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 December 29, 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
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Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.01 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of February 8, 2002, there were 40,793,833 shares of Registrant's Common
Stock outstanding.
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ALLIANCE SEMICONDUCTOR CORPORATION
Form 10-Q
for the Quarter Ended December 31, 2001
INDEX
Page
Part I Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of
December 31, 2001 and March 31, 2001...................................3
Condensed Consolidated Statements of Operations (unaudited) for the
three and nine months ended December 31, 2001 and 2000.................4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended December 31, 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...................................16
Part II Other Information
Item 1 Legal Proceedings.....................................................26
Item 5 Other Information.....................................................26
Item 6 Exhibits and Reports on Form 8-K......................................28
Signatures....................................................................29
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================================================================================
Part I - Financial Information
ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE SEMICONDUCTOR CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
December 31, March 31,
2001 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $6,415 $6,109
Restricted cash 3,132 1,925
Short term investments 320,336 384,374
Accounts receivable, net 4,333 18,001
Inventory 43,555 84,797
Related party receivables 2,320 2,369
Other current assets 7,949 1,079
----------- ------------
Total current assets 388,040 498,654
Property and equipment, net 8,799 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 70,094 80,461
Other assets 5,479 14,981
----------- ------------
Total assets $576,174 $849,239
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $60,703 $22,234
Accounts payable 2,528 76,130
Accrued liabilities 5,847 5,415
Income taxes payable 5,622 3,215
Deferred income taxes 66,406 101,143
Current portion of capital lease 694 858
obligations
----------- ------------
Total current liabilities 141,800 208,995
Long term obligations 11,450 11,882
Long term capital lease obligations 163 686
Deferred income taxes 25,770 80,387
----------- ------------
Total liabilities 179,183 301,950
----------- ------------
Stockholders' equity:
Common stock 429 427
Additional paid-in capital 198,423 197,350
Treasury stock (30,430) (22,762)
Retained earnings 149,828 372,274
Accumulated other comprehensive income 78,741 -
----------- ------------
Total stockholders' equity 396,991 547,289
----------- ------------
Total liabilities and $576,174 $849,239
stockholders' equity
=========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
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ALLIANCE SEMICONDUCTOR CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended Nine months ended
December 31, December 31,
------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues $6,347 $63,815 $23,526 $175,685
Cost of revenues 11,042 42,530 50,849 112,357
--------- --------- ---------- ---------
Gross profit (loss) (4,695) 21,285 (27,323) 63,328
--------- --------- ---------- ---------
Operating expenses:
Research and development 2,041 3,109 7,226 10,167
Selling, general and 3,579 4,777 12,004 14,550
administrative
--------- --------- ---------- ---------
Total operating expenses 5,620 7,886 19,230 24,717
--------- --------- ---------- ---------
Income (loss) from operations (10,315) 13,399 (46,553) 38,611
Gain (loss) on investments 219 5,258 (7,593) 66,260
Write-down of marketable securities (1,750) - (296,846) -
and other investments
Other income (expense), net (1,432) (200) (3,598) 473
--------- --------- ---------- ---------
Income (loss) before income taxes, (13,278) 18,457 (354,590) 105,344
equity in loss of investees and
cumulative effect of change in
accounting principle
Provision (benefit) for income (4,635) 5,654 (137,095) 41,017
taxes
--------- --------- ---------- ---------
Income (loss) before equity in (8,643) 12,803 (217,495) 64,327
loss of investees and cumulative
effect of change in accounting
principle
Equity in loss of investees (2,376) (1,854) (7,006) (3,645)
--------- --------- ---------- ---------
Income (loss) before cumulative (11,019) 10,949 (224,501) 60,682
effect of change in accounting
principle
Cumulative effect of change in - - 2,055 -
accounting principle
--------- --------- ---------- ---------
Net income (loss) ($11,019) $10,949 $222,446) $60,682
========= ========= ========== =========
Income (loss) per share before
cumulative effect of change in
accounting principle
Basic ($0.27) $0.27 ($5.47) $1.47
========= ========= ========== =========
Diluted ($0.27) $0.26 ($5.47) $1.43
========= ========= ========== =========
Cumulative effect of change in
accounting principle per share
Basic $- $- ($0.05) $-
========= ========= ========== =========
Diluted $- $- ($0.05) $-
========= ========= ========== =========
Net income (loss) per share
Basic ($0.27) $0.27 ($5.42) $1.47
========= ========= ========== =========
Diluted ($0.27) $0.26 ($5.42) $1.43
========= ========= ========== =========
Weighted average number of
common shares
Basic 41,311 41,296 41,005 41,380
========= ========= ========== =========
Diluted 41,311 42,221 41,005 42,511
========= ========= ========== =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ALLIANCE SEMICONDUCTOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended
December 31,
--------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income (loss) $(222,446) $60,682
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 2,297 3,196
Equity in loss of investees, net of 7,006 3,645
tax
(Gain) loss on investments 8,287 (66,260)
Other income (2,044) -
Accrued interest 2,011 -
Write down of investments 296,846 -
Cumulative effect of accounting (2,055) -
change, net of tax
Inventory write down 15,281 3,890
Changes in assets and liabilities:
Accounts receivable 13,668 (11,272)
Inventory 25,961 (95,946)
Related party receivables 49 (873)
Other assets (1,921) (630)
Accounts payable (73,602) 58,519
Accrued liabilities 1,454 (53)
Deferred income tax (140,092) (6,989)
Income tax payable 2,407 -
--------- --------
Net cash used in operating (66,893) (52,091)
activities
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (913) (2,851)
Proceeds from sale of marketable 63,404 80,075
securities
Investment in Tower Semiconductor (11,001) -
Corporation
Purchase of Alliance Venture and (19,293) (53,442)
other investments
--------- --------
Net cash provided by investing 32,197 23,782
activities
--------- --------
Cash flows from financing activities:
Net proceeds from issuance of common 1,075 1,498
stock
Principal payments on lease (687) (695)
obligation
Repurchase of common stock (7,668) (10,294)
Proceeds from borrowings 43,489 16,000
Restricted cash (1,207) 922
--------- --------
Net cash provided by financing 35,002 7,431
activities
--------- --------
Net increase (decrease) in cash and 306 (20,878)
cash equivalents
Cash and cash equivalents at beginning 6,109 34,770
of the period
--------- --------
Cash and cash equivalents at end of $6,415 $13,892
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.
