In March 2004, the Emerging Issues Task Force reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. As our accounting estimating methodology for other-than-temporary impairment evaluations is consistent with EITF 03-01, we do not believe adoption will have a material effect on our consolidated financial statements.
In April 2004, the Financial Accounting Standards Board issued FASB Staff Position (FSP) 129-1, "Disclosure Requirements under FASB Statement 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities," further defining disclosure requirements for convertible notes, among other things. As a result of adopting FSP 129-1, we further described circumstances under which note holders may convert their notes into our common shares before note maturity.
Liquidity and Capital Resources
As of June 30, 2004, our principal source of liquidity was $310.8 million of cash and short-term investments, an increase of $33.0 million from the balance of $277.8 million at December 31, 2003. This increase was due primarily to the receipt of $18.9 million in the first half of 2004 from the sale of shares of our equity investment in UMC and, to a lesser extent, from cash flow from operations. Working capital increased to $387.7 million at June 30, 2004 from $363.6 million at December 31, 2003.
Accounts receivable days outstanding declined from approximately 46 to 43 days from December 31, 2003 to June 30, 2004 reflecting the timing of receipts within the period. Accounts receivable at June 30, 2004 increased by $2.1 million, or 8%, as compared to the balance at December 31, 2003. This increase was primarily due to the timing of billings and payments during the quarter as compared to the fourth quarter of 2003. Inventories decreased by $5.9 million, or 13%, in the first half of 2004 primarily due to increased customer shipments.
Foundry investments, advances and other assets decreased by $31.2 million from December 31, 2003 to June 30, 2004. This decrease was primarily related to reclassifying $11.4 million of our UMC shares and $8.7 million of our prepaid wafer advance payment to Other current assets in order to reflect estimated sales and usage, respectively, in the upcoming 12 months, and a mark to market adjustment related to our UMC shares of $11.4 million. Net intangible assets decreased by $33.6 million in the first half of 2004, which is attributable to amortization during the period.
Deferred income increased by $5.4 million at June 30, 2004 as compared to December 31, 2003 reflecting an increase in the amount of inventory held by distributors to accommodate higher levels of resale by distributors to their end customers.
Deferred Stock Compensation within Stockholders’ Equity decreased by $2.2 million during the first two quarters of 2004 due to amortization. The $15.6 million decrease in Accumulated Other Comprehensive Income within the Stockholders’ Equity during the first half of 2004 is attributable to the unrealized loss in equity securities partially offset by the realized gain on sale of UMC securities (see Note 9 to the Condensed Unaudited Consolidated Financial Statements).
At June 30, 2004, we had no senior indebtedness and our subsidiaries had approximately $2.0 million of other liabilities. Issuance costs of $3.1 million, net of debt extinguishments, relative to our zero percent convertible subordinated notes are included in Other Assets in our Condensed Consolidated Balance Sheet and are being amortized to expense over the life of the notes. Accumulated amortization amounted to $2.2 million at June 30, 2004. The estimated fair value of our convertible notes, based on quoted market prices, was approximately $158 million at the end of the June 30, 2004 quarter. At the conversion price of $12.06 per share (82.9105 shares of common stock per each $1,000 principal amount notes), 15.3 million common shares are issuable upon conversion. In general, and as further described in the related agreements, the notes may be converted into com
mon stock before maturity if we request a redemption, make a distribution to common stock holders that is dilutive to note holders or if we become a party to a merger or consolidation or sale of substantially all of our assets.
We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.
Capital expenditures were $6.8 million for the first half of 2004. We expect to spend approximately $12 million to $15 million for the fiscal year ending December 31, 2004.
At June 30, 2004, we own 71.7 million shares of UMC common stock. Restrictions by UMC apply to approximately 32% of these shares (see Note 9 to the Condensed Unaudited Consolidated Financial Statements). During the first six months of 2004, we sold 20.0 million of our UMC shares for $18.9 million in cash, resulting in a gain of $5.6 million. In the future, we may or may not choose to liquidate additional UMC shares.
