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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ x ] Annual report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
For the fiscal year ended March 31, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the
securities exchange act of 1934
For the transition period from __________ to __________.
Commission file number: 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0057842
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2575 Augustine Drive
Santa Clara, California 95054-2914
(Address of principal executive offices)
Registrant's telephone number, including area code is (408)855-4900
Registrant's website address is http://www.alsc.com
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.01 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed under Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes X No
--- ---
As of June 22, 2001, there were 41,522,266 shares of Registrant's Common Stock
outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant on June 22, 2001, based upon the closing price
of the Common Stock on the NASDAQ National Market for such date, was
approximately $457,160,000.
Documents Incorporated by Reference
Portions of Registrant's definitive Proxy Statement for its 2000 Annual Meeting
of Stockholders ("Proxy Statement") to be filed pursuant to Regulation 14A of
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, which is anticipated to be filed within 120 days after the end
of Registrant's fiscal year ended March 31, 2001, are incorporated by reference
into Part III hereof.
-1- Exhibit Index on page 36
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PART I
Forward Looking Statements
When used in this report, the words "expects," anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, are subject to risks and uncertainties and
include the following statements concerning as the potential for further price
erosion of the Company's products; additional cancellation of orders in the
Company's backlog; continuing slowdown in the electronics industry; further
decreased demand and increased competitive environment for the Company's
products, including, without limitation, obsolescence of the Company's products;
continued accumulation of excess inventory and price erosion or obsolescence of
existing inventory, any of which may result in additional charges against the
Company's earnings; inability to timely ramp up production of and deliver new or
enhanced SRAM, DRAM or flash products; inability to successfully develop and
introduce new products; inability to successfully recruit and retain qualified
technical and other personnel; further adverse changes in the value of
securities held by the Company, including those of Vitesse Semiconductor
Corporation, PMC-Sierra, Inc., Broadcom Corporation, Chartered Semiconductor,
United Microelectronics Corporation and Tower Semiconductor; further adverse
changes in value of investments made by Alliance's venture funds managed by
Alliance Venture Management, LLC; the Company's potential status as an
Investment Act of 1940 reporting company. These risks and uncertainties include
those set forth in Item 1 of Part I hereof (entitled "Business") and in Item 7
of Part II hereof (entitled "Factors That May Affect Future Results") and
elsewhere in this Report. 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.
ITEM 1
BUSINESS
Overview
Alliance Semiconductor Corporation was incorporated in California on February 4,
1985 and reincorporated in Delaware on October 26, 1993. Unless the context
indicates otherwise, the terms "Alliance" and the "Company" refer to Alliance
Semiconductor Corporation, a Delaware corporation, and its direct and indirect
subsidiaries. The Company designs, develops and markets high performance memory
and memory intensive logic products to the personal computer, networking,
telecommunications, instrumentation and consumer markets.
Market trends, such an increased emphasis on high-throughput applications,
including networking, graphics, multimedia, computer, consumer, and
telecommunications products, have created opportunities for high performance
memory products. The Company addresses these opportunities with its families of
static random access memories ("SRAMs") and dynamic random access memories
("DRAMs"), characterized by high storage capacity (density), fast access times
and low power consumption.
The semiconductor industry is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production overcapacity and undercapacity, and
accelerated erosion of selling prices. As the Company is currently experiencing,
as well as during much of fiscal 1999, 1998 and 1997 the market for certain of
the Company's DRAM and SRAM devices continued to experience excess supply
relative to demand, which resulted in a significant downward trend in average
selling prices. Although the Company is unable to predict future trends in
average selling prices, historically the semiconductor industry has experienced
significant annual declines in average selling prices.
The average selling price that the Company is able to command for its products
is highly dependent on industry-wide production capacity and demand, and as a
consequence the Company is currently experiencing (as it did throughout much of
fiscal 1999, 1998 and 1997) rapid erosion in product pricing which is not within
the control of the Company could continue to have an adverse material effect on
the Company's results of operations. The Company is unable to predict the future
prices for its products.
-2-
Throughout this report, the Company has indicated its fiscal years as ending on
March 31, whereas the Company's fiscal year actually ends on the Saturday
nearest the end of March. The fiscal year ended March 31, 2001 contained 52
weeks, while the fiscal years ended March 31, 2000 and March 31, 1999 contained
52 weeks and 53 weeks, respectively.
Industry Background
Traditionally, large manufacturing companies, such as Samsung, Hyundai, Micron,
NEC, Toshiba, Hitachi and Cypress Semiconductor have dominated the markets for
SRAMs and DRAMs. The majority of the memory products from these manufacturers
have consisted of commodity products, which have relatively predictable,
multi-year product life cycles and thus require more focus on process technology
and production cost and less on design. In recent years, certain technology
trends dramatically increased the performance requirements for SRAMs and DRAMs,
creating new design challenges and market opportunities for emerging
semiconductor companies. The proliferation of more powerful personal computers
and workstations in recent years and the increasing emphasis on high-throughput
networking, graphics, multimedia and telecommunications products have created
mass market opportunities for high speed and low power SRAMs and high speed
DRAMs.
SRAMs and DRAMs are forms of "volatile" memory, meaning that such devices retain
their memory only when connected to a power supply. In contrast, flash memory is
a form of "non-volatile" memory, which retains its memory even when the power
supply is turned off. The demand for flash memory has increased in recent years.
In addition to being a preferred method of storing the basic input/output system
("BIOS") for computers, a variety of applications make use of flash memory (for
instance, cellular phone handsets often allow users to "store" frequently-dialed
numbers in flash memory; such memory is retained when the handset power is
turned off).
Embedded-memory applications are growing rapidly, as manufacturers of items from
cell phones to toasters are introducing "smart" machines that use integrated
circuits to improve performance. Embedding memory and logic on a single chip may
produce significant advantages in size and speed.
Technology
The Company has focused on using innovative design techniques to develop high
performance SRAMs and DRAMs that can be manufactured using a simple CMOS
manufacturing process. The Company combines both SRAM and DRAM design approaches
in creating its SRAM and DRAM products, and believes that merging these
techniques enables it to design SRAMs that feature some of the density
attributes of DRAMs and to design DRAMs that feature some of the speed
attributes of SRAMs. Since its inception in 1985, the Company has accumulated
substantial experience in designing SRAM and DRAM products.
The Company believes that the die sizes (the physical sizes of its complete,
unpackaged, memory circuits) of many of its products are smaller than those of
competing products, providing the Company with a key competitive advantage.
Because yields increase significantly as die size decreases, the Company
believes that its small die sizes have been a major contributor to its generally
high manufacturing yields. Small die sizes also generally result in additional
benefits, such as lower die cost, increased speed, greater reliability and lower
power consumption.
In addition to having small die sizes, many of the Company's products are
designed to be manufactured using a CMOS process with fewer steps than required
for some competitive memory products. The Company's competitors often require a
greater number of mask steps and/or more complex manufacturing processes to
achieve similar performance of such products. Because yields typically decline
as manufacturing complexity and the number of process steps increase, the
simpler manufacturing process utilized by the Company has contributed to its
generally high manufacturing yields. The Company also believes that a simpler
manufacturing process leads to faster time to market and shorter manufacturing
cycle times.
The Company's development strategy is to leverage its proprietary design
modules, which have been created using its design philosophies. These modules,
which are scaleable in size, can be used by the Company as building blocks for
new products, resulting in shorter design cycles. The Company believes that this
design strategy also enables it to maximize the performance, yield and cost
advantages of its basic designs and sustain them over time in successive
generations of higher performance and higher density products.
-3-
Products
High Speed CMOS DRAMs
Sales of the Company's DRAM products accounted for 57% of the Company's net
revenues in fiscal 2001. During fiscal years 2000 and 1999, DRAM products
contributed 56% and 40%, respectively, of the Company's net revenues. During
fiscal year 2001, the Company continued to increase its volume of production of
4-Mbit and 16-Mbit DRAM products in the 256 Kbit x 16 and 1-Mbit x 16
configurations using technologies down to 0.18 micron.
High Speed CMOS SRAMs
Sales of the Company's SRAM products accounted for 43% of the Company's net
revenues in fiscal 2001. During fiscal year's 2000 and 1999, SRAM products
contributed approximately 43% and 58%, respectively, of the Company's net
revenues. Focused on the telecommunications, networking and wireless markets,
the Company currently offers SRAM products in broad range densities, packages,
speed grades and low-power ranges from 64 Kbit to 4 Kbit with speeds as fast as
10ns and stand by power as low as 20uA. Currently the Company's volume SRAM
products are manufactured using 0.35 and 0.25 micron technology, with
development to 0.18 micron technology underway.
High Speed CMOS Flash Memories
During fiscal 2001, the Company changed its focus from 5V to 3V flash memory
products (which use a single nominal, 3-volt power supply for read and
programming functions). The Company has available the 8-Mbit product with access
times as fast as 80ns, and has achieved functional silicon on 4-Mbit product.
The Company is co-developing a 16-Mbit product with one of its fab partners,
United Microelectronics Corporation ("UMC"). To date, the Company has not
derived significant revenue from flash memory products.
Network Hardware Accelerators
In fiscal year 1999, the Company announced that it expected to introduce the
first product of an Internet Protocol Routing Processor ("IPRP") family that
will leverage the Company's logic and embedded memory technology, to enable
hardware accelerated wire speed routing of IP packets, in multi-ported Gigabit
and Terabit routers. These IPRP devices could become integral components in
mission critical and multimedia enhanced high-end routers, which are being
deployed to build the next generation Internet infrastructure. The Company
achieved working silicon of the first product of IPRP family during the quarter
ended April 3, 1999. However, these prototypes did not achieve all the
specifications necessary to introduce the product, including the desired speed.
The Company spent the entire fiscal years 2000 and 2001 redesigning the product
and still has not produced a marketable product. While the Company plans on
continuing its effort to produce an IPRP product, there can be no assurance that
the Company can or will do so.
Product Development
Timely development and introduction of new products are essential to maintaining
the Company's competitive position. The Company currently develops all of its
products in-house and has 84 development personnel (38 in the United States and
46 in India) as of March 31, 2001. The Company uses a workstation-based
computer-aided design environment to design and prototype new products. The
Company's design process uses network computing, high-level design
methodologies, simulators, circuit synthesizers and other related tools. During
fiscal 2001, 2000 and 1999, the Company spent approximately $13.8 million, $14.6
million and $14.1 million respectively, on product development activities. The
Company plans to continue to invest substantial amounts in development to design
additional products.
The markets for the Company's products are characterized by rapid technological
change, evolving industry standards and product obsolescence. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive performance levels. The success of
new products depends on a variety of factors, including product selection,
successful and timely completion of product development, the Company's ability
to secure sufficient foundry capacity for volume manufacturing of wafers,
achievement of acceptable wafer fabrication yields (the proportion of good die
on a silicon wafer) by the Company's independent foundries and the Company's
ability to offer products at competitive prices. There can be no assurance that
the Company will be able to identify new product opportunities successfully,
develop and
-4-
bring to market such new products in a timely and cost effective manner, or that
the Company will be able to respond effectively to new technological changes or
new product announcements by others. There also can be no assurance that the
Company can secure adequate foundry capacity for the production of such
products, or obtain acceptable manufacturing yields necessary to enable the
Company to offer products at competitive prices. Additionally, there can be no
assurance that the Company's products will gain or maintain market acceptance.
Such inabilities could materially and adversely affect the Company's results of
operations.
The markets for SRAMs, DRAMs, and flash memory products are volatile and subject
to rapid technological and price change. Any inventory of products for those
markets may be subject to obsolescence and price erosion, which could materially
and adversely affect the Company's results of operations.
Customers
The Company's primary customers are major domestic and international
manufacturers of personal computer and computer peripherals, consumer,
networking, telecommunications and wireless products, including; 3Com, Pace
Micro Technology, Lucent, Sony, IBM, Toshiba, Acer, Alcatel, Nokia, Solectron,
Jabil, Newbridge Networks, Efficient Networks, General Instruments, Seagate,
Brother and Pioneer. A decline in demand in these industries or lack of success
in developing new markets or new products could have a material adverse effect
on the Company's results of operations.
The Company believes that if its sales penetration into these markets increases,
its customer base will diversify not only by product application but also
geographically. There can be no assurance that such sales penetration into these
markets will, in fact, increase. 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. During fiscal year 2000, the Company moved
all of its SRAM production out of Taiwan. The Company intends to sell its
remaining SRAM inventory that was manufactured in Taiwan, outside the United
States. See Note 17 of Notes to Consolidated Financial Statements.
Sales to the Company's customers are typically made pursuant to specific
purchase orders, which may be canceled by the customer without enforceable
penalties. For the fiscal year ended March 31, 2001, no customers accounted for
10% or more of the Company's net revenues. For the fiscal year ended March 31,
2000, one customer accounted for approximately 10% of the Company's net
revenues. For the fiscal year ended March 31, 1999, two customers accounted for
approximately 15% and 13% of the Company's net revenues. See Note 1 of Notes to
Consolidated Financial Statements.
Historically, the semiconductor industry in general, and the semiconductor
memory business in particular have experienced cyclical downturns in business
every few years. The industry experienced such a downturn in the mid 1990's and
had been recovering over the last few years, as had the Company. In the fourth
fiscal quarter of fiscal year 2001, the industry and the Company experienced a
significant downturn. The Company cannot predict when the current downturn will
end. Even after the end of the current downturn, the Company fully expects that
other downturns will occur. And while the Company will try to take precautions
so that it will not be carrying significant inventory (as happened in both the
current and the last downturns) when another downturn occurs, it is difficult to
predict when such downturns will occur, and when customers will start canceling
orders. There can be no assurance that the Company will be able to manage its
business in a manner so as to prepare for downturns, when they occur.
Additionally, even if the Company is able to prepare for downturns, any such
downturns could have a significant and material negative impact on the Company's
ability to sell products and results of operations, and such a negative impact
on the Company may last several years.
Sales and Marketing
The Company markets and distributes its products through a network of
manufacturers' representatives and distributors throughout North America,
Europe, Asia and the rest of the world.
The Company uses manufacturers' representatives and distributors who are not
subject to minimum purchase requirements and who can discontinue marketing the
Company's products at any time. Many of the Company's distributors are permitted
to return a limited amount of product purchased in exchange for future orders.
The loss of one or more manufacturers' representatives or distributors could
have a material adverse effect on the
-5-
Company's results of operations. The Company believes that its relations with
its manufacturers' representatives and distributors generally are good.
The Company believes that customer service and technical support are important
competitive factors in selling to major customers. The Company provides
technical support to its customers worldwide. Distributors and manufacturers'
representatives supplement the Company's efforts by providing additional
customer service at a local level. The Company also works closely with its
customers in qualification of its products and providing the needed quality and
reliability data. The Company believes that close contact with its customers not
only improves the customers' level of satisfaction but also provides important
insights into future market directions.
International revenues accounted for approximately 63%, 59% and 50% of net
revenues in fiscal 2001, 2000 and 1999, respectively. The Company expects that
international sales will continue to represent a significant portion of net
revenues. In addition, the Company's products are manufactured, assembled and
tested by independent third parties primarily located in Asia and North America,
and the Company has in the past, and intends in the future, to make investments
in certain foundries in Asia or elsewhere in order to secure production
capacity. Due to its international sales and independent third party
manufacturing, assembly and testing operations, the Company is subject to the
risks of conducting business internationally. These risks include unexpected
changes in regulatory requirements, delay resulting from difficulty in obtaining
export licenses of certain technology, tariffs and other barriers and
restrictions, and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks in connection with its
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. In addition, because the Company's
international sales generally are denominated in U.S. dollars, fluctuations in
the U.S. dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies.
Although the Company to date has not experienced any material adverse effect on
its results of operations as a result of such regulatory, geopolitical and other
factors, there can be no assurance that such factors will not adversely impact
the Company's results of operations in the future or require the Company to
modify its current business practices. See Note 19 of Notes to Consolidated
Financial Statements.
Manufacturing
The Company subcontracts its manufacturing to independent foundries, which
allows the Company to avoid the significant capital investment required for
wafer fabrication facilities. The Company, however, has entered into agreements
providing for the investment of significant sums for the formation of companies
to build and operate manufacturing facilities or to obtain guaranteed capacity,
as described below. As a result, the Company focuses its resources on product
design and development, quality assurance, marketing and sales, and customer
support. The Company designs its products using proprietary circuit modules and
standard fabrication processes in order to operate within the process parameters
of its contract manufacturers.
The Company's major foundries are United Microelectronics Corporation ("UMC") in
Taiwan and Japan, Chartered Semiconductor Manufacturing Ltd. ("Chartered") in
Singapore and National Semiconductor Corporation ("National") in the United
States. The Company has entered into foundry production agreements with all of
its major foundries. In fiscal 2001, the Company entered into a foundry
production agreement with Tower Semiconductor, Ltd. ("Tower"), in connection
with an investment in a new fabrication facility being constructed by Tower.
Although the Company believes it currently has adequate capacity to address
market requirements, there can be no assurance that in the future the Company's
current foundries, together with any additional sources, would be willing or
able to satisfy all of the Company's requirements on a timely basis. The Company
has encountered delays in the qualification process and production ramp-up in
the past, and qualification of or production ramp-up at any additional foundries
could take longer than anticipated. The Company has entered into equity
arrangements in order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies. The Company will continue to
consider various possible transactions, including but not limited to equity
investments in independent wafer manufacturers, in exchange for guaranteed
production; the formation with others of new companies to own and operate
foundries; the usage of "take or pay" contracts that commit the Company to
purchase specified quantities of wafers over extended periods; and the licensing
of certain of the Company's designs, in order to obtain an adequate supply of
wafers using advanced process technologies. There can be no assurance, however,
that the Company would be able to consummate any such transaction in a timely
manner, or at all, or on terms commercially acceptable to the Company.
-6-
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Alliance received 247.7 million shares of
UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and
approximately 35.6 million shares of UMC stock for its 48.1 million shares, or
3.2% ownership of USIC. As a result of the merger, at March 31, 2000 Alliance
Semiconductor owned approximately 283.3 million shares, or approximately 3.2%,
of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the
former USC and USIC foundries, respectively.
In January 2001, Tower satisfied the closing conditions of the share purchase
agreements (as described in Investments section) it entered into with the
Company to make an investment in Tower, in exchange for shares of Tower and
certain manufacturing rights, including capacity rights and wafer credits. The
investment in Tower, along with the investment of the Israel Corporation
("TIC"), SanDisk Corporation, Inc. ("SanDisk") and Macronix International Co.,
Ltd. to purchase an aggregate of 3,629,873 Tower shares, will be used to build
and operate a new fabrication facility, which is expected to become operational
in 2002.
The Company has encountered delays in qualification and production ramp-up in
the past and the production ramp-up at any additional foundries could take
longer than anticipated. In the event that the Company's foundries are unable or
unwilling to satisfy the Company's requirements in a timely manner, the
Company's results of operations could be materially adversely affected. In
addition, some of UMC's foundries are located in the Science-Based Industrial
Park in Hsin-Chu City, Taiwan. The Company currently expects these foundries to
supply the substantial portion of the Company's products in fiscal 2002.
Disruption of operations at the Company's foundries for any reason, including
work stoppages, fire, and earthquakes as was the case in September 1999, or
other natural disasters, could cause delays in shipments of the Company's
products, and could have a material adverse effect on the Company's results of
operations. In or about October 1997, a fire caused extensive damage to one of
UMC's foundries, not used by the Company, which is located in the Hsin-Chu
Science-Based Industrial Park. 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 effect on UMC in the future. In addition, as a result of the
rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based
Industrial Park, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity could
adversely affect the Company's foundries' ability to supply the Company's
products, which could have a material adverse effect on the Company's results of
operations.
The Company is using multiple sources for certain of its products, which may
require the Company's customers to perform separate product qualifications. The
Company has not, however, developed alternate sources of supply for certain
other products, and its newly introduced products are typically produced
initially by a single foundry until alternate sources can be qualified. The
requirement that a customer perform separate product qualifications or a
customer's inability to obtain a sufficient supply of products from the Company
may cause that customer to satisfy its product requirements from the Company's
competitors, which would adversely affect the Company's results of operations.
The Company purchases semiconductor wafers from these foundries pursuant to
various agreements. The Company believes that its relationship with each of
these foundries is good. However, UMC and Chartered manufacture similar products
which are sold to the Company's competitors and customers.
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, costs and loss of production due to
seismic activity, weather conditions and other factors. Although the Company
continuously evaluates sources of supply and may seek to add additional foundry
capacity, there can be no assurance that such additional capacity can be
obtained at acceptable prices, if at all. The occurrence of any supply or other
problem resulting from these risks could have a material adverse effect on the
Company's results of operations. There can be no assurance that problems
affecting manufacturing yields of the Company's products will not occur in the
future such as those occurring during late fiscal 1996.
The Company uses offshore subcontractors, which are located primarily in Taiwan
and Singapore for die assembly and testing. In the assembly process, the silicon
wafers are separated into individual dies that are then assembled into packages
and tested in accordance with procedures developed by the Company. Following
assembly, the packaged devices are further tested and inspected pursuant to the
Company's quality assurance program before shipment to customers. While the
timeliness, yield and quality of product deliveries from the
-7-
Company's suppliers of assembly and test services have been acceptable to date,
there can be no assurance that problems will not occur in the future. Any
significant disruption in adequate supplies from these subcontractors, or any
other circumstances that would require the Company to qualify alternative
sources of supply, could delay shipment and result in the loss of customers,
limitations or reductions in the Company's revenue, and other adverse effects on
the Company's results of operations. Most of the Company's wafer foundries,
assembly and testing facilities comply with the requirements of ISO 9000.
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 by such suppliers. The occurrence
of such price increases could have a material adverse effect on the Company's
results of operations.
The Company also is subject to the risks of shortages and increases in the cost
of raw materials used in the manufacture or assembly of the Company's products.
Shortages of raw materials or disruptions in the provision of services by the
Company's assembly or testing houses or other circumstances that would require
the Company to seek alternative sources of supply, assembly or testing could
lead to constraints or delays in timely delivery of the Company's products. Such
constraints or delays may result in the loss of customers, limitations or
reductions in the Company's revenue or other adverse effects on the Company's
results of operations. The Company's reliance on outside foundries and
independent assembly and testing houses involves several other risks, including
reduced control over delivery schedules, quality assurance and costs.