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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 (the "Company" or "Alliance") 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 nine months of
fiscal 2002 and 2001 as ending on December 31; whereas, in fact, the Company's
fiscal quarters ended on December 29, 2001 and December 30, 2000, respectively.
The financial results for the third quarter of fiscal 2002 and 2001 were
reported on a 13-week quarter.
The results of operations for the nine months ended December 31, 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. Inventory
December 31, March 31, 2001
2001
---------------- ---------------
Work in process $21,755 $41,350
Finished goods 21,800 43,447
---------------- ---------------
$43,555 $84,797
================ ===============
Note 3. Investment in Chartered Semiconductor Manufacturing Ltd.
In February and April 1995, the Company purchased shares of Chartered
Semiconductor Manufacturing Ltd. ("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 accounts for its investment in Chartered as an available for sale
marketable security in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115").
At December 31, 2001, the Company owned approximately 1.6 million American
Depository shares or "ADSs" of Chartered common stock and had recognized a gross
unrealized gain of approximately $15.5 million, net of tax of approximately $5.6
million, as part of the accumulated other comprehensive income in the
stockholders' equity section of the balance sheet. 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 $11.2 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
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start to lose a proportionate share of its wafer production capacity rights,
which could materially affect its ability to conduct its business.
Note 4. Investment in United Microelectronics Corporation
At December 31, 2001, the Company owned approximately 282.1 million shares of
the common stock of United Microelectronics Corporation ("UMC"), representing
approximately 2% ownership. The portion of the investment in UMC for which sale
of shares is restricted beyond twelve months (approximately 40.2% of the
Company's holdings at December 31, 2001) is accounted for as a cost method
investment and is presented as a long-term investment. As this long-term portion
becomes current over time, the investment will be transferred to short-term
investments and will be accounted for as an available-for-sale marketable
security in accordance with SFAS 115. The long-term portion of the investment
becomes unrestricted between 2003 and 2004.
In the quarters ended December 31, 2001 and September 30, 2001, the Company sold
15.8 million and 42.0 million shares of UMC stock and recorded a pre-tax
non-operating loss of approximately $76,000 and $34.7 million, respectively. 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. At December 31, 2001, the Company owned 168.8 million shares of UMC
that are available-for-sale and recorded a gross unrealized gain of
approximately $99.4 million, net of taxes of approximately $40.1 million, as
part of accumulated other comprehensive income in the stockholders' equity
section of the balance sheet.
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
The Company accounts for its investment in Broadcom Corporation ("Broadcom") as
an available-for-sale marketable security in accordance with SFAS 115. In July
2001, the Company sold 125,000 shares of Broadcom common stock, 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 relating to 75,000 shares of Broadcom. 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 13). At December
31, 2001, the Company owned 75,000 shares of Broadcom and recorded a gross
unrealized gain of approximately $1.8 million, net of taxes of approximately
$737,000, as part of accumulated other comprehensive income in the stockholders'
equity section of the balance sheet.
In the December 2000 quarter, the Company sold 100,000 shares of Broadcom
recording a gain of approximately $5.3 million. For the first nine months of
fiscal 2001, the Company has recorded approximately $21.9 million in realized
gain on the sale of 250,891 shares of Broadcom stock.
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
The Company accounts for its investment in Vitesse Semiconductor Corporation
("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 13). At December 31, 2001, the
Company owned in total 728,293 shares of Vitesse and recorded a gross unrealized
gain of approximately $1.2 million, net of taxes
-6-
of approximately $481,000, as part of accumulated other comprehensive income in
the stockholders' equity section of the balance sheet.
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 years
2002 and 2001. Thus, there can be no assurance that the Company's investment in
Vitesse will increase in value or even maintain its value.
