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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended March 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number: 0-22594
ALLIANCE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0057842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3099 North First Street, San Jose, California 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 383-4900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
(Title of class)
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 in this form, and no disclosure will 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 of this Form 10-K. [ ]
The aggregate market value of Registrant's Common Stock held by
non-affiliates of Registrant as of June 18, 1998 was approximately $144.9
million based on the closing sale price of such stock on the Nasdaq National
Market.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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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 18, 1998, there were 41,389,842 shares of Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its 1998 Annual Meeting
of Stockholders (the "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 28, 1998, are incorporated by reference
into Part III hereof.
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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, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the personal computer, networking,
telecommunications and instrumentation markets, in particular as they may affect
demand for or pricing of the Company's products; the percentage of export sales
and sales to strategic customers; the percentage of revenue by product line; and
the availability and cost of products from the Company's suppliers; are subject
to risks and uncertainties. These risks and uncertainties include those set
forth in Item 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.
PART I
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 and instrumentation industries. Market trends
such as the proliferation of high-end personal computers and workstations and an
increased emphasis on high-throughput applications, including networking,
graphics, multimedia 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. Additionally, the Company produces
a family of single power supply flash memory products, for applications such as
personal computer BIOS storage and cellular phones. The Company also offers
multimedia user interface ("MMUI") accelerator products that combine 2D and 3D
graphics and motion video acceleration capabilities, and is actively pursuing a
variety of opportunities to leverage its competencies in memory and
memory-intensive logic design to create a range of embedded-memory products that
combine logic and memory on a single chip.
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 accelerated erosion of
selling prices. During much of fiscal 1998, the market for certain of the
Company's DRAM devices continued to experience excess supply relative to demand
which resulted in a significant downward trend
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in average selling prices. Pricing pressure also resulted in significant
declines in average selling prices during fiscal 1998 for many of the Company's
SRAM, flash and graphics products. 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 could experience (as it did throughout much of
fiscal 1998 and continuing into fiscal 1999) rapid erosion in product pricing
which is not within the control of the Company and which could have an adverse
material effect on the Company's operating results. The Company announced in May
1998 that primarily due to continued weakening in the DRAM market, the Company
expects its operating results for the first quarter of fiscal 1999 to be
significantly below results from the prior quarter, and to result in a net loss
for the quarter. The Company anticipates that in the first quarter of fiscal
1999, it will record a material valuation adjustment with respect to its
inventory, primarily to reflect a decline in the market value of such inventory.
Throughout this Report, the Company often has indicated its fiscal years as
ending on March 31, whereas the Company's fiscal year ends on the Saturday
nearest the end of March. The fiscal years ended March 31, 1998, March 31, 1997
and March 31, 1996 each contained 52 weeks.
Industry Background
SRAMs and DRAMs are the most commonly-used memory circuits for the storage
and retrieval of data during a computer system's operation, and are used in a
wide variety of other applications, such as telecommunications, networking and
instrumentation. SRAMs are roughly four to six times as complex as DRAMs (four
to six transistors per bit of memory compared to one transistor) but also are
generally roughly four times as fast. SRAMs are also substantially more
expensive than DRAMs per unit of storage. Computer architectures have evolved to
make efficient use of both SRAMs and DRAMs, taking into account their cost and
performance characteristics. DRAMs are used in a computer's main memory to
temporarily store the large amounts of data retrieved from low cost external
mass memory, such as hard disk drives. SRAMs are principally used as caches and
buffers between the computer's microprocessor and its DRAM-based main memory.
DRAMs and SRAMs also are used in a variety of applications in industries such as
networking, Communications and instrumentation.
Traditionally, the markets for SRAMs and DRAMs have been dominated by large
manufacturing companies, such as Toshiba, NEC, Hitachi, Texas Instruments and
Samsung. The majority of the memory products from these manufacturers has
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 SRAMs and high speed DRAMs.
The emergence of graphical user interface ("GUI") environments (such as
Microsoft(R) Windows(R)) and multimedia applications for personal computers has
placed an additional burden on microprocessors to manipulate windows, icons,
video and other complex graphical objects. This burden on microprocessors and
the resulting decrease in the speed with which software applications are
executed have created a need for a companion processor (a "GUI accelerator")
that off-loads from the main
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processor the management of GUI tasks. GUI acceleration has become a fundamental
requirement for high performance personal computers. The emergence of multimedia
applications has driven the need for higher performance multimedia user
interface accelerators that can provide acceleration of 2D/3D graphics and
video. Both GUI and MMUI (multi-media user interface) accelerators require fast
DRAMs or SGRAMs (synchronous graphic random access memories) to store screen
content that is used frequently to refresh the display. 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 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
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basic designs and sustain them over time in successive generations of higher
performance and higher density products.
Products
High Speed CMOS SRAMs
Sales of the Company's SRAM products accounted for substantially all of the
Company's net revenues from April 1, 1992 through the early part of fiscal 1997.
During fiscal 1998, SRAM products, including cache memory modules, contributed
approximately 27% of the Company's net revenues, as compared to approximately
41% of the Company's net revenues in fiscal 1997. The Company currently offers
SRAM products in several different packages and speed grades ranging from
64-Kbit densities with 8ns access times to 4-Mbit densities with 15ns access
times. Currently, substantially all of the Company's volume SRAM products are
manufactured using 0.35 micron technology, with development for a transition to
0.25 micron technology underway.
High Speed CMOS DRAMs
During fiscal 1998, the Company commenced volume production of 4-Mbit and
16-Mbit DRAM products in 256Kbitx16 and 1Mbitx16 configurations, respectively.
Sales of the Company's family of DRAM products experienced significant growth
during the fiscal year, contributing approximately 66% of the fiscal year's net
revenues, as compared to approximately 47% of the Company's net revenues in
fiscal 1997.
MMUI Accelerators
During fiscal 1998, the Company further expanded its offering of graphics
accelerator products, and introduced an embedded DRAM 2D/3D graphics controller.
Sales of MMUI accelerator products accounted for approximately 7% of the
Company's net revenues during fiscal 1998 as compared to approximately 11% of
the Company's net revenues in fiscal 1997.
High Speed CMOS Flash Memories
During fiscal 1998, the Company extended its offering of 5 volt-only flash
memory products (which use a single, 5 volt, power supply for read and
programming functions) and now offers 5 volt-only products in densities up to
8-Mbit, with access times as fast as 55ns. To date, the Company has not derived
significant revenue from flash memory products.
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 had on staff 80 development personnel as of
March 28, 1998. 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 1998, fiscal 1997 and fiscal
1996, the Company spent approximately $15.3 million, $15.0
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million and $14.7 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 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 operating results.
The markets for SRAMs, DRAMs, MMUI accelerators 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 operating results.
During fiscal 1998, the Company incurred pre-tax charges of approximately $18
million, primarily to adjust the valuation of the Company's inventory to relect,
declines in market value. The Company anticipates that in the first quarter of
fiscal 1999, it will record a material valuation adjustment with respect to its
inventory, primarily to reflect a decline in the market value of such inventory.
Customer
The Company's primary customers are major domestic and international
suppliers and manufacturers of personal computers and personal computer
peripheral system boards including Acer, Apricot (acquired by Mitsubishi),
Diamond Multimedia, Hewlett Packard, IBM, Jabil, NEC, SCI Manufacturing and
Solectron. The market for DRAMs and SRAMs used in personal computers is
characterized by price volatility and has experienced significant fluctuations
and downturns in product demand. Moreover, with respect to SRAMs, the Company
derived less than 10% of its net revenue in fiscal 1998 from the sale of SRAMs
for personal computer cache applications. Intel introduced last year the Pentium
II card containing a microprocessor and cache memory (SRAM) on the card, and the
Company has not to date been selected as a supplier of SRAM memory to Intel for
the Pentium II card. There can be no assurance that the Company will be selected
by Intel to supply SRAM memory for the Pentium II card in the future. If Intel
continues to assemble cache memory onto the Pentium II card (or successors
thereto) prior to sale to customers, then failure by the Company to be chosen to
supply SRAM to Intel for the Pentium II card (or successors thereto) would
likely materially limit the Company's sales of SRAMs to the personal computer
market.
While the Company's strategy is to increase its penetration into the
networking, telecommunications and instrumentation markets with its existing
SRAM products and to develop new products complementary to its existing
products,
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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
operating results.
Because a large percentage of the worldwide supply of personal computers
and personal computer system boards is manufactured by suppliers located in
Asia, a substantial percentage of the Company's net revenues are derived from
Asian companies. During the fiscal years ended March 31, 1998, 1997 and 1996
sales to customers in Asia accounted for approximately 30%, 28% and 25% of the
Company's net revenues, respectively. Continued weakness of the Asian economies
- -- a risk heightened by the recent financial and currency crisis in many Asian
countries -- may have a material adverse impact on the Company.
The Company is also selling SRAMs to networking, telecommunications and
instrumentation customers including 3Com, Adaptec, Alteon, Ascend, Bay Networks,
Hitachi, Mitsubishi, Siemens, Sony, Tektronix and Xircom. 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. Although the Company may be refunded such deposits as early as the
year 2000 (see Item 3 - Legal Proceedings, below), the deposit requirement, and
the potential that antidumping duties will be liquidated in early 2000, may
materially adversely affect the Company's ability to sell Taiwan manufactured
(wafer fabrication) SRAMs in the United States. The Company manufactures (wafer
fabrication) SRAMs in Singapore (and has manufactured SRAMs in Japan as well),
and may be able to support its U.S. customers with such products, which are not
subject to antidumping duties. There can be no assurance, however, that the
Company will be able to do so.
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, 1998, one customer accounted for
approximately 18% of the Company's net revenues. For the fiscal year ended March
31, 1997, no customer accounted for 10% or more of the Company's net revenues.
For fiscal year ended March 31, 1996, one customer accounted for approximately
18% of the Company's net revenues. See Note 1 of Notes to Consolidated Financial
Statements.
Sales and Marketing
The Company markets and distributes its products in North America through a
direct sales organization supported by manufacturers' representatives and
distributors. The Company uses manufacturers' representatives and/or
distributors to make sales in 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 to the Company a portion of the products purchased by them.
The loss of one or more manufacturers' representatives or distributors could
have a
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material adverse effect on the Company's operating results. 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 41%, 36% and 43% of net revenues in
fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The majority of the
Company's international revenues in fiscal years 1996 through 1998 were derived
from Asian manufacturers of personal computers and personal computer system
boards, because a large percentage of the worldwide supply of these products has
been and continues to be manufactured by suppliers located in Asia. 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
the Company has in the past and intends in the future to make investments in
certain foundries in Asia 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. Further, the Company's investments in
foundries are denominated in local currencies. The recent financial and economic
crisis in Asia may have heightened all of the foregoing risks (for instance, the
U.S. dollar was significantly stronger at the end of fiscal 1998 vis-a-vis many
Asian currencies than at the beginning of fiscal 1998). Although the Company to
date has not experienced any material adverse effect on its 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 operations
in the future or require the Company to modify its current business practices.
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
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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, United Semiconductor Corporation ("USC") in Taiwan, Chartered
Semiconductor Manufacturing Ltd. ("Chartered") in Singapore and Rohm Co., Ltd.
("Rohm") in Japan. The Company has entered into foundry production agreements
with all of its major foundries. 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.
In February 1995, the Company agreed to purchase shares of Chartered for
approximately US$10 million and entered into a manufacturing agreement under
which Chartered will provide a minimum number of wafers from its 8-inch wafer
fabrication facility known as "Fab 2." In April 1995, the Company agreed to
purchase additional shares in Chartered, bringing the total agreed investment in
Chartered to approximately US$51.6 million and Chartered agreed to provide an
increased minimum number of wafers to be provided by Chartered from Fab 2. The
Company has paid all installments to Chartered. Chartered is a private company
based in Singapore that is controlled by entities affiliated with the Singapore
government. The Company does not own a material percentage of the equity of
Chartered. Chartered has also received investments of approximately US$10
million to US$20 million from a number of United States companies, including
Actel Corporation, Brooktree Corporation, LSI Logic Corporation and Rockwell
International Corporation, in return for guaranteed minimum numbers of wafers
from Fab 2. Chartered also announced in January 1998 that it had entered into an
agreement with Lucent Technologies Inc. to create a foundry venture, Silicon
Manufacturing Partners Pte. Ltd., and announced in April 1997 that it had
entered into an agreement with Hewlett-Packard Co. to create a foundry venture,
Chartered Silicon Partners Pte. Ltd.
In July 1995, the Company entered into an agreement with UMC and S3
Incorporated ("S3") to form a separate Taiwanese company, USC, for the purpose
of building and managing an 8-inch semiconductor manufacturing facility in
Taiwan. The facility is in full production utilizing advanced sub-micron
semiconductor manufacturing processes. Alliance's initial contribution of
approximately $70 million was paid in three installments between September 1995
and July 1997, representing an initial equity ownership of approximately 19.0%.
In April 1998, the Company sold 3.5% of the outstanding shares of USC, for gross
proceeds of approximately $32 million and the right to receive contingent
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payment of up to approximately 665 million New Taiwan Dollars (approximately US
$19.3 million at the exchange rate prevailing on June 18, 1998, which rate is
subject to material change). As a result of that sale, the Company currently
owns approximately 15.5% of the outstanding shares of USC, and has the right to
purchase up to approximately 25% of the manufacturing capacity in this facility.