Interruptions in supply at the Company's foundries or assembly or testing houses
may cause delays in delivery of the Company's products. The occurrence of any
supply or other problem resulting from the risks described above could have a
material adverse effect on the Company's results of operations.
Competition
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, product obsolescence and heightened
international competition in many markets. Many of the Company's customers may
be purchasing products from both the Company and the Company's competitors. The
Company's principal competitors include Cypress Semiconductor Corporation,
Integrated Device Technology, Inc., Integrated Silicon Solutions, Inc., Micron
Technology, Inc., AMD, NEC, Samsung, Toshiba, and other U.S., Japanese, Korean,
and Taiwanese manufacturers. Most of the Company's competitors and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer-standing
relationships with customers than the Company. During an industry downturn such
as the current downturn and as occurred in 1999, 1998 and 1997 in the SRAM and
DRAM markets, companies that have broader product lines and longer-standing
customer relationships may be in a stronger competitive position than the
Company. In addition, as the Company enters into new markets, the Company may
face additional competition. Markets for most of the Company's products are
characterized by intense price competition. The Company's future success will be
highly dependent upon the successful development and timely introduction of new
products that meet the needs of the market at a competitive price. There can be
no assurance that the Company will be able to develop or market any such
products successfully. The Company believes that its ability to compete
successfully depends on a number of factors both within and outside of its
control, including price, product quality, performance, success in developing
new products, adequate foundry capacity, sources of raw materials, efficiency of
production, timing of new product introductions by competitors, protection of
Company products by effective utilization of intellectual property laws and
general market and economic conditions. There can be no assurance that the
Company will be able to compete successfully in the future.
Licenses, Patents and Maskwork Protection
The Company seeks to protect its proprietary technology by filing patent
applications in the United States and registering its circuit designs pursuant
to the Semiconductor Chip Protection Act of 1984. As of June 22, 2001, the
Company holds 64 United States patents covering certain aspects of its product
designs or manufacturing technology, which patents expire between 2009 and 2019.
The Company also has 27 pending United States patent applications, three of
which have been allowed and are expected to be issued as patents. No assurance
can be given that the claims allowed on any patents held by the Company will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. The loss of patent
protection on the Company's technology or the circumvention of its patent
protection by competitors could have a material adverse effect on the Company's
ability to compete
-8-
successfully in its products business. There can be no assurance that any
existing or future patent applications by the Company will result in issued
patents with the scope of the claims sought by the Company, or at all, that any
current or future issued or licensed patents, trade secrets or know-how will
afford sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes, which are the same
as or substantially, equivalent or superior to those of the Company.
From time to time, the Company is contacted by companies who hold patents which
they claim the Company infringes. As of June 22, 2001, the Company is in
discussions with one company who has made such claims. If the Company determines
that the Company possibly infringes a patent and the patent appears valid, the
Company will negotiate a license, if possible. There can be no assurance that
the Company has not or will not infringe prior or future patents owned by
others, that the Company will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to the
Company, or that such licenses will be available to the Company, if at all, on
terms acceptable to the Company.
Copyrights and maskwork protection are also key elements in the conduct of the
Company's business. The Company also relies on trade secrets and proprietary
know-how, which it seeks to protect by confidentiality agreements with its
employees and consultants, and with third parties. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that its trade secrets and proprietary know-how will
not otherwise become known or be independently discovered by others.
The semiconductor industry is characterized by frequent claims and litigation
regarding patent and other intellectual property rights. The Company has from
time to time received, and believes that it likely will receive in the future,
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. The ultimate conclusion with respect to any alleged infringement
must be determined by a court or administrative agency in the event of
litigation, and there can be no assurance that a court or administrative agency
would determine that the Company's products do not infringe the patents in
question. Patent litigation is inherently uncertain and the Company cannot
predict the result of any such litigation or the level of damages that could be
imposed if it were determined that certain of the Company's products or
processes infringe any of the patents in question.
There can be no assurance that other third parties will not assert claims
against the Company with respect to existing or future products or that, in the
case of the existing or potential allegations described above or any new
dispute, licenses to disputed third-party technology will be available on
reasonable commercial terms, if at all. In the event of litigation to determine
the validity of any third-party claims (or claims against the Company for
indemnification related to such third-party claims), including the claims and
potential claims referred to in the preceding paragraph, 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, and
expend significant resources to develop non-infringing technology or obtain
licenses to the infringing technology. In addition, depending upon the number of
infringing products and the extent of sales of such products, the Company could
suffer significant monetary damages. In the event of a successful claim against
the Company and the Company's failure to develop or license a substitute
technology, the Company's results of operations could be materially adversely
affected. In addition, the laws of certain territories, in which the Company's
products are or may be developed, manufactured or sold, including Asia, Europe
and Latin America, may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
Backlog
Sales of the Company's products are made pursuant to standard purchase orders.
Purchase orders are subject to changes in quantities of products and delivery
schedules in order to reflect changes in the customers' requirements and to
price renegotiations. In addition, orders typically may be canceled at the
discretion of the buyer without enforceable penalty. The Company's business, in
line with that of much of the semiconductor industry, is characterized by short
lead-time orders and quick delivery schedules. Also, the Company's actual
shipments depend on the manufacturing capacity of the Company's foundries.
Finally, capacity constraints or
-9-
unexpected manufacturing delays may prevent the Company from meeting the demand
for certain of its products. Therefore backlog is not necessarily indicative of
future sales.
Investments
In the past six months, marketable securities held by the Company have
experienced significant declines in their market value primary due to the
downturn in the semiconductor sector and general market conditions. Management
has evaluated the marketable securities for potential "other-than-temporary"
declines in their fair value. Such evaluation included researching commentary
from industry experts, analysts, and other companies, all of whom were not
optimistic that the semiconductor sector would recover in the next quarter or
two or three. Based on the continuing depression in the investments' stock
prices from those originally used to record the investment and coupled with the
expectation that stock prices will not significantly recover in the next 6 to 9
months, based on unfavorable business conditions for companies in the
semiconductor industry in general management determined that a write-down was
necessary as of March 31, 2001. As a result, the Company recorded a pre-tax,
non-operating loss of approximately $509.4 million during the fourth quarter of
fiscal 2001 based on the quoted price of the respective marketable securities as
of March 31, 2001. This was recorded in the Write-down of Marketable Securities.
Chartered Semiconductor Corporation
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2," if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States. At March 31, 2000, the Company
owned approximately 21.4 million ordinary shares or approximately 2.14 million
American Depository Shares or "ADSs." These shares were subject to a six-month
"lock-up," or no trade period, which expired in April 2000. In May 2000,
Chartered completed a secondary public offering, in which the Company decided
not to participate. In June 2000, the underwriter of the secondary offering
released the Company from the lockup, and the Company started selling some of
its shares. The Company does not own a material percentage of the equity of
Chartered. During fiscal 2001, the Company sold 500,000 shares and recognized a
pre-tax non-operating gain of approximately $33.5 million. At March 31, 2001,
the Company owned approximately 16.4 million ordinary shares or approximately
1.64 million American Depository Shares or "ADSs" of Chartered.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more than 50% of its original holdings of Chartered, the Company will start to
lose a proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Since Chartered is in the semiconductor business, as is the Company, it will be
subject to the same fluctuations in market value as is the Company, and may
experience downturns in value at the same time the Company is experiencing such
downturns. All of the risks that the Company may experience as a semiconductor
company are also applicable to Chartered. In addition, because Chartered is a
semiconductor manufacturer, it is subject to additional risks, such as fires and
other disasters, excess fabrication capacity, and other risks known to
semiconductor manufacturers. There can be no assurances that the Company's
investment in Chartered will increase in value or even maintain its value.
Because of the cyclical nature of the semiconductor industry, it is very likely
that Chartered, like the Company, will experience a significant business
downturn in the future, which will significantly depress the value of Chartered
stock. Additionally, because of the loss of its wafer production capacity rights
if the Company sells more than 50% of its original holdings in Chartered, there
can be no assurance that the Company can sell sufficient stock to realize its
value on its investment in Chartered.
United Microelectronics Corporation
In July 1995, the Company entered into an agreement with United Microelectronics
Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese
company, United Semiconductor Corporation ("USC"), for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between
September 1995 and July 1997 the Company invested approximately $70.4 million in
USC in exchange for 190 million shares or 19% of the outstanding shares and 25%
of the total wafer capacity.
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In April 1998, the Company received approximately US$31.7 million In connection
with the sale of 35 million shares of USC, and the Company had the right to
receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence
of certain potential future events, including the sale or transfer of USC shares
by USC in an arms length transaction, or by a public offering of USC stock, or
by the sale of all or substantially all of the assets of USC. In March 2000,
this right resulted in Alliance's receipt of approximately NTD 665 million (US$
21.5 million) as a result of the merger between USC and UMC.
Following the April 1998 USC stock sale, the Company owned approximately 15.5%
of the outstanding shares of USC. In October 1998, USC issued 46 million shares
to the Company by way of a dividend distribution. Additionally, USC made a stock
distribution to its employees, thereby the Company's ownership in USC was
reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million
shares to the Company by way of dividend distribution as well as distributions
to other entities. As a result of these distributions, the Company owned
approximately 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was
entitled to 25% of the output capacity of the wafer fabrication facility
operated by USC as well as a seat on the board of directors of USC. As a result
of the capacity rights and the board seat, Alliance had participated in both
strategic and operating decisions of USC on a routine basis and concluded that
it had significant influence on financial and operating decisions of USC.
Accordingly, the Company accounted for its investment in USC using the equity
method with a ninety-day lag in reporting the Company's share of results for the
entity. In fiscal years 2000 and 1999, the Company reported its proportionate
share of equity income of USC of $9.5 million and $10.9 million, net of tax,
respectively.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and owned approximately 3.2% of the outstanding
shares of USIC has the right to purchase approximately 3.7% of the manufacturing
capacity of the facility. The Company accounted for its investment in USIC using
the cost method of accounting prior to the merger with UMC in January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. The Company received 247.7 million shares
of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and
approximately 35.6 million shares of UMC stock for its 48.1 million shares, or
3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the
Company owned approximately 283.3 million shares, or approximately 3.2% of UMC,
and maintained its 25% and 3.7% wafer capacity allocation rights in the former
USC and USIC foundries, respectively. As the Company no longer has an ability to
exercise significant influence over UMC's operations, the investment in UMC is
accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US
$3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued $3.0 million
for the Taiwan securities transaction tax in connection with the shares received
by the Company. This transaction tax will be paid, on a per share basis, when
the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares were subject to a six-month "lock-up" or no trade period. This
lock-up period expired in July 2000. Of the remaining 50%, or 141.6 million
shares, approximately 28.3 million shares will become eligible for sale two
years from the closing date of the transaction (i.e. January 2002), with
approximately 28.3 million shares available for sale every six months
thereafter, during years three and four (i.e.2002-2004). In May 2000, the
Company received additional 20% or 56.6 million shares of UMC by way of a stock
dividend.
Subsequent to the completion of the merger, the Company accounted for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which became
unrestricted on January 2, 2001 as an available-for-sale marketable security in
accordance with SFAS 115. The portion of the investment in UMC, which is
restricted beyond twelve months (approximately 50% and 42% of the Company's
holdings at March 31, 2000 and 2001, respectively), is accounted for as a cost
method investment and is presented as a long-term investment. As this
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long-term portion becomes current over time, the investment will be transferred
to short-term investments and will be accounted for as an available-for-sale
marketable security in accordance with SFAS 115. The long-term portion of the
investments become unrestricted securities between 2002 and 2004.
At March 31, 2000, the Company has recorded an unrealized gain of approximately
$25.7 million, which is net of deferred tax of $17.6 million, as part of
accumulated other comprehensive income in the stockholders' equity section of
the balance sheet with respect to the short-term portion of the investments. At
the end of the fourth quarter of fiscal 2001, the Company wrote-down its
investment in UMC and recognized a pre-tax, non-operating loss of approximately
$460.0 million. This was recorded in the write-down of marketable securities. At
March 31, 2001, the Company owned approximately 340.0 million shares of UMC.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more than 50% of its original holdings of UMC, the Company will start to lose a
proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Since UMC is in the semiconductor business, as is the Company, it will be
subject to the same fluctuations in market value as is the Company, and may
experience downturns in value at the same time the Company is experiencing such
downturns. All of the risks that the Company may experience as a semiconductor
company are also applicable to UMC. In addition, because UMC is a semiconductor
manufacturer, it is subject to additional risks, such as fires and other
disasters, excess fabrication capacity, and other risks known to semiconductor
manufacturers. There can be no assurance that the Company's investment in UMC
will increase in value or even maintain its value. Because of the cyclical
nature of the semiconductor industry, it is possible that UMC, like the Company,
will experience a significant business downturn in the future, which will
significantly depress the value of UMC stock. Additionally, because of the loss
of its wafer production capacity rights if the Company sells more than 50% of
its original holdings in UMC, there can be no assurance that the Company can
sell sufficient stock to realize its value on its investment in UMC.
Maverick Networks, Inc. / Broadcom Corporation
In 1998, the Company was approached by a startup company, Maverick Networks,
Inc. ("Maverick"), regarding their need for embedded memory in an internet
router semiconductor that Maverick was designing. Because the Company was also
interested in eventually entering the internet router semiconductor market, the
Company entered into an agreement with Maverick which called for the Company to
provide memory technology, access to the Company's wafer production rights, and
cash to Maverick, in exchange for certain rights to Maverick's technology and
stock in Maverick. On May 31, 1999, Maverick completed a transaction with
Broadcom Corporation, resulting in the Company selling its 39% ownership
interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common
stock. Based on Broadcom's closing share price on the date of sale, the Company
recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of
approximately $51.6 million based on the closing share price of Broadcom at the
date of the merger. During fiscal 2000, the Company sold 275,600 shares of
Broadcom stock and realized an additional pre-tax, non-operating gain of
approximately $23.7 million. In February 2000, Broadcom Corporation announced a
two for one stock split. During fiscal 2001, the Company sold 287,522 shares and
realized a pre-tax, non-operating gain of approximately $31.3 million. At the
end of the fourth quarter fiscal 2001, the Company wrote-down its investment in
Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8
million. This was recorded in the write-down of marketable securities. At March
31, 2001, the Company owned approximately 200,000 shares of Broadcom.
Broadcom's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Broadcom's and the Company's, sometimes move
as a group, it is possible that Broadcom's stock and the Company's stock can
both suffer significant loss in value at the same time, as occurred in fiscal
2001. Thus, there can be no assurance that the Company's investment in Broadcom
will increase in value or even maintain its value.
Alliance Venture Management, LLC
In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with
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the Company, but is entitled to a management fee out of the net profits of the
investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds, by allowing them limited participation in the profits of the
various investment funds, through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Venture Management acts as the general
partner of these partnerships and receives a management fee of 15% of the
profits from these partnerships for its managerial efforts.
At Alliance Venture Management's inception in November 1999, series A member
units and series B member units in Alliance Venture Management were created. The
unit holders of Series A units and Series B units receive management fees of 15%
of investment gains realized by Alliance Ventures I and Alliance Ventures II,
respectively. In February 2000, upon the creation of Alliance Ventures III, LP
("Alliance Ventures III"), the management agreement for Alliance Venture
Management was amended to create series C member units which are entitled to
receive a management fee of 16% of investment gains realized by Alliance
Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP
("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"),
the management agreement for Alliance Venture Management was amended to create
series D and E member units which are entitled to receive a management fee of
15% of investment gains realized by Alliance Ventures IV and Alliance Ventures
V, respectively.
Each of the owners of the series A, B, C, D and E member units paid the initial
carrying value for their shares of the member units. While the Company owns 100%
of the common units in Alliance Venture Management, it does not hold any series
A, B, C, D or E member units and does not participate in the management fees
generated by the management of the investment funds. Several of the Company's
senior management hold the majority of the units of Alliance Venture Management.
After Alliance Ventures I was formed, the Company contributed all its then
current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I
to allow Alliance Venture Management to manage these investments. As of March
31, 2001, Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested $22.0 million in nine companies,
with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in
investing in internet start-up ventures has invested approximately $9.1 million
in ten companies, with a total fund allocation of $15.0 million. As of March 31,
2001, Alliance Ventures III, whose focus is investing in emerging companies in
the networking and communication market areas, has invested $38.6 million in 14
companies, with a total fund allocation of $100.0 million. As of March 31, 2001,
Alliance Ventures IV, whose focus is investing in emerging companies in the
semiconductor market areas, has invested $4.0 million in two companies, with a
total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures
V, whose focus is investing in emerging companies in the networking and
communication market areas, has invested $6.5 million in three companies, with a
total fund allocation of $60.0 million.
Several of the Alliance Venture investments are accounted for as the equity
method due to the Company's ability to exercise significant influence on the
operations of investees resulting primarily from ownership interest and/or board
representation. The total equity in the net losses of the equity investees of
Alliance Ventures was approximately $5.7 million for the year ended March 31,
2001. In addition, the Company wrote-down several of its investments in Alliance
Ventures and recognized a pre-tax, non-operating loss of approximately $2.6
million, at the end of the fourth quarter fiscal 2001. This was recorded in the
write-down of marketable securities and other investments.
Certain of the Company's officers have formed private venture funds, which
invest in some of the same investments as the Company. Additionally, an outside
venture fund has been formed in which certain of the Company's officers and
employees, as well as the Company itself, has made similar venture investments,
including investment in some of the same companies as Alliance Ventures.
Alliance Venture Management generally directs the individual funds to invest in
startup, pre-IPO (initial public offering) companies. These types of investments
are inherently risky and many venture funds have a large percentage of
investments decrease in value or fail. Most of these startup companies fail, and
the investors lose their entire investment. Successful investing relies on the
skill of the investment managers, but also on market and other factors outside
the control of the managers. Recently, the market for these types of investments
has
-13-
been successful and many venture capital funds have been profitable, and while
the Company has been successful in its recent investments, there can be no
assurance as to any future or continued success. It is likely there will be a
downturn in the success of these types of investments in the future and the
Company will suffer significant diminished success in these investments. There
can be no assurance, and in fact it is possible, that many or most, and maybe
all of the Company's venture type investments may fail, resulting in the
complete loss of some or all the money the Company has invested in these types
of investments.
Solar Venture Partners, LP
In August 2000, the Company agreed to invest $20 million in Solar Venture
Partners, LP ("Solar"), a venture capital partnership whose focus is in
investing in early stage companies in the areas of networking,
telecommunications, wireless, software infrastructure enabling efficiencies of
the Web and e-commerce, semiconductors for emerging markets and design
automation. The Company has invested $12.5 million, $9.5 million is in the form
of three promissory notes, which on March 31, 2001 were converted into a limited
partnership interest in Solar. Due to changes in the venture capital market,
Alliance has decided to limit its investment in Solar to $12.5 million already
invested.
Certain of the Company's officers and employees have invested in Solar. Solar
has made investments in some of the same companies as Alliance Ventures.
Orologic Corporation / Vitesse Semiconductor Corporation
In August 1999, the Company made an investment in Orologic Corporation
("Orologic"), a fabless semiconductor company that develops high performance
system on chip solutions. In November 1999, the Company transferred its interest
in Orologic to Alliance Ventures I, to allow it to be managed by Alliance
Venture Management. Subsequently, in March 2000, Vitesse Semiconductor
Corporation ("Vitesse") acquired Orologic. In connection with this merger,
Alliance Ventures I received 852,447 shares of Vitesse for its equity interest
in Orologic. The Company records its investment in Vitesse Semiconductor
Corporation as an available-for-sale marketable security in accordance with SFAS
115.
In January 2001, the Company entered into two derivative contracts
("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5
million. The Agreements have payment provisions that incorporate a collar
arrangement with respect to 490,000 shares of Vitesse Semiconductor common
stock. As such, under the Agreements, the Company must pay Bear Stearns an
amount based on the market price of Vitesse Semiconductor Common Stock in
January 2003, the maturity date of the Agreements. If the stock price of Vitesse
Semiconductor exceeds the ceiling of the collar, then the settlement amount
increases by an amount determined by a formula included in the Agreements
(generally equal to the excess of the value of the stock over the ceiling of the
collar). If the stock price of Vitesse Semiconductor declines below the floor of
the collar, then the settlement amount also decreases by the amount determined
by a formula included in the Agreements (generally equal to the excess of the
floor of the collar over the value of the stock). At March 31, 2001, the
derivative contracts were in the money to the Company based on Vitesse
Semiconductor's market price of $23.81 on that date. Under the current
accounting practice, the Company is required to offset the gain on the contracts
with the loss on the Vitesse stock, both were recorded in the write-down of
marketable securities in the fourth quarter of fiscal 2001. The pre-tax,
non-operating gain on the contracts amounted to $20.6 million, representing
their intrinsic value at March 31, 2001. At the end of the fourth quarter fiscal
2001, the Company wrote-down its investment in Vitesse and recognized a pre-tax,
non-operating loss of approximately $52.9 million. At March 31, 2001, the
Company owned 728,293 shares of Vitesse.
Vitesse's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Vitesse's and the Company's, sometimes move as
a group, it is possible that Vitesse's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in fiscal 2001.
Thus, there can be no assurance that the Company's investment in Vitesse will
increase in value or even maintain its value.
Malleable Technologies, Inc. / PMC-Sierra, Inc.
In 1999, the Company made an investment in a start-up called Malleable
Technologies, Inc. ("Malleable"). This investment was transferred to Alliance
Venture I, LP, upon its creation. In June 2000, PMC-Sierra, Inc. ("PMC"),
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announced that it agreed to acquire Malleable. According to the terms of the
acquisition, PMC exchanged 1.25 million shares of PMC stock for the remaining
85% interest of Malleable that PMC did not already own. In connection with the
proposed merger, Alliance Ventures I will receive approximately 79,000 shares of
PMC for its 7% interest in Malleable. Upon the completion of the merger, the
Company will report a gain based on the closing share price of PMC on the date
of the merger. Based on the closing share price of PMC on June 14, 2000, the
estimated pretax gain from this transaction is approximately $11 million. At the
end of the fourth quarter fiscal 2001, the Company wrote-down its investment in
PMC and recognized a pre-tax, non-operating loss of approximately $10.8 million,
which was recorded in the write-down of marketable securities. . At March 31,
2001, the Company owned 68,152 shares of PMC.
