit ("CAFC"). On September 21, 2001, the CAFC
affirmed the ITC's negative injury determination. Micron has until December 20,
2001 to seek review by the U.S. Supreme Court. If it does not, or if the Court
denies review, DOC will revoke the order and instruct the U.S. Customs Service
to refund the Company's cash deposits with interest. As of September 30, 2001,
the Company had made cash deposits in the amount of $1.7 million and had posted
a bond secured by a letter of credit in the amount of approximately $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 not be properly safeguarded, by the persons in control of
them.
When the Act was written, its drafters (and Congress) also felt that a company
could, either deliberately or inadvertently, come to have the defining
characteristics of an investment company without proclaiming that fact or being
willing to voluntarily submit itself to regulation as an acknowledged investment
company, and that investors in such a company could be just as much in need of
protection as are investors in companies that are openly and deliberately
established as investment companies. In order to deal with this perceived
potential abuse, the Act and rules under it contain provisions and set forth
principles that are designed to differentiate "true" operating companies from
companies that may be considered to have sufficient investment-company-like
characteristics to require regulation by the Act's complex procedural and
substantive requirements. These provisions apply to companies that own or hold
securities, as well as companies that invest, reinvest and trade in securities,
and particularly focus on determining the primary nature of a company's
activities, including whether an investing company controls and does business
through the entities in which it invests or, instead, holds its securities
investments passively and not as part of an operating business. For instance,
under what is, for most purposes, the most liberal of the relevant tests, a
company may become subject to the Act's registration requirements if it either
holds more than 45% of its assets in, or derives more than 45% of its income
from, investments in companies that the investor does not primarily control or
through which it does not actively do business. In making these determinations
the Act generally requires that a company's assets be valued on a current fair
market value basis, determined on the basis of securities' public trading price
or, in the case of illiquid securities and other assets, in good faith by the
company's board of directors.
The Company viewed its investments in Chartered, USC and USIC, and its new
investment in Tower, as operating investments primarily intended to secure
adequate wafer manufacturing capacity; as previously noted, the Company's access
to the manufacturing resources that it obtained in conjunction with those
investments will decrease if the Company ceases to own at least 50% of its
original investments in the enterprises, as modified, in the cases of USC and
USIC, by their merger into UMC. In addition, the Company believes that, before
USC's merger into UMC, the Company's investment in USC constituted a joint
venture interest that the staff of the Securities and Exchange Commission (the
"SEC") would not regard as a security for purposes of determining the proportion
of the Company's assets that might be viewed as having been held in passive
investment securities. However, because of the success during the last two years
of the Company's investments, including its strategic wafer manufacturing
investments, at least from the time of the completion of the merger of USC and
USIC into UMC in January 2000 the Company believes that it could be viewed as
holding a much larger portion of its assets in investment securities than is
presumptively permitted by the Act for a company that is not registered under
it.
On the other hand, the Company also believes that the investments that it
currently holds in Chartered and UMC, even though in companies that the Company
does not control, should be regarded as strategic deployments of Company assets
for the purpose of furthering the Company's memory chip business, rather than as
the kind of financial investments that generally are considered to constitute
investment securities. Applying certain other
-26-
tests that the SEC utilizes in determining investment company status, the
Company has never held itself out as an investment company; its historical
development has focused almost exclusively on the memory chip business; the
activities of its officers and employees have been overwhelmingly addressed to
achieving success in the memory chip business; and until the past two years, its
income (and losses) have derived almost exclusively from the memory chip
business. Accordingly, the Company believes that it should be regarded as being
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities, and has applied to the SEC for an order under
section 3(b)(2) of the Act confirming its non-investment-company status.
However, if the Company's investments in Chartered, UMC and Tower are now viewed
as investment securities, it must be conceded that an unusually large proportion
of the Company's assets could be viewed as invested in assets that would, under
most circumstances, give rise to investment company status. Therefore, while the
Company believes that it has meritorious arguments as to why it should not be
considered an investment company and should not be subject to regulation under
the Act, there can be no assurance that the SEC will agree. And even if the SEC
grants some kind of exemption from investment company status to the Company, it
may place significant restrictions on the amount and type of investments the
Company is allowed to hold, which might force the Company to divest itself of
many of its current investments. Significant potential penalties may be imposed
upon a company that should be registered under the Act but is not, and the
Company is proceeding expeditiously to resolve its status.
If the Company does not receive an exemption from the SEC, the Company would be
required to register under the Act as a closed-end management investment
company. In the absence of exemptions granted by the SEC (if it determines to do
so in its discretion after an assessment of the public interest), the Act
imposes a number of significant requirements and restrictions upon registered
investment companies that do not normally apply to operating companies. These
would include, but not be limited to, a requirement that at least 40% of the
Company's board of directors not be "interested persons" of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain 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.
ITEM 6
Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) No reports on Form 8-K were filed during quarter ended September 30,
2001.
-27-
================================================================================
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
November 16, 2001 By: /s/ N. Damodar Reddy
-------------------------------------------
N. Damodar Reddy
Chairman of the Board, President, Chief Executive
Officer (Principal Executive Officer) and Acting
Chief Financial Officer (Principal Financial and
Accounting Officer)
-28-