Note 7. Investment in PMC-Sierra Corporation
The Company records its investment in PMC-Sierra Corporation ("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. In
the second fiscal quarter of 2002, the Company wrote down its investment in PMC
recognizing a non-operating pre-tax loss of approximately $1.0 million. At
December 31, 2001, the Company owns 68,152 shares of PMC common stock and
recorded a gross unrealized gain of approximately $845,000, net of taxes of
approximately $288,000, as part of accumulated other comprehensive income in the
stockholders' equity section of the balance sheet.
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 years 2002 and
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 1,540,961 shares of Adaptec common stock and $15.9 million
in cash, of which $4.5 million is held in an escrow account and is classified on
the balance sheet as an other current asset, and recorded a pre-tax,
non-operating gain of approximately $28.6 million.
In the third fiscal quarter of fiscal 2002, the Company sold 100,000 shares of
Adaptec recording a non-operating pre-tax gain of approximately $403,000.
In December 2001, the Company entered into a derivative contract with a
brokerage firm and received aggregate cash proceeds of approximately $5.0
million. The Contract has repayment provisions that incorporate a collar
arrangement with respect to 362,173 shares of Adaptec common stock. The Company
accounts for its derivative contract as a derivative instrument in accordance
with SFAS 133 (see Note 13).
At December 31, 2001, the Company owns 1,440,961 shares of Adaptec and recorded
a gross unrealized gain of approximately $6.1 million, net of tax of
approximately $2.5 million, as part of accumulated other comprehensive income 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 years
2002 and 2001. Thus, there can be no assurance that the Company's investment in
Adaptec will increase in value or even maintain its value.
-7-
Note 9. Investment in Magma Design Automation
In December 1999, the Company, through its venture arm Alliance Venture
Management, LLC, made an investment in Magma Design Automation ("Magma"). On
November 20, 2001, Magma successfully completed its initial public offering
(Nasdaq: "LAVA"). In the third quarter of fiscal 2002, in connection with the
offering, the Company recorded a gross unrealized gain of approximately $1.8
million, net of tax of approximately $733,000, after distribution of the
management fee to Alliance Venture Management LLC, based on the IPO price of
$18.36 per share. The Company accounts for its investment in Magma as an
available-for-sale marketable security in accordance with SFAS 115. At December
31, 2001, the Company had recorded a gross unrealized gain of approximately $5.9
million, net of tax of approximately $2.4 million, as part of accumulated other
comprehensive income in the stockholders' equity section of the balance sheet.
Magma'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 Magma's and the Company's, sometimes move as a
group, it is likely that Magma's stock and the Company's stock can both suffer
significant loss in value at the same time. Thus, there can be no assurance that
the Company's investment in Magma will increase in value or even maintain its
value.
Note 10. Alliance Venture Management, LLC
In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee out of the net profits of
the investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds, by allowing them limited participation in the profits of the
various investment funds, through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Venture Management acts as the general
partner of these partnerships and receives a management fee of 15% of the
profits from these partnerships for its managerial efforts.
At the inception of Alliance Venture Management in November 1999, series A
member units and series B member units in Alliance Venture Management were
created. The unit holders of series A units and series B units receive
management fees of 15% of investment gains realized by Alliance Ventures I and
Alliance Ventures II, respectively. In February 2000, upon the creation of
Alliance Ventures III, LP ("Alliance Ventures III"), the management agreement
for Alliance Venture Management was amended to create series C member units
which are entitled to receive a management fee of 16% of investment gains
realized by Alliance Ventures III. In January 2001, upon the creation of
Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures V, LP
("Alliance Ventures V"), the management agreement for Alliance Venture
Management was amended to create series D and E member units which are entitled
to receive a management fee of 15% of investment gains realized by Alliance
Ventures IV and Alliance Ventures V, respectively.
Each of the owners of the series A, B, C, D and E member units paid the initial
carrying value for their shares of the member units. While the Company owns 100%
of the common units in Alliance Venture Management, it does not hold any series
A, B, C, D or E member units and does not participate in the management fees
generated by the management of the investment funds. Several of the Company's
senior management hold the majority of the series A, B, C, D or E member units
of Alliance Venture Management.
As of December 31, 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 December 31, 2001, Alliance Ventures III,
whose focus is investing in emerging companies in the networking and
communication market areas, has invested $39.3 million in 14 companies, with a
total fund allocation of $100.0 million. As of December 31, 2001, Alliance
Ventures IV, whose focus is investing in emerging companies in the semiconductor
market areas, has
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invested $14.2 million in four companies, with a total fund allocation of $40.0
million. As of December 31, 2001, Alliance Ventures V, whose focus is investing
in emerging companies in the networking and communication market areas, has
invested $14.2 million in eight companies, with a total fund allocation of $60.0
million. The Company accounts for its investments in Alliance Ventures I, II,
III, IV and V under the consolidation method.
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 December 31, 2000 and 2001,
respectively, the total equity in the loss of equity investees was approximately
$1.9 million and $1.6 million, net of tax. For the nine months ended December
31, 2000 and 2001, the total equity in the loss of investees was approximately
$3.6 million and $6.3 million, net of tax, respectively. In the first, second
and third quarters of fiscal 2002, the Company wrote down Alliance Ventures
investments and recognized a pre-tax, non-operating loss of approximately $4.5
million, $2.0 million, and $1.0 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 11. Investment in Solar Venture Partners, LP
Through December 31, 2001, the Company has invested $12.5 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.