The Company anticipates that as a result of an upcoming issuance of shares to
USC employees (which issuance has been approved by USC's board of directors),
the Company's ownership position will be diluted to approximately 15.1%. A
portion of UMC's equity contribution was paid through the grant by UMC to USC of
royalty-free licenses to certain UMC sub-micron process technologies. To the
extent USC experiences operating income or losses, and the Company maintains its
current ownership percentage of outstanding shares, the Company will recognize
its proportionate share of such income or losses. Throughout fiscal 1998, the
Company reported income of approximately $15.5 million related to its share of
USC's income. The Company believes that a number of manufacturers are expanding
or planning to expand their fabrication capacity over the next several years,
which could lead to overcapacity in the market and resulting decreases in costs
of finished wafers. If the wafers produced by USC cannot be produced at
competitive prices, or if there is not sufficient demand for USC's wafers, USC
could sustain operating losses. There can be no assurance that such operating
losses will not have a material adverse effect on the Company's results of
operations.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, United Silicon Inc. ("USI"), for
the purpose of building and managing an 8-inch semiconductor manufacturing
facility in Taiwan. The facility has commenced volume production utilizing
advanced sub-micron semiconductor manufacturing processes. The contributions of
Alliance and other parties shall be in the form of equity investments,
representing an initial ownership interest of approximately 5% for each US$30
million invested. Alliance had originally committed to an investment of
approximately US$60 million or 10% ownership interest but subsequently requested
that its level of participation be reduced by 50%. The first installment of
approximately 50% of the revised investment, or US$13.7 million, was made in
January 1996. The Company had but did not exercise the option to pay a second
installment of approximately 25% of the revised investment payable in December
1997. Currently, the Company owns approximately 3.33% of the outstanding shares
of USI and has the right to purchase approximately 4.17% of the manufacturing
capacity of the facility. A portion of UMC's equity contribution was paid
through the grant by UMC to USI of royalty-free licenses to certain UMC
sub-micron below process technologies.
There can be no assurance that the Company's current foundries, together
with any additional sources, will be able or willing to satisfy all of the
Company's requirements on a timely basis. 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 operating results could be
materially adversely affected. In addition, UMC, USC and USI all are located in
the Science-Based Industrial Park in Hsin Chu City, Taiwan. The Company
currently expects these three foundries to supply the substantial portion of the
Company's products in fiscal 1999. Disruption of operations at the Company's
foundries for any reason, including work stoppages, fire, earthquakes or other
natural disasters, could cause delays in shipments of the Company's products,
and
-11-
could have a material adverse effect on the Company's results of
operations. 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 USI and near USC and UMC in the
Hsin-Chu Science-Based Industrial Park. (The Company has products manufactured
at UMC and USC, and owns equity stakes in USC and USI.) UICC suffered an
additional fire in January 1998, and since October 1996, there have been at
least two other fires at semiconductor manufacturing facilities in the Hsin-Chu
Science-Based Industrial Park. There can be no assurance that fires or other
disasters will not have a material adverse affect on UMC, USC or USI in the
future. In addition, as a result of the rapid growth of the semiconductor
industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity could adversely affect the Company's
foundries' ability to supply the Company's products, which could have a 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 products from UMC, USC, Chartered and Rohm pursuant
to various agreements. The Company believes that its relationship with each of
these foundries is good. However, UMC and Rohm manufacture products in the same
facilities used to manufacture the Company's products, which products are sold
in competition with 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, 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 operating results. There can be no assurance that problems affecting
manufacturing yields of the Company's products will not occur in the future such
as occurred during late in fiscal 1996.
The Company uses domestic and offshore subcontractors 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 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 circumstance 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 operating results. Most of
the
-12-
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 affect on the
Company's operating results.
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 operating results. 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 operating results.
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.; Motorola; Samsung; S3; Toshiba; and other U.S., Japanese,
Korean, and Taiwanese manufacturers. Certain 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. Due to the
downturn 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 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 and 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
-13-
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. The Company holds 35 United
States patents covering certain aspects of its product designs or manufacturing
technology, which patents expire between 2009 and 2016. The Company also has
32 pending United States patent applications, 9 of which have been allowed and
are expected to be issued as patents. There can be no assurance that any
additional patents will be issued to the Company or that the Company's patents
will provide meaningful protection from competition or will not be invalidated
or challenged in the future. Copyrights, maskwork protection, trade secrets and
confidential technological know-how are also key elements in the conduct of the
Company's business.
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. The Company currently is in
litigation with Advanced Micro Devices, Inc. ("AMD") concerning claims by AMD
that the Company's flash memory devices infringe two AMD patents. See Item 3 -
Legal Proceedings, below.
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, expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology. In addition, depending upon the number of infringing
products and the extent of sales of such products, the Company could suffer
significant monetary damages. In the event of a successful claim against the
Company and the Company's failure to develop or license a substitute technology,
the Company's operating results could be materially adversely affected. In
addition, the laws of certain territories in which the Company's products are or
may be developed, manufactured or sold, including Asia, Europe or 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
-14-
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 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.
Employees
As of March 28, 1998, the Company had 168 full-time employees, consisting
of 80 in research and development, 7 in marketing, 24 in sales, 11 in finance,
and 46 in administration and operations. Of the 80 research and development
employees, 26 have advanced degrees. The Company recently has opened a design
center in India. The Company believes that its 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. During fiscal
1997, the Company initiated the conversion of its business information systems
to Oracle(R) and its manufacturing tracking systems to FASTech(R) which will be
further integrated with the Oracle(R) application. The full conversion is
scheduled to be completed in February 1999, however, there can be no assurance
that the conversion will not suffer delays or not experience other problems
which may have a materially adverse impact on the business operations of the
Company. Additionally 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 operating results.
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,
Chief Financial Officer and President of the Company, and his brother C.N.
Reddy, Executive Vice President and Chief Operating Officer 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 1998
and subsequently, a number of officers and design personnel left Alliance 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
-15-
The Company's executive offices and its principal marketing, sales and
product development operations are located in a 41,400 square foot leased
facility in San Jose, California under a lease which expires in 1999, which the
Company may extend for 5 years beyond such expiration. 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 office in Bangalore, India, and has purchased a parcel of land
in an office park under development in Hyderabad, India, for product
development. Additionally, the Company leases sales offices in Irvine,
California; Reading, Massachusetts; Plano, Texas; Heathrow, Florida; Taipei,
Taiwan; Munich, Germany; and Derby, England.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, in March 1996, a putative class action lawsuit was
filed against the Company and certain of its officers and directors and others
in the United States District Court for the Northern District of California,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder. (The complaint alleged
that the Company, N.D. Reddy and C.N. Reddy also had liability under Section
20(a) of the Exchange Act.) The complaint, brought by an individual who claimed
to have purchased 100 shares of the Company's common stock on November 2, 1995,
was putatively brought on behalf of a class of persons who purchased the
Company's common stock between July 11, 1995 and December 29, 1995. In April
1997, the Court dismissed the complaint, with leave to file an amended
complaint. In June 1997, plaintiff filed an amended complaint against the
Company and certain of its officers and directors alleging violations of
Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to
dismiss the amended complaint. In March 1998, the court ruled in defendants'
favor as to all claims but one, and dismissed all but one claim with prejudice.
In April 1998, defendants requested reconsideration of the ruling as to the one
claim not dismissed. In June 1998, the parties stipulated to dismiss the
remaining claim without prejudice, on the condition that in the event the
dismissal with prejudice of the other claims is affirmed in its entirety, such
remaining claim shall be deemed dismissed with prejudice. In June 1998, the
court entered judgement dismissing the case pursuant to the parties'
stipulation. The Company intends to continue to defend vigorously against any
claims asserted against it, and believes it has meritorious defenses. Due to the
inherent uncertainty of litigation, the Company is not able to reasonably
estimate the potential losses, if any, that may be incurred in relation to this
litigation.
As previously reported, in December 1996, Alliance Semiconductor
International Corporation, a wholly-owned subsidiary of the Company ("ASIC") was
served with a complaint alleging that ASIC has infringed two patents owned by
AMD related to flash memory devices, and seeking injunctive relief and damages.
In March 1997, the Company was added as a defendant. Each defendant has denied
the allegations of the complaint and asserted a counterclaim for declaration
that each of the AMD Patents is invalid and not infringed by such defendant. The
Company believes that the resolution of this matter will not have a material
adverse effect on the financial condition of the Company.
In February 1997, Micron Technology, Inc. filed an anti-dumping petition
(the "Petition") with the United States International Trade Commission ("ITC")
(Investigation Nos. 731-TA-761-762) and United States Department of Commerce
("DOC") (Investigations No. A-583-827), alleging that static random access
memories ("SRAMs") produced in South Korea and Taiwan are being sold in the
United States at less than fair value, and that the United States industry
producing SRAMs is materially injured or threatened with material injury by
reason of imports of SRAMs manufactured in South Korea and Taiwan. As a result
of the Petition, the Company, in order to import into the United States, on or
after approximately April 1998, SRAMs manufactured in Taiwan, must pay a cash
deposit in the amount of 50.15% (the "Antidumping Margin") of the cost of such
SRAMs. (The Company has posted a bond in the
-16-
amount of 59.06% (the preliminary margin) with respect to its importation,
between approximately October 1997 and March 1998, of SRAMs manufactured in
Taiwan.) The Company and others have appealed the determination by the ITC that
imposed the Antidumping Margin. The Company may, in 1999, request a review of
its sales of Taiwan-fabricated SRAMs from approximately October 1997 through
March 1999 (the "Review Period"). If the Company makes such a request, the cash
deposits made by the Company shall not be "assessed" or "liquidated" until the
conclusion of the review, in early 2000. If the DOC found, based upon analysis
of the Company's sales during the Review Period, that antidumping duties either
should not be imposed or should be imposed at a lower rate than the Antidumping
Margin, the difference between the cash deposits made by the Company, and the
deposits that would have been made had the lower rate (or no rate, as the case
may be) been in effect, would be returned to the Company, plus interest. If, on
the other hand, the DOC found that higher margins were appropriate, the Company
would have to pay difference between the cash deposits made by the Company, and
the deposits that would have been made had the higher rate been in effect. (In
either case, the Company also would be responsible to pay antidumping duties in
the amount of the revised margin with respect to its imports, between
approximately October 1997 and March 1998, of SRAMs manufactured in Taiwan.) A
material portion of the SRAMs designed and sold by the Company are manufactured
in Taiwan, and the cash deposit requirement and possibility of assessment
(liquidation) of antidumping duties could materially adversely affect the
Company's ability to sell Taiwan-fabricated SRAMs in the United States and have
a material adverse effect on the Company's operating results and financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-17-
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.......... 59 President and Chief Executive Officer,
Chief Financial Officer
C.N. Reddy................ 42 Executive Vice President and Chief
Operating Officer
Gregory Barton............ 36 Vice President - Corporate and Legal
Affairs, General Counsel
William Caparelli......... 54 Senior Vice President - Sales (resigned
effective July 1998)
Sunit Saxena.............. 39 Vice President - Product/Test
Engineering and Operations
Ritu Shrivastava.......... 47 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. In June 1998, after the resignation of Charles
Alvarez as Chief Financial Officer, Mr. Reddy was appointed Chief Financial
Officer until a replacement is named. 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. He holds an M.S. degree in Electrical Engineering
from North Dakota State University and a 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 the Company's
Secretary and director since its inception in February 1985. Beginning 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. 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. C.N. Reddy is named inventor of over 15
patents related to SRAM and DRAM designs. C.N. Reddy is the brother of N.
Damodar Reddy.
-18-
Gregory Barton joined the Company in 1995 as General Counsel and was
appointed Vice President - Corporate and Legal Affairs in 1996. From 1986 to
1993, he was an associate in the New York office of the law firm Gibson, Dunn &
Crutcher. Mr. Barton received a J.D. degree magna cum laude from Harvard Law
School, and a B.A. degree summa cum laude from Claremont McKenna College.
William Caparelli joined the Company in October 1997 as Senior Vice
President - Sales. Prior to joining the Company, Mr. Caparelli spent almost ten
years in various positions at Cirrus Logic, Inc., most recently as Senior Vice
President, Worldwide Sales. Mr. Caparelli holds a B.S.E.E. from Lowell
Technological Institute. In June 1998, Mr. Caparelli announced his resignation,
effective July 1998, to pursue other opportunities.
Sunit Saxena joined the Company in January 1995 and was appointed Vice
President - Product/Test Engineering and Operations in January 1998. Mr. Saxena
had been appointed Vice President - Product Engineering in August 1995. Prior to
joining the Company, Mr. Saxena held positions at Altera as Director of Product
and Test Engineering and at Advanced Micro Devices, Inc. where his career
included management of Product/Test Engineering for CMOS and Bipolar Network
products, the 2900 series Microprocessor family, DRAMs, and process development
and management of EPROM and EEPROM. Mr. Saxena has an M.S. degree in Solid State
Device Physics from the Indian Institute of Technology in New Delhi, India and
an M.S. degree in Computer Engineering from Syracuse University.
Ritu Shrivastava joined the Company in November 1993, and was appointed
Vice President - Technology Development in August 1995. Mr. 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 Senior Member of IEEE.
