UNITED STATES 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 January 2, 1999 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 incorporation or organization) Identification No.) 3099 North First Street San Jose, California 95134-2006 (Address of principal executive offices) (Zip code) (408) 383-4900 (Registrant's telephone number, including area code) 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 . --- --- The number of shares outstanding of the registrant's Common Stock on February 10, 1999 was 41,528,518 shares. Page 1 of 26, including exhibits ALLIANCE SEMICONDUCTOR CORPORATION FORM 10-Q INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets December 31, 1998 and March 31, 1998 3 Consolidated Statements of Operations Three months and nine months ended December 31, 1998 and 1997 4 Consolidated Statements of Cash Flows Nine months ended December 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 23 Item 5. Other Information. 24 Item 6. Exhibits and Reports on Form 8-K. 25 SIGNATURES 26 2 Part I. FINANCIAL INFORMATION Item I. Consolidated Financial Statements. ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited, in thousands) December 31, March 31, 1998 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents (excluding restricted cash) $ 5,452 $ 3,010 Restricted cash and short term investments 5,525 6,512 Accounts receivable, net 6,711 15,716 Inventory 13,715 32,375 Deferred taxes -- 8,397 Income tax receivable 103 17,147 Other current assets 3,280 1,670 --------- --------- Total current assets 34,786 84,827 Property and equipment, net 10,366 11,123 Investment in Chartered Semiconductor 51,596 51,596 Investment in United Semiconductor Corporation ("USC") 79,397 85,935 Investment in United Silicon, Inc. 16,799 13,701 Other assets 1,368 1,083 --------- --------- Total assets $ 194,312 $ 248,265 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,987 $ 35,714 Accrued liabilities 5,610 7,771 Current portion of long term obligations 1,070 1,463 --------- --------- Total current liabilities 12,667 44,948 Long term obligations 462 1,276 --------- --------- Total liabilities 13,129 46,224 --------- --------- Stockholders' equity Common stock 415 404 Additional paid-in capital 184,831 183,099 Retained earnings (4,063) 18,538 --------- --------- Total stockholders' equity 181,183 202,041 --------- --------- $ 194,312 $ 248,265 ========= ========= See accompanying notes to consolidated financial statements. 3 ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended December 31 December 31 -------------------------- --------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net revenue $ 13,282 $ 24,768 $ 33,904 $ 90,105 Cost of revenue 10,864 26,336 51,899 87,644 -------- -------- -------- -------- Gross profit (loss) 2,418 (1,568) (17,995) 2,461 -------- -------- -------- -------- Operating expenses: Research and development 3,285 3,276 11,012 10,941 Selling, general and administrative 2,863 4,875 9,671 13,815 -------- -------- -------- -------- Total operating expenses 6,148 8,151 20,683 24,756 -------- -------- -------- -------- Loss from operations (3,730) (9,719) (38,678) (22,295) Other income, net (387) 171 15,173 414 -------- -------- -------- -------- Loss before income taxes and equity in income of USC (4,117) (9,548) (23,505) (21,881) Provision (benefit) for income taxes -- (3,342) 8,397 (7,658) -------- -------- -------- -------- Loss before equity in income of USC (4,117) (6,206) (31,902) (14,223) Equity in income of USC 2,064 3,833 9,301 8,407 -------- -------- -------- -------- Net Loss ($ 2,053) ($ 2,373) ($22,601) ($ 5,816) ======== ======== ======== ======== Basic and diluted net loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15) ======== ======== ======== ======== Basic and diluted weighted average number of common shares 41,512 39,439 41,315 39,204 ======== ======== ======== ======== <FN> See accompanying notes to consolidated financial statements. </FN> 4 ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended December 31, --------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net loss ($22,601) ($ 5,816) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,823 2,595 Equity in income of USC (9,301) (8,407) Gain on sale of USC shares (15,823) -- Changes in assets and liabilities: Accounts receivable 9,005 4,189 Inventory 18,660 (1,187) Other assets (198) (2,531) Accounts payable (29,727) 8,547 Accrued liabilities (2,161) 3,200 Deferred income taxes and tax receivable 25,441 10,010 -------- -------- Net cash provided by (used in) operating activities (23,882) 10,600 -------- -------- Cash provided by (used in) investing activities: Acquisition of equipment (2,066) (2,687) Proceeds from sale of (investment in) USC shares 31,662 (17,631) Investment in United Silicon, Inc. (3,098) -- -------- -------- Net cash provided by (used in) investing activities 26,498 (20,318) -------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock 46 1,923 Repayments of long term obligations (1,207) (645) Restricted cash 987 (734) -------- -------- Net cash provided by (used in) financing activities (174) 544 -------- -------- Net increase (decrease) in cash and cash equivalents 2,442 (9,174) Cash and cash equivalents at beginning of the period 3,010 17,368 -------- -------- Cash and cash equivalents at end of the period $ 5,452 $ 8,194 ======== ======== <FN> See accompanying notes to consolidated financial statements. </FN> 5 ALLIANCE SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by Alliance Semiconductor Corporation (the "Company") in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, necessary to present fairly the consolidated financial position of the Company and its subsidiaries, and their consolidated results of operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended March 31, 1998 and 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 26, 1998. For purposes of presentation, the Company has indicated the first nine months of fiscal 1999 and 1998 as ending on December 31, respectively; whereas, in fact, the Company's fiscal quarters ended on January 2, 1999 and December 27, 1997, respectively. The financial results for the third quarter of fiscal 1999 were reported on a 14-week quarter compared to a 13-week quarter for the third quarter of fiscal 1998. The results of operations for the three and nine months ended December 31, 1998, are not necessarily indicative of the results that may be expected for the year ending March 31, 1999, and the Company makes no representations related thereto. Note 2. Balance Sheet Components December 31, March 31, 1998 1998 ------- ------- Inventory: (in thousands) Work in process $ 6,510 $17,564 Finished goods 7,205 14,811 ------- ------- $13,715 $32,375 ======= ======= Note 3. Inventory Charges and Valuation Allowance During the third quarter of fiscal 1999, the Company continued to experience a deterioration in the average selling prices for certain products and a slowing in demand for certain products, compared to the third quarter of fiscal 1998. As a result of these factors, in the third quarter of fiscal 1999, the Company recorded a pre-tax charge of approximately $0.6 million primarily to reflect a further decline in market value of certain inventory and to provide additional reserves for obsolete and excess inventory. This compares to a pre-tax inventory valuation charge of $6 million for the same period of fiscal 1998. During the first and second quarters of fiscal 1999, the Company continued to experience a deterioration in the average selling prices for certain products and a slowing in demand for certain products. As a result of these factors, in the first and second quarters of fiscal 1999 respectively, the Company recorded pre-tax charges of approximately $17.0 million and $2.9 million primarily to reflect further declines in market value of the Company's inventory and to provide additional reserves for