Due to the Company's majority interest in Solar, the Company accounts for Solar
under the consolidation method. Some of the investments Solar has made 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. In the third quarter of
fiscal 2002, the Company recorded an equity in the loss of investees of
approximately $743,000 and wrote down certain Solar investments by $750,000.
Certain of the Company's directors and officers are the general partners of
Solar and run the day-to-day operations. Furthermore, 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 I, II, III, IV, and V.
Note 12. 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 $75.0 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 certain events relating to
Tower's construction of FAB 2 as specified in the agreement between the Company
and
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Tower. These additional shares are expected to be purchased by the Company
during fiscal 2002 and 2003. The Company accounts for its investment in Tower
under the cost method. At September 30, 2001, due to an "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.
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. 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 December 31, 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.
Note 13. Derivative Instruments and Hedging Activities
The Company has investments in the common stock of Vitesse, Broadcom and Adaptec
(see Notes 5, 6 and 8 above). The Company's investments expose it to a risk
related to the effects of changes in the price of Vitesse, Broadcom and Adaptec
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, and forward sales 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 an asset, the counterparty owes the Company, which
creates repayment risk for the Company. When the fair value of a derivative
contract is a liability, 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.
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.
-10-
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 purchase put option to sell
75,000 shares at a price of $36.72 through August 2002.
In December 2001, the Company entered into a derivative contract with a
brokerage firm and received aggregate cash proceeds of $5.0 million. The
contract has repayment provisions that incorporate a collar arrangement with
respect to 362,173 shares of Adaptec common stock. The Company has to deliver a
certain number of Adaptec shares in June 2003, the maturity date of the
contract. The number of Adaptec shares to be delivered is determined by a
formula in the contract based upon the market price of the Adaptec shares on the
settlement date. Under the contract, if the stock price of Adaptec is outside of
the collar (the floor of which is $16.26 and the ceiling of which is $21.99),
the number of Adaptec shares to be delivered equals 362,173. If the stock price
of Adaptec is within the collar, the Company will have to deliver that number of
Adaptec shares having total value equal to $5.9 million.
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
transition 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 December 2001 quarter, the Company recorded a loss
of $5.5 million relating to the Vitesse hedged instrument, offset by a gain of
$2.5 million on the Vitesse investments. The Company recognized a loss of $1.2
million for the Broadcom hedged instrument offset by a gain of $1.2 million, on
the Broadcom investment. The Company also recorded a gain of $162,000 relating
to the Adaptec derivative contract and a loss of $405,000 on the Adaptec
investments.
Note 14. 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, bearing
interest at a rate of 5.0% per annum. The outstanding balance on the loan at
December 31, 2001, was approximately $16.1 million.
During the first quarter of fiscal 2002, the Company entered into a secured loan
agreement with Citibank, N.A. to borrow up to $60.0 million. The loan matured on
November 19, 2001 and incurred interest at LIBO Rate plus 1%. The borrowings
under the loan were secured by approximately 181.7 million shares of UMC common
stock held by the Company. On November 16, 2001, the Company paid off its loan
in full with Citibank for an aggregate sum of $17.3 million.
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. The outstanding balance on the
loan approximated $14.4 million at December 31, 2001.
-11-
In the third quarter of fiscal 2002, the Company entered into a secured loan
agreement with Chinatrust Commercial Bank, Ltd, to borrow up to $46.0 million.
The loan is secured by UMC stock with the aggregate value at least 250% of the
outstanding loan balance. The loan bears interest at LIBOR plus 2.5% and matures
on December 7, 2002. The loan requires compliance with certain restrictive
covenants with which the Company was in compliance at December 31, 2001. The
outstanding balance on the Chinatrust loan approximated $30.2 million at
December 31, 2001.
Note 15. Comprehensive Income
The following are the components of comprehensive income:
Three months ended Nine months ended
December 31, December 31,
------------------- -----------------------
2001 2000 2001 2000
--------- --------- ----------- -----------
Net income (loss) ($11,019) $10,949 ($222,446) $60,682
Unrealized gain 80,845 (130,673) 78,741 (303,942)
(loss) on
marketable
securities, net of
deferred taxes of
$53,495 and $52,075
for the three and
nine months ended
December 31, 2001
and ($89,686) and
($208,608) for the
three and nine
months ended
December 31, 2000
--------- --------- ----------- -----------
Comprehensive income $69,826 ($119,724) ($143,705) ($243,260)
(loss)
========= ========= =========== ===========
Note 16. 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 ended Nine months ended
December 31, December 31,
-------------------- -------------------
2001 2000 2001 2000
---------- -------- --------- --------
Net income (loss) ($11,019) $10,949 ($222,446) $60,682
========== ======== ========= ========
Weighted average shares 41,311 41,296 41,005 41,380
outstanding
Effect of dilutive employee - 925 - 1,131
stock options
---------- -------- --------- --------
Average shares outstanding 41,311 42,221 41,005 42,511
assuming dilution
========== ======== ========= ========
Net income (loss) per share:
Basic ($0.27) $0.27 ($5.42) $1.47
========== ======== ========= ========
Diluted ($0.27) $0.26 ($5.42) $1.43
========== ======== ========= ========
The following are not included in the above calculation, as they were considered
anti-dilutive:
Three months ended Nine months ended
December 31, December 31,
--------------------- -------------------
2001 2000 2001 2000
--------- ---------- --------- --------
Employee stock options 1,545 611 1,618 325
outstanding
========= ========== ========= ========
-12-
Note 17. 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 No.