Charles Alvarez, the Company's Chief Financial Officer since March 1997,
resigned from the Company effective June 1998 to pursue other opportunities.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
quoted 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 sale prices for the
Company's Common Stock, as adjusted to reflect the three-for-two stock split
effected in in July 1995. Such prices represent prices between dealers, do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Calendar Year High Low
- ------------- ---- ---
1996
- ----
1st Quarter .................... $ 13.00 $ 8.00
2nd Quarter .................... 12.00 7.75
3rd Quarter .................... 9.00 5.13
4th Quarter .................... 10.00 6.00
1997
- ----
1st Quarter .................... $ 9.50 $ 6.31
2nd Quarter .................... 9.38 6.44
3rd Quarter .................... 15.75 7.63
4th Quarter .................... 11.06 4.00
1998
- ----
1st Quarter .................... $ 8.25 $ 4.50
As of June 18, 1998, there were approximately 187 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 31, 1998 and should be read in
conjunction with the consolidated financial statements and notes relating
thereto.
Year Ended March 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues ..................................... $ 118,400 $ 82,572 $ 201,098 $ 119,327 $ 54,574
Cost of revenues ................................. 117,400 84,630 158,159 65,035 33,414
--------- --------- --------- --------- ---------
Gross profit (loss) ........................... 1,000 (2,058) 42,939 54,292 21,160
Operating expenses:
Research and development ...................... 15,254 15,012 14,664 8,374 3,661
Selling, general and administrative ........... 18,666 10,344 17,202 9,600 3,953
--------- --------- --------- --------- ---------
Income (loss) from operations .................... (32,920) (27,414) 11,073 36,318 13,546
Other income, net ................................ 287 1,753 6,498 2,035 343
--------- --------- --------- --------- ---------
Income (loss) before income taxes ................ (32,633) (25,661) 17,571 38,353 13,889
Provision for income taxes ....................... (11,421) (8,990) 6,852 14,462 5,213
--------- --------- --------- --------- ---------
Income (loss) before equity in income of USC ..... (21,212) (16,671) 10,719 23,891 8,676
Equity in income of USC .......................... 15,475 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (5,737) $ (16,671) $ 10,719 $ 23,891 $ 8,676
========= ========= ========= ========= =========
Net income (loss) per share:
Basic ........................................ $ (0.15) $ (0.43) $ 0.28 $ 0.78 $ 0.37
========= ========= ========= ========= =========
Diluted ...................................... $ (0.15) $ (0.43) $ 0.26 $ 0.69 $ 0.32
========= ========= ========= ========= =========
Weighted average number of common shares:
Basic ........................................ 39,493 38,653 37,900 30,612 23,475
========= ========= ========= ========= =========
Diluted ...................................... 39,493 38,653 40,633 34,559 26,906
========= ========= ========= ========= =========
March 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Working capital .................................. $ 39,879 $ 78,000 $106,171 $ 86,845 $ 26,550
Total assets ..................................... 248,265 232,569 263,238 126,866 40,192
Stockholders' equity ............................. 202,041 204,677 219,381 107,803 28,998
-21-
Fiscal Year
--------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- --------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- -------- -------- -------- -------- -------- -------- --------
Operating Summary: (in thousands, except per share data)
Net revenues ..................... $ 28,295 $ 24,768 $ 28,998 $ 36,339 $ 30,105 $ 25,224 $ 13,135 $ 14,108
Cost of revenues ................. 29,756 26,336 31,693 29,615 27,437 21,833 11,029 24,331
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss) ........... (1,461) (1,568) (2,695) 6,724 2,668 3,391 2,106 (10,223)
Operating expenses:
Research and development ...... 4,313 3,276 3,558 4,107 4,261 3,673 3,639 3,439
Selling, general and
administrative ............ 4,851 4,875 4,885 4,055 3,003 2,146 2,703 2,492
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations .... (10,625) (9,719) (11,138) (1,438) (4,596) (2,428) (4,236) (16,154)
Other income (expenses), net ..... (127) 171 54 189 209 369 459 716
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes ......................... (10,752) (9,548) (11,084) (1,249) (4,387) (2,059) (3,777) (15,438)
Provision (benefit) for income
taxes ......................... (3,763) (3,342) (3,879) (437) (1,544) (721) (1,322) (5,403)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before equity in
Income of USC .................... (6,989) (6,206) (7,205) (812) (2,843) (1,338) (2,455) (10,035)
Equity in income of USC .......... 7,068 3,833 2,654 1,920 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ................ $ 79 $ (2,373) $ (4,551) $ 1,108 $ (2,843) $ (1,338) $ (2,455) $(10,035)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic ........................ $ 0.00 $ (0.06) $ (0.12) $ 0.03 $ (0.07) $ (0.03) $ (0.06) $ (0.26)
======== ======== ======== ======== ======== ======== ======== ========
Diluted ...................... $ 0.00 $ (0.06) $ (0.12) $ 0.03 $ (0.07) $ (0.03) $ (0.06) $ (0.26)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of
common shares:
Basic ........................ 40,361 39,439 39,175 38,999 38,896 38,513 38,483 38,416
======== ======== ======== ======== ======== ======== ======== ========
Diluted ...................... 40,985 39,439 39,175 41,042 38,896 38,513 38,483 38,416
======== ======== ======== ======== ======== ======== ======== ========
During fiscal 1997 and fiscal 1998, the Company experienced significant
deterioration in the average selling prices of its SRAM and DRAM products.
Primarily as a result of this deterioration, the Company recorded pre-tax
charges in the first and fourth quarters of fiscal 1997 of approximately $16
million and $1 million, respectively; and pre-tax charges in the second, third,
and fourth quarters of fiscal 1998, of approximately $6 million each such
quarter. The Company is unable to predict when or if such decline in prices will
stabilize. The Company announced in May 1998 that primarily due to continued
weakening in the DRAM market, the Company expects its operating results for the
first quarter of fiscal 1999 to be significantly below results for the prior
quarter, and to result in a net loss for the quarter. A continued decline in
average selling prices of any of the Company's products could result in an
additional material valuation adjustment and corresponding charge to operations
which could have a material adverse effect on the Company's operating results.
The Company anticipates that in the first quarter of fiscal 1999, it will record
a material valuation adjustment with respect to its inventory, primarily to
reflect a decline in the market value of such inventory.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company was founded in February 1985 to focus on the design and
development of high performance semiconductor memory products. In March 1991 the
Company filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code (the "Reorganization"). All of the Company's obligations
set forth in the Plan of Reorganization, as modified, were satisfied, and, in
August 1994, the Company received a final decree from the Bankruptcy Court.
Since 1991, the Company's business strategy has been to be a supplier of
high performance memory products and memory intensive logic products, operating
on a fabless basis by utilizing independent manufacturing facilities and, more
recently, joint venture facilities as well. Due to favorable market acceptance
of SRAM products introduced by the Company, annual revenues grew rapidly through
fiscal 1996. In addition, from September 1992 through September 1995, gross
profit increased primarily due to reductions in average unit product costs,
higher average selling prices, a shift to higher margin products and an increase
in manufacturing capacity to address the increased demand for SRAM products. As
a result, operating income also experienced substantial growth during that same
period. From October 1995 through most of fiscal 1998 gross profit decreased
primarily due to a decline in average selling prices and to pre-tax inventory
related charges. The Company recorded pre-tax charges in fiscal 1996, 1997 and
1998 of approximately $55 million, $17 million and $18 million, respectively,
primarily to adjust the valuation of the Company's inventory to reflect declines
in market value for certain of the Company's products. The Company anticipates
that in the first quarter of fiscal 1999, it will record a material valuation
adjustment with respect to its inventory, primarily to reflect a decline in the
market value of such inventory.
From April 1, 1992 through the early part of fiscal 1997, substantially all
of the Company's net revenues were derived from the sale of SRAM products.
During fiscal 1998, DRAM products accounted for approximately 66% of net
revenues, SRAM products accounted for approximately 27% of net revenues and
graphics products accounted for approximately 7% of net revenues. The Company
had introduced 4-Mbit DRAM in 1-Mbitx4 configuration in fiscal 1997. During
fiscal 1998, the Company commenced volume production in 0.45 micron geometry, of
4-Mbit DRAMs in a 256-Kbitx16 configuration and of 16-Mbit DRAMs in a 1-Mbitx16
configuration. The Company enhanced its SRAM product line with the introduction
of Industrial Temperature SRAMs and in April 1998 introduced its Intelliwatt(TM)
1-Mbit SRAM products. The Company continued development and sales of graphics
accelerator products, and developed its first embedded product, which combines
2D/3D graphics controller with 2 megabytes of embedded memory. Finally, the
Company put into volume production a 4-Mbit flash product and introduced a
8-Mbit flash design. Flash products did not contribute significant revenue in
fiscal 1998. A substantial portion of the Company's net revenues is derived from
a relatively small number of customers in the personal computer industry.
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 in fiscal
1998 (which has continued into the first quarter of fiscal 1999). While the
Company's strategy is to increase its penetration into the networking,
telecommunications and instrumentation markets with its existing SRAM 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 operating results.
-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
Year Ended March 31,
-----------------------------
1998 1997 1996
----- ----- -----
Net revenues ................................ 100.0% 100.0% 100.0%
Cost of revenues ............................ 99.2 102.5 78.7
----- ----- -----
Gross profit (loss) ...................... 0.8 (2.5) 21.3
Operating expenses:
Research and development ................. 12.9 18.2 7.3
Selling, general and administrative ...... 15.7 12.5 8.5
----- ----- -----
Income (loss) from operations ............... (27.8) (33.2) 5.5
Other income, net ........................... 0.2 2.1 3.2
----- ----- -----
Income (loss) before income taxes ........... (27.6) (31.1) 8.7
Provision (benefit) for income taxes ........ (9.7) (10.9) 3.4
----- ----- -----
Income (loss) before equity in
income of USC ............................ (17.9)% (20.2)% 5.3%
===== ===== =====
Net Revenues. The Company's net revenues increased to approximately $118.4
million in fiscal 1998, from approximately $82.6 million in fiscal 1997, an
increase of approximately 43%. The increase in net revenues in fiscal 1998 was
due primarily to increased sales of DRAM products, an overall increase in units
shipped, and increase in average selling prices due to a change in the product
mix of SRAMs and DRAMs.
During fiscal 1998, the Company commenced volume production of 4-Mbit and
16-Mbit DRAM products in 256Kbitx16 and 1-Mbitx16 configurations, respectively.
Revenues from the Company's DRAM product family grew steadily throughout the
year and contributed approximately 66% of the Company's net revenues in fiscal
1998. During fiscal 1998, the average selling prices for the Company's DRAMs
declined significantly. The DRAM market is characterized by volatile supply and
demand conditions, adverse effects of Asia's financial problems, more OEMs
switching to build-to-order processes and rapid technology changes to higher
density products. The Company is unable to predict when or if such price
declines will stabilize. A continued decline in average selling prices of DRAMs
could have a material adverse effect on the Company's operating results, as will
be the case for the first quarter of fiscal 1999.
The Company also commenced volume production in fiscal 1998 of a 4-Mbit
family of asynchronous SRAM products. Overall, SRAM products accounted for
approximately 27% of the Company's fiscal 1998 revenue. In general, SRAM prices
continued a steady decline throughout fiscal 1998.
Sales of the Company's MMUI product line contributed approximately 7% of
the Company's net revenues during fiscal 1998. The MMUI graphics and video
accelerator market is characterized by a large and growing number of competitors
providing a steady stream of new products with enhanced features.
-24-
The Company's flash memory products did not contribute significant revenue
during fiscal 1998 and prior years.
A significant decline in average selling prices in any of the Company's
product lines due to competitive conditions, including overall supply and demand
in the market, could have a material adverse effect on the Company's operating
results. The Company announced in May 1998 that primarily due to continued
weakening in the DRAM market, the Company expects its operating results for the
first quarter of fiscal 1999 to be significantly below results from the prior
quarter, and to result in a net loss for the quarter.
The Company's net revenues decreased to approximately $82.6 million in
fiscal 1997, a decrease of approximately 59% from approximately $201.1 million
of net revenues in fiscal 1996. The decrease in net revenues in fiscal 1997 was
due primarily to lower unit demand and lower average selling prices for SRAM
products as compared to the prior year. During fiscal 1998, one customer
accounted for approximately 18% of net revenues. During fiscal 1997, no customer
accounted for 10% or more of net revenues. During fiscal 1996, one customer
accounted for approximately 18% of net revenues. During fiscal 1997, the Company
experienced significant deterioration in the average selling prices for its SRAM
and DRAM products. The Company believes that the decrease in average selling
prices was due to a number of factors, including increased supply of SRAMs and
DRAMs from foreign and domestic competitors and weakening unit demand for such
products.
Generally, the markets for the Company's products are characterized by
volatile supply and demand condition, numerous competitors, rapid technological
change, and product obsolescence, conditions which could require the Company to
make significant shifts in its product mix in a relatively short period of time.
To diversify its product offerings, the Company has introduced new SRAM, DRAM,
MMUI accelerators and flash memory products and is developing its capability to
produce a variety of embedded-memory products. These changes involve several
risks, including, among others, constraints or delays in timely deliveries of
products from the Company's suppliers; lower than anticipated wafer
manufacturing yields; lower than expected throughput from assembly and test
suppliers; and less than anticipated demand and selling prices. The occurrence
of any problems resulting from these risks could have a material adverse effect
on the Company's operating results.
Gross Profit (Loss). The Company's gross profit for fiscal 1998 was
approximately $1.0 million or approximately 0.8% of net revenues compared to a
gross loss of approximately $(2.1) million or approximately (2.5)% of net
revenues for the same period in fiscal 1997. The increase in gross profits
resulted primarily from increased unit demand for DRAM products, lower cost of
production for DRAM and SRAM products, and introduction to volume production of
newer, higher density SRAM products. These increases slightly more than offset
pre-tax charges in fiscal 1998 of approximately $18 million (compared with
pre-tax charges in fiscal 1997 of approximately $17 million) primarily to adjust
the valuation of the Company's inventory to reflect declines in market value.