PMC's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like PMC's and the Company's, sometimes move as a
group, it is likely that PMC's stock and the Company's stock can both suffer
significant loss in value at the same time, as occurred in fiscal 2001. Thus,
there can be no assurance that the Company's investment in PMC will increase in
value or even maintain its value.
Tower Semiconductor Ltd.
In August 2000, the Company entered into a share purchase agreement with Tower
Semiconductor ("Tower") under which Alliance committed to make a $75 million
strategic investment in Tower as part of Tower's plan to build its new fab. In
return for its investment, Alliance will receive equity, corresponding
representation on Tower's Board of Director and committed production capacity in
the advanced fab, which Tower intends to build. Pursuant to the agreement, the
Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase
price of $31 million in the fourth quarter of fiscal 2001. The Company has an
obligation to purchase an additional 1,466,760 ordinary shares in four equal
increments upon occurrence of events relating to Tower's construction of FAB 2
as specified in the agreement. These additional shares are expected to be
purchased by the Company during fiscal 2002 and 2003.
In connection with the share purchase agreement, the Company entered into a
foundry agreement under which the Company is entitled to a certain amount of
credits towards future wafer purchases from Tower. The amount of credits is
determined upon each share purchase transaction by Alliance and is calculated
based on the difference between Tower's average stock price for 30 days
preceding a purchase transaction and Alliance's share purchase exercise price.
At March 31, 2001, such wafer credits from Tower totaled $14.7 million. The
wafer credits will be utilized as the Company purchases wafers from Tower in the
future where 15% of order value will be applied against the wafer credits. Under
the terms of the foundry agreement, the Company is guaranteed a capacity of up
to 15% of available wafer starts but not to exceed 5,000 wafers starts per
month. The guaranteed capacity may be reduced if the Company elects not to
exercise its additional share purchase obligation. The Company accounts for its
investment in Tower under the cost method based on the Company's inability to
exercise significant influence over Tower's operations.
The Investment Company Act of 1940
Following a special study after the stock market crash of 1929 and the ensuing
Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The
Act was primarily meant to regulate mutual funds, such as the families of funds
offered by the Fidelity and Vanguard organizations (to pick two of many), and
the smaller number of closed-end investment companies that are traded on the
public stock markets. In those cases the funds in question describe themselves
as being in the business of investing, reinvesting and trading in securities and
generally own relatively diversified portfolios of publicly traded securities
that are issued by companies that the investment companies do not control. The
fundamental intent of the Act is to protect the interests of public investors
from fraud and manipulation by the people who establish and operate such
investment companies, which constitute large pools of liquid assets that could
be used improperly, or not be properly safeguarded, by the persons in control of
them.
When the Act was written, its drafters (and Congress) also felt that a company
could, either deliberately or inadvertently, come to have the defining
characteristics of an investment company without proclaiming that fact or being
willing to voluntarily submit itself to regulation as an acknowledged investment
company, and that investors in such a company could be just as much in need of
protection as are investors in companies that are openly and deliberately
established as investment companies. In order to deal with this perceived
potential abuse, the Act
-15-
and rules under it contain provisions and set forth principles that are designed
to differentiate "true" operating companies from companies that may be
considered to have sufficient investment-company-like characteristics to require
regulation by the Act's complex procedural and substantive requirements. These
provisions apply to companies that own or hold securities, as well as companies
that invest, reinvest and trade in securities, and particularly focus on
determining the primary nature of a company's activities, including whether an
investing company controls and does business through the entities in which it
invests or, instead, holds its securities investments passively and not as part
of an operating business. For instance, under what is, for most purposes, the
most liberal of the relevant tests, a company may become subject to the Act's
registration requirements if it either holds more than 45% of its assets in, or
derives more than 45% of its income from, investments in companies that the
investor does not primarily control or through which it does not actively do
business. In making these determinations the Act generally requires that a
company's assets be valued on a current fair market value basis, determined on
the basis of securities' public trading price or, in the case of illiquid
securities and other assets, in good faith by the company's board of directors.
The Company viewed its investments in Chartered, USC and USIC, and its new
investment in Tower, as operating investments primarily intended to secure
adequate wafer manufacturing capacity; as previously noted, the Company's access
to the manufacturing resources that it obtained in conjunction with those
investments will decrease if the Company ceases to own at least 50% of its
original investments in the enterprises, as modified, in the cases of USC and
USIC, by their merger into UMC. In addition, the Company believes that, before
USC's merger into UMC, the Company's investment in USC constituted a joint
venture interest that the staff of the Securities and Exchange Commission (the
"SEC") would not regard as a security for purposes of determining the proportion
of the Company's assets that might be viewed as having been held in passive
investment securities. However, because of the success during the last two years
of the Company's investments, including its strategic wafer manufacturing
investments, at least from the time of the completion of the merger of USC and
USIC into UMC in January 2000 the Company believes that it could be viewed as
holding a much larger portion of its assets in investment securities than is
presumptively permitted by the Act for a company that is not registered under
it.
On the other hand, the Company also believes that the investments that it
currently holds in Chartered and UMC, even though in companies that the Company
does not control, should be regarded as strategic deployments of Company assets
for the purpose of furthering the Company's memory chip business, rather than as
the kind of financial investments that generally are considered to constitute
investment securities. Applying certain other tests that the SEC utilizes in
determining investment company status, the Company has never held itself out as
an investment company; its historical development has focused almost exclusively
on the memory chip business; the activities of its officers and employees have
been overwhelmingly addressed to achieving success in the memory chip business;
and until the past two years, its income (and losses) have derived almost
exclusively from the memory chip business. Accordingly, the Company believes
that it should be regarded as being primarily engaged in a business other than
investing, reinvesting, owning, holding or trading in securities, and has
applied to the SEC for an order under section 3(b)(2) of the Act confirming its
non-investment-company status. However, if the Company's investments in
Chartered, UMC and Tower are now viewed as investment securities, it must be
conceded that an unusually large proportion of the Company's assets could be
viewed as invested in assets that would, under most circumstances, give rise to
investment company status. Therefore, while the Company believes that it has
meritorious arguments as to why it should not be considered an investment
company and should not be subject to regulation under the Act, there can be no
assurance that the SEC will agree. And even if the SEC grants some kind of
exemption from investment company status to the Company, it may place
significant restrictions on the amount and type of investments the Company is
allowed to hold, which might force the Company to divest itself of many of its
current investments. Significant potential penalties may be imposed upon a
company that should be registered under the Act but is not, and the Company is
proceeding expeditiously to resolve its status.
If the Company does not receive an exemption from the SEC, the Company would be
required to register under the Act as a closed-end management investment
company. In the absence of exemptions granted by the SEC (if it determines to do
so in its discretion after an assessment of the public interest), the Act
imposes a number of significant requirements and restrictions upon registered
investment companies that do not normally apply to operating companies. These
would include, but not be limited to, a requirement that at least 40% of the
Company's board of directors not be "interested persons" of the Company as
defined in the Act and that those directors be granted certain special rights
with respect to the approval of certain kinds of transactions (particularly
those that pose a possibility of giving rise to conflicts of interest);
prohibitions on the grant of stock options that would be outstanding for more
than 120 days and upon the use of stock for compensation (which could be highly
detrimental to the Company in view of the competitive circumstances in which it
seeks to attract and retain
-16-
qualified employees); and broad prohibitions on affiliate transactions, such as
the compensation arrangements applicable to the management of Alliance Venture
Management, many kinds of incentive compensation arrangements for management
employees and joint investment by persons who control the Company in entities in
which the Company is also investing (which could require the Company to abandon
or significantly restructure its management arrangements, particularly with
respect to its investment activities). While the Company could apply for
individual exemptions from these restrictions, there could be no guarantee that
such exemptions would be granted, or granted on terms that the Company would
deem practical. Additionally, the Company would be required to report its
financial results in a different form from that currently used by the Company,
which would have the effect of turning the Company's Statement of Operations
"upside down" by requiring that the Company report its investment income and the
results of its investment activities, instead of its operations, as its primary
sources of revenue.
While the Company is working diligently to deal with these investment company
issues, there can be no assurance that a manageable solution will be found. The
SEC may be hesitant to grant an exemption from investment company status in the
Company's situation, and it may not be feasible for the Company to operate in
its present manner as a registered investment company. As a result, the Company
might be required to divest itself of assets that it considers strategically
necessary for the conduct of its operations, to reorganize as two or more
separate companies, or both. Such divestitures or reorganizations could have a
material adverse effect upon the Company's business and results of operations.
Employees
As of March 31, 2001, the Company had 203 full-time employees, consisting of 84
in research and development, 6 in marketing, 19 in sales, 38 in administration
and 56 in operations. Of the 84 research and development employees (38 in the US
and 46 in India), 24 have advanced degrees. In 1997, the Company opened a design
center in India. The Company believes that the Company's future success will
depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly-skilled design engineers
involved in new product development, for whom competition is intense. The
Company's employees are not represented by any collective bargaining unit, and
the Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
The Company has recently experienced and may continue to experience growth in
the number of its employees and the scope of its operating and financial
systems, resulting in increased responsibilities for the Company's management.
To manage future growth effectively, the Company will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its employees. There can be no
assurance that the Company will be able effectively to manage future growth, and
the failure to do so could have a material adverse effect on the Company's
results of operations.
The Company will depend to a large extent on the continued contributions of its
founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and
President of the Company, and his brother C.N. Reddy, Executive Vice President
for Investments and Director of the Company (collectively referred to as the
"Reddys"), as well as other officers and key design personnel, many of whom
would be difficult to replace. During fiscal 2000 and subsequently, a number of
officers and design personnel left the Company to pursue various other
opportunities. The future success of the Company will depend on its ability to
attract and retain qualified technical and management personnel, particularly
highly-skilled design engineers involved in new product development, for whom
competition is intense. The loss of either of the Reddys or key design personnel
could delay product development cycles or otherwise have a material adverse
effect on the Company's business. The Company is not insured against the loss of
any of its key employees, nor can the Company assure the successful recruitment
of new and replacement personnel.
ITEM 2
FACILITIES
The Company's executive offices and its principal marketing, sales and product
development operations are located in a 56,600 square foot leased facility in
Santa Clara, California under a lease which expires in June 2006. The Company
has an option to extend the lease for a term of five years. The Company also
leases office space in Hsin-Chu, Taiwan to manage the logistics of the wafer
fabrication, assembly and testing of the Company's products in Taiwan. The
Company leases an engineering office in Bangalore, India, and has purchased a
parcel
-17-
of land in an office park under development in Hyderabad, India, for product
development. Additionally, the Company leases sales offices in Natick,
Massachusetts; Garner, North Carolina; San Diego, California; Berkshire, United
Kingdom; Taipei, Taiwan; and Japan.
ITEM 3
LEGAL PROCEEDINGS
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately $170 million (USD), in a
case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd.
v. Fitch Research Corporation, et al., British Columbia Supreme Court No.
85-2805 (Victoria Registry). The Company, which had previously not participated
in the case, believes that it never was properly served with process in this
action, and that the Canadian court lacks jurisdiction over the Company in this
matter. In addition to jurisdictional and procedural arguments, the Company also
believes it may have grounds to argue that the claims against the Company should
be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the
court set aside the default judgment against the Company. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. Oral
arguments were made before the Court of Appeals in June 2000. In July 2000 the
Court of Appeals instructed the lower Court to allow the parties to take
depositions regarding the issue of service of process, while also setting aside
the default judgment against the Company. The plaintiffs appealed the setting
aside of the default judgment against the Company to the Canadian Supreme Court.
In June 2001, the Canadian Supreme Court refused to hear the appeal of the
setting aside of the default judgment against the Company. The Company believes
the resolution of this matter will not have a material adverse effect on its
financial conditions and its results of operations.
In February 1997, Micron Technology, Inc. filed an antidumping petition with the
United States International Trade Commission ("ITC") and United States
Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were
being sold in the United States at less than fair value, and that the United
States industry producing SRAMs was materially injured or threatened with
material injury by reason of imports of SRAMs fabricated in Taiwan. After a
final affirmative DOC determination of dumping and a final affirmative ITC
determination of injury, DOC issued an antidumping duty order in April 1998.
Under that order, the Company's imports into the United States on or after
approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash
deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value
of such SRAMs. (The Company posted a bond in the amount of 59.06% (the
preliminary margin) with respect to its importation, between approximately
October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the
Company and others filed an appeal in the United States Court of International
Trade (the "CIT"), challenging the determination by the ITC that imports of
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On
June 30, 1999, the CIT issued a decision remanding the ITC's affirmative
material injury determination to the ITC for reconsideration. The ITC's remand
determination reaffirmed its original determination. The CIT considered the
remand determination and remanded it back to the ITC for further
reconsideration. On June 12, 2000, in its second remand determination the ITC
voted negative on injury, thereby reversing its original determination that
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The
second remand determination was transmitted to the CIT on June 26, 2000 for
consideration. Micron has appealed the decision of the CIT to the Court of
Appeals for the Federal Circuit. The Company cannot predict either the timing or
the eventual results of the appeal, although it is expected to take a year or
more to conclude. Until a final judgment is entered in the appeal, no final
duties will be assessed on the Company's entries of SRAMs from Taiwan covered by
the DOC antidumping duty order. If the appeal is unsuccessful, the antidumping
order will be terminated and cash deposits will be refunded with interest. If
the appeal is successful, the Company's entries of Taiwan-fabricated SRAMs from
October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in
effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs,
the Company will continue to make cash deposits in the amount of 50.15% of the
entered value. At March 31, 2001, the Company had posted a bond secured by a
letter of credit in the amount of approximately $1.7 million and made cash
deposits in the amount of $1.7 million relating to the Company's importation of
Taiwan-manufactured SRAMs.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-18-
Executive Officers of the Registrant
Information concerning executive officers of the Company as of the date of this
report is set forth below:
Name Age Position
- ---------------- ---- --------------------------------------------------
N. Damodar Reddy 62 Chairman, President, Chief Executive Officer, and
Acting Chief Financial Officer
C.N. Reddy 45 Executive Vice President for Investments, Director
Bradley A. Perkins 44 Vice President, General Counsel and Secretary
Ritu Shrivastava 50 Vice President, Technology Development
N. Damodar Reddy is the co-founder of the Company and has served as the
Company's Chairman of the Board, Chief Executive Officer and President from its
inception in February 1985. Mr. Reddy also served as the Company's Chief
Financial Officer from June 1998 until January 1999 . From September 1983 to
February 1985, Mr. Reddy served as President and Chief Executive Officer of
Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of
Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of
Honeywell, Inc. Prior to that time, Mr. Reddy held various research and
development and management positions at Four Phase Systems, a subsidiary of
Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. Mr. Reddy is
a member of the board of directors of two publicly traded companies, Sage, Inc.
and eMagin, Corporation. He holds an M.S. degree in Electrical Engineering from
North Dakota State University and an M.B.A. from Santa Clara University. N.
Damodar Reddy is the brother of C.N. Reddy.
C.N. Reddy is the co-founder of the Company and has served as a director of the
Company since its inception in February 1985. Mr. Reddy served as Secretary to
the Company from February 1985 to October 2000. Beginning in February 1985, Mr.
Reddy served as the Company's Vice President - Engineering. In May 1993, he was
appointed Senior Vice-President - Engineering and Operations of the Company. In
December 1997, he was appointed Executive Vice President and Chief Operating
Officer. In October 2000, Mr. Reddy resigned his positions as Chief Operating
Officer and Secretary, and was appointed Executive Vice President for
Investments. From 1984 to 1985, he served as Director of Memory Products of
Modular Semiconductor, Inc., and from 1983 to 1984, Mr. Reddy served as a SRAM
product line manager for Cypress Semiconductor Corporation. From 1980 to 1983,
Mr. Reddy served as a DRAM development manager for Texas Instruments, Inc. and,
before that, he was a design engineer with National Semiconductor Corporation
for two years. Mr. Reddy holds an M.S. degree in Electrical Engineering from
Utah State University. Mr. Reddy is named inventor of over 15 patents related to
SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy.
Bradley A. Perkins joined the Company in January 1999, and was appointed Vice
President and General Counsel. In January 2001, Mr. Perkins was appointed
Secretary of the Company. Prior to joining the Company, Mr. Perkins was Vice
President, General Counsel and Secretary at Mission West Properties (formerly
Berg & Berg Developers), from January 1998 to January 1999. From November 1991
to January 1998, Mr. Perkins was with Valence Technology, Inc., where he was
Vice President, General Counsel and Secretary. From August 1988 to November
1991, Mr. Perkins was Assistant General Counsel and Intellectual Property
Counsel with VLSI Technology, Inc. Mr. Perkins holds a B.S.E. in electrical
engineering from Duke University, and a J.D. from McGeorge School of Law,
University of the Pacific.
Ritu Shrivastava joined the Company in November 1993, and was appointed Vice
President - Technology Development in August 1995. Dr. Shrivastava was
designated as an executive officer of the Company in July 1997. Prior to joining
the Company, Dr. Shrivastava worked at Cypress Semiconductor Corporation for
more than 10 years in various technology management positions, the last one
being Director of Technology Development. Prior to that time, Dr. Shrivastava
was with Mostek Corporation for 3 years, responsible for CMOS development. Dr.
Shrivastava served on the Electrical Engineering faculty at Louisiana State
University where he also received his Ph.D.. Dr. Shrivastava completed his
Masters and Bachelor's degrees in Electrical Communication Engineering from
Indian Institute of Science, Bangalore, India and a Bachelor's degree in Physics
from Jabalpur University, India. Dr. Shrivastava is named inventor in over 9
patents related to various technologies, and is a Fellow of IEEE.
-19-
================================================================================
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the NASDAQ National Market under the
symbol ALSC. The Company completed its initial public offering on December 1,
1993. The following table sets forth, for the periods indicated the high and low
closing sale prices on NASDAQ for the Company's common stock.
Fiscal Year High Low
----------- ----------
2000
1st Quarter $11.56 $2.63
2nd Quarter 12.94 7.69
3rd Quarter 16.69 9.00
4th Quarter 26.31 14.81
2001
1st Quarter $29.38 $14.00
2nd Quarter 26.69 17.88
3rd Quarter 20.75 10.88
4th Quarter 16.19 10.69
2002
1st Quarter
(through June $14.55 $10.00
22, 2001)
As of June 22, 2001, there were approximately 129 holders of record of the
Company's common stock.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain future earnings, if any, for development
of its business and, therefore, does not anticipate that it will declare or pay
cash dividends on its capital stock in the foreseeable future.
-20-
ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated financial information for
each of the five fiscal years ended March 31st and should be read in conjunction
with the consolidated financial statements and notes relating thereto.
Year Ended March 31,
--------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues $208,678 $89,153 $47,783 $118,400 $82,572
Cost of revenues 187,913 58,428 60,231 117,400 84,630
-------- -------- ------- -------- --------
Gross profit (loss) 20,765 30,725 (12,448) 1,000 (2,058)
Operating expenses:
Research and development 13,766 14,568 14,099 15,254 15,012
Selling, general and 19,691 15,962 12,652 18,666 10,344
administrative
-------- -------- ------- -------- --------
Income (loss)from (12,692) 195 (39,199) (32,920) (27,414)
operations
Gain on investments 75,801 1,049,130 15,823 - -
Write-down of marketable
securities and (509,449) - - - -
Other investments
Other income, net (200) 29 (1,126) 287
1,753
-------- -------- ------- -------- --------
Income (loss) before (446,540) 1,049,354 (24,502) (32,633) (25,661)
income taxes
Provision (benefit) for
income taxes (179,956) 410,348 8,397 (11,421) (8,990)
-------- -------- ------- -------- --------
Income (loss) before
equity in income (loss) (266,584) 639,006 (32,899) (21,212) (16,671)
of investees
Equity in income (loss) of
investees (5,737) 9,094 10,856 15,475 -
-------- -------- ------- -------- --------
Net income (loss) $(272,321) $648,100 $(22,043) $(5,737) $(16,671)
======== ======== ======= ======== ========
Net income (loss) per share:
Basic $(6.58) $15.49 $(0.53) $(0.15) $(0.43)
======== ======== ======= ======== ========
Diluted $(6.58) $15.07 $(0.53) $(0.15) $(0.43)
======== ======== ======= ======== ========
Weighted average number of common shares:
Basic 41,376 41,829 41,378 39,493 38,653
======== ======== ======= ======== ========
Diluted 41,376 42,992 41,378 39,493 38,653
======== ======== ======= ======== ========
Year ended March 31,
--------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Working capital $289,659 $615,937 $22,102 $39,879 $78,000
Total assets 849,239 1,520,442 193,557 243,668 232,486
Stockholders' equity 547,289 963,955 163,570 189,111 204,594
Long term obligations 12,568 2,714 578 1,276 2,219
-21-
Fiscal Year 2001 Fiscal Year 2000
-------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
Operating Summary: (in thousands, except per share data)
Net revenues $32,993 $63,815 $64,466 $47,404 $28,833 $23,497 $19,112 $17,711
Cost of revenues 75,557 42,530 39,943 29,883 18,242 15,412 12,304 12,470
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss) (42,564) 21,285 24,523 17,521 10,591 8,085 6,808 5,241
Operating expenses:
Research and 3,599 3,109 3,467 3,591 3,788 3,330 4,244 3,206
development
Selling, general and 5,140 4,777 5,260 4,514 3,356 6,753 3,108 2,745
administrative
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from (51,303) 13,399 15,796 9,416 3,447 (1,998) (544) (710)
operations
Gain on investments 9,541 5,258 13,485 47,517 988,717 5,111 3,696 51,606
Write-down of
marketable securities(509,449) - - - - - - -
and other investments
Other income (673) (200) 333 340 233 (56) (269) 121
(expense), net
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before (551,884) 18,457 29,614 57,273 992,397 3,057 2,883 51,017
income taxes
Provision (benefit) (220,973) 5,654 12,053 23,310 410,944 (963) 1,186 (819)
for income taxes
-------- -------- -------- -------- -------- -------- -------- --------
(330,911) 12,803 17,561 33,963 581,453 4,020 1,697 51,836
Income (loss) before
equity in income
(loss) of investees
Equity in income (2,092) (1,854) (1,093) (698) (368) 5,134 2,796 1,532
(loss) of investees
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $(333,003) $10,949 $16,468 $33,265 $581,085 $9,154 $4,493 $53,368
======== ======== ======== ======== ======== ======== ======== ========
et income (loss) per share:
Basic $(8.05) $0.27 $0.40 $0.80 $13.88 $0.22 $0.11 $1.28
======== ======== ======== ======== ======== ======== ======== ========
Diluted $(8.05) $0.26 $0.39 $0.78 $13.48 $0.21 $0.10 $1.27
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of common shares:
Basic 41,383 41,296 41,326 41,543 41,864 41,858 41,812 41,608
======== ======== ======== ======== ======== ======== ======== ========
Diluted 41,383 42,221 42,537 42,778 43,118 42,944 42,995 42,149
======== ======== ======== ======== ======== ======== ======== ========
During the first and second quarters of fiscal year 2001, the Company
experienced an increase in the average selling price and increased demand for
DRAM and SRAM products. During the third and fourth quarters of fiscal year
2001, the Company experienced substantial order cancellations and reschedules.