In March 1997 and as subsequently amended in January 2002 and March 2004, we entered into an advance payment production agreement with Seiko Epson and Epson Electronics America, Inc. (“EEA”) under which we advanced $51.3 million to Seiko Epson to finance construction of an eight-inch sub-micron semiconductor wafer manufacturing facility. Under the terms of the agreement, the advance is to be repaid with semiconductor wafers over a multi-year period. No interest income is recorded. The agreement calls for wafers to be supplied by Seiko Epson through EEA pursuant to purchase agreements with EEA. Cumulatively, $19.2 million of these payments have been repaid to us in the form of semiconductor wafers. We currently estimate that approximately $14.9 million of the outstanding advances are
expected to be repaid with semiconductor wafers during the next twelve months and are thus reflected as part of Other current assets in our Consolidated Balance Sheet. We are not obligated to make additional payments under this agreement.
On March 22, 2004 we announced that Fujitsu Limited (“Fujitsu”) has agreed to manufacture our next generation FPGA products on its 130-nanometer (nm) and 90-nanometer CMOS process technologies, as well as on a 130-nm technology with embedded Flash memory that we have jointly developed with Fujitsu. Additionally we announced plans which contemplate investing in stages before the end of 2005 between $100 million to $200 million in Fujitsu’s new 300mm wafer fab and structuring the investment as an advance payment for production wafers and access to future process technologies. We are proceeding with negotiation of a definitive agreement with Fujitsu that would fix the amount of advance payment at $125 million.
We believe that our existing liquid resources, expected cash generated from operations and existing credit facilities combined with our ability to borrow additional funds will be adequate to meet our operating and capital requirements and obligations for the next 12 months, including the continued possible extinguishment of a portion of our convertible subordinated notes as discussed above.
We may in the future seek new or additional sources of funding. In addition, in order to secure additional wafer supply, we may from time to time consider various financial arrangements including joint ventures, equity investments, advance purchase payments, loans, or similar arrangements with independent wafer manufacturers in exchange for committed wafer capacity. To the extent that we pursue any such additional financing arrangements, additional debt or equity financing may be required. There can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financing will decrease existing stockholders’ equity percentage ownership and may, depending on the price at which the equity is sold, result in dilution.
FACTORS AFFECTING FUTURE RESULTS
We may be unsuccessful in defining, developing or selling new products required to maintain or expand our business.
As a semiconductor company, we operate in a dynamic environment marked by rapid product obsolescence. Our future success depends on our ability to introduce new or improved silicon and software products that meet customer needs while achieving acceptable margins. We are presently in the process of releasing next generation FPGA product families that are critical to our ability to address the FPGA segment of the programmable logic market. If we fail to introduce these, or other, new products in a timely manner or such products fail to achieve market acceptance, our operating results, would be harmed.
Fujitsu Limited has agreed to manufacture our next generation FPGA products on its 130 nanometer and 90 nanometer CMOS process technologies, as well as on a 130 nanometer technology with embedded Flash memory that we have jointly developed with Fujitsu. The success of our next generation FPGA products is dependent on our ability to successfully partner with Fujitsu, which has not previously manufactured any of our products. If for any reason we are unsuccessful in our efforts to partner with Fujitsu in connection with these next generation FPGA products, our future revenue growth would be materially adversely affected.
The introduction of new silicon and software products in a dynamic market environment presents significant business challenges. Product development commitments and expenditures must be made well in advance of product sales. The market reception of new products depends on accurate projections of long-term customer demand, which by their nature are uncertain.
Our future revenue growth is dependent on market acceptance of our new silicon and software product families and the continued market acceptance of our current products. The success of these products is dependent on a variety of specific technical factors including:
• successful product definition;
• timely and efficient completion of product design;
• timely and efficient implementation of wafer manufacturing and assembly processes;
• product performance;
• product cost; and
• the quality and reliability of the product.