The Company's gross loss for fiscal 1997 was approximately $(2.1) million
or approximately (2.5)% of net revenues compared to gross profit of
approximately $42.9 million or approximately 21.3% of net revenues for the same
period in fiscal 1996. The decrease in gross profit in fiscal 1997 resulted
primarily from reduced unit demand and lower average selling prices for the
Company's SRAM products. Gross profits associated with sales from the Company's
DRAM and MMUI product families contributed partially to offset the declines
attributable to the SRAM products.
-25-
The Company is unable to predict when or if declines in the average selling
prices of the Company's products will stabilize. A continued decline in any of
such average selling prices could result in a material decline of the Company's
gross profits unless the Company is able to reduce its cost per unit to offset
such declines. There can be no assurance that the Company will be able to reduce
its cost per unit at a level to offset a decline in average selling prices. As
indicated above, the Company believes that it will incur a net loss for the
first quarter of fiscal 1999, and will record a material valuation adjustment
with respect to its inventory, primarily to reflect a decline in the market
value of such inventory.
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 expenses were
approximately $15.3 million or approximately 12.9% of net revenues for fiscal
1998, approximately $15.0 million or approximately 18.2% of net revenues for
fiscal 1997 and approximately $14.7 million or approximately 7.3% of net
revenues for fiscal 1996. These dollar increases in research and development
expenses were primarily due to the addition of new personnel for development of
new products and the enhancement of existing products and expenditures for
materials related to such development activities. During fiscal 1998, the
Company's development efforts focused on advanced process and design technology,
SRAMs, DRAMs, flash memory and MMUI accelerator products. Research and
development expenses are expected to continue to increase in absolute dollars,
although such expenses may fluctuate as a percentage of net revenues. The
Company also may incur research and development expenses in connection with
development of a variety of embedded-memory products.
Selling, General and Administrative. Selling, general and administrative
expenses in fiscal 1998 were approximately $18.7 million or approximately 15.7%
of net revenues compared to approximately $10.3 million or approximately 12.5%
of net revenues for fiscal 1997, and approximately $17.2 million or
approximately 8.5% of net revenues for fiscal 1996. The increase in selling,
general and administrative expenses in absolute dollars and as a percentage of
net revenues in fiscal 1998 was principally the result of higher sales
commissions associated with the 43% increase in net revenues and legal fees
associated with the SRAM antidumping proceeding. Selling, general and
administrative expenses may increase in absolute dollars, although such expenses
may fluctuate as a percentage of net revenues.
Other Income, Net. Net other income was approximately $0.3 million for
fiscal 1998, approximately $1.8 million for fiscal 1997 and approximately $6.5
million for fiscal 1996 (constituting approximately 0.2%, 2.1% and 3.2% of the
respective fiscal year's net revenues). Net other income primarily represents
interest, dividend income and other income or losses from investments, offset by
interest expense for long term obligations.
Provision for Income Taxes. The Company's effective tax rate was 35% for
fiscal 1998, 35% for fiscal 1997 and 39% for fiscal 1996. The effective tax rate
for fiscal 1998 and fiscal 1997 represented tax benefits accrued at applicable
statutory rates. The effective tax rate for fiscal 1996 represented taxes
accrued at applicable statutory rates partially offset by the effect of research
and development tax credits.
-26-
Equity in Income of USC. The Company's investment in USC is accounted for
under the equity method of accounting. In fiscal 1998, the Company recorded
income of approximately $15.5 million representing its share of USC's income for
the year ended December 31, 1997 (the Company uses a 90-day lag in recording its
share of USC's results of operations). The Company's share of USC's income in
fiscal 1997 and fiscal 1996 was not recorded as it was not material.
Factors That May Affect Future Results
The Company's quarterly and annual operating results have historically
been, and will continue to be, subject to quarterly and other fluctuations due
to a variety of factors, including: general economic conditions; changes in
pricing policies by the Company, its competitors or its suppliers; anticipated
and unanticipated decreases in unit average selling prices of the Company's
products; fluctuations in manufacturing yields, availability and cost of
products from the Company's suppliers; the timing of new product announcements
and introductions by the Company or its competitors; changes in the mix of
products sold; the cyclical nature of the semiconductor industry; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; market acceptance of new or enhanced
versions of the Company's products; seasonal customer demand; and the timing of
significant orders. Operating results 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 operating results 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 has experienced significant deterioration in
the average selling prices for its SRAM and DRAM products. The Company is unable
to predict when or if such decline in prices will stabilize. Average selling
prices for DRAM products, in particular, have continued to weaken significantly
through the first quarter of fiscal 1999. Historically, average selling prices
for semiconductor memory products have declined and the Company expects that
average selling prices will decline in the future. Accordingly, the Company's
ability to maintain or increase revenues will be highly dependent on its ability
to increase unit sales volume of existing products and to successfully develop,
introduce and sell new products. Declining average selling prices will also
adversely affect the Company's gross margins unless the Company is able to
significantly reduce its cost per unit in an amount to offset the declines in
average selling prices. There can be no assurance that the Company will be able
to increase unit sales volumes of existing products, develop, introduce and sell
new products or significantly reduce its cost per unit. There also can be no
assurance that even if the Company 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
-27-
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 operating results. There can be no assurance that the Company in the
future will not produce excess quantities of any of its products. To the extent
the Company produces excess or insufficient inventories of particular products,
the Company's operating results could be adversely affected, as was the case in
fiscal 1997 and fiscal 1998, when the Company recorded pre-tax charges totalling
approximately $17 million and $18 million, respectively, primarily to reflect a
decline in market value of certain inventory. The Company anticipates that in
the first quarter of fiscal 1999, it will record a material valuation adjustment
with respect to its inventory, primarily to reflect a decline in the market
value of such inventory.
The Company currently relies on independent and joint venture foundries to
manufacture all of the Company's products. Reliance on these foundries involves
several risks, including constraints or delays in timely delivery of the
Company's products, reduced control over delivery schedules, quality assurance
and costs and loss of production due to 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 USI and near USC and UMC in
the Hsin-Chu Science-Based Industrial Park. (The Company has products
manufactured at UMC and USC, and owns equity stakes in USC and USI.) UICC
suffered an additional fire in January 1998, and since October 1996, there have
been at least two other fires at semiconductor manufacturing facilities in the
Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or
other disasters will not have a material adverse affect on UMC, USC or USI in
the future. In addition, as a result of the rapid growth of the semiconductor
industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity could adversely affect the Company's
foundries' ability to supply the Company's products, which could have a material
adverse effect on the Company's results of operations or financial condition.
Although the Company continuously evaluates sources of supply and may seek to
add additional foundry capacity, there can be no assurance that such additional
capacity can be obtained at acceptable prices, if at all. The occurrence of any
supply or other problem resulting from these risks could have a material adverse
effect on the Company's operating results, as was the case during the third
quarter of fiscal 1996, during which period manufacturing yields of one of the
Company's products were materially adversely affected by manufacturing problems
at one of the Company's foundry suppliers.
-28-
There can be no assurance that other problems affecting manufacturing yields of
the Company's products will not occur in the future.
There is an ongoing risk that the suppliers of wafer fabrication, wafer
sort, assembly and test services to the Company may increase the price charged
to the Company for the services they provide, to the point that the Company may
not be able to profitably have its products produced at such suppliers. The
occurrence of such price increases could have a material adverse affect on the
Company's operating results.
The Company conducts a significant portion of its business internationally
and is subject to a number of risks resulting from such operations. Such risks
include political and economic instability and changes in diplomatic and trade
relationships, foreign currency fluctuations, unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the burdens
of complying with a variety of foreign laws. Because the Company conducts most
of its manufacturing operations in Asia, and receives a significant amount of
its net revenue from sales to Asian customers, the foregoing risks heightened in
light of the recent financial and economic crisis in Asia. Current or potential
customers of the Company in Asia, for instance, may become unwilling or unable
to purchase the Company's products, and the Company's Asian competitors may be
able to become more price-competitive relative to the Company due to declining
values of their national currencies. There can be no assurance that such factors
will not adversely impact the Company's operating results in the future or
require the Company to modify its current business practices.
Additionally, other factors may materially adversely affect the Company's
operating results. The Company relies on domestic and offshore subcontractors
for die assembly and testing of products, and is subject to risks of disruption
in adequate supply of such services and quality problems with such services. The
Company is subject to the risks of shortages of goods or services and increases
in the cost of raw materials used in the manufacture or assembly of the
Company's products. The Company faces intense competition, and many of its
principal competitors and potential competitors have substantially greater
financial, technical, marketing, distribution and other resources, broader
product lines and longer-standing relationships with customers than does the
Company, any of which factors may place such competitors and potential
competitors in a stronger competitive position than the Company. The Company's
corporate headquarters are located near major earthquake faults, and the Company
is subject to the risk of damage or disruption in the event of seismic activity.
There can be no assurance that any of the foregoing factors will not materially
adversely affect the Company's operating results.
Most computer programs were designed to perform data computations on the
last two digits of the numerical value of a year. When a computation referencing
the year 2000 is performed, these systems may interpret "00" as the year 1900
and could either stop processing date-related computations or could process them
incorrectly. Computations referencing the year 2000 might be invoked at any
time, but are likely to begin occurring in the year 1999. The Company is in the
process of implementing new information systems which the Company believes will
be year 2000 compliant and does not anticipate that it will incur material
expenditures for the resolution of any year 2000 issues relating to either its
own information systems, databases and programs, or its software products.
However, the Company could be materially adversely impacted by year 2000 issues
faced by major distributors, suppliers, customers,
-29-
vendors, and financial service organizations with which the Company interacts.
Management is in the process of determining the impact, if any, that third
parties who are not year 2000 compliant may have on the operations of the
Company.
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 operating
results. 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 operating results could be materially
adversely affected.
The Company also, as a result of an antidumping proceeding commenced in
February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs
manufactured (wafer fabrication) in Taiwan, in order to import such goods into
the U.S. Although the Company may be refunded such deposits in early 2000 (see
Item 3 - Legal Proceedings, above), the deposit requirement, and the potential
that antidumping duties will be liquidated in early 2000, may materially
adversely affect the Company's ability to sell in the United States SRAMs
manufactured (wafer fabrication) in Taiwan. The Company manufactures (wafer
fabrication) SRAMs in Singapore (and has manufactured SRAMs in Japan as well),
and may be able to support its U.S. customers with such products, which are not
subject to antidumping duties. There can be no assurance, however, that the
Company will be able to do so.
As a result of the foregoing factors, as well as other factors affecting
the Company's operating results, past performance should not be considered to be
a reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, stock prices for many technology companies are subject to significant
volatility, particularly on a quarterly basis. If revenues or earnings fail to
meet expectations of the investment community, there could be an immediate and
significant impact on the market price of the Company's Common Stock.
-30-
Due to the foregoing factors, it is likely that in some future quarter or
quarters the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
Liquidity and Capital Resources
The Company's operating activities generated cash of approximately $6.9
million in fiscal 1998, versus using approximately $44.6 million in fiscal 1997
and providing approximately $1.8 million in fiscal 1996. Cash generated by
operations in fiscal 1998 was the result of a tax refund and changes in working
capital accounts offset by a net loss incurred during the fiscal year. Cash
utilized in operations in fiscal 1997 was the result of an operating loss and an
increase in working capital, while cash generated from operations in fiscal 1996
was primarily the result of net income generated during the period, partially
offset by increases in working capital. The increase in inventory in fiscal 1998
is due to an increase inventory of DRAM products partially offset by inventory
reduction of older SRAM products as compared to the same period of the previous
year.
Net cash used in investing activities was approximately $21.9 million in
fiscal 1998, approximately $19.3 million in fiscal 1997 and approximatey $104.0
million in fiscal 1996. Net cash used in investing activities in fiscal 1998
reflect equipment purchases of approximately $3.2 million and an equity
investment in USC of approximately $17.6 million. Net cash used in investing
activities during fiscal 1997 including equipment purchases of approximately
$3.1 million and an equity investment in USC of approximately $16.4 million. Net
cash used in investing activities in fiscal 1996 equipment purchases of
approximately $9.5 million and investments in Chartered of approximately $44.6
million, in USC of approximately $36.4 million and in USI of approximately $13.9
million.
Net cash provided by financing activities of approximately $0.6 million in
fiscal 1998 reflects receipt of approximately $3.1 million from issuance of
common stock upon exercise of options pursuant to the Company's stock option and
employee stock purchase plans, partially offset by the reduction of a long term
debt obligation of approximately $1.1 million and an increase in restricted cash
of approximately $1.4 million. Net cash provided by financing activities was
approximately $0.7 million in fiscal 1997, and approximately $107.3 million in
fiscal 1996. Net cash generated in fiscal 1997 through financing activities
resulted from proceeds of a secured loan of approximately $3.8 million and
proceeds of approximately $2.0 million through issuance of common stock upon
exercise of options under the Company's stock option and employee stock purchase
plans, partially offset by an increase in restricted cash of approximately $5.1
million. Net cash provided by financing activities in fiscal 1996 reflects
primarily net proceeds of approximately $97.3 million from sales of common stock
in connection with the Company's public offering in April 1995, exercises of
stock options pursuant to the Company's stock option plan and a receipt from UMC
of a loan repayment of approximately $10.0 million.