As a result, the Company experienced a decrease in certain product average
selling prices and a decrease in demand. In the first fiscal quarter of 2001,
the Company recognized a gain on its investment in Malleable Technologies, Inc.
("Malleable") when it was sold to PMC-Sierra, Inc. ("PMC"), for $11.0 million.
Also in the first fiscal quarter, the Company recognized gains of $2.9 million
on the sale of Broadcom Corporation ("Broadcom") securities, and $33.5 million
on the sale of Chartered Semiconductor Corporation ("Chartered") securities. In
subsequent quarters, the Company recognized gains of $28.5 million on additional
sales of Broadcom securities. In the fourth fiscal quarter, the Company recorded
a pre-tax charge of $509.4 million for a write-down of its marketable securities
and other investments. In the third and fourth fiscal quarters, the Company
recorded pre-tax charges of $53.9 million ($32.2 million net of tax) for decline
in market value of certain inventory and to provide additional reserves for
obsolete and excess inventory. In the first fiscal 2000 quarter, the Company
recognized a gain on its investment in Maverick Networks ("Maverick") when it
was sold to Broadcom Corporation ("Broadcom"), for $51.6 million. In subsequent
quarters, the Company recognized additional gains of $23.7 million on sale of
Broadcom securities. In the third fiscal 2000 quarter, the Company also recorded
a $3.6 million discretionary non-recurring compensation expense related to this
transaction. In the fourth fiscal 2000 quarter, the Company recognized a gain on
its investment in United Microelectronics Corporation ("UMC") of $908 million
($532 million net of tax). Also in the fourth fiscal 2000 quarter, the Company
recognized a gain of $69 million ($41 million net of tax) on its investment in
Orologic Corporation ("Orologic") when it was sold to Vitesse Semiconductor
Corporation ("Vitesse").
-22-
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements in this Management's Discussion and Analysis that are forward
looking involve numerous risks and uncertainties and are based on current
expectations. Actual results may differ materially. Certain of these risks and
uncertainties are discussed under "Factors That May Affect Future Results," as
well as elsewhere in this report.
Overview
Overview Years ended
--------------------------------
March March March
31, 2001 31, 2000 31, 1999
--------- ---------- ---------
Revenue $208,678 $89,153 $47,783
========= ========== =========
Net income $(272,321) $648,100 $(22,043)
(loss)
========= ========== =========
Diluted
earnings per
share $(6.58) $15.07 $(0.53)
========= ========== =========
The Company designs and develops high performance memory products and memory
intensive logic products. These circuits are used in a wide variety of
electronic products, including desktop and portable computers, networking,
telecommunications, instrumentation and consumer devices. The Company's business
strategy has been to be a supplier of these products, operating on a fabless
basis by utilizing independent manufacturing facilities.
During fiscal 2001, DRAM products accounted for approximately 57% of net
revenues, SRAM products accounted for approximately 43% of net revenues and
flash products accounted for approximately less than 1% of net revenues. This
compares to 56%, 43% and 1% of net revenues, respectively, for fiscal 2000.
The market for memory products used in personal computers is characterized by
price volatility and has experienced significant fluctuations and cyclical
downturns in product demand, such as the severe price erosion of DRAMs and SRAMs
in fiscal 1999, 1998 and 1997. On June 8, 2001, the Company announced that it
expected that its revenues for the first quarter of fiscal 2002 will be
approximately 50% to 55% below the $33.0 million reported in the fourth quarter
of fiscal 2001, as a result of lower demand and lower average selling prices of
some of its products. While the Company's strategy is to increase its
penetration into the networking, telecommunications, instrumentation and
consumer markets with its existing SRAM, DRAM and flash products and to develop
and sell in volume quantities new products complementary to its existing
products, the Company may not be successful in executing such strategy. A
decline in demand in the personal computer industry or lack of success in
developing new markets or new products could have a material adverse effect on
the Company's results of operations.
-23-
Results of Operations
The percentage of net revenues represented by certain line items in the
Company's consolidated statements of operations for the years indicated, are set
forth in the table below.
Percentage of Net Revenues for Year
Ended March 31,
--------------------------------------
2001 2000 1999
----------- ------------ -----------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 90.1 65.5 126.1
----------- ------------ -----------
Gross profit (loss) 9.9 34.5 (26.1)
Operating expenses:
Research and development 6.6 16.3 29.5
Selling, general and 9.4 17.9 26.5
administrative
----------- ------------ -----------
Income (loss) from operations (6.1) 0.3 (82.1)
Gain on investments 36.3 1176.8 33.2
Write-down of marketable
s ecurities and other (244.1) - -
investments
Other income (loss), net (0.1) 0.0 (2.4)
----------- ------------ -----------
Income (loss) before income taxes (214.0) 1177.1 (51.3)
Provision (benefit) for income (86.2) 460.3 17.7
taxes
----------- ------------ -----------
Income (loss) before equity in (127.8) 716.8 (69.0)
income (loss) of investees
Equity in income (loss) of (2.7) 10.2 22.7
investees
----------- ------------ -----------
Net income (loss) (130.5)% 727.0% (46.3)%
=========== ============ ===========
Net Revenues
Revenues Years ended Percentage change
-------------------------------- -------------------
March March March 2000 1999
31, 31, 31, to to
2001 2000 1999 2001 2000
--------- --------- ---------- -------- ---------
SRAMS $90,549 $38,088 $28,435 137.7% 33.9%
DRAMS 117,938 50,235 18,424 134.8% 172.7%
Other 191 830 924 (77.0)% (10.2)%
--------- --------- ---------- -------- ---------
Total $208,678 $89,153 $47,783 134.1% 86.6%
Revenues
========= ========= ========== ======== =========
The Company's net revenues increased to $208.7 million in fiscal 2001 or
approximately 134%, from $89.2 million in fiscal 2000. The increase in net
revenues in fiscal 2001 was primarily due to a combination of sales of new
products, overall increase in average selling prices and an increase in unit
sales of the Company's SRAM and DRAM products during the first three quarters.
During the fourth quarter of fiscal 2001 the Company's net revenues fell,
largely due to a decrease in demand and in some cases a decrease in average
selling prices. The Company's net revenues in fiscal 2000 increased to $89.2
million from $47.8 million in fiscal 1999, an increase of approximately 87%. The
increase in net revenues in fiscal 2000 was due to a higher average selling
price and an increase unit shipments of the Company's SRAM and DRAM products.
Net revenue from the Company's DRAM product family in fiscal 2001 contributed
$117.9 million or approximately 57%, up from $50.2 million or approximately 56%
in fiscal 2000. During the first three quarters of fiscal 2001, sales of the
Company's 16-Mbit DRAM in both the 1-Mbit x 16 configuration and the 4-Mbit x 4
configuration, increased significantly, along with an overall increase in the
average selling prices. During the fourth quarter of fiscal 2001 demand for
these products decreased as well as the average selling prices. DRAM net
revenues for fiscal 1999 were $18.4 million or approximately 39% of total net
revenues.
Net revenue from the Company's SRAM product family in fiscal 2001 contributed
$90.5 million or approximately 43% of the Company's revenues up from $38.1
million or approximately 43% in fiscal 2000. During the first three quarters of
fiscal 2001, sales of the Company's 4-Mbit SRAM in both the 3.3V and 5V fast
asynchronous configurations, increased significantly along with an overall
increase in the average selling prices. During the fourth quarter of fiscal 2001
the demand for those products decreased but the average selling prices remained
stable. SRAM net revenues in fiscal 1999 were $28.4 million, or approximately
59% of total net revenues.
-24-
The Company continues to focus its effort in selling in the non-PC market. Net
sales to non-PC segments of the market, such as telecommunications, networking,
datacom and consumer in fiscal 2001 accounted for approximately 73% compared to
approximately 56% during fiscal 2000 and 52% in fiscal 1999.
International net revenues in fiscal 2001 were $131.6 million or approximately
63% of total net revenues for fiscal 2001. This was an increase of approximately
148% over fiscal 2000. International net revenues in fiscal 2000 increased
approximately 121% over fiscal 1999. International net revenues are derived from
customers in Europe, Asia and the rest of the world. The largest percentage
increase in international net revenues was to customers in Asia, which increased
approximately 236% over fiscal year 2000. The increase was due to an overall
increase in product demand and higher selling prices during the first three
quarters of the year.
During fiscal 2001, no single customer accounted for over 10% of net revenues.
During fiscal 2000, one customer accounted for approximately 10% of net
revenues. Two customers accounted for approximately 15% and 13% of net revenues
during fiscal 1999.
On June 8, 2001, the Company announced that it expected that its revenues for
the first quarter of fiscal 2002 will be approximately 50% to 55% below the
$33.0 million reported in the fourth quarter of fiscal 2001, as a result of
lower demand and lower average selling prices of some of its products.
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 results of operations.
Gross Profit (Loss)
The Company's gross profit for fiscal 2001 was approximately $20.8 million, or
10.0% of net revenues, as compared to $30.7 million, or approximately 34.5% of
net revenues, for the same period in fiscal 2000, and a loss of approximately
$12.4 million, or approximately 26.1% of net revenues, in fiscal 1999. During
third and fourth quarter of fiscal 2001, the Company took pre-tax inventory
charges of $53.9 million in recognition of lower average selling prices and
inventory in excess of demand due to the decline in unit shipments for the
Company's DRAM and SRAM products. The dramatic improvement in gross profits
during fiscal year 2000 was primarily the result of higher average selling
prices, higher unit sales, and an increased mix of higher margin DRAM products.
During fiscal 1999, the Company recorded $20.0 million pre-tax inventory charges
in recognition of lower average selling prices together with the decline in the
unit shipments for the Company's DRAM and SRAM products due to competitive
market conditions.
The Company is subject to a number of factors that may have an adverse impact on
gross profits, including the availability and cost of products from the
Company's suppliers; increased competition and related decreases in unit average
selling prices; changes in the mix of product 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 the
commencement of such manufacturing will not have a material adverse effect on
the Company's gross profits in future periods.
Research and Development
Research and
Development Years ended Percentage change
--------------------------------- -------------------
March March March 2000 to 1999
31, 2001 31, 2000 31, 1999 2001 to 2000
---------- ---------- ---------- --------- --------
Revenue $208,678 $89,153 $47,783 134.1% 86.6%
========== ========== ========== ========= ========
Research and $13,766 $14,568 $14,099 (5.5)% 3.3%
Development
========== ========== ========== ========= ========
R&D as a percent
of revenues 6.6% 16.3% 29.5% (59.6)% (44.6)%
========== ========== ========== ========= ========
-25-
Research and development expenses consist principally of salaries and benefits
for engineering design, contracted development efforts, facilities costs,
equipment and software depreciation and amortization, wafer masks and tooling
costs, test wafers and other expense items.
Research and development expenses were approximately $13.8 million or
approximately 7% of net revenues for fiscal 2001 as compared to $14.6 million or
approximately 16% of net revenues for fiscal 2000, and approximately $14.1
million or approximately 29% of net revenues for fiscal 1999. The small decrease
in spending between fiscal 2001 and 2000 was due to lower depreciation expense
for R&D equipment. The small increase in spending between fiscal 2000 and 1999
was higher mask and tooling charges. During fiscal 2001, the Company's
development efforts focused on advanced process and design technology involving
SRAMs, DRAMs and Flash memory products.
The Company believes that investments in research and development are necessary
to remain competitive in the marketplace and accordingly, research and
development expenses may increase in absolute dollars and may also increase as a
percentage of net revenue in future periods.
Selling, General and Administrative
Selling, General
and Administration Years ended Percentage change
--------------------------------- -------------------
March March March 2000 to 1999
31, 2001 31, 2000 31, 1999 2001 to 2000
---------- ---------- --------- --------- --------
Revenue $208,678 $89,153 $47,783 134.1% 86.6%
========== ========== ========= ========= ========
Selling, General $19,691 $15,962 $12,652 23.4% 26.2%
and Administration
========== ========== ========= ========= ========
SG&A as a percent
of revenues 9.4% 17.9% 26.5% (47.3)% (32.4)%
========== ========== ========= ========= ========
Selling, general and administrative expenses generally include salaries and
benefits associated with sales, sales support, marketing and administrative
personnel, as well as sales commissions, outside marketing costs, travel,
equipment depreciation and software amortization, facilities costs, bad debt
expense, insurance and legal costs.
Selling, general and administrative expenses in fiscal 2001 were approximately
$20 million or approximately 9% of net revenues as compared to approximately $16
million or approximately 18% in fiscal 2000 and approximately $12.7 million or
approximately 26% of net revenues for fiscal 1999. The increase in spending
between fiscal 2001 and 2000 was higher sales commissions principally due to the
134% growth in net revenues, travel and an increase in allowances for bad debts.
In fiscal 2000, the Company recorded a $3.6 million discretionary non-recurring
compensation expense related to the sale of Maverick Networks, Inc. ("Maverick")
to Broadcom Corporation ("Broadcom"). The decrease in spending in fiscal 1999
compared to fiscal 2000 was due principally to lower outside sales commissions.
Selling, general and administrative expenses may increase in absolute dollars,
and may also fluctuate as a percentage of net revenues in the future primarily
as the result of commissions, which are dependent on the level of revenues.
Gain on Investments
Gain on investments during fiscal 2001 was largely attributed to the sale of
Chartered and Broadcom securities. During fiscal 2001, the Company sold 500,000
shares of Chartered and recorded a pre-tax gain of $33.5 million and sold
287,522 shares of Broadcom and recorded a pre-tax gain $31.3 million.
In June 2000, Malleable completed a merger with PMC-Sierra, resulting in the
Company's selling its ownership interest in Malleable in exchange for 68,000
shares of PMC-Sierra Common Stock with a fair market value of $12.4 million.
Upon completion of the transaction in June 2000, the Company recorded a pre-tax
gain of $11.0 million. Subsequent to the transaction date, the Company's
investment in PMC-Sierra is accounted for as an "available-for-sale" security in
accordance with SFAS No. 115.
In May 1999, Maverick (an entity in which the Company had a 39% interest in)
completed a transaction with Broadcom, resulting in the Company selling its
ownership interest in Maverick in exchange for 538,961 shares of Broadcom's
Class B common stock. Based on Broadcom's closing share price on the date of
sale, the Company
-26-
recorded a pre-tax gain in the first quarter of fiscal 2000 of approximately
$51.6 million. Subsequent to the transaction date, the Company's investment in
Broadcom is being be accounted for as an available-for-sale marketable security
in accordance with SFAS 115. During fiscal 2000, the Company sold 275,600 shares
of Broadcom stock and realized an additional pre-tax gain of approximately $23.7
million. At March 31, 2000, the Company owned 487,522 shares, after being
adjusted for a 2 for 1 stock split in February 2000, and recorded an additional
unrealized gain of approximately $23.4 million, which is net of deferred tax of
approximately $16.1 million tax, as part of accumulated other comprehensive
income in the stockholders equity section of the balance sheet. At March 31,
2001, the Company owned 200,000 shares of Broadcom. See Note 2 of Notes to
Consolidated Financial Statements.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. Alliance received 247.7 million shares of
UMC stock for its 247.7 million shares, or 15% ownership of USC, and
approximately 35.6 million shares of UMC stock for its 48.1 million shares, or
3% ownership of USIC. At March 31, 2001 and 2000, the Company owned
approximately 340.0 and 283.3 million shares, respectively or approximately 3.0%
and 3.2% of UMC, and maintained its 25% and 4% wafer capacity allocation rights
in the former USC and USIC foundries, respectively. As the Company no longer has
an ability to exercise significant influence over UMC's operations, the
investment in UMC is accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax, non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US
$3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued approximately
$3.0 million for the Taiwan securities transaction tax in connection with the
shares received by the Company. This transaction tax will be paid, on a per
share basis, when the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares were subject to a six-month "lock-up" or no trade period. This
lock-up period expired in July 2000. Of the remaining 50%, or 141.6 million
shares, approximately 28.3 million shares will become eligible for sale two
years from the closing date of the transaction (i.e. January 2002), with
approximately 28.3 million shares available for sale every six months
thereafter, during years three and four (i.e. 2002 to 2004). In May 2000, the
Company received additional 20% or 56.6 million shares of UMC by way of a stock
dividend.
Subsequent to the completion of the merger the Company accounts for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which became
unrestricted in January 2001 as an available-for-sale marketable security in
accordance with SFAS 115. At March 31, 2000, the Company recorded an unrealized
gain of approximately $25.7 million, which is net of deferred tax of $17.6
million, as part of accumulated other comprehensive income in the stockholders'
equity section of the balance sheet with respect to the short-term portion of
the investments. The portion of the investment in UMC, which is restricted
beyond twelve months (approximately 42% of the Company's holdings at March 31,
2001), is accounted for as a cost method investment and is presented as a
long-term investment. As this long-term portion becomes current over time, the
investment will be transferred to short-term investments and will be accounted
for as an available-for-sale marketable security in accordance with SFAS 115.
The long-term portion of the investments become unrestricted securities between
2002 and 2004.
On March 31, 2000, Orologic completed a transaction with Vitesse, resulting in
the Company selling its ownership interest in Orologic in exchange for 852,447
shares of Vitesse. Based on Vitesse's closing share price on the date of sale,
the Company recognized approximately $69 million pre-tax, non-operating gain,
which is in fiscal 2000. Subsequent to the transaction date, the Company's
investment in Vitesse is being be accounted for as an available-for-sale
marketable security in accordance with SFAS 115. At March 31, 2001, the Company
owns 728,293 Vitesse shares, after distribution made to Alliance Venture
Management in May 2000.
Write-Down of Marketable Securities and Other Investments
In the past six months, marketable securities held by the Company have
experienced significant declines in their market value primarily due to the
downturn in the semiconductor sector and general market conditions. Management
has evaluated the marketable securities for potential "other-than-temporary"
declines in their value.
-27-
Such evaluation included researching commentary from industry experts, analysts
and other companies, all of whom were not optimistic that the semiconductor
sector would recover in the quarter or two or three. Based on the continuing
depression in the in investments' stock prices from those originally used to
record the investment and coupled with the expectation that the stock prices
will not significantly recover in the next 6 to 9 months, based on unfavorable
business conditions for the companies in the semiconductor industry in general
(including lower Fab capacity at UMC), management determined that a write down
was necessary as of March 31, 2001. As a result the Company recorded a pre-tax
loss of $506.8 million during the fourth quarter of fiscal 2001 based on the
quoted market price of the respective marketable securities as of March 31,
2001.
At the end of the fourth quarter fiscal 2001, the Company wrote-down several of
its investments in Alliance Ventures and recognized a pre-tax, non-operating
loss of approximately $2.6 million. This was recorded in the write-down of
marketable securities and other investments.
In January 2001, the Company entered into two derivative contracts
("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5
million. The Agreements have payment provisions that incorporate a collar
arrangement with respect to 490,000 shares of Vitesse Semiconductor common
stock. As such, under the Agreements, the Company must pay Bear Stearns an
amount based on the market price of Vitesse Semiconductor Common Stock in
January 2003, the maturity date of the Agreements. If the stock price of Vitesse
Semiconductor exceeds the ceiling of the collar, then the settlement amount
increases by an amount determined by a formula included in the Agreements
(generally equal to the excess of the value of the stock over the ceiling of the
collar). If the stock price of Vitesse Semiconductor declines below the floor of
the collar, then the settlement amount also decreases by the amount determined
by a formula included in the Agreements (generally equal to the excess of the
floor of the collar over the value of the stock). At March 31, 2001, the
derivative contracts were in the money to the Company based on Vitesse
Semiconductor's market price of $23.81 on that date. Under the current
accounting practice, the Company is required to offset the gain on the contracts
with the loss on the Vitesse stock, both were recorded in the write-down of
marketable securities in the fourth quarter of fiscal 2001. The pre-tax gain on
the contracts amounted to $20.6 million, representing their intrinsic value at
March 31, 2001. The Company has adopted SFAS No. 133 effective April 2, 2001.
Under SFAS No. 133, the derivative contracts must be accounted for based on
their fair value. These changes in fair value contracts must be reported in
earnings until maturity.
Other Income (Expense), Net
Other Income (Expense), Net represents interest income from short-term
investments and interest expense on short and long-term obligations. In fiscal
2001, Other Expense, Net was approximately $200,000 compared to a net income of
$29,000 in fiscal 2000. The change from fiscal 2000 to fiscal 2001 was
attributed to higher interest expense on short and long-term borrowing. In
fiscal 1999 net expense was $1.1 million.
Provision for Income Taxes
The Company's effective tax rate for fiscal years 2001, 2000, and 1999 was
(40.3%), 39.1%, and (34.3%), respectively.
During fiscal 2001, the Company recorded a benefit for income taxes of
approximately $180 million primarily as a result of a write down of marketable
securities and other investments of $509.4 million in the fourth quarter.
During fiscal 2000, the Company recorded a provision for income taxes of
approximately $410.3 million, primarily the result of the gains on investments
of Broadcom, UMC and Vitesse.