If, due to these or other factors, our new silicon and software products do not achieve market acceptance, our operating results would be harmed.
Our products may not be competitive if we are unsuccessful in migrating our manufacturing processes to more advanced technologies or alternative fabrication facilities.
To develop new products and maintain the competitiveness of existing products, we need to migrate to more advanced wafer manufacturing processes that use larger wafer sizes and smaller device geometries. We also may need to use additional foundries. Because we depend upon foundries to provide their facilities and support for our process technology development, we may experience delays in the availability of advanced wafer manufacturing process technologies at existing or new wafer fabrication facilities. As a result, volume production of our advanced process technologies at the fabs of Seiko Epson, UMC, Chartered Semiconductor, Fujitsu or future foundries may not be achieved. This could harm our operating results, including gross margin.
The cyclical nature of the semiconductor industry may limit our ability to maintain or increase revenue levels and operating results during industry downturns.
The semiconductor industry is highly cyclical, to a greater extent than other less technology-driven industries. Our financial performance has periodically been negatively affected by downturns in the semiconductor industry. Factors that contribute to these industry downturns include:
• the cyclical nature of the demand for the products of semiconductor customers;
• general reductions in inventory levels by customers;
• excess production capacity;
• general decline in end-user demand; and
• accelerated declines in average selling prices.
In 2001, the semiconductor industry experienced a downturn of extreme severity and duration. While semiconductor industry conditions recently have improved, the improvement may not be significant or sustainable. Increased demand for semiconductor industry products may not proportionately increase demand for programmable logic market segment products in general, or our products in particular. Even if demand for our products increases, average sales prices for our products may not increase, and could decline. Whenever adverse semiconductor industry conditions or other similar conditions exist, there is likely to be an adverse effect on our operating results.
A downturn in the communications equipment and computing end markets could cause a reduction in demand for our products and limit our ability to maintain or increase revenue levels and operating results.
The majority of our revenue is derived from customers in the communications equipment and computing end markets. While economic conditions in general, and the communications and computer end markets in particular, are currently stable, any deterioration in these end markets or any reduction in technology capital spending could lead to a reduction in demand for our products. Whenever adverse economic or end market conditions exist, there is likely to be an adverse effect on our operating results.
We face risks related to our recent accounting restatement.
On January 22, 2004, we announced that we had discovered possible accounting inaccuracies in previously reported quarterly financial statements. An internal investigation was conducted by the Audit Committee of our Board of Directors to determine the scope and magnitude of these inaccuracies. On March 24, 2004, we announced that the Audit Committee had completed its internal accounting investigation and, as a result, we restated our financial statements for the first, second and third quarters of 2003 to correct inappropriate accounting entries and a failure to record a change in accounting estimate related to deferred income. On April 19, 2004, we filed such restated financial statements with Form 10Q/A for the affected quarters.
The restatement of these financial statements may lead to litigation claims and/or regulatory proceedings against us. The defense of any such claims or proceedings may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses. Moreover, we may be the subject of negative publicity focusing on the financial statement inaccuracies and resulting restatement. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our common stock to decline.
If we are unable to effectively and efficiently implement our plan to remediate a material weakness that has been identified in our internal controls and procedures, there could be a material adverse effect on our operations or financial results.
We received notice from our independent registered public accounting firm that, in connection with the 2003 year-end audit, the auditor has identified a material weakness in our internal controls and procedures relating to separation of duties and establishment of standards for review of journal entries and related file documentation. We have implemented and are continuing to implement various initiatives intended to materially improve our internal controls and procedures to address this weakness. These initiatives address our control environment, organization and staffing, policies, procedures and documentation, and information systems. The implementation of these initiatives is one of our highest priorities. Our Board of Directors, in coordination with our Audit Committee, will continually assess the progress and sufficiency of these initiatives and make adjustm
ents as necessary. However, no assurance can be given that we will be able to successfully implement our revised internal controls and procedures or that our revised controls and procedures will be effective in remedying all of the identified deficiencies in our internal controls and procedures. In addition, we may be required to hire additional employees, and may experience higher than anticipated capital expenditures and operating expenses, during the implementation of these changes and thereafter. If we are unable to implement these changes effectively or efficiently, there could be a material adverse effect on our operations or financial results. Moreover, we could be subject to additional regulatory oversight and our business and reputation could be harmed.