obsolete and excess inventory. Such charges were $6 million for the second quarter of fiscal 1998(no such charges for the first quarter of fiscal 1998). The Company is unable to predict when or if such decline in prices will stabilize. A continued decline in 6 average selling prices for its products could result in additional material inventory valuation adjustments and corresponding charges to operations. During the first quarter of fiscal 1999, the Company also recorded a valuation allowance of $8.4 million with respect to the Company's previously recorded deferred tax asset. The Company also did not recognize a deferred tax asset (which would have been $2.8 million) with respect to the first fiscal quarter's loss. Note 4. Investments In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. The Company paid approximately 1 billion New Taiwan Dollars ("NTD") (approximately US$36.4 million) in September 1995, approximately NTD 450 million (approximately US$16.4 million) in July 1996, and approximately NTD 492 million (approximately US$17.6 million) in July 1997. After the last of these payments, the Company owned approximately 190 million shares of USC, or approximately 19% of the outstanding shares. In April 1998, the Company sold 35 million shares of USC to an affiliate of UMC and received approximately US$31.7 million. In connection with the sale of 35 million shares of USC, the Company additionally has the right to receive up to another 665 million NTD (approximately US$20.4 million at the exchange rate prevailing on January 2, 1999, which rate is subject to material change) upon the occurrence of certain potential future events. After the April 1998 sale, the Company owned approximately 15.5% of the outstanding shares of USC, and has the right to purchase up to approximately 25% of the manufacturing capacity in this facility. In October 1998, USC issued 46 million shares to the Company by way of dividend distribution. As a result of this distribution, the Company owns approximately 15.1% of the outstanding shares. To the extent USC experiences operating income or losses, and the Company maintains its current ownership percentage of outstanding shares, the Company will recognize its proportionate share of such income or losses. During the first nine months of fiscal 1999, the Company recorded $9.3 million of equity in income of USC, as compared to $8.4 million recorded during the first nine months of fiscal 1998. In February 1995, the Company agreed to purchase shares of Chartered Semiconductor ("Chartered") for approximately US$10 million and entered into a manufacturing agreement under which Chartered will provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2." In April 1995, the Company agreed to purchase additional shares in Chartered, bringing the total agreed investment in Chartered to approximately US$51.6 million and Chartered agreed to provide an increased minimum number of wafers to be provided by Chartered from Fab2. The Company has paid all installments to Chartered. Chartered is a private company based in Singapore that is controlled by entities affiliated with the Singapore government. The Company owns approximately 2.1% of the equity of Chartered. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon, Inc. ("USI"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. The facility has commenced volume production utilizing advanced sub-micron semiconductor manufacturing processes. The contributions of the Company and other parties shall be in the form of equity investments, representing an initial ownership interest of approximately 5% for each US$30 million invested. The Company had originally committed to an investment of approximately US$60 million or 10% ownership interest but subsequently requested that its level of participation be reduced by 50%. The first installment of approximately 50% of the revised investment was made in January 1996, and the Company had, but did not exercise, the option to pay a second installment of approximately 25% of the revised investment payable in December 1997. The Company made a third installment payment of approximately 106 million NTD (or approximately US$3.1 million) in July 1998. After the third installment, the Company owns approximately 2.96% of the 7 outstanding shares of USI and has the right to purchase approximately 3.70% of the manufacturing capacity of the facility. Note 5. Gain On Sale of USC Shares In April 1998, the Company sold 35 million shares of USC (representing approximately 18% of the Company's interest in USC) to an affiliate of UMC for net proceeds of $31.7 million, plus the right to receive a contingent payment of up to 665 million NTD (approximately US$20.4 million at the exchange rate prevailing on January 2, 1999, which rate is subject to material change) upon the occurrence of certain potential future events. The net gain on the sale, after deducting the cost basis plus a share of the equity in income of those shares disposed, was $15.8 million. Note 6. Purchase Order Commitments At December 31, 1998, the Company had approximately $4.3 million of noncancelable purchase commitments with suppliers. The Company expects to sell all products which it has committed to purchase from suppliers. Note 7. Letters of Credit As of December 31, 1998, $5.5 million of standby letters of credit were outstanding and expire on or before December 1, 1999, secured by restricted cash and short term investments. Note 8. Net Loss Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during the third quarter of fiscal 1998. SFAS 128 requires presentation of both basic EPS and diluted EPS on the face of the income statement. Basic EPS, which replaces primary EPS, is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding during the period (denominator). Diluted EPS, which replaces fully diluted EPS, gives effect to all dilutive potential common shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. As required, the Company has applied the new standard to all periods presented. The computations for basic and diluted EPS are presented below (in thousands, except per share data): Three months ended Nine Months Ended December 31, December 31, 1998 1997 1998 1997 -------- -------- -------- -------- Net loss ($ 2,053) ($ 2,373) ($22,601) ($ 5,816) Shares calculation: Weighted average shares outstanding 41,512 39,439 41,315 39,204 Effect of dilutive employee stock options -- -- -- -- Average shares outstanding assuming dilution 41,512 39,439 41,315 39,204 ======== ======== ======== ======== Basic loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15) ======== ======== ======== ======== Diluted loss per share ($ 0.05) ($ 0.06) ($ 0.55) ($ 0.15) ======== ======== ======== ======== 8 The following are not included in the above calculation as they were considered anti-dilutive (in thousands, except option price data): Three months ended December 31, 1998 1997 ---- ---- Weighted employee stock options outstanding 2,336 3,121 Average exercise price $ 5.53 $ 4.34 Note 9. Legal Matters As previously reported, in March 1996, a putative class action lawsuit was filed against the Company and certain of its officers and directors and others in the United States District Court for the Northern District of California, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. (The complaint alleged that the Company, N.D. Reddy and C.N. Reddy also had liability under Section 20(a) of the Exchange Act.) The complaint, brought by an individual who claimed to have purchased 100 shares of the Company's common stock on November 2, 1995, was putatively brought on behalf of a class of persons who purchased the Company's common stock between July 11, 1995 and December 29, 1995. In April 1997, the Court dismissed the complaint, with leave to file an amended complaint. In June 1997, plaintiff filed an amended complaint against the Company and certain of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to