For the year ended March 31, 1999, the Company incurred a $24.5 million pretax
loss, $9.8 million of which was incurred in the quarter ended June 30, 1998. As
a result of the fiscal year 1999 loss, the lack of carryback potential, and the
uncertainty regarding future results due to significant, rapid and unexpected
product selling price declines that the Company experienced during the first and
subsequent quarters of fiscal 1999, management could no longer conclude that it
was "more likely than not" that its deferred tax assets would be realized. As a
result, a full valuation allowance of $8.4 million was recorded during quarter
ended June 30, 1998.
-28-
Equity in Income of Investees
The Company, through Alliance Venture Management, invested approximately $62.0
million during fiscal 2001 in five Alliance venture funds, Alliance Ventures I,
Alliance Ventures II, Alliance Ventures III, Alliance Ventures IV, and Alliance
Ventures V. Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested $22.0 million in nine companies,
with approximately $20.0 million allocated to this fund. Alliance Ventures II,
whose focus is in investing in internet start-up ventures has approximately $9.1
million invested to-date in ten companies, with approximately $15.0 million
total designated for this fund. Alliance Ventures III, whose focus is on
emerging companies in the networking and communication market areas has invested
approximately $38.6 million in 14 companies and has been allocated up to $100.0
million for new investments. Alliance Ventures IV, whose focus is on emerging
companies in the networking and communication market areas has invested
approximately $4.0 million in two companies and has been allocated up to $40.0
million for new investments. Alliance Ventures V, whose focus is on emerging
companies in the networking and communication market areas has invested
approximately $6.5 million in three companies and has been allocated up to $60.0
million for new investments.
Several of the Alliance Venture investments are accounted for under the equity
method due to the Company's ability to exercise significant influence on the
operations of investees resulting primarily from ownership interest and/or board
representation. The total equity in the net losses of the equity investees of
Alliance Ventures was approximately $5.7 million for the year ended March 31,
2001.
Prior to the UMC merger (discussed elsewhere), the Company had made several
investments with other parties to form a separate Taiwanese company, USC. This
investment was accounted for under the equity method of accounting with a
ninety-day lag in reporting the Company's share of results for the entity.
Equity in income of USC reflects the company's share of income earned by USC for
the previous quarter. In fiscal 2000, the Company reported its share in the
income of USC in the amount of $9.5 million. As a result of the merger in
January 2000, the Company no longer recorded its proportionate share of equity
income in USC, as the Company no longer has an ability to exercise significant
influence over UMC's operations. The investment in UMC is accounted for as a
cost method investment. In fiscal 1999, the Company reported its share in the
income of USC in the amount of $10.9 million, as compared to $15.5 million
reported in fiscal 1998. The 30% decrease in income between fiscal 1999 and 1998
is primarily due to lower net income and a decrease in the Company's ownership
percentage from approximately 18% to 15%.
Factors That May Affect Future Results
The Company's quarterly and annual results of operations have historically been,
and will continue to be, subject to quarterly and other fluctuations due to a
variety of factors, including; general economic conditions; changes in pricing
policies by the Company, its competitors or its suppliers; anticipated and
unanticipated decreases in unit average selling prices of the Company's
products; fluctuations in manufacturing yields, availability and cost of
products from the Company's suppliers; the timing of new product announcements
and introductions by the Company or its competitors; changes in the mix of
products sold; the cyclical nature of the semiconductor industry; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; market acceptance of new or enhanced
versions of the Company's products; seasonal customer demand; and the timing of
significant orders. Results of operations could also be adversely affected by
economic conditions generally or in various geographic areas, other conditions
affecting the timing of customer orders and capital spending, a downturn in the
market for personal computers, or order cancellations or rescheduling.
Additionally, because the Company is continuing to increase its operating
expenses for personnel and new product development to be able to support
increased sales levels, the Company's results of operations will be adversely
affected if such increased sales levels are not achieved.
The markets for the Company's products are characterized by rapid technological
change, evolving industry standards, product obsolescence and significant price
competition and, as a result, are subject to decreases in average selling
prices. The Company had experienced significant deterioration in the average
selling prices for its SRAM and DRAM products during fiscal years 2001, 1998,
1997 and 1996. The Company is unable to predict the future prices for its
products. Historically, average selling prices for semiconductor memory products
have declined and the Company expects that average-selling prices will decline
in the future. Accordingly, the Company's ability to maintain or increase
revenues will be highly dependent on its ability to increase unit sales volume
of existing products and to successfully develop, introduce and sell new
products. Declining average selling prices will also adversely affect the
Company's gross margins unless the Company is able to significantly
-29-
reduce its cost per unit in an amount to offset the declines in average selling
prices. There can be no assurance that the Company will be able to increase unit
sales volumes of existing products, develop, introduce and sell new products or
significantly reduce its cost per unit. There also can be no assurance that even
if the Company were to increase unit sales volumes and sufficiently reduce its
costs per unit, the Company would be able to maintain or increase revenues or
gross margins.
The Company usually ships more product in the third month of each quarter than
in either of the first two months of the quarter, with shipments in the third
month higher at the end of the month. This pattern, which is common in the
semiconductor industry, is likely to continue. The concentration of sales in the
last month of the quarter may cause the Company's quarterly results of
operations to be more difficult to predict. Moreover, a disruption in the
Company's production or shipping near the end of a quarter could materially
reduce the Company's net sales for that quarter. The Company's reliance on
outside foundries and independent assembly and testing houses reduces the
Company's ability to control, among other things, delivery schedules.
The cyclical nature of the semiconductor industry periodically results in
shortages of advanced process wafer fabrication capacity such as the Company has
experienced from time to time. The Company's ability to maintain adequate levels
of inventory is primarily dependent upon the Company obtaining sufficient supply
of products to meet future demand, and any inability of the Company to maintain
adequate inventory levels may adversely affect its relations with its customers.
In addition, the Company must order products and build inventory substantially
in advance of products shipments, and there is a risk that because demand for
the Company's products is volatile and subject to rapid technology and price
change, the Company will forecast incorrectly and produce excess or insufficient
inventories of particular products. This inventory risk is heightened because
certain of the Company's key customers place orders with short lead times. The
Company's customers' ability to reschedule or cancel orders without significant
penalty could adversely affect the Company's liquidity, as the Company may be
unable to adjust its purchases from its independent foundries to match such
customer changes and cancellations. The Company has in the past produced excess
quantities of certain products, which has had a material adverse effect on the
Company's results of operations. There can be no assurance that the Company in
the future will not produce excess quantities of any of its products. To the
extent the Company produces excess or insufficient inventories of particular
products, the Company's results of operations could be adversely affected, as
was the case in fiscal 2001, 1999, 1998 and 1997, when the Company recorded
pre-tax charges totaling approximately $53.9 million, $20.0 million, $15.0
million and $17.0 million, respectively, primarily to reflect a decline in
market value of certain inventory.
The Company currently relies on independent foundries to manufacture all of the
Company's products. Reliance on these foundries involves several risks,
including constraints or delays in timely delivery of the Company's products,
reduced control over delivery schedules, quality assurance and costs and loss of
production due to seismic activity, weather conditions and other factors. In or
about October 1997, a fire caused extensive damage to United Integrated Circuits
Corporation ("UICC"), a foundry joint venture between UMC and various companies.
UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where
Company has products manufactured. UICC suffered an additional fire in January
1998, and since October 1996, there have been at least two other fires at
semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial
Park. There can be no assurance that fires or other disasters will not have a
material adverse affect on UMC in the future. In addition, as a result of the
rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based
Industrial Park, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity could
adversely affect the Company's foundries' ability to supply the Company's
products, which could have a material adverse effect on the Company's results of
operations or financial condition. Although the Company continuously evaluates
sources of supply and may seek to add additional foundry capacity, there can be
no assurance that such additional capacity can be obtained at acceptable prices,
if at all. The occurrence of any supply or other problem resulting from these
risks could have a material adverse effect on the Company's results of
operations, as was the case during the third quarter of fiscal 1996, during
which period manufacturing yields of one of the Company's products were
materially adversely affected by manufacturing problems at one of the Company's
foundry suppliers. There can be no assurance that other problems affecting
manufacturing yields of the Company's products will not occur in the future.
There is an ongoing risk that the suppliers of wafer fabrication, wafer sort,
assembly and test services to the Company may increase the price charged to the
Company for the services they provide, to the point that the Company may not be
able to profitably have its products produced at such suppliers. The occurrence
of such price increases could have a material adverse affect on the Company's
results of operations.
-30-
The Company conducts a significant portion of its business internationally and
is subject to a number of risks resulting from such operations. Such risks
include political and economic instability and changes in diplomatic and trade
relationships, foreign currency fluctuations, unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the burdens
of complying with a variety of foreign laws. Current or potential customers of
the Company in Asia, for instance, may become unwilling or unable to purchase
the Company's products, and the Company's Asian competitors may be able to
become more price-competitive relative to the Company due to declining values of
their national currencies. There can be no assurance that such factors will not
adversely impact the Company's results of operations in the future or require
the Company to modify its current business practices.
Additionally, other factors may materially adversely affect the Company's
results of operations. The Company relies on domestic and offshore
subcontractors for die assembly and testing of products, and is subject to risks
of disruption in adequate supply of such services and quality problems with such
services. The Company is subject to the risks of shortages of goods or services
and increases in the cost of raw materials used in the manufacture or assembly
of the Company's products. The Company faces intense competition, and many of
its principal competitors and potential competitors have substantially greater
financial, technical, marketing, distribution and other resources, broader
product lines and longer-standing relationships with customers than does the
Company, any of which factors may place such competitors and potential
competitors in a stronger competitive position than the Company. The Company's
corporate headquarters are located near major earthquake faults, and the Company
is subject to the risk of damage or disruption in the event of seismic activity.
There can be no assurance that any of the foregoing factors will not materially
adversely affect the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Effective April 2, 2001, we have adopted SFAS No.
133, and we are required to adjust hedging instruments to fair value in the
balance sheet, and recognize the offsetting gain or loss as transition
adjustments to be reported in net income or other comprehensive income, as
appropriate, and presented in a manner similar to the cumulative effect of a
change in accounting principle.
Current pending litigation, administrative proceedings and claims are set forth
in Item 3 - Legal Proceedings and in Item 1 - Licenses, Patents and Maskwork
Protection, above. The Company intends to vigorously defend itself in the
litigation and claims and, subject to the inherent uncertainties of litigation
and based upon discovery completed to date, management believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position. However, should the outcome of any of these
actions be unfavorable, the Company may be required to pay damages and other
expenses, or may be enjoined from manufacturing or selling any products deemed
to infringe the intellectual property rights of others, which could have a
material adverse effect on the Company's financial position or results of
operations. Moreover, the semiconductor industry is characterized by frequent
claims and litigation regarding patent and other intellectual property rights.
The Company has from time to time received, and believes that it likely will in
the future receive, notices alleging that the Company's products, or the
processes used to manufacture the Company's products, infringe the intellectual
property rights of third parties, and the Company is subject to the risk that it
may become party to litigation involving such claims (the Company currently is
involved in patent litigation). In the event of litigation to determine the
validity of any third-party claims (such as the current patent litigation), or
claims against the Company for indemnification related to such third-party
claims, such litigation, whether or not determined in favor of the Company,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from other matters. In the event of
an adverse ruling in such litigation, the Company might be required to cease the
manufacture, use and sale of infringing products, discontinue the use of certain
processes, expend significant resources to develop non-infringing technology or
obtain licenses to the infringing technology. In addition, depending upon the
number of infringing products and the extent of sales of such products, the
Company could suffer significant monetary damages. In the event of a successful
claim against the Company and the Company's failure to develop or license a
substitute technology, the Company's results of operations could be materially
adversely affected.
-31-
The Company also, as a result of an antidumping proceeding commenced in February
1997, must pay a cash deposit equal to 50.15% of the entered value of any SRAMs
manufactured (wafer fabrication) in Taiwan, in order to import such goods into
the U.S. Although the Company may be refunded such deposits in the future (see
Item 3 - Legal Proceedings, above), the deposit requirement, and the potential
that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March
31, 1999 will be liquidated at the bond rate or deposit rate in effect at the
time of entry, may materially adversely affect the Company's ability to sell in
the United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company
manufactures (wafer fabrication) SRAMs in Singapore (and has manufactured SRAMs
in the United States as well), and may be able to support its U.S. customers
with such products, which are not subject to antidumping duties. There can be no
assurance, however, that the Company will be able to do so.
The Company, through Alliance Venture Management, invests in startup, pre-IPO
(initial public offering) companies. These types of investments are inherently
risky and many venture funds have a large percentage of investments decrease in
value or fail. Most of these startup companies fail, and the investors lose
their entire investment. Successful investing relies on the skill of the
investment managers, but also on market and other factors outside the control of
the managers. Recently, the market for these types of investments has been
successful and many venture capital funds have been profitable, and while the
Company has been successful in its recent investments, there can be no assurance
as to any future or continued success. It is likely there will be a downturn in
the success of these types of investments in the future and the Company will
suffer significant diminished success in these investments. There can be no
assurance, and in fact it is likely, that many or most, and maybe all of the
Company's venture type investments may fail, resulting in the complete loss of
some or all the money the Company invested.
As a result of the foregoing factors, as well as other factors affecting the
Company's results of operations, past performance should not be considered to be
a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, stock prices for many technology companies are subject to significant
volatility, particularly on a quarterly basis. If revenues or earnings fail to
meet expectations of the investment community, there could be an immediate and
significant impact on the market price of the Company's common stock.
Due to the foregoing factors, it is likely that in some future quarter or
quarters the Company's results of operations may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
common stock would likely be materially and adversely affected.
Liquidity and Capital Resources
At March 31, 2001, the Company had approximately $6.1 million in cash and cash
equivalents, a decrease of $28.7 million from March 31, 2000; and approximately
$289.7 million in net working capital, a decrease of approximately $326.2
million from approximately $615.9 million at March 31, 2000.
Additionally, the Company had short-term investments in marketable securities
whose fair value at March 31, 2001 was $384.4 million. Refer to Notes 2-8 of
Notes to the Consolidated Financial Statements for further details.
During fiscal year 2001, operating activities used cash of approximately $26.3
million. This was primarily the result of net loss, the impact of non-cash items
such as depreciation and amortization and the growth of inventory and accounts
payable, offset by the non-cash investment losses. Cash used in operating
activities of approximately $3.5 million in fiscal year 2000 was primarily the
result of net income, the impact of non-cash items such as depreciation and
amortization, non-cash investment gains related primarily to the merger of USC
and USIC into UMC and Broadcom, net of deferred taxes, offset in part by growth
in inventory and accounts receivable, accounts payable and taxes payable. Cash
used in operating activities of approximately $23.6 million in fiscal year 1999
was primarily due to the operating loss of $22.0 million.
Investing activities used cash in the amount of approximately $16.9 million in
fiscal 2001 as result of proceeds from sale of the Company's holdings in
Chartered in the amount of $45.5 million and Broadcom's $39.0 million, offset in
part, by the Company's purchase of other investments of $66.0 million and
investment in Tower and related wafer credits of approximately $31.0 million. In
addition, the Company purchased $4.4 million of capital equipment during fiscal
2001. Investing activities during fiscal 2000 provided cash in the amount of
approximately $38.9 million. This was the result of the proceeds from the sale
of a portion of the Company's holdings in Broadcom of $48.9 million, additional
proceeds from the April 1998 sale of USC stock of $21.5 million, offset in
-32-
part, by investments made by Alliance Ventures of $28.7 million. Investing
activities in fiscal 1999 provided cash in the amount of approximately $25.0
million as the result of proceeds from the sale of a portion of the Companies
holdings in USC, which were offset, in part, by additional investments in USIC
and other start-up companies and purchases of equipment.
Net cash provided by financing activities in fiscal 2001 was approximately $14.6
million as a result of borrowings from the Company's credit line of $22.2
million, offset in part, by the Company repurchasing its shares of common stock
of $10.3 million. Net cash used in financing activities in fiscal 2000 was
approximately $6.8 million. The use of cash for financing activities in fiscal
2000 was primarily the result of repurchase of 720,000 shares of the Company's
common stock for $12.5 million offset, by a decrease in restricted cash of
approximately $2.3 million, and proceeds from sale of common stock of
approximately $4.7 million. Cash provided by financing activities of
approximately $1.8 million in fiscal 1999 primarily reflects a decrease in
restricted cash of approximately $1.3 million and net proceeds from the issuance
of common stock, offset, in part, by principal lease payments of $1.5 million.
The Company believes these sources of liquidity, and financing opportunities
available to it will be sufficient to meet its projected working capital and
other cash requirements for the foreseeable future. However, it is possible that
we may need to raise additional funds to finance our activities beyond the next
year or to consummate acquisitions of other businesses, products, wafer capacity
or technologies. We could raise such funds by selling some our short-term
investments, selling more stock to the public or to selected investors, or by
borrowing money. We may not be able to obtain additional funds on terms that
would be favorable to our shareholders and us, or at all. If we raise additional
funds by issuing additional equity, the ownership percentages of existing
shareholders would be reduced.
In order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process technologies, the Company has entered into and will
continue to consider various possible transactions, including equity investments
in or loans to foundries in exchange for guaranteed production capacity, the
formation of joint ventures to own and operate foundries, as was the case with
Chartered Semiconductor, UMC or Tower, or the usage of "take or pay" contracts
that commit the Company to purchase specified quantities of wafers over extended
periods. Manufacturing arrangements such as these may require substantial
capital investments, which may require the Company to seek additional equity or
debt financing. There can be no assurance that such additional financing, if
required, will be available when needed or, if available, will be on
satisfactory terms. Additionally, the Company has entered into and will continue
to enter into various transactions, including the licensing of its integrated
circuit designs in exchange for royalties, fees or guarantees of manufacturing
capacity. Refer to Part I, Item 1- Investments and Notes 4 and 5 in the Notes to
the Consolidated Financial Statements.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to the impact of foreign currency fluctuations and changes in
market values of our investments. These investments operate in markets that have
experienced significant exchange rate and market price fluctuations over the
year ended March 31, 2001. These entities, in which we hold varying percentage
interests, operate and sell their products in various global markets; however,
the majority of their sales are denominated in U.S. dollars, and therefore,
their foreign currency risk is reduced. We did not hold any derivative financial
instruments for trading purposes as of March 31, 2001.
Investment Risk
As of March 31, 2001, our short-term investment portfolio consisted of
marketable equity securities in Chartered Semiconductor, UMC, Broadcom
Corporation, PMC-Sierra and Vitesse Semiconductor, the future value of which is
subject to market value fluctuations. Refer to Notes 2, 3, 4, 5, 6, 7 and 8 for
further details.
In the past six months, marketable securities held by the Company have
experienced significant declines in their market value primarily due to the
downturn in the semiconductor sector and general market conditions. Management
has evaluated the marketable securities for potential "other-than-temporary"
declines in their value. Such evaluation included researching commentary from
industry experts, analysts and other companies, all of whom were not optimistic
that the semiconductor sector would recover in the quarter or two or three.
Based on the continuing depression in the in investments' stock prices from
those originally used to record the investment
-33-
and coupled with the expectation that the stock prices will not significantly
recover in the next 6 to 9 months, based on unfavorable business conditions for
the companies in the semiconductor industry in general (including lower Fab
capacity utilization at UMC), management determined that a write down was
necessary as of March 31, 2001. As a result, the Company recorded a pre-tax loss
of $506.8 million during the fourth quarter of fiscal 2001 based on the quote
market price of the respective marketable securities as of March 31, 2001
Foreign Currency Risk
Based on our overall currency rate exposure at March 31, 2001, a near term 10.0%
appreciation or depreciation in the value of the U.S. dollar would have an
insignificant effect on our financial position, results of operations and cash
flows over the next fiscal year. There can be no assurance that there will not
be a material impact in the future.
As of June 22, 2001, the Company owned approximately 340.0 million shares of
UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable
in the United States they are subject to foreign currency risk. The market value
of these holdings on June 22, 2001 based on the price per share of NTD 47.40 and
the NTD/US dollar exchange rate of NTD 34.45 per US$ is US$467.8 million. The
value of these investments could be impacted by foreign currency fluctuations
which could have a material impact on the financial condition and results of
operations of the Company in the future.
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS
The index to the Company's Consolidated Financial Statements and Schedules, and
the report of the independent accountants appear in Part III of this Form 10-K.
Selected quarterly financial data appears in Item 6 above.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
-34-
================================================================================
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Other than the information required pursuant to Item 405 of Regulation S-K, the
information required by this item concerning executive officers of the Company
is set forth in Part I of this Form 10-K after Item 4. The information required
by this item with respect to directors is incorporated by reference to the
section captioned "Election of Directors" in the proxy statement.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section captioned "Certain Transactions" contained in the Proxy Statement.
ITEM 14
EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) (I) Financial Statements - See Index to Consolidated Financial
Statements on page F-1 of this Form 10-K Annual Report.
(II) Report of Independent Accountants - See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report.
(2) (I) Schedule II: Valuation and Qualifying
Accounts - See Index to Consolidated Financial
Statements on F-1 of this Form 10-K Annual Report.
(3) Exhibits - See Exhibit Index on page 36 of this Form 10-K Annual
Report.
-35-
================================================================================
EXHIBIT INDEX
Exhibit Document Description
Number
- ----------- --------------------------------------------------------------
3.01(A) Registrant's Certificate of Incorporation
3.02(A) Registrant's Certificate of Elimination of Series A
Preferred Stock
3.03(F) Registrant's Certificate of Amendment of Certificate of
Incorporation
3.04(A) Registrant's Bylaws
4.01(A) Specimen of Common Stock Certificate of Registrant
10.01+(K) Registrant's 1992 Stock Option Plan adopted by Registrant on
April 7, 1992 and amended through September 19, 1996, and
related documents
10.02+(A) Registrant's Directors Stock Option Plan adopted by
Registrant on October 1, 1993 and related documents
10.03+(A) Form of Indemnity Agreement used between Registrant and
certain of its officers and directors
10.04+(K) Form of Indemnity Agreement used between the Registrant and
certain of its officers
10.05(B) Sublease Agreement dated February 1994 between Registrant
and Fujitsu America, Inc.