144 ("SFAS 144"), "Accounting for Impairment or Disposal of Long-Lived Assets,"
which supercedes Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" 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 18. 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 November 2001 Amstrad plc ("Amstrad") filed suit against the Company in
England in the amount of approximately $1.5 million. This claim is based on
allegations that a batch of 15,000 parts supplied by the Company, and which were
incorporated into Amstrad products, were defective. The Company has investigated
whether there are sufficient grounds to dispute the jurisdiction of the English
Court to hear this case. In November 2001, the Company had filed suit in the
California Superior Court for $45,000 owed for the parts sold to Amstrad that
were not paid for. In January 2002, the California Superior Court granted
Amstrad's motion to quash the Company's California action for lack of
jurisdiction. As a consequence, there are no grounds to dispute the jurisdiction
of the English Court to hear Amstrad's suit. The Company has prepared a detailed
defense to Amstrad's suit, which will be filed in February 2002. 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
-13-
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, 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. 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 balances remained unchanged at December 31, 2001.
In January 2002, the decision of the CIT was made final and the DOC revoked the
order and instructed the U.S. Customs Service to refund the Company's cash
deposits with interest.
Note 19. Subsequent Event
On January 17, 2002, the Company completed the acquisition of the assets of
PulseCore, Inc. ("PulseCore"), as previously announced in October 2001. The
acquisition cost was approximately $5 million payable in cash, with $115,000
paid at closing, and the remainder payable in March 2003. All of the employees
of PulseCore have accepted positions with the Company. PulseCore will operate as
the core of Alliance's new mixed signal division, specializing in high speed and
low power mixed signal design, and provide electromagnetic interference (EMI)
suppression integrated circuits to manufacturers of computer peripherals,
communication and digital consumer products.
-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 Magma Design Automation, 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 quarters ending
June 30, 2001 and September 29, 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 periods indicated, are
set forth in the table below.
Three months ended Nine months ended
December 31, December 31,
--------------------- ------------------
2001 2000 2001 2000
---------- --------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 174.0 66.6 216.1 64.0
---------- --------- -------- --------
Gross profit (loss) (74.0) 33.4 (116.1) 36.0
Operating expenses:
Research and development 32.2 4.9 30.7 5.8
Selling, general and 56.4 7.5 51.0 8.3
administrative
---------- --------- -------- --------
Total operating expenses 88.6 12.4 81.7 14.1
---------- --------- -------- --------
Income (loss) from operations (162.6) 21.0 (197.8) 21.9
Gain (loss) on investments 3.5 8.2 (32.3) 37.7
Write-down of marketable
securities and other investments (27.6) - (1,261.8) -
Other income (expense), net (24.1) (0.3) (15.3) 0.3
---------- --------- -------- --------
Income (loss) before income (209.2) 28.9 (1,507.2) 59.9
taxes, equity in loss of
investees and cumulative
effect of change in
accounting principle
Provision (benefit) for income (73.0) 8.9 (582.7) 23.3
taxes
---------- --------- -------- --------
Income (loss) before equity in (136.3) 20.0 (924.5) 36.6
loss of investees and
cumulative effect of change
in accounting principle
Equity in loss of investees (37.4) 2.9) (29.8) (2.1)
---------- --------- -------- --------
Income (loss) before cumulative
effect of change in (173.7) 17.1 (954.3) 34.5
accounting principle
Cumulative effect of changes in - - 8.7 -
accounting principle
---------- --------- -------- --------
Net income (loss) (173.7)% 17.1% (945.6)% 34.5%
========== ========= ======== ========
Net revenues decreased by 90% to $6.3 million for the three months ended
December 31, 2001 from $63.8 million for the similar period in 2000 but
increased $1.2 million or approximately 24% over the September 2001 quarter. The
decrease in revenue from the December 2000 quarter was the result of inventory
reduction efforts by our customers and a slowdown in demand that started in the
September 30, 2000 quarter. The increase in net revenue over the September 2001
quarter was the result of a 63% increase in unit shipments offset in part by a
24% decrease in average selling prices ("ASP").
Revenues from the Company's DRAM products contributed approximately 45% of the
Company's net revenues for the December 2001 quarter and approximately 57% of
the Company's net revenues for the December 2000 quarter. The DRAM revenues
decreased by approximately 92% to $2.9 million in the December 2001 quarter from
$36.6 million for the December 2000 quarter but increased $367,000 or
approximately 45% over the September 2001 quarter. The decrease in revenue for
DRAMs from the December 2000 quarter was the result of inventory reduction
efforts by our customers and a slowdown in demand. The increase in net revenues
over the September 2001 quarter was attributed to an increase in unit shipments
of approximately 45% offset in part by a decrease in ASPs by approximately 22%.