dismiss the amended complaint. In March 1998, the court ruled in defendants' favor as to all claims but one, and dismissed all but one claim with prejudice. In April 1998, defendants requested reconsideration of the ruling as to the one claim not dismissed. In June 1998, the parties stipulated to dismiss the remaining claim without prejudice, on the condition that in the event the dismissal with prejudice of the other claims is affirmed in its entirety, such remaining claim shall be deemed dismissed with prejudice. In June 1998, the court entered judgment dismissing the case pursuant to the parties' stipulation. In July 1998, plaintiff filed a notice of appeal of the dismissal. In November 1998, the parties agreed to stay the filing of an appeal brief pending the decision of the Appellate Court in a case which might have bearing on this case. The Company intends to continue to defend vigorously against any claims asserted against it, and believes it has meritorious defenses. Due to the inherent uncertainty of litigation, the Company is not able to reasonably estimate the potential losses, if any, that may be incurred in relation to this litigation. In July 1998, a complaint naming the Company and twenty-five other semiconductor companies was filed in the United States District Court for the District of Arizona (captioned Lemelson Medical, Education & Research Foundation, Ltd. Partnership v. Intel Corp. et al., Civ. 98-1413 PHX PGR), alleging that each defendant manufactures or has manufactured on its behalf integrated circuits using manufacturing processes that violate sixteen patents owned by plaintiff. In January 1999, the Company reached a settlement and the case against the Company has been dismissed. In July 1998, the Company learned that a default judgment might soon be entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and Trit Tek 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. The plaintiffs may renew the writ and/or may appeal this judgment. 9 As previously reported, 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 static random access memories ("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 appealed the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. The Company cannot predict either the timing or the eventual results of the appeal. The Company may, in 1999, request a review of its sales of Taiwan-fabricated SRAMs from approximately October 1997 through March 1999 (the "Review Period"). If the Company makes such a request, the amount of antidumping duties, if any, owed on imports from October 1997 through March 1999 will remain undetermined until the conclusion of the review in early 2000. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. (In either case, the Company also would be responsible to pay antidumping duties in the amount of the revised margin with respect to its imports, between approximately October 1997 and March 1998, of SRAMs manufactured in Taiwan.) A material portion of the SRAMs designed and sold by the Company are fabricated in Taiwan, and the cash deposit requirement and possibility of assessment of antidumping duties could materially adversely affect the Company's ability to sell Taiwan-fabricated SRAMs in the United States and have a material adverse effect on the Company's operating results and financial condition. In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs") fabricated in Taiwan are being sold in the United States at less than fair value, and that the United States industry producing DRAMs is materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requests the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. A material portion of the DRAMs designed and sold by the Company are fabricated in Taiwan. The Company received preliminary producer and importer questionnaires from the ITC, and submitted responses to such questionnaires in November 1998. In December 1998, the ITC preliminarily determined that there is a reasonable indication that the imports of the products under investigation are injuring the United States industry. The Company received a questionnaire from the DOC, and responded to such questionnaire in accordance with the deadlines established by the DOC. The DOC is currently scheduled to complete its investigation by mid-1999. The Company vigorously is seeking, and intends to continue vigorously to seek, to ensure that dumping duties are not imposed on imports of its DRAM products fabricated in Taiwan. There can be no assurance, however, that antidumping duties will not be imposed on the Company's imports of Taiwan-fabricated DRAM products into the United States, which duties could materially adversely affect the Company's ability to sell such products in the United States. 10 Note 10. Maverick Networks Investment On January 25, 1999, the Company agreed to approve a proposed merger between Maverick Networks ("Maverick"), a startup company funded by the Company, Broadcom Corporation ("Broadcom") and a wholly-owned subsidiary of Broadcom. At the signing of the merger agreement, the Company owned approximately 28.4% of the total outstanding shares of Maverick. In February 1998, the Company entered into investment and technology license agreements with Maverick intended to assist Maverick in developing integrated semiconductors for multi-layer network switches. Broadcom is expected to issue 864,200 shares of its Class B Common Stock in exchange for all shares of Maverick's Preferred and Common Stock, including shares issuable upon exercise of employee stock options and other rights. The agreement has been approved by the Board of Directors of both companies and, according to Broadcom, is expected to close in approximately ninety (90) days. The transaction is subject to the approval of Maverick's shareholders and satisfaction of regulatory requirements and other closing conditions, and there can be no assurance that the Company will receive any shares of Broadcom stock in connection with its investment in Maverick. On January 25, 1999, the Company filed a Form 8-K regarding this matter. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. When used in this Report, the words "expects," anticipates," "believes," "approximates," "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, which include statements concerning the timing of new product introductions; the functionality and availability of products under development; trends in the personal computer, networking, telecommunications and instrumentation markets, in particular as they may affect demand for or pricing of the Company's products; the percentage of export sales and sales to strategic customers; the percentage of revenue by product line; and the availability and cost of products from the Company's suppliers; are subject to risks and uncertainties. 