In addition, we may in the future experience accounting estimate changes related to our deferred income account, inventory account, income tax liability, accounts receivable collectibility, or realization of goodwill and intangible assets, any of which could adversely affect our financial results.
Our future quarterly operating results may fluctuate and therefore may fail to meet expectations.
Our quarterly operating results including gross margin have fluctuated and may continue to fluctuate. Consequently, our operating results including gross margin may fail to meet the expectations of analysts and investors. As a result of industry conditions and the following specific factors, our quarterly operating results are more likely to fluctuate and are more difficult to predict than a typical non-technology company of our size and maturity:
• general economic conditions in the countries where we sell our products;
• conditions within the end markets into which we sell our products;
• the cyclical nature of demand for our customers’ products;
• excessive inventory accumulation by our end customers;
• the timing of our and our competitors’ new product introductions;
• product obsolescence;
• the scheduling, rescheduling and cancellation of large orders by our customers;
• our ability to develop new process technologies and achieve volume production at the fabs of Seiko
Epson, UMC, Chartered Semiconductor, Fujitsu or at other foundries;
• changes in manufacturing yields including delays in achieving target yields on New products;
• adverse movements in exchange rates, interest rates or tax rates; and
• the availability of adequate supply commitments from our wafer foundries and assembly and test
subcontractors.
As a result of these factors, our past financial results are not necessarily a good predictor of our future results.
Our stock price may continue to experience large fluctuations.
In recent years, the price of our common stock has fluctuated greatly. These price fluctuations have been rapid and severe and have left investors little time to react. The price of our common stock may continue to fluctuate greatly in the future due to a variety of company specific factors, including:
• quarter-to-quarter variations in our operating results;
• shortfalls in revenue or earnings from levels expected by securities analysts; and
• announcements of technological innovations or new products by other companies.
Presently, our stock price is trading near our consolidated book value. A sustained decline in our stock price may result in a write-off of goodwill (see Note 6 of our Condensed Unaudited Consolidated Financial Statements).
Our wafer supply may be interrupted or reduced, which may result in a shortage of products available for sale.
We do not manufacture finished silicon wafers. Currently, substantially all of our silicon wafers are manufactured by Seiko Epson in Japan, UMC in Taiwan, and Chartered Semiconductor in Singapore. In March 2004 we announced that we will also be sourcing wafers on advanced process technologies from Fujitsu in Japan. If any of our current or future foundry partners significantly interrupts or reduces our wafer supply, our operating results could be harmed.
In the past, we have experienced delays in obtaining wafers and in securing supply commitments from our foundries. At present, we anticipate that our supply commitments are adequate. However, these existing supply commitments may not be sufficient for us to satisfy customer demand in future periods. Additionally, notwithstanding our supply commitments we may still have difficulty in obtaining wafer deliveries consistent with the supply commitments. We negotiate wafer prices and supply commitments from our suppliers on at least an annual basis. If any of our foundry partners were to reduce its supply commitment or increase its wafer prices, and we cannot find alternative sources of wafer supply, our operating results could be harmed.
Many other factors that could disrupt our wafer supply are beyond our control. Since worldwide manufacturing capacity for silicon wafers is limited and inelastic, we could be harmed by significant industry-wide increases in overall wafer demand or interruptions in wafer supply. Additionally, a future disruption of any of our foundry partners’ foundry operations as a result of a fire, earthquake or other natural disaster could disrupt our wafer supply and could harm our operating results.
If our foundry partners experience quality or yield problems, we may face a shortage of products available for sale.