At March 28, 1998, the Company had approximately $3.0 million in cash, a
decrease of approximately $14.4 million from March 31, 1997, and working capital
of approximately $40.0 million, a decrease of approximately $38.0 million from
March 31, 1997. The Company believes that its existing levels of cash, together
with proceeds from the sale of 35 million shares of USC stock in April 1998 for
approximately $32 million, an expected income tax refund and other financing
opportunities the Company believes to be available to it, will be sufficient to
meet its projected working capital and other cash requirements through the end
of fiscal 1999.
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
-31-
capacity, the formation of joint ventures to own and operate foundries, or the
usage of "take or pay" contracts that commit the Company to purchase specified
quantities of wafers over extended periods. Manufacturing arrangements such as
these may require substantial capital investments, which may require the Company
to seek additional 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.
In February 1995, the Company agreed to purchase shares of Chartered for
approximately US$10 million and entered into a manufacturing agreement under
which Chartered will provide a minimum number of wafers from its 8-inch wafer
fabrication facility known as "Fab 2." In April 1995, the Company agreed to
purchase additional shares in Chartered, bringing the total agreed investment in
Chartered to approximately US$51.6 million and Chartered agreed to provide an
increased minimum number of wafers to be provided by Chartered from Fab 2. The
Company has paid all installments to Chartered. Chartered is a private company
based in Singapore that is controlled by entities affiliated with the Singapore
government. The Company does not own a material percentage of the equity of
Chartered. Chartered has also received investments of approximately US$10
million to US$20 million from a number of United States companies, including
Actel Corporation, Brooktree Corporation, LSI Logic Corporation and Rockwell
International Corporation, in return for guaranteed minimum numbers of wafers
from Fab 2. Chartered also announced in January 1998 that it had entered into an
agreement with Lucent Technologies Inc. to create a foundry venture, Silicon
Manufacturing Partners Pte. Ltd., and announced in April 1997 that it had
entered into an agreement with Hewlett-Packard Co. to create a foundry venture,
Chartered Silicon Partners Pte. Ltd.
In July 1995, the Company entered into an agreement with UMC and S3
Incorporated ("S3") to form a separate Taiwanese company, USC, for the purpose
of building and managing an 8-inch semiconductor manufacturing facility in
Taiwan. The facility is in full production utilizing advanced sub-micron
semiconductor manufacturing processes. Alliance's initial contribution of
approximately $70 million was paid in three installments between September 1995
and July 1997, representing an initial equity ownership of approximately 19.0%.
In April 1998, the Company sold 3.5% of the outstanding shares of USC, for gross
proceeds of approximately $32 million and the right to receive contingent
payment of up to approximately 665 million New Taiwan Dollars (approximately US
$19.3 million at the exchange rate prevailing on June 18, 1998, which rate is
subject to material change). As a result of that sale, the Company currently
owns approximately 15.5% of the outstanding shares of USC, and has the right to
purchase up to approximately 25% of the manufacturing capacity in this facility.
The Company anticipates that as a result of an upcoming issuance of shares to
USC employees (which issuance has been approved by USC's board of directors),
the Company's ownership position will be diluted to approximately 15.1%. A
portion of UMC's equity contribution was paid through the grant by UMC to USC of
royalty-free licenses to certain UMC sub-micron process technologies. To the
extent USC experiences operating income or losses, and the Company maintains its
current ownership percentage of outstanding shares, the Company will recognize
its proportionate share of such income or losses. Throughout fiscal 1998, the
Company reported income of approximately $15.5 million related to its share of
USC's income. The Company believes that a number of manufacturers are expanding
or planning to
-32-
expand their fabrication capacity over the next several years, which could lead
to overcapacity in the market and resulting decreases in costs of finished
wafers. If the wafers produced by USC cannot be produced at competitive prices,
or if there is not sufficient demand for USC's wafers, USC could sustain
operating losses. There can be no assurance that such operating losses will not
have a material adverse effect on the Company's consolidated results of
operations.
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, USI, for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in Taiwan. The
facility has commenced volume production utilizating advanced sub-micron
semiconductor manufacturing processes. The contributions of Alliance and other
parties shall be in the form of equity investments, representing an initial
ownership interest of approximately 5% for each US$30 million invested. Alliance
had originally committed to an investment of approximately US$60 million or 10%
ownership interest but subsequently requested that its level of participation be
reduced by 50%. The first installment of approximately 50% of the revised
investment, or US$13.7 million, was made in January 1996. The Company had but
did not exercise the option to pay a second installment of approximately 25% of
the revised investment payable in December 1997. Currently, the Company owns
approximately 3.33% of the outstanding shares of USI and has the right to
purchase approximately 4.17% of the manufacturing capacity of the facility. A
portion of UMC's equity contribution was paid through the grant by UMC to USI of
royalty-free licenses to certain UMC sub-micron process technologies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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
Not applicable.
-33-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
"Proposal No. 1. Election of Directors, Board of Directors' Meetings and
Committees and Directors' Compensation" and disclosures pursuant to Item 405 of
Regulation S-K contained in the Proxy Statement are incorporated by reference.
Information required by Item 10 concerning executive officers of the Company is
set forth in Part I of this Form 10-K after Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from 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 from 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 from the
section captioned "Certain Transactions" contained in the Proxy Statement.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements of the Registrant are filed as part of
this report:
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Operations for the years ended March 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended March 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(a)(2)(i) Financial Statement Schedules
The following consolidated financial statement schedule is filed as part of
this report and should be read in conjunction with the consolidated
financial statements:
-34-
Schedule II - Valuation and Qualifying Accounts
(a)(2)(ii) Financial Statements of United Semiconductor Corporation, a
Taiwanese Company
The following financial statements are filed as part of this report:
Financial Statements of United Semiconductor Corporation for the Fiscal
Years Ended 12/31/97 and 12/31/96
-35-
(a) (3) Exhibits
INDEX TO EXHIBITS
Exhibit
Number Document Description Page
------ -------------------- ----
3.01 Registrant's Certificate of Incorporation (A)
3.02 Registrant's Certificate of Elimination of Series A Preferred Stock (A)
3.03 Registrant's Certificate of Amendment of Certificate of Incorporation (F)
3.04 Registrant's Bylaws (A)
4.01 Specimen of Common Stock Certificate of Registrant (A)
10.01+ Registrant's 1992 Stock Option Plan adopted by Registrant on April 7, 1992 and
amended through September 19, 1996, and related documents (K)
10.02+ Registrant's Directors Stock Option Plan adopted by Registrant on October 1, 1993
and related documents (A)
10.03+ Form of Indemnity Agreement used between Registrant and certain of its officers and
directors (A)
10.04+ Form of Indemnity Agreement used between the Registrant and certain of its officers
(K)
10.05 Sublease Agreement dated February 1994 between Registrant and Fujitsu America, Inc.
(B)
10.06 Net Lease Agreement dated February 1, 1994 between Registrant and Realtec Properties
I L.P. (B)
10.07* Subscription Agreement dated February 17, 1995, by and among Registrant, Singapore
Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. (C)
10.8* Manufacturing Agreement dated February 17, 1995, between Registrant and Chartered
Semiconductor Manufacturing Pte. Ltd. (C)
10.9 Supplemental Subscription Agreement dated March 15, 1995, by and among Registrant,
Singapore Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. (D)
10.10* Supplemental Manufacturing Agreement dated March 15, 1995, between Registrant and
Chartered Semiconductor Manufacturing Pte. Ltd. (D)
-36-
10.11* Foundry Venture Agreement dated July 8, 1995, by and among Registrant, S3
Incorporated and United Microelectronics Corporation (E)
10.12* Foundry Capacity Agreement dated July 8, 1995, by and among Registrant, Fabco, S3
Incorporated and United Microelectronics Corporation (E)
10.13* Foundry Venture Agreement dated September 29, 1995, between Registrant and United
Microelectronics Corporation (F)
10.14* Foundry Capacity Agreement dated September 29, 1995, by and among Registrant, FabVen
and United Microelectronics Corporation (F)
10.15* Written Assurances Re: Foundry Venture Agreement dated September 29, 1995 by and
among Registrant, FabVen and United Microelectronics Corporation (F)
10.16* Letter Agreement dated June 26, 1996 by and among Registrant, S3 Incorporated and (G)
United Microelectronics Corporation
10.17 Stock Purchase Agreement dated as of June 30, 1996 by and among Registrant, S3 (H)
Incorporated, United Microelectronics Corporation and United Semiconductor
Corporation
10.18* Amendment to Fabco Foundry Capacity Agreement dated as of July 3, 1996 by and among (H)
Registrant, S3 Incorporated, United Microelectronics Corporation and United
Semiconductor Corporation
10.19 Side Letter dated July 11, 1996 by and among Registrant, S3 Incorporated, United (H)
Microelectronics Corporation and United Semiconductor Corporation
10.20+ 1996 Employee Stock Purchase Plan (I)
10.21 Letter Agreement dated December 23, 1996 by and among Registrant, S3 Incorporated, (J)
United Microelectronics Corporation and United Semiconductor Corporation
10.22 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 (K)
10.23 Restated Amendment to FabCo Foundry Venture Agreement dated as of February 28, 1997
by and among Registrant, S3 Incorporated, United Microelectronics Corporation and (K)
United Semiconductor Corporation
-37-
10.24 Letter Agreement dated April 25, 1997 by and among Registrant, S3 Incorporated,
United Microelectronics Corporation and United Semiconductor Corporation (K)
10.25* Restated DRAM Agreement dated as of February 28, 1996 between Registrant and United
Microelectronics Corporation (K)
10.26* First Amendment to Restated DRAM Agreement dated as of March 26, 1996 between
Registrant and United Microelectronics Corporation (K)
10.27* Second Amendment to Restated DRAM Agreement dated as of July 10, 1996 between
Registrant and United Microelectronics Corporation (K)
10.28 Promissory Note and Security Agreement dated March 28, 1997 between Registrant and (K)
Matrix Funding Corporation
10.29** Sale and Transfer Agreement dated as of March 4, 1998 (L)
21.01 Subsidiaries of Registrant (M)
23.01 Consent of Price Waterhouse LLP (San Jose, California) (M)
23.02 Consent of Price Waterhouse LLP (Hsinchu, Taiwan, R.O.C.) (M)
27.01 Financial Data Schedule (M)
-------------------
+ 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.
-38-
(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 filed herewith.
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed during the Registrant's
fourth fiscal quarter: Current Report on Form 8-K dated March 4, 1998,
reporting under Item 5 agreement to sell shares of USC, filed March 19,
1998.
Subsequently, Registrant also filed the following Current Report on Form
8-K: Current Report on Form 8-K dated April 8, 1998, reporting under Item 2
receipt of funds from sale of shares of USC, filed April 23, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ALLIANCE SEMICONDUCTOR CORPORATION
By: /s/ N. DAMODAR REDDY Date: June 26, 1998
------------------------------------
N. Damodar Reddy, Chairman
of the Board, Chief Executive
Officer and President
-39-
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed below on behalf of the Registrant and in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
Principal Executive Officer:
/s/ N. DAMODAR REDDY Chairman of the Board, Chief June 26, 1998
- ----------------------------------- Executive Officer and President
N. Damodar Reddy
Principal Financial Officer and
Principal Accounting Officer:
/s/ N. DAMODAR REDDY Chief Financial Officer June 26, 1998
- -----------------------------------
N. Damodar Reddy
Directors:
/s/ SANFORD L. KANE Director June 26, 1998
- -----------------------------------
Sanford L. Kane
/s/ JON B. MINNIS Director June 26, 1998
- -----------------------------------
Jon B. Minnis
/s/ C.N. REDDY Director June 26, 1998
- -----------------------------------
C. N. Reddy
/s/ N. DAMODAR REDDY Director June 26, 1998
- -----------------------------------
N. Damodar Reddy
-40-
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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
San Jose, California
April 22, 1998
-41-
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31,
-------------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents (excluding restricted cash) .................................. $ 3,010 $ 17,368
Restricted cash and short term investments ............................................. 6,512 5,121
Accounts receivable, net ............................................................... 15,716 16,827
Inventory .............................................................................. 32,375 29,535
Deferred taxes ......................................................................... 8,397 17,851
Income tax receivable .................................................................. 17,147 14,633
Other current assets ................................................................... 1,670 1,636
-------- --------
Total current assets ............................................................... 84,827 102,971
Property and equipment, net ............................................................... 11,123 11,352
Investment in Chartered Semiconductor ..................................................... 51,596 51,596
Investment in United Semiconductor Corp. .................................................. 85,935 52,829
Investment in United Silicon, Inc. ........................................................ 13,701 13,701
Other assets .............................................................................. 1,083 120
-------- --------
Total Assets ....................................................................... $248,265 $232,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 35,714 $ 18,766
Accrued liabilities .................................................................... 7,771 4,584
Current portion of long term obligations ............................................... 1,463 1,621
-------- --------
Total current liabilities .......................................................... 44,948 24,971
Long term obligations (Note 6) ............................................................ 1,276 2,219
Deferred tax liability .................................................................... -- 702
-------- --------
Total liabilities .................................................................. 46,224 27,892
-------- --------
Commitments and contingencies (Notes 4, 5, 6, 10 and 11)
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;
40,450 and 38,985 shares issued and outstanding ...................................... 404 390
Paid-in capital ........................................................................ 183,099 180,012
Retained earnings ...................................................................... 18,538 24,275
-------- --------
Total stockholders' equity ........................................................... 202,041 204,677
-------- --------
Total Liabilities and Stockholders' Equity ...................................... $248,265 $232,569
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
-42-
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended March 31,
-----------------------------------------------------
1998 1997 1996
--------- --------- ---------
Net revenues ...................................................... $ 118,400 $ 82,572 $ 201,098
Cost of revenues .................................................. 117,400 84,630 158,159
--------- --------- ---------
Gross profit (loss) ............................................ 1,000 (2,058) 42,939
--------- --------- ---------
Operating expenses:
Research and development ....................................... 15,254 15,012 14,664
Selling, general and administrative ............................ 18,666 10,344 17,202
--------- --------- ---------
Income (loss) from operations ..................................... (32,920) (27,414) 11,073
Other income, net ................................................. 287 1,753 6,498
--------- --------- ---------
Income (loss) before income taxes ................................. (32,633) (25,661) 17,571
Provision (benefit) for income taxes .............................. (11,421) (8,990) 6,852
--------- --------- ---------
Income (loss) before equity in income of USC ...................... (21,212) (16,671) 10,719
Equity in income of USC ........................................... 15,475 -- --
--------- --------- ---------
Net income (loss) ................................................. $ (5,737) $ (16,671) $ 10,719
========= ========= =========
Net income (loss) per share:
Basic .......................................................... $ (0.15) $ (0.43) $ 0.28
Diluted ........................................................ $ (0.15) $ (0.43) $ 0.26
Weighted average number of common shares:
Basic .......................................................... 39,493 38,653 37,900
Diluted ........................................................ 39,493 38,653 40,633
The accompanying notes are an integral part of these consolidated financial statements.