10.06(B) Net Lease Agreement dated February 1, 1994 between Registrant and
Realtec Properties I L.P.
10.07*I Subscription Agreement dated February 17, 1995, by and among
Registrant, Singapore Technology Pte. Ltd. and Chartered
Semiconductor Manufacturing Pte. Ltd.
10.8*I Manufacturing Agreement dated February 17, 1995, between
Registrant and Chartered Semiconductor Manufacturing Pte.
Ltd.
10.9(D) Supplemental Subscription Agreement dated March 15, 1995, by
and among Registrant, Singapore Technology Pte. Ltd. and
Chartered Semiconductor Manufacturing Pte. Ltd.
10.10*(D) Supplemental Manufacturing Agreement dated March 15, 1995,
between Registrant and Chartered Semiconductor Manufacturing
Pte. Ltd.
10.11*(E) Foundry Venture Agreement dated July 8, 1995, by and among
Registrant, S3 Incorporated and United Microelectronics Corporation
10.12*(E) Foundry Capacity Agreement dated July 8, 1995, by and among
Registrant, Fabco, S3 Incorporated and United
Microelectronics Corporation
10.13*(F) Foundry Venture Agreement dated September 29, 1995, between
Registrant and United Microelectronics Corporation
10.14*(F) Foundry Capacity Agreement dated September 29, 1995, by and
among Registrant, FabVen and United Microelectronics
Corporation
10.15*(F) Written Assurances Re: Foundry Venture Agreement dated
September 29, 1995 by and among Registrant, FabVen and
United Microelectronics Corporation
10.16*(G) Letter Agreement dated June 26, 1996 by and among Registrant, S3
Incorporated and United Microelectronics Corporation
10.17(H) Stock Purchase Agreement dated as of June 30, 1996 by and
among Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.18*(H) Amendment to Fabco Foundry Capacity Agreement dated as of
July 3, 1996 by and among Registrant, S3 Incorporated,
United Microelectronics Corporation and United Semiconductor
Corporation
10.19(H) Side Letter dated July 11, 1996 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United
Semiconductor Corporation
10.20+(I) 1996 Employee Stock Purchase Plan
10.21(J) Letter Agreement dated December 23, 1996 by and among
Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.22(K) Trademark License Agreement dated as of October 17, 1996 between
Registrant and Alliance Semiconductor International Corporation, a
Delaware corporation, as amended through May 31, 1997
10.23(K) Restated Amendment to FabCo Foundry Venture Agreement dated
as of February 28, 1997 by and among Registrant, S3
Incorporated, United Microelectronics Corporation and United
Semiconductor Corporation
10.24(K) Letter Agreement dated April 25, 1997 by and among
Registrant, S3 Incorporated, United Microelectronics
Corporation and United Semiconductor Corporation
10.25*(K) Restated DRAM Agreement dated as of February 28, 1996
between Registrant and United Microelectronics Corporation
10.26*(K) First Amendment to Restated DRAM Agreement dated as of March 26,
1996 between Registrant and United Microelectronics Corporation
10.27*(K) Second Amendment to Restated DRAM Agreement dated as of July 10,
1996 between Registrant and United Microelectronics Corporation
10.28(K) Promissory Note and Security Agreement dated March 28, 1997
between Registrant and Matrix Funding Corporation
10.29*(L) Sale and Transfer Agreement dated as of March 4, 1998
10.30(M) Alliance Venture Management, LLC Limited Liability Company
Operating Agreement dated October 15, 1999
10.31(M) Alliance Venture Management, LLC Amended Limited Liability
Company Operating Agreement dated February 28, 2000
10.32(M) Alliance Ventures I, LP Agreement of Limited Partnership
dated November 12, 1999
10.33(M) Alliance Ventures II, LP Agreement of Limited Partnership
dated November 12, 1999
10.34(M) Alliance Ventures III, LP Agreement of Limited Partnership
dated February 28, 2000
10.35(N) Share Purchase Agreement, dated as of July 4, 2000, by and
between SanDisk Corporation and Tower Semiconductor Ltd.
10.36(N) Additional Purchase Obligation Agreement, dated as of July 4,
2000, by and between SanDisk Corporation and Tower Semiconductor
Ltd.
10.37(N) Registration Rights Agreement, dated as of January 18, 2001,
by and between Tower Semiconductor Ltd., SanDisk
Corporation, The Israel Corporation, Registrant, Macronix
International Co., Ltd. and QuickLogic Corporation.
-36-
10.38(N) Consolidated Shareholders Agreement, dated as of January 18,
2001 by and among SanDisk Corporation, The Israel
Corporation, Registrant and Macronix International Co., Ltd.
10.39(N) Alliance / Tower Joinder Agreement, dated August 29, 2000, by
and between Registrant and Tower Semiconductor Ltd.
10.40(N) Alliance / TIC Joinder Agreement, dated August 29, 2000, by and
between Registrant and The Israel Corporation
10.41(O) Alliance Venture Management, LLC Amended Limited Liability
Company Operating Agreement dated January 23, 2001
10.42(O) Alliance Ventures IV, LP Agreement of Limited Partnership
dated January 23, 2001
10.43(O) Alliance Ventures V, LP Agreement of Limited Partnership
dated January 23, 2001
10.44(O) Loan Agreement dated May 17, 2001, by and between Registrant
and Citibank, N.A.
10.45(O) Share Pledge Agreement dated May 17, 2001, by and between
Registrant and Citibank, N.A.
21.01(O) Subsidiaries of Registrant
23.01(O) Consent of PricewaterhouseCoopers LLP (San Jose, California)
+ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K.
* Confidential treatment has been granted with respect to certain portions of
this document.
** Confidential treatment has been requested with respect to certain portions of
this document.
(A)The document referred to is hereby incorporated by reference from
Registrant's Registration Statement on Form SB-2 (File No. 33-69956-LA)
declared effective by the Commission on November 30, 1993.
(B)The document referred to is hereby incorporated by reference from
Registrant's Annual Report on Form 10-KSB filed with the Commission on June
29, 1994.
(C)The document referred to is hereby incorporated by reference from
Registrant's Registration Statement on Form SB-2 (File No. 33-90346-LA)
declared effective by the Commission on March 28, 1995.
(D)The document referred to is hereby incorporated by reference from
Registrant's Current Report on Form 8-K filed with the Commission on April
28, 1995.
(E)The document referred to is hereby incorporated by reference from
Registrant's Current Report on Form 8-K filed with the Commission on July 24,
1995.
(F)The document referred to is hereby incorporated by reference from
Registrant's Current Report on Form 8-K filed with the Commission on October
23, 1995.
(G)The document referred to is hereby incorporated by reference from
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
August 13, 1996.
(H)The document referred to is hereby incorporated by reference from
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
November 12, 1996.
(I)The document referred to is hereby incorporated by reference from
Registrant's Registration Statement on Form S-8 (File No. 333-13461) filed
with the Commission on October 4, 1996.
(J)The document referred to is hereby incorporated by reference from
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
February 11, 1997.
(K)The document referred to is hereby incorporated by reference from
Registrant's Annual Report on Form 10-K filed with the Commission on June 27,
1997.
(L)The document referred to is hereby incorporated by reference from
Registrant's Current Report on Form 8-K filed with the Commission on March
19, 1998.
(M)The document referred to is hereby incorporated by reference from
Registrant's Annual Report on Form 10-K filed with the Commission on June 30,
2000.
(N)The document referred to is hereby incorporated by reference from
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
February 13, 2000.
(O)The document referred to is filed herewith.
-37-
================================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Alliance Semiconductor Corporation
June 29, 2001 By: /s/ N. Damodar Reddy
------------------------------------
N. Damodar Reddy
Chairman of the Board, President, Chief Executive
Officer and Acting Chief Financial Officer
(Principal Executive Officer, and Principal Financial
and Accounting Officer)
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints N. Damodar Reddy and Bradley A. Perkins or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ N. Damodar Reddy Director, Chairman of the Board, June 29, 2001
- ------------------------ President, Chief Executive
N. Damodar Reddy Officer and Acting Chief
Financial Officer
/s/ C. N. Reddy Director, Executive Vice June 29, 2001
- ------------------------ President for Investments
C. N. Reddy
/s/ Sanford L. Kane Director June 29, 2001
- ------------------------
Sanford L. Kane
/s/ Jon B. Minnis Director June 29, 2001
- ------------------------
Jon B. Minnis
-38-
ALLIANCE SEMICONDUCTOR CORPORATION
Index to Consolidated Financial Statements
Pages
Consolidated Financial Statements:
Report of Independent Accountants.......................................F-2
Consolidated Balance Sheets as of March 31, 2001 and 2000...............F-3
Consolidated Statements of Operations for the years ended
March 31, 2001, 2000 and 1999...........................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 2001, 2000 and 1999.....................................F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999...........................................F-6
Notes to Consolidated Financial Statements..............................F-7
Financial Statement Schedule:
Report of Independent Accountants.......................................F-23
Schedule II - Valuation and Qualifying Accounts.........................F-24
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Alliance Semiconductor Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Alliance
Semiconductor Corporation and its subsidiaries at March 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 25, 2001
F-2
ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Balance Sheets
(in thousands)
March 31,
-------------------------
2001 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $6,109 $34,770
Restricted cash 1,925 2,804
Short term investments (Notes 384,374 883,300
2,3,4,5, 6, 7 and 8)
Accounts receivable, net (Note 2) 18,001 15,858
Inventory (Note 2) 84,797 37,439
Related party receivables (Note 18) 2,369 1,778
Other current assets 1,079 1,958
----------- ------------
Total current assets 498,654 977,907
Property and equipment, net (Note 2) 10,183 9,990
Investment in United Microelectronics
Corp. (excluding short term portion) 228,633 505,478
(Notes 2 and 5)
Investment in Tower Semiconductor 16,327 -
Corporation (Note 2 and 11) 80,461 26,646
Alliance Ventures and other investments
(Note 2, 9 and 10)
Other assets 14,981 421
----------- ------------
Total assets $849,239 $1,520,442
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings (Note 2) $22,234 $-
Accounts payable 76,130 27,133
Accrued liabilities 5,415 10,388
Income taxes payable 3,215 6,641
Deferred income taxes (Note 13) 101,143 316,903
Current portion of capital lease 858 905
obligation (Note 12)
----------- ------------
Total current liabilities 208,995 361,970
Long term obligations (Note 12) 11,882 1,517
Long term capital lease obligation (Note 686 1,197
12)
Deferred income taxes (Note 13) 80,387 191,803
----------- ------------
Total liabilities 301,950 556,487
----------- ------------
Commitments and contingencies (Notes
12,16 and 17)
Stockholders' equity:
Preferred stock, $0.01 par value;
5,000 shares authorized; none issued - -
and outstanding
Common stock, $0.01 par value; 100,000
shares authorized; 42,725 and 42,406 427 424
shares issued and 41,440 and 41,686
shares outstanding
Additional paid-in capital 197,350 193,260
Treasury stock (1,285 and 720 shares (22,762) (12,468)
at cost)
Retained earnings (deficit) 372,274 644,595
Accumulated other comprehensive - 138,144
income (Note 2)
----------- ------------
Total stockholders' equity 547,289 963,955
----------- ------------
Total liabilities and
stockholders' equity $849,239 $1,520,442
=========== ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended March 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Net revenues $208,678 $89,153 $47,783
Cost of revenues 187,913 58,428 60,231
------------ ------------ ------------
Gross profit (loss) 20,765 30,725 (12,448)
Operating expenses:
Research and development 13,766 14,568 14,099
Selling, general and 19,691 15,962 12,652
administrative
------------ ------------ ------------
Income (loss) from (12,692) 195 (39,199)
operations
Gain on investments 75,801 1,049,130 15,823
Write-down of marketabl (509,449) - -
securities and
other investments
Other income (loss), net (200) 29 (1,126)
------------ ------------ ------------
Income (loss) before (446,540) 1,049,354 (24,502)
income taxes
Provision (benefit) for (179,956) 410,348 8,397
income taxes
------------ ------------ ------------
Income (loss) before
equity in income (loss) (266,584) 639,006 (32,899)
of investees
Equity in income (loss) of (5,737) 9,094 10,856
investees
------------ ------------ ------------
Net income (loss) $(272,321) $648,100 $(22,043)
============ ============ ============
Net income (loss) per share:
Basic
$(6.58) $15.49 $(0.53)
============ ============ ============
Diluted
$(6.58) $15.07 $(0.53)
============ ============ ============
Weighted average number of common shares:
Basic 41,376 41,829 41,378
============ ============ ============
Diluted 41,376 42,992 41,378
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Statements of Stockholders' Equity
(in thousands)
Accumulated
Common Stock Additional Other Retained Total
-------------------------- Paid in Treasury Comprehensive Earnings Stockholder's
Shares Amount Capital Stock Income (loss) (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at March 40,449,988 $404 $183,099 $- $(12,930) $18,538 $189,111
31, 1998
Issuance of common 1,158,635 12 1,926 - - - 1,938
stock under
employee stock
plans
Cumulative - - - - (5,436) -
translation
adjustments
Net loss - - - - - (22,043)
Total - - - - - - (27,479)
comprehensive loss
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at March 41,608,623 416 185,025 - (18,366) (3,505) 163,570
31, 1999
Issuance of common 797,482 8 4,719 - - - 4,727
stock under
employee stock
plans
Repurchase of - - - (12,468) - - (12,468)
common stock (1)
Tax benefit on - - 3,516 - - - 3,516
exercise of stock
options
Cumulative - - - - 18,366 -
translation
adjustments
Unrealized gain on - - - - 138,144 -
investments
(net of tax,
$94,814)
Net income - - - - - 648,100
Total - - - - - - 804,610
comprehensive
income
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at March 42,406,105 424 193,260 (12,468) 138,144 644,595 963,955
31, 2000
Issuance of common
stock under 319,246 3 2,349 - - - 2,352
employee stock
plans
Repurchase of - - - (10,294) - - (10,294)
common stock (1)
Tax benefit on - - 1,741 - - - 1,741
exercise of stock
options
Unrealized loss on - - - - (138,144) -
investments
Net income - - - - - (272,321)
Total - - - - - - (410,465)
comprehensive
income
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at March 42,725,351 $427 $197,350 $(22,762) $- $372,274 $547,289
31, 2001
============ ============ ============ ============ ============ ============ ============
(1) At March 31, 2000 and 2001, the Company held 720,000 and 1,285,000 shares
in treasury, which have not been retired. After taking into account these
treasury shares, the net outstanding shares at March 31, 2000 and 2001 was
41,686,105 and 41,440,351, respectively.
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
ALLIANCE SEMICONDUCTOR CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Year Ended March 31,
---------------------------------
2001 2000 1999
---------- --------- ----------
Cash flows from operating activities:
Net Income (loss) $(272,321) $648,100 $(22,043)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 4,202 4,417 3,789
Inventory write-downs 53,945 742 20,437
Non-recurring compensation - 3,655 -
charge
Equity in income of investees 5,737 (9,094) (10,856)
(Gain)/ loss on investments (75,801 (1,049,130) (15,823)
Write-down of marketable 509,449 - -
securities and other investments
Changes in assets and liabilities:
Accounts receivable (2,143) (6,915) 6,773
Inventory (101,303) (25,254) (989)
Related party receivables (591) 37 (1,815)
Other assets 993 (99) 1,622
Accounts payable 48,997 19,087 (27,668)
Accrued liabilities (4,973) 92 (2,446)
Deferred income taxes (221,877) 399,168 25,466
Income tax payable (1,685) 10,157 -
Long-term obligations 31,035 1,517 -
---------- --------- ----------
Net cash provided by (used in) (26,336) (3,520) (23,553)
operating activities
---------- --------- ----------
Cash provided by (used in) investing activities:
Purchase of property and (4,395) (2,816) (2,609)
equipment
Proceeds from sale of
securities of United - 21,481 31,662
Semiconductor Corporation
Proceeds from sale of 38,965 48,911 -
securities of Broadcom
Proceeds from sale of
securities of Chartered 45,500 - -
Semiconductor, Co.
Purchase of securities of - - (3,098)
United Silicon, Inc.
Investment in Tower (16,327) - -
Semiconductor Corporation
Other assets (14,674) - -
Purchase of Alliance Venture (66,007) (28,696) (1,000)
and other investments
---------- --------- ----------
Net cash provided by (used in) (16,938) 38,880 24,955
investing activities
---------- --------- ----------
Cash flows from financing activities:
Net proceeds from the issuance 2,352 4,727 1,938
of common stock
Principal payments on lease (558) (1,439) (1,468)
obligation
Repurchase of common stock (10,294) (12,468) -
Short-term borrowings 22,234 - -
Restricted cash 879 2,371 1,337
---------- --------- ----------
Net cash provided by (used in) 14,613 (6,809) 1,807
financing activities
---------- --------- ----------
Net increase (decrease) in cash (28,661) 28,551 3,209
and cash equivalents
Cash and cash equivalents at 34,770 6,219 3,010
beginning of the period
---------- --------- ----------
Cash and cash equivalents at end $6,109 $34,770 $6,219
of the period
========== ========= ==========
Supplemental disclosures of cash flow information:
Cash paid (refunded) for income $29,501 $355 $(17,736)
taxes
========== ========= ==========
Cash paid for interest $733 $99 $214
========== ========= ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
ALLIANCE SEMICONDUCTOR CORPORATION
Notes to Consolidated Financial Statements
(in thousands, except per share data)
NOTE 1. The Company and Its Significant Accounting Policies
Alliance Semiconductor Corporation (the "Company" or "Alliance"), a Delaware
corporation, designs, develops and markets high performance memory products and
memory intensive logic products. The Company sells its products to the desktop
and portable computing, networking, telecommunications, instrumentation and
consumer markets.
The semiconductor industry is highly cyclical and has been subject to
significant rapid technological changes at various times that have been
characterized by diminished product demand, production overcapacity, product
shortages due to production under-capacity and accelerated erosion of selling
prices. The average selling price that the Company is able to command for its
products is highly dependent on industry-wide production capacity and demand,
and as a consequence the Company could experience rapid erosion in product
pricing (such as that occurred with SRAM and DRAM pricing during the fourth
quarter of fiscal year 2001, as well as, fiscal years 1999, 1998 and 1997),
which is not within the control of the Company and which could have an adverse
material effect on the Company's results of operations. The Company is unable to
predict future prices for its products.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its direct and indirect subsidiaries, including Alliance Venture Management,
LLC, Alliance Ventures, LP I, II, III, IV and V. (See Note 9). All significant
inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Basis of Presentation
For purposes of presentation, the Company has indicated its fiscal years as
ending on March 31, whereas the Company's fiscal year actually ends on the
Saturday nearest the end of March. The fiscal years ended March 31, 2001 and
2000 contained 52 weeks, while March 31, 1999 contained 53 weeks. Certain items
previously reported in specific financial statement captions have been
reclassified to conform to the fiscal year 2001 presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid money
market instruments with banks and financial institutions. The Company considers
all highly liquid debt investments with maturity from the date of purchase of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash, in the form of certificates of deposit, support stand-by
letters of credit, which in turn are used to secure customs duties and other
purchase commitments.
Short term Investments
The Company accounts for its short term investments in accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate categorization of investment securities at the time
of purchase and reevaluates such designation as of each balance sheet date. At
March 31, 2001, all short-term investment securities were designated as
available-for-sale in accordance with SFAS 115.
F-7
Available-for-sale securities are carried at fair value using available market
information. Unrealized gains and losses are generally reported in accumulated
other comprehensive income (loss) in the balance sheet.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market. Market is based on the estimated
net realizable value or current replacement cost. The Company also evaluates its
open purchase order commitments on an on-going basis and accrues for any
expected loss if appropriate.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated economic useful lives of the assets, which range from
three to seven years. Upon disposal, the cost of the asset and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations.
Long-Lived Assets
Long-lived assets held by the Company are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of carrying amounts to
future net cash flows an asset is expected to generate. If an asset is
considered to be impaired, the impairment to be recognized is measured by the
amount to which the carrying amount of the assets exceeds the projected
discounted future cash flows arising from the asset.
Revenue Recognition
Revenue from product sales, including sales to distributors, is recognized upon
shipment, net of accruals for estimated sales returns and allowances.
Research and Development Costs
Costs incurred in the research and development of semiconductor devices are
expensed as incurred, including the cost of prototype wafers and new production
mask sets.
Income Taxes
The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and income tax bases of
the assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Concentration of Risks
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short and long
term investments and accounts receivable.
Cash is deposited with one major bank in the United States while cash
equivalents are deposited with two major financial institutions in the United
States. The Company attempts to limit its exposure to these investments by
placing such investments with several financial institutions and performs
periodic evaluations of these institutions.
Short and long term investments are subject to declines in market as well as
risk associated with the underlying investment. The Company evaluates its
investments from time to time in terms of credit risk since a substantial
portion of its assets are now in the form of investments, not all of which are
liquid, and may enter into full or partial hedging strategies involving
financial derivative instruments to minimize market risk. During fiscal years
2000 and 2001, the Company entered into a number of "cashless collar" and
"covered call" option transactions to partially hedge its holdings in Broadcom
Corporation. In addition, during fiscal 2001, the Company entered into an
"indexed debt" transaction to partially hedge its holdings in Vitesse
Semiconductor Corporation. The Company may enter into other similar transactions
in the future.
F-8
Since Chartered, UMC, Broadcom, Vitesse and PMC-Sierra are in the semiconductor
business, as is the Company, they will be subject to the same fluctuations in
market value as is the Company, and may experience downturns in value at the
same time the Company is experiencing such downturns. All of the risks that the
Company may experience as a semiconductor company are also applicable to these
companies. In addition, because they are semiconductor manufacturers, they are
subject to additional risks, such as fires and other disasters, excess
fabrication capacity, and other risks known to semiconductor manufacturers.