We depend on our foundries to deliver reliable silicon wafers with acceptable yields in a timely manner. As is common in our industry, we have experienced wafer yield problems and delivery delays. If our foundries are unable for a prolonged period to produce silicon wafers that meet our specifications, with acceptable yields, our operating results could be harmed.
The majority of our revenue is derived from products based on a specialized silicon wafer manufacturing process technology called E²CMOS®. The reliable manufacture of high performance E²CMOS semiconductor wafers is a complicated and technically demanding process requiring:
• a high degree of technical skill;
• state-of-the-art equipment;
• the absence of defects in the masks used to print circuits on a wafer;
• the elimination of minute impurities and errors in each step of the fabrication process; and
• effective cooperation between the wafer supplier and us.
As a result, our foundries may experience difficulties in achieving acceptable quality and yield levels when manufacturing our silicon wafers.
If our assembly and test contractors experience quality or yield problems, we may face a shortage of products available for sale.
We rely on contractors to assemble and test our devices with acceptable quality and yield levels. As is common in our industry, we have experienced quality and yield problems in the past. If we experience prolonged quality or yield problems in the future, our operating results could be harmed.
The majority of our revenue is derived from semiconductor devices assembled in advanced packages. The assembly of advanced packages is a complex process requiring:
• a high degree of technical skill;
• state-of-the-art equipment;
• the absence of defects in lead frames used to attach semiconductor devices to the package;
• the elimination of raw material impurities and errors in each step of the process; and
• effective cooperation between the assembly contractor and us.
As a result, our contractors may experience difficulties in achieving acceptable quality and yield levels when assembling and testing our semiconductor devices.
Deterioration of conditions in Asia may disrupt our existing supply arrangements and result in a shortage of finished products available for sale.
All of our major silicon wafer suppliers operate fabs located in Asia. Our finished silicon wafers are assembled and tested by independent contractors located in China, Malaysia, the Philippines, South Korea and Taiwan. A prolonged interruption in our supply from any of these contractors could harm our operating results.
Economic, financial, social and political conditions in Asia have historically been volatile. Financial difficulties, governmental actions or restrictions, prolonged work stoppages or any other difficulties experienced by our suppliers may disrupt our supply and could harm our operating results.
Our wafer purchases from Seiko Epson are denominated in Japanese yen. The value of the dollar with respect to the yen fluctuates. Substantial deterioration of dollar-yen exchange rates could harm our operating results.
Export sales account for a substantial portion of our revenues and may decline in the future due to economic and governmental uncertainties.
Our export sales are affected by unique risks frequently associated with foreign economies including:
• changes in local economic conditions;
• exchange rate volatility;
• governmental controls and trade restrictions;
• export license requirements and restrictions on the export of technology;
• political instability or terrorism;
• changes in tax rates, tariffs or freight rates;
• interruptions in air transportation; and
• difficulties in staffing and managing foreign sales offices.
For example, our export sales have historically been affected by regional economic crises. Significant changes in the economic climate in the foreign countries where we derive our export sales could harm our operating results.
We may not be able to successfully compete in the highly competitive semiconductor industry.
The semiconductor industry is intensely competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing and sales resources. If we are unable to compete successfully in this environment, our future results will be adversely affected.
The current level of competition in the programmable logic market is high and may increase in the future. We currently compete directly with companies that have licensed our technology or have developed similar products. We also compete indirectly with numerous semiconductor companies that offer products and solutions based on alternative technologies. These direct and indirect competitors are established multinational semiconductor companies as well as emerging companies. We also may experience significant competition from foreign companies in the future.
We may fail to retain or attract the specialized technical and management personnel required to successfully operate our business.
To a greater degree than most non-technology companies or larger technology companies, our future success depends on our ability to attract and retain highly qualified technical and management personnel. As a mid-sized company, we are particularly dependent on a relatively small group of key employees. Competition for skilled technical and management employees is intense within our industry. As a result, we may not be able to retain our existing key technical and management personnel. In addition, we may not be able to attract additional qualified employees in the future. If we are unable to retain existing key employees or are unable to hire new qualified employees, our operating results could be adversely affected.