Revenues from the Company's SRAM products contributed approximately 54% of the
Company's net revenues for the December 2001 quarter and approximately 42% of
the Company's net revenues for the December 2000 quarter. The SRAM revenues
decreased by approximately 87% to $3.4 million in the December 2001 quarter from
$27.1 million for the December 2000 quarter but increased $835,000 or
approximately 33% over the September 2001 quarter. The decrease in revenue for
SRAMs from the December 2000 quarter was the result of inventory reduction
efforts by our customers and a slowdown in demand. The increase in net revenues
over the
-16-
September 2001 quarter was attributed to an increase in unit shipments of
approximately 89% offset in part by a decrease in ASPs by approximately 30%.
In the December 2001 quarter, sales to the computing market segment and non-PC
market segment (i.e. communication, networking and consumer) accounted for
approximately 32% and 68% of total sales. Whereas in the December 2000 quarter,
approximately 10% of the Company's sales were in the computing market segment
and 90% in the non-PC market segments.
In the December 2001 quarter, sales by geographic areas were 33%, 38% and 29%
for U.S., Asia and Europe, respectively. Whereas during the December 2000
quarter, U.S., Asia and Europe accounted for 37%, 42% and 21%, respectively.
No customers accounted for net revenues greater than 10% in the December 2001 or
December 2000 quarter.
Net revenues for the nine-months ended December 31, 2001 decreased by 87% to
$23.5 million from $175.7 million during nine-months ended December 31, 2000.
The revenue decrease during the nine months ended December 31, 2001 compared to
the nine months ended December 31, 2000, was primarily due to significant
decreases in unit volumes and ASPs.
Revenues from the Company's SRAM products during the nine-months ending December
31, 2001 accounted for approximately $12.5 million or 53% of the total net
revenues, with DRAMs accounting for approximately $10.8 million or 46%. This
compares to SRAM products sales during the nine-months ending December 31, 2000
of approximately $74.2 million or 42% of the total revenues, with DRAMs
accounting for approximately $101.1 million or 58%.
For the nine-months ended December 31, 2001, sales to the computing market
segment accounted for approximately 27% of total sales, with 73% attributable to
sales in the communication, networking and consumer markets whereas during the
nine months ended December 31, 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 nine months ending December 31, 2001,
was 31% in U.S., 38% in Asia, and 31% in Europe, whereas during the nine months
ending December 31, 2000, U.S., Asia, and European sales accounted for
approximately 37%, 45% and 18%, respectively, of net revenues.
The largest customer accounted for approximately 4.6% of the Company's net
revenues during the first nine months ended December 31, 2001, whereas the
largest customer for the first nine months ended December 31, 2000, accounted
for approximately 6.4%.
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 December 2001 quarter was $4.7 million, or 74% of net
revenues compared to a gross profit of $21.3 million or 33% for the December
2000 quarter. The decrease in gross profits was primarily related to a 73%
decrease in unit shipments and a 63% reduction in the ASPs, which was driven by
the weak market demand. During the December 31, 2001 quarter, the Company took a
$1.0 million write-down of its inventory due to scrapping of certain wafers. The
inventory write-down accounted for 16% of the 74% gross loss reported in the
December 2001 quarter. The gross loss for December 2001 quarter compared to the
September 2001 quarter was $12.8 million less. This was due to the Company
taking a $10.4 million inventory write-off in the September 2001 as well as the
December quarter units shipments increasing 63% despite the ASP decreasing by
24%.
-17-
The gross loss was approximately $27.3 million, or 116% of the net revenues, for
the first nine months ended December 31, 2001. This compares to a gross profit
of approximately $63.3 million or 36% of net revenues for the nine months ending
December 31, 2000. The Company took an approximate $17.4 million inventory write
down as a result of the weak market demand as well as the erosion of its ASPs
for the nine months ended December 31, 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 $2.0 million, or 32% of net revenue in
the December 2001 quarter, compared to $3.1 million, or 5% of net revenue, for
the December 2000 quarter. In absolute dollars, these expenses decreased
approximately $1.1 million or 34% from the December 2000 quarter. Research and
development expenses in the first nine months ending December 31, 2001, were
$7.2 million, or 31% of net revenues compared to $10.2 million, or 6% for the
first nine months ending December 31, 2000. The reduction in expenses for the
December 2001 quarter as compared to the December 2000 quarter, as well as
during the nine months ending December 31, 2001 versus the first nine months
ending December 31, 2000, was due to a decrease in mask and tooling costs.
During the December 2001 quarter and the first nine months ended December 31,
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 $3.6 million, or 56% of net
revenue in the December 2001 quarter compared to $4.8 million, or 8% of net
revenue in the December 2000 quarter. In absolute dollars, these expenses
decreased approximately $1.2 million or 25% from the December 2000 quarter. For
the nine months ending December 31, 2001, expenses were $12.0 million, or 51%,
compared to $14.6 million, or 8%, for the nine months ending December 31, 2000.