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 30, 1998 filed with the Securities and Exchange Commission on June 26, 1998. These risks and uncertainties, or the occurrence of other events, could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part. Results of Operations The following table sets forth, for the periods indicated, certain operating data as a percentage of net revenue: Three Months Ended Nine Months Ended December 31, December 31, 1998 1997 1998 1997 ----- ----- ----- ----- Net revenue 100.0% 100.0% 100.0% 100.0% Cost of revenue 81.8 106.3 153.1 97.3 ----- ----- ----- ----- Gross profit (loss) 18.2 (6.3) (53.1) 2.7 ----- ----- ----- ----- Operating expenses: Research and development 24.7 13.2 32.5 12.2 Selling, general and administrative 21.6 19.7 28.5 15.3 ----- ----- ----- ----- Total operating expenses 46.3 32.9 61.0 27.5 ----- ----- ----- ----- Loss from operations (28.1) (39.2) (114.1) (24.8) Other income, net (2.9) 0.7 44.8 0.5 ----- ----- ----- ----- Loss before income taxes and equity in income of United Semiconductor Corporation ("USC") (31.0) (38.5) (69.3) (24.3) Provision (benefit) for income taxes -- (13.5) 24.8 (8.5) ----- ----- ----- ----- Loss before equity in income of USC (31.0) (25.0) (94.1) (15.8) Equity in income of USC 15.5 15.5 27.4 9.3 ----- ----- ----- ----- Net loss (15.5)% (9.5)% (66.7)% (6.5)% ===== ===== ===== ===== 12 Net Revenues Third quarter of fiscal 1999(December 1998 quarter) compared to third quarter of fiscal 1998 (December 1997 quarter) Net revenues decreased by 46% to $13.3 million in the December 1998 quarter from $24.8 million in the December 1997 quarter. The decrease in revenues was mainly due to the decline in unit shipments of dynamic random access memory ("DRAM") and graphics products combined with a decline in the average selling prices of the Company's products. The Company experienced revenue decline of 66% in DRAM and 96% in graphics product lines for the December 1998 quarter compared to the December 1997 quarter. In July 1998, the Company decided to exit from the mainstream graphics accelerator business. The revenues for the December 1998 quarter include a $1.5 million adjustment related to the reversal of accruals established in prior periods to cover potential sales returns which are no longer required. One customer accounted for 44% of revenues for the December 1998 quarter. One customer accounted for 22% of revenues for the December 1997 quarter. The net revenues of $13.3 million for the third quarter of fiscal 1999 increased by 27% from the second quarter of fiscal 1999(September 1998 quarter). The increase was due to some improvement in the unit shipments and higher average selling prices for static random access memory ("SRAM") and DRAM and reversal of $1.5 million of reserves. Excluding the reversal of the adjustment the net revenue increase would have been 12%. Revenues from the Company's SRAM products contributed approximately 66% of the Company's net revenues for the December 1998 quarter and approximately 33% of the Company's net revenues for the December 1997 quarter. The net revenues increased by 7% to $8.8 million for the December 1998 quarter from $8.2 million for the December 1997 quarter. The net increase was due to an improvement in the average selling prices of some of the SRAM products partially offset by the drop in the unit shipments of SRAM products. Revenues from the Company's DRAM products contributed approximately 33% of the Company's net revenues for the December 1998 quarter and approximately 52% of the Company's net revenues for the December 1997 quarter. The net revenues decreased by 66% to $4.4 million for the December 1998 quarter from $13 million for the December 1997 quarter. The net decrease was due to a combination of lower average selling prices of some of the DRAM products and the drop in the unit shipments of DRAM products. Revenues from the Company's graphics products contributed approximately 1% of the Company's net revenues for the December 1998 quarter and approximately 14% of the Company's net revenues for the December 1997 quarter. The net decrease was due to a combination of significantly lower average selling prices of the graphics products and a drop in the unit shipments of graphics products. As mentioned above, in July, 1998, the Company decided to exit from the mainstream graphics accelerator business. Nine months of fiscal 1999(April to December 1998) compared to nine months of fiscal 1998 (April to December 1997) Net revenues decreased by 62% to $33.9 million for the nine months of fiscal 1999 from $90.1 million in the nine months of fiscal 1998. The decrease in revenues was mainly due to the decline in unit shipments of SRAM, DRAM and graphics products combined with a decline in the average selling prices of the Company's products. The Company experienced revenue decline of 20% in SRAM, 77% in DRAM and 94% in graphics product lines for the nine months of fiscal 1999 compared to the nine months of fiscal 1998. 13 Revenues from the Company's SRAM products contributed approximately 59% of the Company's net revenues for the nine months of fiscal 1999 and approximately 28% of the Company's net revenues for the nine months of fiscal 1998. The net revenues decreased by 20% to $20 million for the nine months of fiscal 1999 from $25.1 million for the nine months of fiscal 1998. The net decrease was due to a combination of lower average selling prices of some of the SRAM products and the drop in the unit shipments of SRAM products. To attempt to increase demand and average selling prices for the Company's SRAM products, the Company has added to its SRAM product offerings, including the announcement of its Intelliwatt line of SRAM products. The Company is unable to predict when or if such price and demand fluctuations will stabilize or if the introduction of new product offerings will offset future price and demand declines. Any future decline in average selling prices or unit demand could have a material adverse effect on the Company's operating results. Revenues from the Company's DRAM products contributed approximately 40% of the Company's net revenues for the nine months of fiscal 1999 and approximately 65% of the Company's net revenues for the nine months of fiscal 1998. The net revenues decreased by 77% to $13.5 million for the nine months of fiscal 1999 from $58.3 million for the nine months of fiscal 1998. The net decrease was due to a combination of lower average selling prices of some of the DRAM products and the drop in the unit shipments of DRAM products. The DRAM market is characterized by volatile supply and demand conditions, fluctuating pricing and rapid technology changes to higher density products. During the first nine months of fiscal 1999, average selling prices for the Company's DRAM products declined compared to same period of the prior year. The Company is unable to predict when or if such price declines will stabilize. A continued decline in average selling prices of DRAMs due to competitive conditions, including overall supply and demand in the market, could have a material adverse effect on the Company's operating results. Revenues from the Company's graphics products contributed approximately 1% of the Company's net revenues for the nine months of fiscal 1999 and approximately 7% of the Company's net revenues for the nine months of fiscal 1998. The net decrease was due to a combination of lower average selling prices of some of the graphics products and the drop in the unit shipments of graphics products. The graphics and video accelerator market is characterized by a large and growing number of competitors providing a steady stream of new products with enhanced features. In July 1998, the Company determined that it should exit the mainstream graphics accelerator business, and announced a workforce reduction of approximately 45 full-time positions, including substantially all of the Company's graphics personnel. 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. 14 Gross Profit (Loss) The Company experienced a gross profit of $2.4 million for the third quarter of fiscal 1999, or 18% of net revenues compared to a gross loss of $1.6 million, or (6%) of net revenues for the same period of fiscal 1998. The third quarter of fiscal 1999 included pre-tax inventory charge of $0.6 million compared to $6 million for the same period of fiscal 1998. The reversal of the $1.5 million reserve for estimated sales returns had a favorable impact on gross margin. In the absence of the reversal, the gross margin would have been 7% of net revenues. In the third quarter of fiscal 1999, the Company reported a positive gross profit for the first time since the first quarter of fiscal 1998. Gross loss was $18 million for the nine months of fiscal 1999, or (53%) of net revenues compared to gross profit of $2.5 million for the nine months of fiscal 1998. The decrease in gross profit for the nine months of fiscal 1999 primarily resulted from the $20.3 million pre-tax inventory charge taken in the first, second and third quarters together with the decline in the unit shipments and the average selling prices for the Company's DRAM, SRAM and graphics products due to competitive market conditions. Although a majority of the product unit costs were lower for the nine months of fiscal 1999 compared to the nine months of fiscal 1998, such reductions did not offset the decline in the average selling prices of the Company's products. The Company is unable to predict when or if such price declines will stabilize. A continued decline in average selling prices could result in material adverse impacts on the Company's gross margins. 