There can be no assurances that the Company's investment in these companies will
increase in value or even maintain their value. Because of the cyclical nature
of the semiconductor industry, it is possible that these investments, like the
Company, will experience a significant business downturn in the future, which
will significantly depress the value of these stocks. Additionally, because of
the loss of its wafer production capacity rights if the Company sells more than
50% of its original holdings in Chartered or UMC, there can be no assurance that
the Company can sell sufficient stock to realize its value on its investment in
them.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers and, on occasion, may require letters of credit
from its non-US customers. Sales to the Company's customers are typically made
pursuant to specific purchase orders, which may be canceled by the customer
without enforceable penalties. For the fiscal year ended March 31, 2001, no
customers accounted for 10% or more of the Company's net revenues. For the
fiscal year ended March 31, 2000, one customer accounted for approximately 10%
of the Company's net revenues. For the fiscal year ended March 31, 1999, two
customers accounted for approximately 15% and 13% of the Company's net revenues.
The Company conducts the majority of its business in U.S. dollars and foreign
currency translation gains and losses have not been material in any one year.
International sales accounted for approximately $131.5 million, $53.0 million,
and $24.0 million of net revenues for the years ended March 31, 2001, 2000 and
1999, respectively.
Stock-Based Compensation
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. The Company's policy is to
grant options with an exercise price equal to the fair market value of the
Company's stock on the date of grant. Accordingly, no compensation expense has
been recognized in the Company's statements of operations. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
Net Income (Loss) Per Share
Basic EPS is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including stock options, using the treasury stock method. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the proceeds
obtained upon exercise of stock options.
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net income/(loss) available to $(272,321) $648,100 $(22,043)
common shareholders
======== ======== ========
Weighed average common shares 41,376 41,829 41,378
outstanding (basic)
Effect of dilutive options - 1,163 -
-------- -------- --------
Weighed average common shares 41,376 42,992 41,378
outstanding (diluted)
======== ======== ========
Net income/(loss) per share:
Basic $(6.58) $15.49 $(0.53)
======== ======== ========
Diluted $(6.58) $15.07 $(0.53)
======== ======== ========
F-9
Due to the Company incurring a net loss in 2001 and 1999, a calculation of EPS
assuming dilution is not required for those years. At March 31, 2001 and 1999
there were 2,720,687 and 2,741,298 options outstanding to purchase common stock
with respective weighted average purchase price of $11.11 and $5.37 that were
excluded from the diluted loss per share computations because their effect would
be anti-dilutive.
Comprehensive Income
In 1999, the Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from non-owner sources. Total accumulated comprehensive loss
for fiscal year 2001 and 1999 was $410.5 million and $27.5 million,
respectively, compared to total accumulated comprehensive income of $804.6
million for fiscal 2000. The components of accumulated comprehensive income
(loss) are shown in the consolidated statements of shareholders' equity.
Segment Reporting
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company operates in one reportable segment, memory products.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The Company has adopted SFAS No. 133 effective April 2, 2001 and as
a result, the Company is required to adjust hedging instruments to fair value in
the balance sheet, and recognize the offsetting gains or losses as transition
adjustments to be reported in net income or other comprehensive income, as
appropriate, and presented in a manner similar to the cumulative effect of a
change in accounting principle.
NOTE 2. Balance Sheet Components
Short-term Investments
Short-term investments include the following available-for-sale securities at
March 31, 2001 and 2000 (in thousands):
March 31, 2001 March 31, 2000
-------------------------- ------------------------
Number of Market Number of Market
Shares Value Shares Value
------------- ----------- ------------ ----------
UMC 198,315 $320,086 141,650 $548,752
Chartered 1,642 39,481 2,141 201,789
Semiconductor
Broadcom 200 5,780 488 62,831
Corporation
Vitesse 728 17,341 852 69,928
Semiconductor
PMC-Sierra 68 1,686 - -
----------- ----------
Total $384,374 $883,300
=========== ==========
Long-term Investments
At March 31, 2001 and 2000, the Company's long-term investments were as follows
(in thousands):
March 31, 2001 March 31, 2000
------------------------- -------------------------
Number of Cost Number of Cost
Shares basis Shares basis
------------- ---------- ------------ ----------
UMC 141,653 $228,633 141,650 $505,478
Tower Semiconductor 1,233 16,327 - -
Alliance Venture 67,961 26,646
Investments
Solar Venture 12,500 -
Partners, LP
---------- ----------
Total $325,421 $532,124
========== ==========
F-10
Accounts Receivable
March 31,
-----------------------
2001 2000
----------- -----------
(in thousands)
Accounts receivable:
Trade receivables $21,582 $16,812
Less allowance for (3,581) (954)
doubtful accounts and
sales related reserves
----------- -----------
$18,001 $15,858
=========== ===========
Inventories
March 31,
-----------------------
2001 2000
----------- -----------
(in thousands)
Inventory:
Work in process $41,350 $20,737
Finished goods 43,447 16,702
----------- -----------
$84,797 $37,439
=========== ===========
Property and Equipment
March 31,
-----------------------
2001 2000
----------- -----------
(in thousands)
Engineering and test $16,715 $13,756
equipment
Computers and software 11,769 9,474
Furniture and office 689 1,599
equipment
Leasehold improvements 1,350 1,299
Land 288 288
----------- -----------
30,811 26,416
Less: Accumulated (20,628) (16,426)
depreciation and
amortization
----------- -----------
$10,183 $9,990
=========== ===========
Depreciation and amortization expense for fiscal yeFars 2001, 2000 and 1999 were
$4.2 million, $4.4 million and $3.8 million, respectively.
Property and equipment includes $2.2 million and $2.5 million of assets under
capital leases at March 31, 2001 and 2000, respectively. Accumulated
depreciation of assets under capital leases totaled $1,048,000 and $700,000 at
March 31, 2001 and 2000, respectively.
Accumulated Other Comprehensive Income
Components of accumulated other comprehensivFe income at March 31, 2000 were as
follows:
Unrealized Tax Effect Net
Gain Unrealized
Gain
---------- ----------- -------------
UMC $43,274 $(17,613) $ 25,661
Chartered 150,194 (61,129) 89,065
Semiconductor
Broadcom 39,490 (16,072) 23,418
Corporation
---------- ----------- -------------
$232,958 $(94,814) $138,144
========== =========== =============
Short-term borrowings
At March 31, 2001, the Company had short-term borrowings from a brokerage firm
of approximately $22.2 million dollars secured by a portion of its holdings in
Chartered Semiconductor, bearing interest at a rate of 6.5% per annum.
NOTE 3. Write-Down of Marketable Securities
In the past six months, marketable securities held by the Company have
experienced significant declines in their market value primary due to the
downturn in the semiconductor sector and general market conditions. Management
has evaluated the marketable securities for potential "other-than-temporary"
declines in their fair
F-11
value. Such evaluation included researching commentary from industry experts,
analysts, and other companies, all of whom were not optimistic that the
semiconductor sector would recover in the next quarter or two or three. Based on
the continuing depression in the investments' stock prices from those originally
used to record the investment and coupled with the expectation that stock prices
will not significantly recover in the next 6 to 9 months, based on unfavorable
business conditions for companies in the semiconductor industry in general,
management determined that a write-down was necessary as of March 31, 2001. As a
result, the Company recorded a pre-tax, non-operating loss of approximately
$509.4 million during the fourth quarter of fiscal 2001 based on the quoted
price of the respective marketable securities as of March 31, 2001 as follows:
Pre-Tax
Write-Down
--------
(in thousands)
UMC $460,014
Broadcom 3,778
Corporation
Vitesse 32,298
PMC-Sierra 10,777
Other 2,582
--------
Total $509,449
========
At the end of the fourth quarter fiscal 2001, the Company wrote-down several of
its investments in Alliance Ventures and recognized a pre-tax, non-operating
loss of approximately $2.6 million. This was recorded in the write-down of
marketable securities and other investments.
NOTE 4. Investment in Chartered Semiconductor Manufacturing
Ltd. ("Chartered")
In February and April 1995, the Company purchased shares of Chartered
Semiconductor ("Chartered") for approximately $51.6 million and entered into a
manufacturing agreement whereby Chartered agreed to provide a minimum number of
wafers from its 8-inch wafer fabrication facility known as "Fab2," if Alliance
so chooses. In October 1999, Chartered successfully completed an initial public
offering in Singapore and the United States. At March 31, 2000, the Company
owned approximately 21.4 million ordinary shares or approximately 2.14 million
American Depository Shares or "ADSs." These shares were subject to a six-month
"lock-up," or no trade period, which expired in April 2000. In May 2000,
Chartered completed a secondary public offering, in which the Company decided
not to participate. The Companies shares were subject to an additional
three-month "lock-up" which expired in August 2000. In June 2000, the
underwriter of the secondary offering released the Company from the lockup, and
the Company started selling some of its shares. The Company does not own a
material percentage of the equity of Chartered. During fiscal 2001, the Company
sold 500,000 shares and recognized a pre-tax non-operating gain of approximately
$33.5 million. At March 31, 2001, the Company owned approximately 16.4 million
ordinary shares or 1.64 million ADSs of Chartered.
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more than 50% of its original holdings of Chartered, the Company will start to
lose a proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
NOTE 5. Investment in United Microelectronics Corporation ("UMC")
In July 1995, the Company entered into an agreement with United Microelectronics
Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese
company, United Semiconductor Corporation ("USC"), for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between
September 1995 and July 1997 the Company invested approximately $70.4 million in
USC in exchange for 190 million shares or 19% of the outstanding shares and 25%
of the total wafer capacity.
In April 1998, the Company received approximately US$31.7 million In connection
with the sale of 35 million shares of USC, and the Company had the right to
receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence
of certain potential future events, including the sale or transfer of USC shares
by USC in an arms length transaction, or by a public offering of USC stock, or
by the sale of all or substantially all of the assets of USC. In March 2000,
this right resulted in Alliance's receipt of approximately NTD 665 million (US$
21.5 million) as a result of the merger between USC and UMC.
F-12
Following the April 1998 USC stock sale, the Company owned approximately 15.5%
of the outstanding shares of USC. In October 1998, USC issued 46 million shares
to the Company by way of a dividend distribution. Additionally, USC made a stock
distribution to its employees; thereby the Company's ownership in USC was
reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million
shares to the Company by way of dividend distribution as well as distributions
to other entities. As a result of these distributions, the Company owned
approximately 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was
entitled to 25% of the output capacity of the wafer fabrication facility
operated by USC as well as a seat on the board of directors of USC. As a result
of the capacity rights and the board seat, Alliance had participated in both
strategic and operating decisions of USC on a routine basis and concluded that
it had significant influence on financial and operating decisions of USC.
Accordingly, the Company accounted for its investment in USC using the equity
method with a ninety-day lag in reporting the Company's share of results for the
entity. In fiscal years 2000 and 1999 the Company reported its proportionate
share of equity income of USC of $9.5 million and $10.9 million net of tax,
respectively.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and owned approximately 3.2% of the outstanding
shares of USIC has the right to purchase approximately 3.7% of the manufacturing
capacity of the facility. The Company accounted for its investment in USIC using
the cost method of accounting prior to the merger with UMC in January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge
four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit
Corporation and UTEK Semiconductor Corporation, into UMC and subsequently
completed the merger in January 2000. The Company received 247.7 million shares
of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and
approximately 35.6 million shares of UMC stock for its 48.1 million shares, or
3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the
Company owned approximately 283.3 million shares, or approximately 3.2% of UMC,
and maintained its 25% and 3.7% wafer capacity allocation rights in the former
USC and USIC foundries, respectively,. As the Company does not have an ability
to exercise significant influence over UMC's operations, the investment in UMC
is accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million
pre-tax non-operating gain as a result of the merger. The gain was computed
based on the share price of UMC at the date of the merger (i.e. NTD 112, or US
$3.5685), as well as the approximately $21.5 million additional gain related to
the sale of the USC shares in April 1998. The Company has accrued $3.0 million
for the Taiwan securities transaction tax in connection with the shares received
by the Company. This transaction tax will be paid, on a per share basis, when
the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's
UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up
period expired in July 2000. Of the remaining 50%, or 141.6 million shares,
approximately 28.3 million shares will become eligible for sale two years from
the closing date of the transaction (i.e. January 2002), with approximately 28.3
million shares available for sale every six months thereafter, during years
three and four (i.e.2002-2004). In May 2000, the Company received an additional
20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger, the Company accounted for a portion
(approximately 50% at March 31, 2000) of its investment in UMC, which became
unrestricted on January 3, 2001, as an available-for-sale marketable security in
accordance with SFAS 115. At March 31, 2000, the Company recorded an unrealized
gain of approximately $25.7 million, which is net of deferred tax of $17.6
million, as part of accumulated other comprehensive income in the stockholders'
equity section of the balance sheet with respect to the short-term portion of
the investments. The portion of the investment in UMC, which is restricted
beyond twelve months (approximately 50% and 42% of the Company's holdings at
March 31, 2000 and 2001, respectively), is accounted for as a cost method
investment and is presented as a long-term investment. As this long-term portion
becomes current over time, the investment will be transferred to short-term
investments and will be accounted for as an available-for-sale marketable
security in accordance with SFAS 115. The long-term portion of the investments
become unrestricted securities between 2002 and 2004.
F-13
At the end of the fourth quarter of fiscal 2001 the Company wrote-down its
investment in UMC and recognized a pre-tax, non-operating loss of approximately
$460.0 million. (See Note 3). At March 31, 2001, the Company owned approximately
340.0 million shares of UMC. (See Note 2).
Given the market risk for securities, when these shares are ultimately sold, it
is possible that additional gain or loss will be reported. If the Company sells
more that 50% of its original holdings of UMC, the Company will start to lose a
proportionate share of its wafer production capacity rights, which could
materially affect its ability to conduct its business.
Note 6. Investment in Broadcom Corporation
In 1998, the Company was approached by a startup company, Maverick Networks,
Inc. ("Maverick"), regarding their need for embedded memory in an internet
router semiconductor that Maverick was designing. Because the Company was also
interested in eventually entering the internet router semiconductor market, the
Company entered into an agreement with Maverick which called for the Company to
provide memory technology, access to the Company's wafer production rights, and
cash to Maverick, in exchange for certain rights to Maverick's technology and
stock in Maverick. On May 31, 1999, Maverick completed a transaction with
Broadcom Corporation, resulting in the Company selling its 39% ownership
interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common
stock. Based on Broadcom's closing share price on the date of sale, the Company
recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of
approximately $51.6 million based on the closing share price of Broadcom at the
date of the merger. During fiscal 2000, the Company sold 275,600 shares of
Broadcom stock and realized an additional pre-tax, non-operating gain of
approximately $23.7 million. In February 2000, Broadcom Corporation announced a
two for one stock split. During fiscal 2001, the Company sold 287,522 shares and
realized a pre-tax, non-operating gain of approximately $31.3 million. At the
end of the fourth quarter fiscal 2001, the Company wrote-down its investment in
Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8
million. (See Note 3). At March 31, 2001, the Company owned approximately
200,000 shares of Broadcom. (See Note 2).
Note 7. Investment in Vitesse Semiconductor Corporation
In August 1999, the Company made an investment in Orologic Corporation
("Orologic"), a fabless semiconductor company that develops high performance
system on chip solutions. In November 1999, the Company transferred its interest
in Orologic to Alliance Ventures I, to allow it to be managed by Alliance
Venture Management. Subsequently, in March 2000, Vitesse Semiconductor
Corporation ("Vitesse") acquired Orologic. In connection with this merger,
Alliance Ventures I received 852,447 shares of Vitesse for its equity interest
in Orologic. The Company records its investment in Vitesse Semiconductor
Corporation as an available-for-sale marketable security in accordance with SFAS
115.
In January 2001, the Company entered into two derivative contracts
("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5
million. The Agreements have payment provisions that incorporate a collar
arrangement with respect to 490,000 shares of Vitesse Semiconductor common
stock. As such, under the Agreements, the Company must pay Bear Stearns an
amount based on the market price of Vitesse Semiconductor Common Stock in
January 2003, the maturity date of the Agreements. If the stock price of Vitesse
Semiconductor exceeds the ceiling of the collar, then the settlement amount
increases by an amount determined by a formula included in the Agreements
(generally equal to the excess of the value of the stock over the ceiling of the
collar). If the stock price of Vitesse Semiconductor declines below the floor of
the collar, then the settlement amount also decreases by the amount determined
by a formula included in the Agreements (generally equal to the excess of the
floor of the collar over the value of the stock). At March 31, 2001, the
derivative contracts were in the money to the Company based on Vitesse
Semiconductor's market price of $23.81 on that date. Under current accounting
practice, the Company offsets the gain on the contracts with the loss on the
Vitesse stock, both of which were recorded in the write-down of marketable
securities in the fourth quarter of fiscal 2001. The pre-tax, non-operating gain
on the contracts amounted to $20.6 million, representing their intrinsic value
at March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company
wrote-down its investment in Vitesse and recognized a pre-tax, non-operating
loss of approximately $52.9 million. (See Note 3). At March 31, 2001, the
Company owned 728,293 shares of Vitesse. (See Note 2).
Vitesse's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like Vitesse's and the Company's, sometimes move as
a group, it is likely that Vitesse's stock and the Company's stock can both
suffer significant loss in value at the same time, as occurred in
F-14
fiscal 2001. Thus, there can be no assurance that the Company's investment in
Vitesse will increase in value or even maintain its value.
Note 8. Investment in PMC-Sierra Corporation
In 1999, the Company made an investment in a start-up called Malleable
Technologies, Inc. ("Malleable"). This investment was transferred to Alliance
Venture I, LP, upon its creation. On June 27, 2000, PMC-Sierra, Inc. ("PMC")
acquired Malleable. PMC exchanged 1.25 million shares of PMC stock for the
remaining 85% interest of Malleable that PMC did not already own. In connection
with the merger, Alliance Ventures I received 68,152 shares of PMC for its 7%
interest in Malleable. Upon the completion of the merger, the Company reported a
gain of approximately $11.0 million based on the closing share price of $182.875
of PMC on the date of the merger. At the end of the fourth quarter fiscal 2001,
the Company wrote-down its investment in PMC and recognized a pre-tax,
non-operating loss of approximately $10.8 million. (See Note 3). At March 31,
2001, the Company owned 68,152 shares of PMC. (See Note 2).
PMC's stock, like many other high technology stocks, has historically
experienced material and significant fluctuations in market value, and will
probably continue to do so in the future. Additionally, because it is common
that high technology stocks, like PMC's and the Company's, sometimes move as a
group, it is likely that PMC's stock and the Company's stock can both suffer
significant loss in value at the same time, as occurred in fiscal 2001. Thus,
there can be no assurance that the Company's investment in PMC will increase in
value or even maintain its value.
Note 9. Alliance Venture Management, LLC
In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance
Venture Management"), a California limited liability corporation, to manage and
act as the general partner in the investment funds the Company intended to form.
Alliance Venture Management does not directly invest in the investment funds
with the Company, but is entitled to a management fee out of the net profits of
the investment funds. This management company structure was created to provide
incentives to the individuals who participate in the management of the
investment funds, by allowing them limited participation in the profits of the
various investment funds, through the management fees paid by the investment
funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures
I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California
limited partnerships. The Company, as the sole limited partner, owns 100% of the
shares of each partnership. Alliance Venture Management acts as the general
partner of these partnerships and receives a management fee of 15% of the
profits from these partnerships for its managerial efforts.
At Alliance Venture Management's inception in November 1999, series A member
units and series B member units in Alliance Venture Management were created. The
unit holders of series A units and series B units receive management fees of 15%
of investment gains realized by Alliance Ventures I and Alliance Ventures II,
respectively. In February 2000, upon the creation of Alliance Ventures III, LP
("Alliance Ventures III"), the management agreement for Alliance Venture
Management was amended to create series C member units which are entitled to
receive a management fee of 16% of investment gains realized by Alliance
Ventures III. In January 2001, upon the creation of Alliance Ventures IV, LP
("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"),
the management agreement for Alliance Venture Management was amended to create
series D and E member units which are entitled to receive a management fee of
15% of investment gains realized by Alliance Ventures IV and Alliance Ventures
V, respectively.
Each of the owners of the series A, B, C, D and E member units paid the initial
carrying value for their shares of the member units. While the Company owns 100%
of the common units in Alliance Venture Management, it does not hold any series
A, B, C, D or E member units and does not participate in the management fees
generated by the management of the investment funds. Several of the Company's
senior management hold the majority of the series A, B, C, D or E member units
of Alliance Venture Management.
After Alliance Ventures I was formed, the Company contributed all its then
current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I
to allow Alliance Venture Management to manage these investments. As of March
31, 2001, Alliance Ventures I, whose focus is investing in networking and
communication start-up companies, has invested $22.0 million in nine companies,
with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in
investing in internet start-up ventures has invested approximately $9.1 million
in ten
F-15
companies, with a total fund allocation of $15.0 million. As of March 31, 2001,
Alliance Ventures III, whose focus is investing in emerging companies in the
networking and communication market areas, has invested $38.6 million in 14
companies, with a total fund allocation of $100.0 million. As of March 31, 2001,
Alliance Ventures IV, whose focus is investing in emerging companies in the
semiconductor market areas, has invested $4.0 million in two companies, with a
total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures
V, whose focus is investing in emerging companies in the networking and
communication market areas, has invested $6.5 million in three companies, with a
total fund allocation of $60.0 million.
At the end of the fourth quarter fiscal 2001, the Company wrote-down certain of
its investments in Alliance Ventures and recognized a pre-tax, non-operating
loss of approximately $2.6 million. (See Note 3). Also, several of the Alliance
Venture investments are accounted for under the equity method due to the
Company's ability to exercise significant influence on the operations of
investees resulting primarily from ownership interest and/or board
representation. The total equity in the net losses of the equity investees of
Alliance Ventures was approximately $5.7 million for the year ended March 31,
2001.
Certain of the Company's officers have formed private venture funds, which
invest in some of the same investments as the Company. Additionally, an outside
venture fund has been formed in which certain of the Company's officers and
employees, as well as the Company itself, has made similar venture investments,
including investment in some of the same companies as Alliance Ventures.
Alliance Venture Management generally directs the individual funds to invest in
startup, pre-IPO (initial public offering) companies. These types of investments
are inherently risky and many venture funds have a large percentage of
investments decrease in value or fail. Most of these startup companies fail, and
the investors lose their entire investment. Successful investing relies on the
skill of the investment managers, but also on market and other factors outside
the control of the managers. The market for these types of investments has, in
the past, been successful and many venture capital funds have been profitable,
and while the Company has been successful in its recent investments, there can
be no assurance as to any future or continued success. It is possible there will
be a downturn in the success of these types of investments in the future and the
Company will suffer significant diminished success in these investments. It is
possible that many or most, and maybe all of the Company's venture type
investments may fail, resulting in the complete loss of some or all the money
the Company has invested in these types of investments.