-43-
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Additional Total
--------------------------- Paid In Retained Stockholders'
Shares Amount Capital Earnings Equity
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1994 ........... 27,730,325 $ 45 $ 22,617 $ 6,336 $ 28,998
Issuance of common stock under
employee stock plans .............. 935,781 5 699 -- 704
Proceeds from public offering,
net of issuance costs ............. 5,568,750 24 53,020 -- 53,044
Stock dividend effect ................ -- 75 (75) -- --
Tax benefit on exercise of
stock options ..................... -- -- 1,166 -- 1,166
Net income ........................... -- -- -- 23,891 23,891
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1995 ........... 34,234,856 149 77,427 30,227 107,803
Issuance of common stock under
employee stock plans .............. 855,454 89 1,053 -- 1,142
Proceeds from public offering,
net of issuance costs ............. 3,300,000 22 96,142 -- 96,164
Stock dividend effect ................ -- 123 (123) -- --
Tax benefit on exercise of
stock options ..................... -- -- 3,553 -- 3,553
Net income ........................... -- -- -- 10,719 10,719
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1996 ........... 38,390,310 383 178,052 40,946 219,381
Issuance of common stock under
employee stock plans .............. 594,591 7 1,694 -- 1,701
Tax benefit on exercise of
stock options ..................... -- -- 266 -- 266
Net loss ............................. -- -- -- (16,671) (16,671)
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1997 ........... 38,984,901 390 180,012 24,275 204,677
Issuance of common stock under
employee stock plans .............. 1,465,087 14 3,087 -- 3,101
Net loss ............................. -- -- -- (5,737) (5,737)
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1998 ........... 40,449,988 $ 404 $ 183,099 $ 18,538 $ 202,041
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
-44-
ALLIANCE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended March 31,
-----------------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ................................................ $ (5,737) $ (16,671) $ 10,719
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................................. 3,465 2,929 1,792
Equity in income of USC/other .................................. (15,475) -- 72
Changes in assets and liabilities:
Accounts receivable .......................................... 1,111 (12,103) 14,721
Inventory .................................................... (2,840) 617 (23,082)
Other assets ................................................. 3 905 (664)
Accounts payable ............................................. 16,948 (13,592) 21,851
Accrued liabilities .......................................... 3,187 (6,915) 7,385
Income taxes (including deferred income taxes
and tax receivable) ................................ 6,238 200 (30,997)
--------- --------- ---------
Net cash provided by (used in) operating
activities ............................................... 6,900 (44,630) 1,797
--------- --------- ---------
Cash used in investing activities:
Acquisition of equipment ......................................... (3,236) (3,050) (9,459)
Investment in Chartered Semiconductor Pte Ltd. ................... -- -- (44,584)
Investment in United Semiconductor Corporation ................... (17,631) (16,391) (36,438)
Investment in United Silicon Inc. ................................ -- 187 (13,888)
Other assets .................................................... (1,000) -- --
Proceeds from sales of equipment ................................. -- -- 275
--------- --------- ---------
Net cash used in investing activities ...................... (21,867) (19,254) (104,094)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of common stock ................... 3,101 1,967 97,306
Borrowings (repayments) on long term obligations ................. (1,101) 3,840 --
Issuance of notes to UMC ......................................... -- -- 10,000
Restricted cash .................................................. (1,391) (5,121) --
--------- --------- ---------
Net cash provided by financing activities .................. 609 686 107,306
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................ (14,358) (63,198) 5,009
Cash and cash equivalents at beginning of the period ................ 17,368 80,566 75,557
--------- --------- ---------
Cash and cash equivalents at end of the period ...................... $ 3,010 $ 17,368 $ 80,566
========= ========= =========
Supplemental disclosures:
Cash paid (refunded) during the period for income
taxes ............................................................ $ (17,783) $ (9,648) $ 37,873
========= ========= =========
Cash paid for interest ........................................... $ 393 $ 8 --
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
-45-
ALLIANCE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and
instrumentation markets.
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 accelerated erosion of
selling prices. During the second half of fiscal 1996, the market for certain
SRAM devices experienced an excess supply relative to demand which resulted in a
significant downward trend in average selling price. This situation has
continued through fiscal 1997 and 1998. In addition, the average selling price
for the Company's DRAM and SRAM products has experienced volatility during
fiscal 1997 and 1998. The Company is unable to predict when or if average
selling prices will stabilize.
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 DRAM pricing during fiscal year 1998) which
is not within the control of the Company and which could have an adverse
material effect on the Company's operating results.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries. All significant intercompany accounts
and transactions have been eliminated. These financial statements have been
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles. This 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.
Fiscal Year
For purposes of presentation, the Company has indicated its fiscal years as
ending on March 31; whereas the Company's fiscal year ends on the Saturday
nearest the end of March. The fiscal years ended March 31, 1998, March 31, 1997
and March 31, 1996 each contained 52 weeks.
Revenue recognition
Revenue from product sales is recognized upon shipment, net of accruals for
estimated sales returns and allowances.
-46-
Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company accounts
for its short-term investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
The Company's investments are primarily money market funds and
muni-preferreds (state and municipal obligations) and the Company's intent is to
hold investments to maturity.
Inventories
Inventory is stated at the lower of cost, determined on the first-in,
first-out basis, or market. Market is based on estimated net realizable value.
During the third and fourth quarters of fiscal 1997 and continuing throughout
much of fiscal 1998, the Company experienced significant deterioration in the
average selling prices for its SRAM and DRAM products. Primarily as a result of
this deterioration and certain manufacturing issues in fiscal 1996, the Company
recorded pre-tax charges in fiscal 1998, fiscal 1997, and fiscal 1996 of
approximately $18 million, $17 million and $55 million, respectively. The
Company is unable to predict when or if such decline in prices will stabilize. A
continued decline in average selling prices for SRAM and DRAM products could
result in an additional material valuation adjustment and corresponding charge
to operations.
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
(three to five years).
Concentration of risks
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable.
The Company invests primarily in money market accounts and state and
municipal obligations. The Company further limits its exposure to these
investments by placing such investments with various financial institutions. The
Company performs periodic evaluations of these financial institutions.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers and, generally, requires no collateral from its
customers. One customer accounted for approximately 18% of net revenues for the
year ended March 31, 1998. No customer accounted for 10% or more of net revenues
for the year ended March 31, 1997. One customer accounted for approximately 18%
of net revenues for the year ended March 31, 1996. At March 31, 1998, one
customer accounted for approximately 27% and another customer accounted for
approximately 11% of accounts receivable. At March 31, 1997, no customer
accounted for 10% or more of accounts receivable.
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
-47-
$48.5 million, $29.7 million and $85.7 million of net revenues for the years
ended March 31, 1998, March 31, 1997 and March 31, 1996, 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." 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").
Stock splits
Share information for all periods has been retroactively adjusted to
reflect a 3-for-2 stock split of the Common Stock in July 1995, issued in the
form of a stock dividend, and a 3-for-2 stock split of the Common Stock in
January 1995, issued in the form of a stock dividend.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the third quarter of fiscal 1998. This
statement simplifies the standards for computing earnings per share (EPS)
previously defined in Accounting Principles Board Opinion No. 15 "Earnings Per
Share." All prior-period earnings per share data has been restated in accordance
with SFAS 128. SFAS 128 requires presentation of both Basic EPS and Diluted EPS
on the face of the income statement. Basic EPS is computed by dividing net
income available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period including stock options, using the treasury stock method, and convertible
preferred stock, using the if-converted 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 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
1998 1997 1996
--------- -------- --------
Net income (loss) available to common shareholders .............. $ (5,737) $(16,671) $ 10,719
========= ======== ========
Weighed average common shares outstanding (basic) ............... 39,493 38,653 37,900
Effect of dilutive options ...................................... -- -- 2,733
--------- -------- --------
Weighed average common shares outstanding (diluted) ............. 39,493 38,653 40,633
========= ======== ========
Earnings per share:
Basic ........................................................ $ (0.15) $ (0.43) $ (0.28)
========= ======== ========
Diluted ....................................................... $ (0.15) $ (0.43) $ (0.26)
========= ======== ========
-48-
Due to the Company's net loss from continuing operations in 1997 and 1998,
a calculation of EPS assuming dilution is not required. At March 31, 1997, there
were 4,191,289 options outstanding to purchase common stock at a weighted
average price of $3.87 per share. At March 31, 1998, there were 3,675,431
options outstanding to purchase common stock at a weighted average of $5.81 per
share.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards ("SFAS"). SFAS 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income within a financial statement. This Statement requires the
Company to report additional information on comprehensive income to supplement
the reporting of income. SFAS 130 is effective for both interim and annual
periods beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified so that
comprehensive income is displayed in a comparative format for all periods
presented. SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual and interim financial statements. This Statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company will adopt
SFAS 130 for the first quarter of fiscal 1999 and does not expect its provisions
to have a material effect on the Company's presentation of its consolidated
financial statements. The Company will adopt SFAS 131 as of the year ending
March 31, 1999 and is currently studying its provisions.
-49-
Note 2. Balance sheet components
March 31,
---------------------
1998 1997
-------- --------
(in thousands)
Accounts receivable:
Trade receivables ................................. $ 17,726 $ 17,477
Less allowance for doubtful accounts .............. (2,010) (650)
-------- --------
$ 15,716 $ 16,827
======== ========
Inventory:
Work in process ................................... $ 17,564 $ 18,319
Finished goods .................................... 14,811 11,216
-------- --------
$ 32,375 $ 29,535
======== ========
Property and equipment:
Engineering and test equipment .................... $ 11,704 $ 11,526
Computers and software ........................... 7,231 4,496
Furniture and office equipment .................... 970 935
Land .............................................. 288 --
-------- --------
20,193 16,957
Less: accumulated depreciation and amortization ..... (9,070) (5,605)
-------- --------
$ 11,123 $ 11,352
======== ========
Note 3. Investment in Chartered Semiconductor Manufacturing Ltd. ("Chartered")
In February 1995, the Company agreed to purchase shares of Chartered for
$10 million and entered into a manufacturing agreement under which Chartered
will provide a minimum number of wafers from its 8-inch wafer fabrication
facility known as "Fab 2." In April 1995, the Company agreed to purchase
additional shares in Chartered, bringing the total agreed investment in
Chartered to $51.6 million and Chartered agreed to provide an increased minimum
number of wafers to be provided by Chartered from Fab 2. The Company has paid
all installments to Chartered. Chartered is a private company based in Singapore
that is controlled by entities affiliated with the Singapore government. The
Company is accounting for this investment using the cost method of accounting.
The Company does not own a material percentage of the equity of Chartered.
-50-
Note 4. Investment in United Semiconductor Corporation ("USC")
In July 1995, the Company entered into an agreement with United
Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a
separate Taiwanese company, USC, for the purpose of building and managing an
8-inch semiconductor manufacturing facility in Taiwan. The facility is in full
production utilizing advanced sub-micron semiconductor manufacturing processes.
Alliance's initial contribution of approximately $70 million was paid in three
installments between September 1995 and July 1997, representing an initial
equity ownership of approximately 19.0%. In April 1998, the Company sold 3.5% of
the outstanding shares of USC, for gross proceeds of approximately $32 million
and the right to receive contingent payment of up to approximately 665 million
New Taiwan Dollars (approximately US$19.3 million at the exchange rate
prevailing on June 18, 1998, which rate is subject to material change). As a
result of that sale, the Company currently owns approximately 15.5% of the
outstanding shares of USC, and has the right to purchase up to approximately 25%
of the manufacturing capacity in this facility. The Company anticipates that as
a result of an upcoming issuance of shares to USC employees (which issuance has
been approved by USC's board of directors), the Company's ownership position
will be diluted to approximately 15.1%. A portion of UMC's equity contribution
was paid through the grant by UMC to USC of royalty-free licenses to certain UMC
sub-micron process technologies. To the extent USC experiences operating income
or losses, and the Company maintains its current ownership percentage of
outstanding shares, the Company will recognize its proportionate share of such
income or losses. Throughout fiscal 1998, the Company reported income of
approximately $15.5 million related to its share of USC's income.