The decrease in selling, general and administrative expenses for the December
2001 quarter versus December 2000 quarter, as well as during the nine months
ended December 31, 2001, versus the nine months ended December 31, 2000, was
primarily the result of decreased sales commissions due to the decrease in
revenues, as well as decreased headcount and personnel related costs.
-18-
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.
Gain (Loss) on Investments
In the quarter ended December 31, 2001, the Company recorded a $219,000 gain on
its investments. The net gain consisted of a gain of $3.4 million relating to
sales of investments and $3.3 million gain on hedged investments offset by $6.5
million loss on derivative instruments.
For the nine months ended December 31, 2001, the Company has recorded $7.6
million in losses from its investments. Transactions relating to the Company's
Platys holdings being bought out by Adaptec has resulted in a gain of
approximately $28.6 million. The Company sold 100,000 shares of Adaptec
recording a non-operating pre-tax gain of approximately $403,000. In addition,
the Company recognized a gain of $162,000 on the Adaptec hedge instrument and a
loss of $405,000 on the Adaptec investment. The Company sold 125,000 shares of
Broadcom in the second quarter of fiscal 2002, resulting in a pre-tax gain of
approximately $1.6 million. For the nine months ended December 2001, the Company
recognized a loss of approximately $770,000 on its Broadcom investment and a
gain of approximately $172,000 on the Broadcom hedge instrument. The Company
recorded a loss on the sales of UMC stock of approximately $34.8 million. The
Company also recored a loss of approximately $5.4 million on its Vitesse
investment, and an offseting gain of $2.9 on the Vitesse hedge instrument.
In the December 2000 quarter, the Company recognized a gain on investments of
approximately $5.3 million as a result of selling 100,000 shares of the
Company's Broadcom Corporation marketable securities. In the first nine months
of fiscal 2001, the Company sold 236,631 shares of Broadcom, recording a gain of
approximately $21.9 million, sold 500,000 shares of Chartered reporting a gain
of $33.5 million and reported a gain of approximately $11.0 million as a result
of the PMC acquisition of Malleable. The Company received 68,152 shares of PMC,
after the distribution of the management fee to Alliance Venture Management, in
connection with the Malleable acquisition.
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 $1.4 million in the December 2001 quarter
compared to Other Income, net of approximately $200,000 in the December 2000
quarter. This increase in expense was attributed to higher interest on
outstanding loans. For the nine months ended December 31, 2001, Other expense,
net was approximately $3.6 million as compared to Other Income, net of
approximately $473,000 for the nine months ended December 31, 2000.
Write-Down of Marketable Securities and Other Investments
At the end of the December 2001 quarter, the Company wrote off three of its
investments managed by Alliance Venture Management and Solar resulting in a
pre-tax loss of approximately $1.8 million.
During the first six months of fiscal year 2002, marketable securities held by
the Company 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 who 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 at September 30,
2001.
-19-
At the end of the June 2001 quarter, the Company wrote down one of its
investments managed by Alliance Ventures Management LLC, 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 Alliance Ventures
investment and recognized a pre-tax, non-operating loss of approximately $2.0
million. At the end of the December 2001 quarter, the Company wrote down an
Alliance Ventures investment for $1.0 million and two Solar investments for a
total of $750,000. These write-downs are recorded in the Write-down of
Marketable Securities and other investments.
Provision for Income Taxes
Income tax benefits for the three and nine months ended December 31, 2001 were
approximately $4.6 million and $137.1 million, respectively, 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 December 2000 quarter was approximately $5.7 million
and $41.0 million for the nine months ended, December 31, 2000, for an overall
effective tax rate of 38.7%.
Equity in Loss of Investees
Several of the Alliance Venture and Solar 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 December 31, 2001 and 2000,
respectively, the total equity in the loss of investees was approximately $2.4
million and $1.9 million, net of tax. For the nine months ended December 31,
2001 and 2000, the total equity in the loss of investees was approximately $7.0
million and $3.6 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 (herein referred to as "SFAS 133"), on April 1, 2001. In the fourth quarter
of fiscal 2001, the Company entered into two derivative instruments, to hedge
its investment in Vitesse Semiconductor common stock (see Note 13). The Company
has designated these 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 in the
quarter ended 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 Statement of Financial Accounting Standards ("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
-20-
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 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 three quarters of fiscal
2002 and during fiscal years 2001, 1999, 1998 and 1997. Historically, average
selling prices for semiconductor memory products have declined. The Company is
hopeful that average-selling prices may increase over the next several quarters
based on the customer demand and availability of certain products the Company
sells. 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 may also adversely affect the Company's gross margins unless the
Company is able to significantly reduce its cost per unit in an amount to offset
the declines in average selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes of existing products,
develop, introduce and sell new products or significantly reduce its cost per
unit. There also can be no assurance that even if the Company were to increase
unit sales volumes and sufficiently reduce its costs per unit, the Company would
be able to maintain or increase revenues or gross margins.
The Company usually ships more 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
-21-
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 three 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 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.
-22-
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 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.