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; and the timing of new product introductions and volume shipments. In addition, the Company may seek to add additional foundry suppliers and transfer existing and newly developed products to more advanced manufacturing processes. The commencement of manufacturing at a new foundry is often characterized by lower yields as the manufacturing process is refined. There can be no assurance that 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 were $3.3 million, or 25% of net revenue in the third quarter of fiscal 1999 compared to $3.3 million, or 13% of net revenue in the same period of the prior fiscal year. Research and development expenses were $11.0 million, or 33% of net revenue in the first nine months of fiscal 1999 compared to $10.9 million, or 12% of net revenue in the same period of the prior fiscal year. One percent increase in research and development expenses for the first nine months of fiscal 1999 was due to increased expenditures for materials utilized in the Company's development activities which are dependent on the timing of new product development and introduction, increased patent related legal expenses and increases in personnel related costs. This was partially offset by the reduction of the personnel and development activities of the graphics products. In July 1998, the Company announced its plan to exit from the graphics accelerator business. 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 were $2.9 million, or 22% of net revenue in the third quarter of fiscal 1999 compared to $4.9 million, or 20% of net revenue in the same period of the prior fiscal year. Selling, general and administrative expenses were $9.7 million, or 29% of net revenue in the first nine months of fiscal 1999 compared to $13.8 million, or 15% of net revenue in the same period of the prior fiscal year. The decrease in selling, general and administrative expenses was primarily the result of decreased sales commissions due to decreased revenue, offset in part by higher personnel-related costs. Selling, general and administrative expenses may increase in absolute dollars and may also increase as a percentage of net revenue in future periods. 15 Other Income, Net Net other income was ($0.4) million for the third quarter of fiscal 1999 compared to $0.2 million for the same period of fiscal 1998. Net other income was $15.2 million for the first nine months of fiscal 1999 compared to $0.4 million for the same period of fiscal 1998. Net other income for the first nine months of fiscal 1999 primarily represents the net gain of $15.8 million on the sale of shares of USC (as discussed in Note 5) and interest income from short-term investments, partially offset by an adjustment in carrying value of the Company's investments. Equity in Income of USC As discussed in the section below entitled "Liquidity and Capital Resources," the Company entered into an agreement with other parties to form a separate Taiwanese company, USC. This investment is accounted for under the equity method of accounting with a ninety-day lag in reporting the Company's share of results for the entity. Equity in income of USC reflects the Company's share of income earned by USC for the previous quarter. In the third quarter of fiscal 1999, the Company reported its share in the income of USC in the amount of $2.1 million, as compared to $3.8 million reported in the same quarter of fiscal 1998. The 44% decrease in income is primarily due to a drop in the ownership percentage from 18% to 15%, unfavorable foreign exchange rates used in translation, and a higher effective tax rate in 1999. Equity income from USC for the first nine months of fiscal 1999 was $9.3 million, or 11% higher as compared to $8.4 million reported for the same period last year. The increase was due primarily to increased operating profit, due to higher sales and higher gross margins, as well as higher net realized and unrealized foreign currency transaction gains related to U.S. dollar denominated accounts receivable and Japanese yen denominated liabilities. Factors That May Affect Future Results The Company's quarterly and annual operating results have historically been, and will continue to be, subject to quarterly and other fluctuations due to a variety of factors, including: general economic conditions; changes in pricing policies by the Company, its competitors or its suppliers; anticipated and unanticipated decreases in unit average selling prices of the Company's products; fluctuations in manufacturing yields, availability and cost of products from the Company's suppliers; the timing of new product announcements and introductions by the Company or its competitors; changes in the mix of products sold; the cyclical nature of the semiconductor industry; the gain or loss of significant customers; increased research and development expenses associated with new product introductions; market acceptance or lack thereof of new or enhanced versions of the Company's products; seasonal customer demand; access to wafer fabrication, wafer sort, assembly and test services; and the timing of significant orders. Operating results could also be adversely affected by such factors as economic conditions generally or in various geographic areas (such as Asian and Latin America), other conditions affecting the timing of customer orders and capital spending, a downturn in the markets for personal computers, networking, telecommunications or instrumentation products, or order cancellations or rescheduling. The markets for the Company's products are characterized by rapid technological change, evolving industry standards, rapid product obsolescence and significant price competition and, as a result, are subject to decreases in average selling prices. The Company has experienced significant deterioration in the average selling prices for its SRAM and DRAM products during the past three years. The Company is unable to predict when or if such decline in prices will stabilize. Average selling prices for DRAM products, in particular, continued to remain unstable through the third quarter of fiscal 1999. Historically, average selling prices for semiconductor memory products have declined and the Company expects that average selling prices will decline in the future. Accordingly, the Company's ability to maintain or increase 16 revenues will be highly dependent on its ability to increase unit sales volume of existing products and to successfully develop, introduce and sell new products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to reduce its cost per unit in an amount sufficient 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 reduce its cost per unit to offset declines in average selling prices. There also can be no assurance that even if the Company were to increase unit sales volumes and sufficiently reduce its costs per unit, the Company would be able to maintain or increase revenues or gross margins. The Company usually ships more product in the third month of each quarter than in either of the first two months of the quarter, with shipments in the third month higher at the end of the month. This pattern, which is common in the semiconductor industry, is likely to continue. The concentration of sales in the last