The Company is accounting for this investment using the equity method of
accounting with a ninety-day lag in recording the Company's share of results for
the entity. The Company had not recorded its share of USC's net income for the
two-year period ended December 31, 1996, as it was immaterial.
Operations through December 31, 1995 consisted primarily of construction
and, therefore, USC's results of operations for this year are immaterial and not
presented below. Summarized financial information, using the respective year-end
exchange rate for the financial position and an average exchange rate for the
respective year for results of operations, for the entity at December 31, 1997
and 1996, is as follows (in thousands):
December 31
---------------------------------
Financial position 1997 1996
- ------------------ ------- -------
Current assets........................... US$348,414 US$224,845
Noncurrent assets ........................ 369,329 387,866
Current liabilities ...................... 127,506 89,327
Noncurrent liabilities ................... 159,184 157,557
Stockholders' equity ..................... 431,053 365,827
Results of operations
Sales.................................... US$340,060 US$60,878
Gross Profit............................. 154,465 1,654
Net income............................... 138,873 563
-51-
Note 5. Investment in United Silicon, Inc. ("USI")
In October 1995, the Company entered into an agreement with UMC and other
parties to form a separate Taiwanese company, USI, for the purpose of building
and managing an 8-inch semiconductor manufacturing facility in Taiwan. The
facility has commenced volume production utilizing advanced sub-micron
semiconductor manufacturing processes. The contributions of Alliance and other
parties shall be in the form of equity investments, representing an initial
ownership interest of approximately 5% for each US$30 million invested. Alliance
had originally committed to an investment of approximately US$60 million or 10%
ownership interest but subsequently requested that its level of participation be
reduced by 50%. The first installment of approximately 50% of the revised
investment was made in January 1996, and the Company had but did not exercise
the option to pay a second installment of approximately 25% of the revised
investment payable in December 1997. Currently, the Company owns approximately
3.33% of the outstanding shares of USI and has the right to purchase
approximately 4.17% of the manufacturing capacity of the facility. A portion of
UMC's equity contribution was paid through the grant by UMC to USI of
royalty-free licenses to certain UMC sub-micron process technologies.
Note 6. Long Term Obligations, Leases and Commitments
Operating Leases
The Company leases its headquarters facility under an operating lease which
expires in 1999. The Company has an option to extend the lease for five years
beyond such expiration. 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 1999 and 2007, and leases other sales offices on month-to-month leases.
Future minimum rental payments under these leases are as follows:
Fiscal Year (in thousands)
----------- --------------
1999................................... $568
2000................................... 286
2001................................... 103
2002................................... 115
2003................................... 115
Thereafter............................. 494
------
Total payments............................ $1,681
======
Rent expense for fiscal 1998, fiscal 1997 and fiscal 1996 was $484,000,
$437,000 and $360,000, respectively.
Long Term Obligations
The Company obtained secured financing of $3.8 million at the end of March
1997. This borrowing is collateralized by equipment with a total acquisition
cost of $4.8 million, and bears interest at
-52-
a fixed rate of 11.26%. No financial covenants are required to be met under the
security agreement related to such financing. Principal and interest are payable
in thirty-six consecutive monthly installments through March 2000.
The Company entered into a financing arrangement with respect to its
purchase and maintenance of certain business software applications, under which
the Company is obligated to make quarterly payments of approximately $96,000
through late 2002, subject to certain contingencies.
Purchase Commitments
At March 31, 1998, the Company had approximately $22.5 million in
noncancelable purchase commitments with suppliers. The Company expects to sell
all products which it has committed to purchase from suppliers. During the
fourth quarter of fiscal 1996, the average selling prices of the Company's SRAM
products deteriorated significantly. As a result of this deterioration, the
Company recorded a charge of approximately $7.2 million for adverse purchase
commitments related to these SRAM products, which was included in the
approximately $55 million charge recorded in fiscal 1996 (see Note 1).
Letters of Credit
At March 31, 1998, approximately $6.5 million standby letters of credit
were outstanding and expire through June 30, 1998, secured by restricted cash
and short term investments.
Note 7. Provision (benefit) for income taxes
The provision (benefit) for income taxes is comprised of the following:
March 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Current:
Federal ............................... $(20,173) $(17,419) $ 26,007
State ................................. -- -- 4,549
-------- -------- --------
(20,173) (17,419) 30,556
Deferred:
Federal ............................... 8,752 8,529 (21,328)
State ................................. -- (100) (2,376)
-------- -------- --------
Total provision (benefit) .... $(11,421) $ (8,990) $ 6,852
======== ======== ========
-53-
Deferred tax assets (liabilities) comprise the following:
March 31,
---------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Inventory reserves ........................ $ 5,127 $ 16,212 $ 19,286
Accrued expenses and reserves ............. 2,310 407 4,520
State taxes ............................... -- -- 1,548
NOL carry forward ....................... -- 1,096 --
Inventory capitalization adjustment ....... 553 136 182
Depreciation .............................. 407 (702) 42
-------- -------- --------
Total net deferred tax assets .......... $ 8,397 $ 17,149 $ 25,578
======== ======== ========
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,
----------------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except percentages)
Federal statutory rate ................. 35% 35% 35%
Tax at federal statutory rate ........... $(11,421) $ (8,981) $ 6,149
State taxes, net of federal benefit ..... -- (291) 500
Research and development tax credits .... -- -- (197)
Other, net .............................. -- 282 400
-------- -------- --------
Total ................................... $(11,421) $ (8,990) $ 6,852
======== ======== ========
Note 8. 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. 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.
-54-
The following table summarizes grant and stock option activity under the
Plan for fiscal years 1998, 1997 and 1996.
Options Outstanding
Options ----------------------------------
Available for Weighted
Grant Shares Average Prices
---------- ---------- --------------
Balance at March 31, 1995 ................................. 2,080,928 4,458,495 $ 2.95
Additional shares authorized .............................. 1,125,000 -- --
Options granted ........................................... (1,477,102) 1,477,102 17.80
Options canceled .......................................... 941,319 (941,319) 22.65
Options exercised ......................................... -- (855,454) 0.89
---------- ---------- --------
Balance at March 31, 1996 ................................. 2,670,145 4,138,824 $ 4.06
Options granted ........................................... (1,846,738) 1,846,738 7.25
Options canceled .......................................... 1,387,389 (1,387,389) 9.79
Options exercised ......................................... -- (406,884) 0.98
---------- ---------- --------
Balance at March 31, 1997 ................................. 2,210,796 4,191,289 $ 3.87
Options granted ........................................... (1,588,504) 1,588,504 8.18
Options canceled .......................................... 736,197 (736,197) 6.77
Options exercised ......................................... -- (1,368,165) 2.12
---------- ---------- --------
Balance at March 31, 1998 ................................. 1,358,489 3,675,431 $ 5.81
========== ========== ========
As of March 31, 1998, options to purchase approximately 1,541,721 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 1998, 1997, and 1996 was $4.90, $2.44
and $8.90 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, which greatly affect the
calculated values. Significant option groups outstanding at March 31, 1998, and
related weighted average exercise price and contractual life information are as
follows:
-55-
Outstanding and Exercisable by Price Range
Weighted Number
Number Average Weighted Vested and Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices As of 3/28/98 Contractual Life Exercise Price As of 3/28/98 Exercise Price
------------------------ ------------- ---------------- -------------- ------------- --------------
$ 1.3333 - $ 1.4667 927,583 4.11 $ 1.4484 927,583 $1.4484
$ 2.2222 - $ 3.3333 223,813 0.57 $ 3.1089 223,813 $3.1089
$ 4.5625 - $ 6.8750 971,535 3.43 $ 6.3657 327,875 $6.4159
$ 7.0000 - $ 8.8125 1,337,750 5.15 $ 7.8874 62,450 $7.8461
$ 9.0000 - $11.0000 82,250 5.41 $ 9.8199 0 $0.0000
$12.1300 - $15.0000 132,500 5.38 $13.2326 0 $0.0000
--------- ---- -------- --------- -------
$ 1.3333 - $15.0000 3,675,431 4.17 $ 5.8051 1,541,721 $3.0050
========= ==== ======== ========= =======
The Company's calculations were made using the following weighted average
assumptions:
March 31,
-------------------------------------------
1998 1997 1996
---------- ---------- ----------
Expected life .................. 5.00 years 5.25 years 5.25 years
Risk-free interest rate ........ 6.0% 6.3% 6.0%
Volatility ..................... 65% 58% 58%
Dividend yield ................. 0% 0% 0%
Directors' Stock Option Plan
On September 30, 1993, the Company adopted its 1993 Directors' Stock Option
Plan (the "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. As of March 31, 1998, no options had been
granted under the Directors' Plan.
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 limited to a
-56-
$25,000 fair market value. Of the 750,000 shares of Common Stock authorized
under the ESPP, 96,922 and 35,983 shares were issued during fiscal 1998 and
1997, respectively.
Compensation costs (included in pro forma net income (loss) and 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:
1998 1997
-------- --------
Expected life..... ............. 6 months 6 months
Risk-free interest rate ........ 5.4% 5.45%
Volatility ..................... 65% 58%
Dividend yield ................. 0% 0%
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 1998
and 1997 was $3.04 and $7.99 per share, respectively.
Pro Forma Net Income (Loss) and 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 its 1992 Stock
Option Plan and its ESPP, the Company's pro forma net income (loss) and net
income (loss) per share for the years ended March 31, 1998, 1997 and 1996, would
have been as follows (in thousands, except per share data):
March 31,
------------------------------------
1998 1997 1996
--------- ---------- ---------
Pro forma net income (loss): $ (8,153) $ (18,795) $ 9,736
Pro forma net income (loss) per share:
Basic $ (0.21) $ (0.49) $ 0.26
Diluted $ (0.21) $ (0.49) $ 0.24
The pro forma effect on net income (loss) and net income (loss) per share
for fiscal 1998, 1997 and 1996 is not representative of the pro forma effect on
net income (loss) in the future years because it does not take into
consideration pro forma compensation expense related to grants prior to fiscal
1996.
Note 9. 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. Under the terms of the Savings
Plan, the Company may make contributions at the discretion of the Board of
Directors. No contributions have been made to the Savings Plan by the Company.
Note 10. Legal Matters
-57-
In March 1996, a putative class action lawsuit was filed against the
Company and certain of its officers and directors and others in the United
States District Court for the Northern District of California, alleging
violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder. (The complaint alleged
that the Company, N.D. Reddy and C.N. Reddy also had liability under Section
20(a) of the Exchange Act.) The complaint, brought by an individual who claimed
to have purchased 100 shares of the Company's common stock on November 2, 1995,
was putatively brought on behalf of a class of persons who purchased the
Company's common stock between July 11, 1995 and December 29, 1995. In April
1997, the Court dismissed the complaint, with leave to file an amended
complaint. In June 1997, plaintiff filed an amended complaint against the
Company and certain of its officers and directors alleging violations of
Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to
dismiss the amended complaint. In March 1998, the court ruled in defendants'
favor as to all claims but one, and dismissed all but one claim with prejudice.
In April 1998, defendants requested reconsideration of the ruling as to the one
claim not dismissed. The Company intends to continue to defend vigorously
against any claims asserted against it, and believes it has meritorious defenses
against the remaining asserted claim. Due to the inherent uncertainty of
litigation, the Company is not able to reasonably estimate the potential losses,
if any, that may be incurred in relation to this litigation.
In December 1996, Alliance Semiconductor International Corporation, a
wholly-owned subsidiary of the Company ("ASIC") was served with a complaint
alleging that ASIC has infringed two patents owned by AMD related to flash
memory devices, and seeking injunctive relief and damages. In March 1997, the
Company was added as a defendant. Each defendant has denied the allegations of
the complaint and asserted a counterclaim for declaration that each of the AMD
Patents is invalid and not infringed by such defendant. The Company believes
that the resolution of this matter will not have a material adverse effect on
the financial condition of the Company.
See also Note 11.
Note 11. Antidumping Proceeding (Taiwan-manufactured SRAMs)
In February 1997, Micron Technology, Inc. filed an anti-dumping petition
(the "Petition") with the United States International Trade Commission ("ITC")
(Investigation Nos. 731-TA-761-762) and United States Department of Commerce
("DOC") (Investigations No. A-583-827), alleging that static random access
memories ("SRAMs") produced in South Korea and Taiwan are being sold in the
United States at less than fair value, and that the United States industry
producing SRAMs is materially injured or threatened with material injury by
reason of imports of SRAMs manufactured in South Korea and Taiwan. As a result
of the Petition, the Company, in order to import into the United States, on or
after approximately April 1998, SRAMs manufactured in Taiwan, must pay a cash
deposit in the amount of 50.15% (the "Antidumping Margin") of the cost of such
SRAMs. (The Company has posted a bond in the amount of 59.06% (the preliminary
margin) with respect to its importation, between approximately October 1997 and
March 1998, of SRAMs manufactured in Taiwan.) The Company and others have
appealed the determination by the ITC that imposed the Antidumping Margin. The
Company may, in 1999, request a review of its sales of Taiwan-fabricated SRAMs
from approximately October 1997 through March 1999 (the "Review Period"). If the
Company makes such a request, the cash deposits made by the Company shall not be
"assessed" or "liquidated" until the conclusion of the review, in early 2000. If
the DOC found, based upon analysis of the Company's sales during the Review
Period, that
-58-
antidumping duties either should not be imposed or should be imposed at a lower
rate than the Antidumping Margin, the difference between the cash deposits made
by the Company, and the deposits that would have been made had the lower rate
(or no rate, as the case may be) been in effect, would be returned to the
Company, plus interest. If, on the other hand, the DOC found that higher margins
were appropriate, the Company would have to pay difference between the cash
deposits made by the Company, and the deposits that would have been made had the
higher rate been in effect. (In either case, the Company also would be
responsible to pay antidumping duties in the amount of the revised margin with
respect to its imports, between approximately October 1997 and March 1998, of
SRAMs manufactured in Taiwan.) At March 31, 1998, the Company had posted a bond
secured by a letter of credit in the amount of approximately $1.6 million
relating to the Company's importation of Taiwan-manufactured SRAMs.