Note 10. Investment in Solar Venture Partners, LP
In August 2000, the Company agreed to invest $20 million in Solar Venture
Partners, LP ("Solar"), a venture capital partnership whose focus is in
investing in early stage companies in the areas of networking,
telecommunications, wireless, software infrastructure enabling efficiencies of
the Web and e-commerce, semiconductors for emerging markets and design
automation. The Company has invested $12.5 million, $9.5 million is in the form
of three promissory notes, which on March 31, 2001 were converted into a limited
partnership interest in Solar. Due to changes in the venture capital market,
Alliance has decided to limit its investment in Solar to $12.5 million already
invested.
Certain of the Company's officers and employees have also invested in Solar.
Solar has made investments in some of the same companies as Alliance Ventures.
Note 11. Investment in Tower Semiconductor Corporation
In August 2000, the Company entered into a share purchase agreement with Tower
Semiconductor ("Tower") under which Alliance committed to make a $75 million
strategic investment in Tower as part of Tower's plan to build its new fab. In
return for its investment, Alliance will receive equity, corresponding
representation on Tower's Board of Director and committed production capacity in
the advanced fab, which Tower intends to build. Pursuant to the agreement, the
Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase
price of $31 million in the fourth quarter of fiscal 2001. The Company has an
obligation to purchase an additional 1,466,760 ordinary shares in four equal
increments upon occurrence of events relating to Tower's construction of FAB 2
as specified in the agreement. These additional shares are expected to be
purchased by the Company during fiscal 2002 and 2003.
In connection with the share purchase agreement, the Company entered into a
foundry agreement under which the Company is entitled to a certain amount of
credits towards future wafer purchases from Tower. The amount of credits is
determined upon each share purchase transaction by Alliance and is calculated
based on the
F-16
difference between Tower's average stock price for 30 days preceding a purchase
transaction and Alliance's share purchase exercise price. At March 31, 2001,
such wafer credits from Tower totaled $14.7 million and are included in other
assets on the balance sheet. The wafer credits will be utilized as the Company
purchases wafers from Tower in the future where 15% of order value will be
applied against the wafer credits. Under the terms of the foundry agreement, the
Company is guaranteed a capacity of up to 15% of available wafer starts but not
to exceed 5,000 wafers starts per month. The guaranteed capacity may be reduced
if the Company elects not to exercise its additional share purchase obligation.
The Company accounts for its investment in Tower under the cost method based on
the Company's inability to exercise significant influence over Tower's
operations.
NOTE 12. Long Term Obligations, Leases and Commitments
In January 2001, the Company entered into two derivative contracts
("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5
million. The Agreements have payment provisions that incorporate a collar
arrangement with respect to 490,000 shares of Vitesse Semiconductor common
stock. As such, under the Agreements, the Company must pay Bear Stearns an
amount based on the market price of Vitesse Semiconductor Common Stock in
January 2003, the maturity date of the Agreements. If the stock price of Vitesse
Semiconductor exceeds the ceiling of the collar, then the settlement amount
increases by an amount determined by a formula included in the Agreements
(generally equal to the excess of the value of the stock over the ceiling of the
collar). If the stock price of Vitesse Semiconductor declines below the floor of
the collar, then the settlement amount also decreases by the amount determined
by a formula included in the Agreements (generally equal to the excess of the
floor of the collar over the value of the stock). At March 31, 2001, the
derivative contracts were in the money to the Company based on Vitesse
Semiconductor's market price of $23.81 on that date and pre-tax, non-operating
gain on the contracts of $20.6 million, representing their intrinsic value at
March 31, 2001, was recorded. As a result, the Company's obligations under the
Agreements were reduced to $10.9 million, which was included in long-term
obligations at March 31, 2001.
Operating Leases
The Company leases its headquarters facility under an operating lease that
expires in June 2006. Under the terms of the lease, the Company is required to
pay property taxes, insurance and maintenance costs. In addition, the Company
also leases sales and design center offices under operating leases, which expire
between 2001 and 2007.
Future minimum fiscal rental payments under non-cancelable leases are as
follows:
Fiscal Year (in thousands)
- ----------- --------------
2002 $1,645
2003 1,607
2004 1,636
2005 1,696
2006 1,754
Thereafter 550
-------------
Total payments $8,888
=============
Rent expense for fiscal 2001, 2000, and 1999 was $1,799,000, $1,386,000 and
$635,000 respectively.
Capital Leases
At March 31, 2001, equipment under capital leases amounted to approximately $2.2
million compared to $2.5 million at March 31, 2000. The original lease terms
ranged from three to five years.
The following is a schedule of future minimum fiscal lease payments under
capital leases:
Fiscal Year (in thousands)
- ------------------------- ----------
2002 $908
2003 686
2004 100
----------
Total payments minimum 1,694
lease payments
Amount representing (150)
interest
----------
1,544
Less current portion (858)
----------
Long-term capital lease $686
obligations
==========
F-17
Letters of Credit
At March 31, 2001, approximately $1.9 million in standby letters of credit were
outstanding and expire through April 1, 2002, secured by restricted cash.
NOTE 13. Provision (benefit) for income taxes
The provision (benefit) for income taxes is comprised of the following:
March 31,
------------------------------
2001 2000 1999
-------- --------- ---------
(in thousands)
Current:
Federal $28,969 $14,340 $-
State 5,291 228 -
Foreign 34 - -
-------- --------- ---------
34,294 14,568 -
-------- --------- ---------
Deferred:
Federal (185,070) 340,351 8,397
State (29,180) 55,429 -
-------- --------- ---------
(214,250) 395,780 8,397
-------- --------- ---------
Total $(179,956) $410,348 $8,397
provision
(benefit)
======== ========= =========
Deferred tax assets (liabilities) comprise the following:
March 31,
------------------
2001 2000
------- ---------
(in thousands)
Inventory reserves $14,743 $1,982
Accrued expenses and 1,839 4,198
reserves
Other 3,866 -
------- ---------
Gross deferred tax 20,448 6,180
assets
Investment in UMC (193,102) (398,851)
Investment in Broadcom (2,254) (25,127)
Investment in Chartered - (61,129)
Investment in Vitesse (6,549) (27,952)
Investment in PMC-Sierra (73) -
Other - (1,827)
------- ---------
Gross deferred tax (201,978) (514,886)
liabilities
------- ---------
$(181,530) $(508,706)
======= =========
The provision (benefit) for income taxes differs from the amount obtained by
applying the U.S. federal statutory rate to income before income taxes as
follows:
Year Ended March 31,
-----------------------------------
2001 2000 1999
---------- ---------- -----------
(in thousands, except percentages)
Federal statutory rate 35% 35% 35%
Tax at federal $(156,289) $367,274 $(8,531)
statutory rate
State taxes, net of (25,893) 59,813 -
federal benefit
Change in valuation - (17,815) 8,397
allowance
Current year losses and
timing differences - - 8,531
with no tax benefit
recognized
Other, net 2,226 1,076 -
---------- ---------- -----------
Total $(179,956) $410,348 $8,397
========== ========== ===========
The tax benefit associated with the exercises of non-qualified stock options and
disqualifying dispositions of incentive stock options reduced taxes currently
payable by $1.7 million and $3.5 million in fiscal years 2001 and 2000,
respectively.
F-18
Note 14. Stock Option Plans
1992 Stock Option Plan
In April 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") and
reserved 5,625,000 shares of common stock for issuance to employees and
consultants of the Company. The Board of Directors may terminate the Plan at any
time at its discretion. On September 30, 1993, the number of shares of common
stock reserved for issuance under the Plan was increased to 7,875,000 and on
September 14, 1995, the number of shares reserved for issuance under the Plan
was increased to 9,000,000. On August 31, 1999, the number of shares reserved
for issuance under the Plan was increased by 2,000,000 to 11,000,000. On
September 8, 2000, the number of shares reserved for issuance under the Plan was
increased by 2,000,000 to 13,000,000. The Option Plan, which has a term of ten
years, provides for incentive as well as nonqualified stock options.
Incentive stock options may not be granted at less than 100 percent of the
estimated fair value, as determined by the Board of Directors, of the Company's
Common Stock at the date of grant and the option term may not exceed 10 years.
For holders of more than 10 percent of the total combined voting power of all
classes of the Company's stock, options may not be granted at less than 110
percent of the estimated fair value of the common stock at the date of grant and
the option term may not exceed five years.
Directors' Stock Option Plan
On September 30, 1993, the Company adopted its 1993 Directors' Stock Option Plan
("Directors' Plan"), under which 900,000 shares of common stock have been
reserved for issuance. The Directors' Plan provides for the automatic grant to
each non-employee director of the Company (but excluding persons on the
Company's Board of Directors in November 1993) of an option to purchase 22,500
shares of common stock on the date of such director's election to the Company's
Board of Directors. Thereafter, such director will receive an automatic annual
grant of an option to purchase 11,250 shares of common stock on the date of each
annual meeting of the Company's stockholders at which such director is
re-elected. The maximum number of shares that may be issued to any one director
under this plan is 90,000. Such options will vest ratably over four years from
their respective dates of grant.
The following table summarizes grant and stock option activity under the Plan
and the Directors' Plan for fiscal years 2001, 2000, and 1999:
Options Options Outstanding
------------ --------------------------
Available Shares Weighted
for Grant Average Prices
------------ ---------- ---------------
Balance at March 31, 1998 1,358,489 3,675,431 $5.81
Options granted (1,405,150) 1,405,150 3.52
Options canceled 1,352,324 (1,352,324) 7.23
Options exercised - (986,959) 1.56
------------ ---------- ---------------
Balance at March 31, 1999 1,305,663 2,741,298 $5.37
Options authorized 2,000,000 -
Options granted (1,150,950) 1,150,950 $11.91
Options canceled 925,374 (925,374) $5.49
Options exercised - (677,717) $5.85
------------ ---------- ---------------
Balance at March 31, 2000 3,080,087 2,289,157 $8.44
Options authorized 2,000,000 -
Options granted (627,250) 627,250 $19.46
Options canceled 267,850 (267,850) $13.93
Options exercised - (274,195) $5.51
------------ ---------- ---------------
Balance at March 31, 2001 4,720,687 2,374,362 $11.11
============ ========== ===============
As of March 31, 2001, options to purchase approximately 523,772 shares of common
stock were exercisable. Options granted vest over a period of four to five
years.
The weighted average estimated fair value at the date of grant, as defined by
SFAS 123, for options granted in fiscal 2001, 2000,and 1999 was $14.69, $8.57,
and $2.44 per option, respectively. The estimated grant date fair value
disclosed above was calculated using the Black-Scholes model. This model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise,
F-19
which greatly affect the calculated values. Significant option groups
outstanding at March 31, 2001, and related weighted average exercise price and
contractual life information are as follows:
Outstanding and Exercisable by Price Range
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Vested and Average
Exercise As of Remaining Exercise Exercisable Exercise
Prices March 31, Contractual Price As of March Price
2001 Life 31, 2001
- ------------- ------------ ------------ ---------- ------------- ---------
$2.09 - 573,230 3.66 $2.94 189,710 $3.18
$4.06
$4.50 - 475,082 2.56 $6.97 175,862 $7.08
$10.94
$11.06 - 270,620 4.41 $11.18 54,124 $11.18
$11.19
$11.25 - 551,430 4.84 $13.06 80,776 $12.98
$17.25
$17.94 - 275,500 5.11 $19.71 1,000 $18.50
$20.50
$20.75 - 228,500 5.18 $25.07 22,300 $25.52
$29.13
- ------------- ------------ ------------ ---------- ------------- ---------
$2.09 - 2,374,362 4.11 $11.11 523,772 $7.81
$29.13
============= ============ ============ ========== ============= =========
The following assumptions are included in the estimated grant date fair value
calculations for stock options:
2001 2000 1999
--------- ---------- ------------
Expected life 5.00 5.00 5.00
years years years
Risk-free 4.8% 6.7% 5.7%
interest rate
Volatility 87.6% 86.0% 88.0%
Dividend 0.0% 0.0% 0.0%
yield
Employee Stock Purchase Plan
In September 1996, the Company and its shareholders approved an Employee Stock
Purchase Plan ("ESPP"), which allows eligible employees of the Company and its
designated subsidiaries to purchase shares of common stock through payroll
deductions. The ESPP consists of a series of 12-month offering periods composed
of two consecutive 6-month purchase periods. The purchase price per share is 85%
of the fair market value of the common stock, at the date of commencement of the
offering period, or at the last day of the respective 6-month purchase period,
whichever is lower. Purchases are limited to 10% of an eligible employee's
compensation, subject to a maximum annual employee contribution and limited to a
$25,000 fair market value. Of the 750,000 shares of common stock authorized
under the ESPP, 45,051, 119,765, and 171,676 shares were issued during fiscal
2001, 2000, and 1999, respectively. At March 31, 2001, there were 280,579 shares
available under the ESPP.
Compensation costs (included in pro forma net income (loss) and pro forma net
income (loss) per share amounts) for the grant date fair value, as defined by
SFAS 123, of the purchase rights granted under the ESPP, were calculated using
the Black-Scholes model. The following weighted average assumptions are included
in the estimated grant date fair value calculations for rights to purchase stock
under the ESPP:
2001 2000 1999
--------- ----------- -----------
Expected life 6 months 6 months 6 months
Risk-free 3.6% 6.4% 4.9%
interest rate
Volatility 87.6% 78.0% 88.0%
Dividend 0.0% 0.0% 0.0%
yield
The weighted average estimated grant date fair value, as defined by SFAS 123, or
rights to purchase common stock under the ESPP granted in fiscal 2001, 2000, and
1999 was $8.43, $2.24, and $2.55 per share, respectively.
Pro Forma Net Income (Loss) and Pro Forma Net Income (Loss) Per
Share
Had the Company recorded compensation expense based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under the Plan, the
Directors' Plan and its ESPP, the Company's pro forma net income (loss) and pro
forma net income (loss) per share for the years ended March 31, 2001, 2000, and
1999, would have been as follows (in thousands, except per share data):
F-20
March 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Pro forma income $(274,635) $646,905 $(23,231)
(loss):
Pro forma net
loss per share:
Basic $(6.64) $15.47 $(0.56)
Diluted $(6.64) $15.05 $(0.56)
NOTE 15. 401(k) Salary Savings Plan
Effective May 1992, the Company adopted the Salary Savings Plan (the "Savings
Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"),
whereby eligible employees may contribute up to 15% of their earnings, not to
exceed amounts allowed under the Code. Effective April 1999, the Company agreed
to match up to 50% of the first 6% of the employee contribution to a maximum of
two thousand dollars annually per employee. The Company's matching contribution
vests over five years. In fiscal year 2001, 2000 and 1999 the Company
contributed approximately $115,000, $131,000 and $0, respectively.
NOTE 16. Legal Matters
In July 1998, the Company learned that a default judgment was entered against
the Company in Canada, in the amount of approximately $170 million (USD), in a
case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd.
v. Fitch Research Corporation, et al., British Columbia Supreme Court No.
85-2805 (Victoria Registry). The Company, which had previously not participated
in the case, believes that it never was properly served with process in this
action, and that the Canadian court lacks jurisdiction over the Company in this
matter. In addition to jurisdictional and procedural arguments, the Company also
believes it may have grounds to argue that the claims against the Company should
be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the
court set aside the default judgment against the Company. In April 1999, the
plaintiffs were granted leave by the Court to appeal this judgment. Oral
arguments were made before the Court of Appeals in June 2000. In July 2000 the
Court of Appeals instructed the lower Court to allow the parties to take
depositions regarding the issue of service of process, while also setting aside
the default judgment against the Company. The plaintiffs appealed the setting
aside of the default judgment against the Company to the Canadian Supreme Court.
In June 2001, the Canadian Supreme Court refused to hear the appeal of the
setting aside of the default judgment against the Company. The Company believes
the resolution of this matter will not have a material adverse effect on its
financial conditions and its results of operations.
NOTE 17. Antidumping Proceeding (Taiwan-manufactured SRAMs and
DRAMs)
In February 1997, Micron Technology, Inc. filed an antidumping petition with the
United States International Trade Commission ("ITC") and United States
Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were
being sold in the United States at less than fair value, and that the United
States industry producing SRAMs was materially injured or threatened with
material injury by reason of imports of SRAMs fabricated in Taiwan. After a
final affirmative DOC determination of dumping and a final affirmative ITC
determination of injury, DOC issued an antidumping duty order in April 1998.
Under that order, the Company's imports into the United States on or after
approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash
deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value
of such SRAMs. (The Company posted a bond in the amount of 59.06% (the
preliminary margin) with respect to its importation, between approximately
October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the
Company and others filed an appeal in the United States Court of International
Trade (the "CIT"), challenging the determination by the ITC that imports of
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On
June 30, 1999, the CIT issued a decision remanding the ITC's affirmative
material injury determination to the ITC for reconsideration. The ITC's remand
determination reaffirmed its original determination. The CIT considered the
remand determination and remanded it back to the ITC for further
reconsideration. On June 12, 2000, in its second remand determination the ITC
voted negative on injury, thereby reversing its original determination that
Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The
second remand determination was transmitted to the CIT on June 26, 2000 for
consideration. Micron has appealed the decision of the CIT to the Court of
Appeals for the Federal Circuit. The Company cannot predict either the timing or
the eventual results of the appeal, although it is expected to take a year or
more to conclude. Until a final judgment is entered in the appeal, no final
duties will be assessed on the Company's entries of SRAMs from Taiwan covered by
the DOC antidumping duty order. If the appeal is unsuccessful, the antidumping
order will be terminated and cash deposits will be refunded with interest. If
the appeal is successful, the Company's entries of Taiwan-fabricated SRAMs from
October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in
effect at the time of entry.
F-21
On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to
make cash deposits in the amount of 50.15% of the entered value. At March 31,
2001, the Company had posted a bond secured by a letter of credit in the amount
of approximately $1.7 million and made cash deposits in the amount of $1.7
million relating to the Company's importation of Taiwan-manufactured SRAMs.
NOTE 18. Related Party Transactions
On May 18, 1998, the Company provided loans to two of its officers and a
director aggregating $1,735,000. The officers' loans were used for the payment
of taxes resulting from the gain on the exercise of non-qualified stock options.
The loan to a director was used for the exercise of stock options. Under these
loans, both principal and accrued interest were due on December 31, 1999, with
accrued interest at rates ranging from 5.50% to 5.58% per annum. The loan to the
director was paid at December 31, 1999. The officer loans were extended to
December 31, 2001. As of March 31, 2001, $1,616,000 was outstanding under these
loans with accrued interest of $252,000.
In fiscal year 2000, the Company made wafer purchases from USC of approximately
$15.1 million prior to the merger with UMC in January 2000. After the completion
of the merger in January 2000, the Company purchased $1.5 million of wafers from
UMC. In fiscal year 1999, the Company made wafer purchases $8.8 million from
USC.
NOTE 19. Segment and Geographic Information
The Company operates in one reportable segment, memory products. The memory
products segment includes; Static Random Access Memories ("SRAMs"), Dynamic
Random Access Memories ("DRAMs"), and Flash Memories ("Flash").
The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customer's location.
Year Ended March 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
(in thousands)
United States $77,114 $36,088 $23,770
Taiwan 35,666 11,310 6,061
Japan 36,775 10,251 3,269
Asia (except 19,069 6,211 5,807
Taiwan and Japan)
Europe (except UK) 18,724 15,042 8,196
UK 20,363 10,251 371
Rest of world 967 - 309
--------- --------- ---------
Total $208,678 $89,153 $47,783
========= ========= =========
International net revenues in fiscal 2001 increased by 148% over fiscal 2000.
International net revenues are derived from customers in Europe, Asia and the
rest of the world. The largest increase in international net revenues was to
customers in Asia, which increased approximately 236% over fiscal year 2000.
This increase was due to an overall increase in product demand and higher
average selling prices during the first three fiscal quarters of the year.
International revenues increased 195% in fiscal 2000 compared to fiscal 1999.
The largest increase in international net revenues was to customers in Europe,
which was attributable to overall increase in product demand and higher average
selling prices.
NOTE 20. Subsequent Events (unaudited)
In May 2001, the Company paid $11.0 million to Tower Semiconductor, in
accordance with the terms of the share purchase agreement between the two
companies.
In May 2001, the Company entered into a secured loan agreement (the "Loan
Agreement") with Citibank, N.A for up to $60 million. Under the terms of the
Loan Agreement, the loan will mature on November 19, 2001 and bears interest at
a per annum rate equal to LIBO Rate plus one percent. Both the principal and
accrued interest are payable upon maturity. The borrowings under the Loan
Agreement are secured by 181,670,000 shares of UMC common stock held by the
Company.
F-22
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Alliance Semiconductor Corporation:
Our audits of the consolidated financial statements referred to in our report
dated April 25, 2001, appearing in this Annual Report on Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a)(2)(I) of this
Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 25, 2001
F-23
ALLIANCE SEMICONDUCTOR CORPORATION
Schedule II: Valuation and Qualifying Accounts
(in thousands)
Balance at Balance
Description beginning Additions Reduction at end
of period of period
- --------------------------------- ---------- --------- --------- ---------
Year ended March 31, 2001
Allowance for doubtful $954 $3,310 $(683) $3,581
accounts and sales-related
reserves
Inventory related reserves for $8,270 $37,886 $(8,216) $37,940
excess and obsolescence; and
lower of cost or market issues
Year ended March 31, 2000
Allowance for doubtful $2,527 $6,209 $(7,782) $954
accounts and sales-related
reserves
Inventory related reserves for $15,701 $5,862 $(13,293) $8,270
excess and obsolescence;
and lower of cost or market
issues
Year ended March 31, 1999
Allowance for doubtful $2,010 $3,193 $(2,676) $2,527
accounts and sales-related
reserves
Inventory related reserves for $14,967 $20,437 $(19,703) $15,701
excess and obsolescence; and
lower of cost or market issues
F-24