month of the quarter may cause the Company's quarterly results of operations to be more difficult to predict. Moreover, a disruption in the Company's production or shipping near the end of a quarter could materially reduce the Company's net sales for that quarter. The Company's reliance on outside foundries and independent assembly and testing houses reduces the Company's ability to control, among other things, delivery schedules. The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as the Company has experienced from time to time. The Company's ability to maintain adequate levels of inventory is primarily dependent upon the Company obtaining sufficient supply of products to meet future demand, and any inability of the Company to maintain adequate inventory levels may adversely affect its relations with its customers. In addition, the Company must order products and build inventory substantially in advance of product shipments, and there is a risk that because demand for the Company's products is volatile and subject to rapid technology and price change, the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of the Company's key customers place orders with short lead times. The Company's customers' ability to reschedule or cancel orders without significant penalty could adversely affect the Company's liquidity, as the Company may be unable to adjust its purchases from its independent foundries to match such customer changes and cancellations. The Company has in the past produced excess quantities of certain products, which has had a material adverse effect on the Company's operating results. 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 operating results could be materially adversely affected, as was the case during the first, second and third quarters of fiscal 1999, when the Company recorded pre-tax charges of approximately $20 million, primarily to reflect a decline in market value of certain inventory and to allow for excess and obsolete reserves. The Company currently relies on independent and joint venture 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 fires, 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 United Microelectronics Corporation ("UMC") and various companies. UICC is located next to United Silicon, Inc. ("USI") and near USC and UMC in the Science-Based Industrial Park in Hsin-Chu, Taiwan. (The Company has products manufactured at UMC and USC, and owns equity stakes in USC and USI.) 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, USC or USI 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 17 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 operating results, 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 operating results. 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. Because the Company conducts most of its manufacturing operations in Asia, and receives a significant amount of its net revenues from sales to Asian customers, the foregoing risks are heightened in light of the recent financial and economic crisis in Asia. 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. Moreover, decreased global demand for the Company's products, and excess supply of competitive products, may lead to accelerated declines in the average selling prices of the Company's products. There can be no assurance that such factors will not adversely impact the Company's operating results in the future or require the Company to modify its current business practices. Additionally, other factors may materially adversely affect the Company's operating results. 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 operating results. The Company uses a number of computer software programs and operating systems and intelligent hardware devices in its internal operations, including information technology (IT) and non-IT systems used in the design, manufacture and marketing of Company products. These items are considered to be year 2000 "objects" and to the extent that these objects are unable to correctly recognize and process date dependent information beyond the year 1999, some level of modification or replacement is necessary. Most computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When a computation referencing the year 2000 is performed, these systems may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. Computations referencing the year 2000 might be invoked at any time, but are likely to begin occurring in the year 1999. 18 The Company is currently conducting a company-wide year 2000 readiness assessment and is in the process of implementing new information systems which the Company believes will be year 2000 compliant. Aside from the expenses associated with implementing the new information systems, the Company does not anticipate that it will incur material expenditures for the resolution of any year 2000 issues relating to its IT or non-IT systems. The Company expects that the implementation of its new systems will be completed by March 1999. However, there can be no assurance that there will not be a delay in the implementation of such systems. The Company could possibly be materially adversely impacted by the year 2000 issues faced by major distributors, suppliers, subcontractors, customers, vendors, and financial service organizations with which the Company interacts. The Company is in the process of determining the impact of the Company's operations as a result of the year 2000 readiness of these third parties. Their failure to address year 2000 issues could have an impact on the Company's operations and financial results. However, the extent of this impact, if any, is not known at this time. The Company does not yet have a contingency plan to address the year 2000 problem, but it is in the process of assessing various scenarios and is in the process of developing a contingency plan by June 1999. Year 2000 compliance issues could have a significant impact on the Company's operations and its financial results if the new information systems are not implemented in a timely manner; unforeseen needs or problems arise; or, if the systems operated by the Company's customers, vendors or subcontractors are not year 2000 compliant. The dates on which the Company believes its year 2000 readiness will be completed are based on the Company's management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of year 2000 compliant solutions. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third-parties and the interconnection of global businesses, the Company cannot ensure its ability to timely and cost-effectively resolve problems associated with the year 2000 issue that may affect its operations and business, or expose it to third-party liability. The Company also is party to certain legal proceedings, and is subject to the risk of adverse developments in such proceedings. The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company currently is involved in patent litigation, and also 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. 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 operating results could be materially adversely affected. There can be no assurance that adverse developments in current or future legal proceedings, including without limitation the 19 patent litigation identified above and the antidumping proceedings described below, will not have a material adverse effect on the Company's operating results or financial condition. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. Although the Company may be refunded such deposits in early 2000 (see Item 3 - Legal Proceedings, in the Company's Form 10-K for the fiscal year ended March 28, 1998, which may be obtained from the Company at the address set forth above, or through the Company's web site (www.alsc.com) or through the Securities and Exchange Commission's EDGAR website (www.sec.gov)), the deposit requirement, and the potential that antidumping duties will be liquidated in early 2000, 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 Japan 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 is also subject to an antidumping investigation commenced in October 1998 on imports into the United States of DRAMs for which wafer fabrication occurred in Taiwan. Currently, a majority of the DRAMs designed and sold by the Company are fabricated in Taiwan. The Company cannot predict the outcome of the investigation. If, however, the U.S. Department of Commerce reaches an affirmative determination of dumping in its preliminary determination, currently scheduled to be issued in April 1999, the Company will have to post a bond in the amount of a percentage (the "antidumping margin") of the value of its subsequent imports of Taiwan-fabricated DRAMs, and if the final outcome of the investigation is an antidumping duty order, the Company will have to pay cash deposits in the amount of a percentage (the "final antidumping margin") of the value of its imports of Taiwan-fabricated DRAMs beginning approximately August 1999. Although, if an antidumping duty order is issued, the Company may be entitled to full or partial release of the bond and refunds of its cash deposits with interest in late 2001, the bonding and deposit requirement and the potential that final antidumping duties will be assessed in 2001 may materially adversely affect the Company's ability to sell Taiwan-fabricated DRAMs in the United States. If an antidumping duty order is issued, the Company may be able to secure non-Taiwan wafer fabrication capacity for its DRAM products in order to support its U.S. customers with DRAMs not subject to antidumping duties, but there can be no assurance that the Company will be able to do so. As a result of the foregoing factors, as well as other factors affecting the Company's operating results, 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 operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. Liquidity and Capital Resources The Company's operating activities utilized cash of $23.9 million in first nine months of fiscal 1999 and provided cash of $10.6 million in the first nine months of fiscal 1998. Cash utilized in operating activities in the first nine months of fiscal 1999 was the result of a loss from operations and changes in working capital accounts during the quarter. Cash provided in operations in the first nine months of fiscal 1998 was primarily a result of net income generated during the period combined with a net increase in certain working capital components. 20 Net cash provided by investing activities was $26.5 million for the first nine months of fiscal 1999 and net cash used in investing activities was $20.3 million for the same period of fiscal 1998. Net cash provided by investing activities in the first quarter of fiscal 1999 reflects the proceeds from the sale of USC shares of $31.7 million, partially offset by equipment purchases of $2.1 million and $3.1 million investment in United Silicon, Inc. The Company's financing activities used cash of $0.2 million in the first nine months of fiscal 1999 and provided cash of $1.5 million in the first quarter of fiscal 1998. Net cash provided by financing activities in the first nine months of fiscal 1999 reflects net proceeds of $0.1 million from the sales of common stock in connection with the exercise of stock options, and a reduction of restricted cash of $1.0 million, partially offset by repayment of long term obligations of $1.2 million. Net cash provided in financing activities in the first nine months of fiscal 1998 reflects net proceeds of $1.9 million and an increase of restricted cash of $0.7 million offset by the repayment of long-term obligations of $0.6 million from the sales of common stock in connection with the exercise of stock options. At December 31, 1998, the Company had $5.5 million in cash, an increase of $2.4 million from March 31, 1998, and working capital of $22.1 million, a decrease of $3.9 million from September 30, 1998. The Company believes that these sources of liquidity, and financing opportunities the Company believes will be available to it, will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has considered and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production, the formation of joint ventures to own and operate foundries, or the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional debt or equity 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. In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. The Company paid approximately 1 billion New Taiwan Dollars ("NTD") (approximately US$36.4 million) in September 1995, approximately NTD 450 million (approximately US$16.4 million) in July 1996, and approximately NTD 492 million (approximately US$17.6 million) in July 1997. After the last of these payments, the Company owned approximately 190 million shares of USC, or approximately 19% of the outstanding shares. In April 1998, the Company sold 35 million shares of USC to an affiliate of UMC and received approximately US$31.7 million. In connection with the sale of 35 million shares of USC, the Company additionally has the right to receive up to another 665 million NTD (approximately US$20.4 million at the exchange rate prevailing on January 2, 1999, which rate is subject to material change) upon the occurrence of certain potential future events. After the April 1998 sale, the Company owned approximately 15.5% of the outstanding shares of USC, and has the right to purchase up to approximately 25% of the manufacturing capacity in this facility. In October 1998, USC issued 46 million shares to the Company by way of dividend distribution. As a result of this distribution, the Company owns approximately 15.1% of the outstanding shares. To the extent USC experiences operating income or losses, and the Company maintains its current ownership percentage of outstanding shares, the Company will recognize its proportionate share of such income or losses. During the first nine months of fiscal 1999, the Company recorded $9.3 million of equity in income of USC, as compared to $8.4 million recorded during the first nine months of fiscal 1998. 21 In February 1995, the Company agreed to purchase shares of Chartered Semiconductor ("Chartered") for approximately US$10 million and entered into a manufacturing agreement under which Chartered will provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2." In April 1995, the Company agreed to purchase additional shares in Chartered, bringing the total agreed investment in Chartered to approximately US$51.6 million and Chartered agreed to provide an increased minimum number of wafers to be provided by Chartered from Fab2. The Company has paid all installments to Chartered. Chartered is a private company based in Singapore that is controlled by entities affiliated with the Singapore government. The Company owns approximately 2.1% of the equity of Chartered. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon, Inc. ("USI"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. The facility has commenced volume production utilizing advanced sub-micron semiconductor manufacturing processes. The contributions of the Company and other parties shall be in the form of equity investments, representing an initial ownership interest of approximately 5% for each US$30 million invested. The Company had originally committed to an investment of approximately US$60 million or 10% ownership interest but subsequently requested that its level of participation be reduced by 50%. The first installment of approximately 50% of the revised investment was made in January 1996, and the Company had, but did not exercise, the option to pay a second installment of approximately 25% of the revised investment payable in December 1997. The Company made a third installment payment of approximately 106 million NTD (or approximately US$3.1 million) in July 1998. After the third installment, the Company owns approximately 2.96% of the outstanding shares of USI and has the right to purchase approximately 3.70% of the manufacturing capacity of the facility. On January 25, 1999, the Company agreed to approve a proposed merger between Maverick Networks ("Maverick"), a startup company funded by the Company, Broadcom Corporation ("Broadcom") and a wholly-owned subsidiary of Broadcom. At the signing of the merger agreement, the Company owned approximately 28.4% of the total outstanding shares of Maverick. In February 1998, the Company entered into investment and technology license agreements with Maverick intended to assist Maverick in developing integrated semiconductors for multi-layer network switches. Broadcom is expected to issue 864,200 shares of its Class B Common Stock in exchange for all shares of Maverick's Preferred and Common Stock, including shares issuable upon exercise of employee stock options and other rights. The agreement has been approved by the Board of Directors of both companies and, according to Broadcom, is expected to close in approximately ninety (90) days. The transaction is subject to the approval of Maverick's shareholders and satisfaction of regulatory requirements and other closing conditions, and there can be no assurance that the Company will receive any shares of Broadcom stock in connection with its investment in Maverick. On January 25, 1999, the Company filed a Form 8-K regarding this matter. 22 Part II. OTHER INFORMATION Item 1. Legal Proceedings. As previously reported, in March 1996, a putative class action lawsuit was filed against the Company and certain of its officers and directors and others in the United States District Court for the Northern District of California, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. (The complaint alleged that the Company, N.D. Reddy and C.N. Reddy also had liability under Section 20(a) of the Exchange Act.) The complaint, brought by an individual who claimed to have purchased 100 shares of the Company's common stock on November 2, 1995, was putatively brought on behalf of a class of persons who purchased the Company's common stock between July 11, 1995 and December 29, 1995. In April 1997, the Court dismissed the complaint, with leave to file an amended complaint. In June 1997, plaintiff filed an amended complaint against the Company and certain of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to dismiss the amended complaint. In March 1998, the court ruled in defendants' favor as to all claims but one, and dismissed all but one claim with prejudice. In April 1998, defendants requested reconsideration of the ruling as to the one claim not dismissed. In June 1998, the parties stipulated to dismiss the remaining claim without prejudice, on the condition that in the event the dismissal with prejudice of the other claims is affirmed in its entirety, such remaining claim shall be deemed dismissed with prejudice. In June 1998, the court entered judgment dismissing the case pursuant to the parties' stipulation. In July 1998, plaintiff filed a notice of appeal of the dismissal. In November 1998, the parties agreed to stay the filing of an appeal brief pending the decision of the Appellate Court in a case which might have bearing on this case. The Company intends to continue to defend vigorously against any claims asserted against it, and believes it has meritorious defenses. Due to the inherent uncertainty of litigation, the Company is not able to reasonably estimate the potential losses, if any, that may be incurred in relation to this litigation. In July 1998, a complaint naming the Company and twenty-five other semiconductor companies was filed in the United States District Court for the District of Arizona (captioned Lemelson Medical, Education & Research Foundation, Ltd. Partnership v. Intel Corp. et al., Civ. 98-1413 PHX PGR), alleging that each defendant manufactures or has manufactured on its behalf integrated circuits using manufacturing processes that violate sixteen patents owned by plaintiff. In January 1999, the Company reached a settlement and the case against the Company has been dismissed. In July 1998, the Company learned that a default judgment might soon be entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and Trit Tek 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. The plaintiffs may renew the writ and/or may appeal this judgment. 23 Item 5. Other Information. As previously reported, 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 static random access memories ("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 appealed the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. The Company cannot predict either the timing or the eventual results of the appeal. The Company may, in 1999, request a review of its sales of Taiwan-fabricated SRAMs from approximately October 1997 through March 1999 (the "Review Period"). If the Company makes such a request, the amount of antidumping duties, if any, owed on imports from October 1997 through March 1999 will remain undetermined until the conclusion of the review in early 2000. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. (In either case, the Company also would be responsible to pay antidumping duties in the amount of the revised margin with respect to its imports, between approximately October 1997 and March 1998, of SRAMs manufactured in Taiwan.) A material portion of the SRAMs designed and sold by the Company are fabricated in Taiwan, and the cash deposit requirement and possibility of assessment of antidumping duties could materially adversely affect the Company's ability to sell Taiwan-fabricated SRAMs in the United States and have a material adverse effect on the Company's operating results and financial condition. In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs") fabricated in Taiwan are being sold in the United States at less than fair value, and that the United States industry producing DRAMs is materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requests the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. A material portion of the DRAMs designed and sold by the Company are fabricated in Taiwan. The Company received preliminary producer and importer questionnaires from the ITC, and submitted responses to such questionnaires in November 1998. In December 1998, the ITC preliminarily determined that there is a reasonable indication that the imports of the products under investigation are injuring the United States industry. The Company received a questionnaire from the DOC, and responded to such questionnaire in accordance with the deadlines established by the DOC. The DOC is currently scheduled to complete its investigation by mid-1999. The Company vigorously is seeking, and intends to continue vigorously to seek, to ensure that dumping duties are not imposed on imports of its DRAM products fabricated in Taiwan. There can be no assurance, however, that antidumping duties will not be imposed on the Company's imports of Taiwan-fabricated DRAM products into the United States, which duties could materially adversely affect the Company's ability to sell such products in the United States. 24 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Number Title 27.01 Financial Data Schedule (filed only with the electronic submission of Form 10-Q in accordance with the EDGAR requirements) 25 SIGNATURES Pursuant to the requirements 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 (Registrant) Date: February 12, 1999 /s/ N. Damodar Reddy ---------------------------------------------- N. Damodar Reddy President and Chief Executive Officer (President and Principal Executive Officer) Date: February 12, 1999 /s/ David P. Eichler ---------------------------------------------- David P. Eichler Vice President of Finance and Administration And Chief Financial Officer (Principal Financial and Accounting Officer) 26