-23-
Liquidity and Capital Resources
At December 31, 2001, the Company had approximately $6.4 million in cash and
cash equivalents, an increase of approximately $306,000 from March 31, 2001 and
approximately $246.2 million in working capital, a decrease of approximately
$43.5 million from $289.7 million at March 31, 2001.
Additionally, the Company had short-term investments in marketable securities
whose fair value at December 31, 2001 was approximately $320.3 million.
During the nine months ended December 31, 2001, operating activities used cash
of $66.9 million compared to $52.1 million used in the nine months of fiscal
2001. Cash utilized in operating activities in the first nine months of fiscal
2002 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.
Net cash provided by investing activities was $32.2 million during the nine
months ended December 31, 2001, as the result of proceeds from the sale of
marketable securities of $63.4 million, offset in part, by $19.3 million in
investments made by Alliance Ventures Funds, an investment made in Tower
Semiconductor of $11.0 million, and purchases of equipment of $913,000.
Investing activities provided cash in the amount of $23.8 million during the
first nine months ended December 31, 2000 as the result of the proceeds from the
sale of marketable securities of $81.1 million, offset in part, by $53.4 million
in investments made by Alliance Ventures and in Solar , and purchases of
equipment of $2.9 million.
Net cash provided by financing activities during the first nine months ended
December 31, 2001 was approximately $35.0 million. The increase in cash from
financing activities in the nine months ended December 31, 2001 was primarily
due to an increase in short-term borrowings of $43.5 million and in part by
proceeds from the sale of common stock through stock option exercises, of
approximately $1.1 million offset by the repurchase of the Company's stock of
approximately $7.7 million and capital lease payments of $687,000. During the
first quarter of fiscal 2002, the Company entered into a secured loan agreement
with Citibank, N.A. for up to $60.0 million. Under the terms of the loan
agreement, the loan matured on November 19, 2001. At December 31, 2001, the
Company had paid off its loan with Citibank. In the third quarter of fiscal
2002, the Company entered into a secured loan agreement with Chinatrust
Commercial Bank, Ltd, to borrow up to $46.0 million. The loan is secured by UMC
stock with the aggregate value at least 250% of the outstanding loan balance.
The loan bears interest at LIBOR plus 2.5% and matures on December 7, 2002. The
loan requires compliance with certain restrictive covenants with which the
Company was in compliance at December 31, 2001. The outstanding balance on the
Chinatrust loan approximated $30.2 million at December 31, 2001.
Net cash provided by financing activities during the first nine months ended
December 31, 2000 was the result of $16.0 million short-term borrowing, net
proceeds from the exercise of employee stock options of $1.5 million, offset by
the repurchase of 565,000 shares of the Company's common stock at a cost of
$10.3 million
The Company believes these sources of liquidity, and financing opportunities
available to it will be sufficient to meet its projected working capital and
other cash requirements for the foreseeable future. However, it is possible that
the Company may need to raise additional funds to fund its activities beyond the
next year or to consummate acquisitions of other businesses, products, wafer
capacity or technologies. The Company could raise such funds by selling some of
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 stockholders and the
Company, or at all. If the Company raises additional funds by issuing additional
equity, the ownership percentages of existing stockholders 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 , 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
-24-
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.
-25-
================================================================================
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.
In November 2001 Amstrad plc ("Amstrad") filed suit against the Company in
England in the amount of approximately $1.5 million. This claim is based on
allegations that a batch of 15,000 parts supplied by the Company, and which were
incorporated into Amstrad products, were defective. The Company has investigated
whether there are sufficient grounds to dispute the jurisdiction of the English
Court to hear this case. In November 2001, the Company had filed suit in the
California Superior Court for $45,000 owed for the parts sold to Amstrad that
were not paid for. In January 2002, the California Superior Court granted
Amstrad's motion to quash the Company's California action for lack of
jurisdiction. As a consequence, there are no grounds to dispute the jurisdiction
of the English Court to hear Amstrad's suit. The Company has prepared a detailed
defense to Amstrad's suit, which will be filed in February 2002. 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 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 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. 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 balances remained unchanged at December 31, 2001.
In January 2002, the decision of the CIT was made final and the DOC revoked the
order and instructed the U.S. Customs Service to refund the Company's cash
deposits with interest.
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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 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
-27-
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:
Exhibit
Number Document Description
- ---------------------------------------------------------------------------
10.46 Credit Agreement dated November 15, 2001, by and between Registrant
and Chinatrust Commercial Bank, Ltd.
10.47 Pledge Agreement dated November 15, 2001, by and between Registrant
and Chinatrust Commercial Bank, Ltd.
10.48 Amended and Restated Credit Agreement dated January 21,
2002, by and between Registrant and Chinatrust Commercial
Bank, Ltd.
10.49 Supplemental Pledge Agreement dated January 21, 2002, by and
between Registrant and Chinatrust Commercial Bank, Ltd.
10.50 Asset Purchase Agreement dated January 17, 2002 by and
between Registrant and PulseCore, Inc.
(b) No reports on Form 8-K were filed during quarter ended December 29,
2001.
-8-
================================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Alliance Semiconductor Corporation
February 12, 2002 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)
-29-