If we are unable to adequately protect our intellectual property rights, our financial results and competitive position may suffer.
Our success depends in part on our proprietary technology. However, we may fail to adequately protect this technology. As a result, we may lose our competitive position or face significant expense to protect or enforce our intellectual property rights.
We intend to continue to protect our proprietary technology through patents, copyrights and trade secrets. Despite this intention, we may not be successful in achieving adequate protection. Claims allowed on any of our patents may not be sufficiently broad to protect our technology. Patents issued to us also may be challenged, invalidated or circumvented. Finally, our competitors may develop similar technology independently.
Companies in the semiconductor industry vigorously pursue their intellectual property rights. If we become involved in protracted intellectual property disputes or litigation we may utilize substantial financial and management resources, which could have an adverse effect on our operating results.
Our industry is characterized by frequent claims regarding patents and other intellectual property rights of others. We have been, and from time-to-time expect to be, notified of claims that we are infringing the intellectual property rights of others. If any third party makes a valid claim against us, we could face significant liability and could be required to make material changes to our products and processes. In response to any claims of infringement, we may seek licenses under patents that we are alleged to be infringing. However, we may not be able to obtain a license on favorable terms or without our operating results being adversely affected.
Our marketable securities, which we hold for strategic reasons, are subject to equity price risk and their value may fluctuate.
Currently we hold substantial equity in UMC, which we acquired as part of a strategic investment to obtain certain manufacturing rights. The market price and valuation of these equity shares has fluctuated widely due to market and other conditions over which we have little control. During the year ended December 31, 2001, we recorded a $152.8 million pre-tax impairment loss related to this investment. In the future, UMC shares may continue to experience significant price volatility. In the second quarter of 2002 and the first and second quarters of 2004, we sold a portion of our UMC shares, but have otherwise not attempted to reduce or eliminate this equity price risk through hedging or similar techniques and hence substantial, sustained changes in the market price of UMC shares could impact our financial results. To the extent that the market value of our UMC s
hares experiences a significant decline for an extended period of time, our net income could be reduced.
There have been no material changes from what we reported in the Form 10K Annual Report for the year ended December 31, 2003.
This portion of our quarterly report is our disclosure of the conclusions of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, based on management’s evaluation of those disclosure controls and procedures. You should read this disclosure in conjunction with the certifications attached as Exhibit 31.1 and 31.2 to this quarterly report for a more complete understanding of the topics presented.
In January 2004, the Audit Committee of our Board of Directors, with the assistance of outside legal counsel and our independent auditor, commenced an internal investigation of the facts and circumstances surrounding inappropriate journal entries affecting the deferred income and accrued expense accounts. As a result of the investigation, it was determined that the unaudited consolidated condensed financial statements for each of the three month periods ended September 30, 2003, June 30, 2003 and March 31, 2003 required restatement.
After reviewing the restatement adjustments and performing an evaluation of our controls and disclosure procedures, management concurred with the Audit Committee that improvements to internal controls are needed relating to: (1) separation of duties and (2) establishment of standards for review and approval of journal entries as well as related file documentation.
We received notice from our independent registered public accounting firm that, in connection with the 2003 year-end audit, the auditor had identified a material weakness relating to our internal controls and procedures. Certain of these internal control deficiencies may also constitute deficiencies in our disclosure controls. While we are in the process of implementing a more effective system of controls and procedures, we have instituted controls, procedures and other changes to ensure that information required to be disclosed in this quarterly report on Form 10-Q has been recorded, processed, summarized and reported accurately.
The incremental steps that we have taken as a result of the aforementioned control deficiencies to ensure that all material information about our company is accurately disclosed in this report include:
1. Performed an analytical review of all journal entries processed for the 2003 year and the first half of 2004;
2. Applied additional methods and techniques to evaluate the accuracy of the deferred income account balance;
3. Instituted an additional level of approval for non-recurring journal entries;
4. Strengthened segregation of duties by adding an additional level of review for authorization and review of significant transactions;
5. Made appropriate personnel changes;
6. Separated responsibilities for preparing financial statements and maintaining accounts in the company’s general ledger;
7. Performed more detailed quarterly reconciliations and analyses of the company’s deferred revenue accounts related to its distributors;
8. Enhanced quarterly accounting review procedures by requiring an independent review of material general ledger accounts;
9. Required all non recurring journal entries to be approved by an independent reviewer; and
10. Selected and began process of implementation of improvements to information systems for distribution accounting.
Based in part on the steps listed above, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in Securities and Exchange Commission rules and forms.
In addition, in order to further address deficiencies described above and to further improve our internal disclosure and control procedures for future periods, we will:
1. Complete implementation of newly selected improvements to information systems for distribution accounting;
2. Perform a review of internal controls and procedures in connection with Section 404 of Sarbanes-Oxley legislative requirements; and
3. Enhance staffing to provide sufficient resources to accomplish the foregoing objectives.
These steps will constitute significant changes in internal controls. We will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, and will take further action as appropriate.
On August 6, 2004, we agreed in principle with the U. S. Department of Commerce to settle charges that we did not comply with Export Administration Regulations between 2000 and 2002. The settlement will result in a fine of $560,000. Provision for these costs has been made in prior years financial statements. The charges involved the exportation of controlled semiconductor devices to a Hong Kong distributor that subsequently re-exported those devices to the Peoples Republic of China (PRC), and the release of controlled semiconductor manufacturing technology to nationals of the PRC employed by Lattice in the United States, as well as the exportation of such manufacturing technology to our design center in the PRC. We voluntarily disclosed these circumstances to the Department, cooperated fully with an investigation of our export practices and procedures, and have implemented enhancements
to strengthen our export control procedures.
In December 2000, our Board of Directors authorized management to repurchase up to five million shares of our common stock. As of June 30, 2004, we had repurchased 1,136,000 shares at an aggregate cost of $20.0 million. There were no repurchases of common stock in 2002, 2003 or the first half of 2004.
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a) |
annual meeting of stockholders was held on May 11, 2004. |
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b) |
the following directors were elected at the meeting to serve a term of three years: |
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Mark O. Hatfield |
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Cyrus Y. Tsui |
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The following directors are continuing to serve their terms: |
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Daniel S. Hauer |
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Soo Boon Koh |
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Harry A. Merlo |
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c) |
the matters voted upon at the meeting and results of the voting with respect to those matters are as follows: |
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For |
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Withheld |
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(1) Election of directors: |
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Mark O. Hatfield |
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83,056,553 |
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22,186,814 |
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Cyrus Y. Tsui |
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85,529,738 |
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19,713,629 |
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For |
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Against |
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Abstain |
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Not Voted |
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(2) Approval of an amendment to the Company’s Employee Stock Purchase Plan |
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86,449,548 |
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3,052,207 |
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431,908 |
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23,181,000 |
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(3) Ratification of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending January 1, 2005 |
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100,603,252 |
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4,546,088 |
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94,027 |
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7,871,296 |
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The foregoing matters are described in further detail in our definitive proxy statement dated April 8, 2004 for the Annual Meeting of Stockholders held on May 11, 2004.
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(a) |
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Exhibits |
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31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
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32.1 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June 30, 2004
On April 7, 2004, we filed a Current Report on Form 8-K stating that Larry W. Sonsini resigned from the board of directors of Lattice Semiconductor Corporation and that this resignation was not the result of a disagreement with the Company
On April 23, 2004, we filed a Current Report on Form 8-K, which included a press release of the same date, reporting our financial results for the first quarter of the year ending December 31, 2004.
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.
LATTICE SEMICONDUCTOR CORPORATION (Registrant)
Date: August 10, 2004
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By: |
/s/ Jan Johannessen |
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Jan Johannessen |
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Corporate Vice President and Chief Financial Officer |