-59-
Report of Independent Accountants
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 22, 1998, appearing in this Annual Report 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/ PRICE WATERHOUSE LLP
San Jose, California
April 22, 1998
-60-
ALLIANCE SEMICONDUCTOR CORPORATION
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Charged to Balance at
beginning of costs and other accounts end of period
Description period expenses Deductions
----------- --------------- --------------- --------------- --------------- ---------------
(in thousands)
Year ended March 31, 1998
Allowance for doubtful accounts and
sales-related reserves $ 650 $ 7,512 $ -- $ (6,152) $ 2,010
======== ========= ======= ======== ========
Inventory related reserves for
excess and obsolescence; and
lower of cost or market issues $ 40,732 $ 15,154 $ -- $(40,919) $ 14,967
======== ========= ======= ======== ========
Year ended March 31, 1997
Allowance for doubtful accounts and
sales-related reserves $ 3,102 $ 5,803 $ -- $ (8,255) $ 650
======== ========= ======= ======== ========
Inventory related reserves for
excess and obsolescence; and
lower of cost or market issues $ 53,555 $ 16,918 $ -- $(29,741) $ 40,732
======== ========= ======= ======== ========
Year ended March 31, 1996
Allowance for doubtful accounts and
sales-related reserves $ 1,450 $ 21,874 $ -- $(20,222) $ 3,102
======== ========= ======= ======== ========
Inventory related reserves for
excess and obsolescence; and
lower of cost or market issues $ 907 $ 52,937 $ -- $ (289) $ 53,555
======== ========= ======= ======== ========
-61-
UNITED SEMICONDUCTOR CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
January 22, 1998
(98)R.L36P6034
To the Board of Directors of United Semiconductor Corporation
We have examined the accompanying balance sheets of United Semiconductor
Corporation as of December 31, 1997 and 1996, and the related statements of
income, of changes in stockholders' equity and of cash flows for the years then
ended. Our examinations were made in accordance with the "Rules Governing the
Certification of Financial Statements by Certified Public Accountants" and
generally accepted auditing standards and accordingly included such tests of the
accounting records and such other auditing procedures as we considered necessary
in the circumstances.
In our opinion, the accompanying financial statements examined by us present
fairly the financial position of United Semiconductor Corporation as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles
consistently applied.
/s/ Price Waterhouse
1
UNITED SEMICONDUCTOR CORPORATION
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents (Note 4(1)) $ 5,469,227 $ 4,542,328
Marketable securities (Note 4(2)) 3,190,746 202,820
Notes receivable - related parties (Note 5) 781 196,616
Accounts receivable (Notes 4(3) and 5)
-third parties 937,320 286,639
-related parties 939,664 368,065
Other receivable 88,905 64,888
Inventories (Note 4(4)) 511,486 485,686
Prepaid expenses 17,669 11,996
Other current assets 230,381 21,952
------------ ------------
11,386,179 6,180,990
------------ ------------
Property, Plant and Equipment (Notes 4(5) and 6)
Cost
Machinery and equipment 10,169,495 8,611,439
Transportation equipment 3,206 2,563
Furniture and fixtures 130,771 87,661
Leasehold improvements 10,966 8,076
Other equipment 14,270 7,995
------------ ------------
10,328,708 8,717,734
Accumulated depreciation (1,944,961) (354,607)
Construction in progress and prepayments 2,460,306 662,007
------------ ------------
10,844,053 9,025,134
------------ ------------
Intangible Asset
Other intangible asset 1,037,500 1,337,500
------------ ------------
Other Assets
Deposit-out 30,979 30,064
Deferred expense 54,027 48,216
Deferred income tax assets (Note 4 (11)) 103,102 219,786
------------ ------------
188,108 298,066
------------ ------------
TOTAL ASSETS $ 23,455,840 $ 16,841,690
============ ============
2
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term loans (Note 4(6)) $ 1,911,632 $ 161,520
Notes payable (Note 5) 125,209 151,043
Accounts payable (Note 5) 534,856 295,274
Accrued expenses (Note 5) 578,013 294,442
Other payables 352,925 1,551,722
Current portion of long-term loans (Note 4(7)) 656,744 --
Other current liabilities 7,515 1,604
----------- -----------
4,166,894 2,455,605
----------- -----------
Long-term Liabilities
Long-term loans (Note 4(7)) 5,190,525 4,329,498
----------- -----------
Other Liabilities
Accrued pension liabilities (Notes 3 and 4(8)) 11,619 --
----------- -----------
Total Liabilities 9,369,038 6,785,103
----------- -----------
Stockholders' Equity
Common stock (Note 4(9)) 10,000,000 10,000,000
Capital reserve generated from the gain on
disposal of fixed assets 40 --
Retained earnings (Note 4(10)) 4,086,762 56,587
----------- -----------
Total stockholders' equity 14,086,802 10,056,587
----------- -----------
Commitments and Contingent Liabilities (Note 7)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,455,840 $16,841,690
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS
EXCEPT EARNINGS PER SHARE DATA)
1997 1996
------------ ------------
Operating Revenues
Sales revenue (Note 5) $ 10,003,022 $ 1,663,010
Sales returns (21,216) (197)
Sales allowance (302,184) (40,653)
------------ ------------
Net sales 9,679,622 1,622,160
Other operating revenues 81,542 45,277
------------ ------------
Net operating revenues 9,761,164 1,667,437
------------ ------------
Operating Cost
Cost of goods sold (Note 5) (5,278,405) (1,182,274)
Other operating cost (38,604) (32,095)
------------ ------------
(5,317,009) (1,214,369)
------------ ------------
Gross Profit 4,444,155 453,068
------------ ------------
Operating Expenses
Selling expenses (88,841) (8,666)
Administrative expenses (250,482) (574,100)
Research and development expenses (443,866) (221,406)
------------ ------------
(783,189) (804,172)
------------ ------------
Operating Income(Loss) 3,660,966 (351,104)
------------ ------------
Non-operating Income
Interest income 264,153 232,942
Dividends revenue 21,420 --
Gain on disposal of investment 16,956 4,474
Foreign exchange gain 397,616 70,170
Other income 6,853 531
------------ ------------
706,998 308,117
------------ ------------
Non-operating Expenses
Interest expense (354,973) (118,223)
Provision for loss on obsolescence of
inventories (50,561) (50,000)
Financial expense (391) (23,778)
Other loss (15,881) (206)
------------ ------------
(421,806) (192,207)
------------ ------------
Income(loss) before income tax 3,946,158 (235,194)
Income tax benefit (Note 4(11)) 84,057 250,619
------------ ------------
Net income $ 4,030,215 $ 15,425
============ ============
Earnings per share
Net income $ 4.03 $ 0.02
============ ============
The accompanying notes are an integral part of these financial statements.
4
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
Total
Retained Stockholders'
Common Stock Capital Reserve Earnings Equity
----------- ----------- ----------- -----------
1996:
Balance at January 1,1996 $ 5,000,000 $ -- $ 41,162 $ 5,041,162
Issued common stock 5,000,000 -- -- 5,000,000
Net income for 1996 -- -- 15,425 15,425
----------- ----------- ----------- -----------
Balance at December 31 ,1996 10,000,000 -- 56,587 10,056,587
1997:
Net income for 1997 -- -- 4,030,215 4,030,215
Transfer of the gain on disposal
of fixed assets to capital reserve -- 40 (40) --
----------- ----------- ----------- -----------
Balance at December 31, 1997 $10,000,000 $ 40 $ 4,086,762 $14,086,802
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1997 1996
----------- -----------
Operating activities:
Net income $ 4,030,215 $ 15,425
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Provision for loss on obsolescence of inventories 38,403 50,000
Depreciation 1,591,371 354,607
Amortization 320,071 166,740
Bad debt expense 24,138 5,908
Fixed assets transferred to deferred assets and expenses 26,516 --
Gain on disposal of fixed assets (40) --
Changes in asset and liability accounts:
Decrease (increase) in notes receivable 195,835 (196,616)
Increase in accounts receivable (1,246,418) (660,612)
Increase in other receivables (24,017) (22,324)
Increase in inventories (64,203) (535,686)
Decrease (increase) in prepaid expenses (5,673) 13,458
Increase in other current assets (208,429) (19,000)
Decrease (increase) in deferred income tax assets 116,684 (219,786)
(Decrease) increase in notes payable (25,834) 125,148
Increase in accounts payable 239,582 295,274
Increase in accrued expenses 283,571 290,804
Increase in other current liabilities 5,911 1,604
Decrease in deferred income tax liabilities -- (13,243)
Increase in accrued pension liabilities 11,619 --
----------- -----------
Net cash provided by (used in) operating activities 5,309,302 (348,299)
----------- -----------
Investing activities:
Acquisition of fixed assets (4,644,743) (7,380,918)
Proceeds from disposal of fixed assets 9,180 --
Increase in marketable securities (2,987,926) (202,820)
Increase in deferred expense (25,882) (49,621)
Increase in deposits-out (915) (64)
----------- -----------
Net cash used in investing activities (7,650,286) (7,633,423)
----------- -----------
Financing activities:
Issuance of common stock -- 4,250,000
Increase in short-term loans 1,750,112 84,488
Proceeds from long-term loans 1,517,771 4,329,498
----------- -----------
Net cash provided by financing activities 3,267,883 8,663,986
----------- -----------
Net increase in cash and cash equivalents 926,899 682,264
Cash and cash equivalents at the beginning of year 4,542,328 3,860,064
----------- -----------
Cash and cash equivalents at the end of year $ 5,469,227 $ 4,542,328
=========== ===========
6
UNITED SEMICONDUCTOR CORPORATION
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1997 1996
----------- -----------
Supplemental disclosures of cash flow information
Cash paid for interest (excluding interest capitalized) $ 345,781 $ 107,333
=========== ===========
Cash paid for income tax $ 51,501 $ 1,409
=========== ===========
Investing activities partially paid by cash
Acquisition of fixed assets $ 3,445,946 $ 8,891,391
Add: payable at the beginning of year 1,551,722 41,249
Less: payable at the end of year (352,925) (1,551,722)
----------- -----------
Cash paid $ 4,644,743 $ 7,380,918
=========== ===========
Financing activities partially provided by cash
Issuance of common stock $ -- $ 5,000,000
Less: common stock issued for the technology knowhow -- (750,000)
----------- -----------
Cash received $ -- $ 4,250,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
UNITED SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1. HISTORY AND ORGANIZATION
United Semiconductor Corporation was incorporated as a company limited by
shares on October 6, 1995 and commenced its operations in June, 1996. As of
December 31, 1997, the paid-in capital is $10,000,000. The Company's major
business activities are as follows:
a. Semiconductor and semiconductor device foundry.
b. Providing the mask tooling, package, burn-in, and testing services for
the above-mentioned products.
c. Research and development for the technology of wafer fabrication.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Translation of foreign currency transactions
The accounts of the Company are maintained in New Taiwan dollars.
Transactions denominated in foreign currencies are translated into New
Taiwan dollars at the rates of exchange prevailing on the transaction
dates. Receivables, other monetary assets and liabilities denominated in
foreign currencies are translated into New Taiwan dollars at the rates of
exchange prevailing at the balance sheet date. Exchange gains or losses are
included in the current year's results.
Cash equivalents
Cash equivalents are short-term, highly liquid investments which are:
A. Convertible to known amounts of cash at any time; and
B. So near their maturity that they present insignificant risk of changes
in value because of changes in interest rates.
Marketable securities
Marketable securities are recorded at cost when acquired. The carrying
amount of the marketable securities portfolio is stated at the lower of its
aggregate cost or market value at the balance sheet date. The market value
for listed equity securities or close-ended funds are determined by the
average closing prices occurred during the last month of the fiscal year.
The market value for open-ended funds are determined by their equity per
unit at balance sheet date.
8
Inventories
Inventories, except raw materials stated at actual, are stated at standard
cost which is adjusted to actual cost based on weighted average method at
month end. Inventories are valued at the lower of cost or market value at
the year end. An allowance for loss on obsolescence and decline in market
value is provided when necessary.
Fixed assets
A. Fixed assets are stated at cost. Interest incurred on loans used to
finance the construction of property and plant is capitalized and
depreciated accordingly.
B. Depreciation is provided on the straight-line method using the assets'
economic service lives. When the economic service lives are completed,
fixed assets which are still in use are depreciated based on the
residual value. The service lives of the fixed assets are five to ten
years.
C. Maintenance and repairs are charged to expenses as incurred.
Significant renewals and improvements are treated as capital
expenditures and are depreciated accordingly.
Intangible asset
The intangible asset represents the technology knowhow provided by a major
shareholder as a part of paid-in capital. The asset is amortized over five
years by straight-line method.
Deferred charges
Deferred charges are stated at cost and amortized on a straight-line basis
over the following years: software-3 years; organization cost-5 years.
Retirement plan
The Company has a retirement plan covering all its regular employees. This
plan is separately funded. Starting from 1996, the net pension cost is
computed based on an actuarial valuation in accordance with the provision
of FASB No. 18 of the R.O.C., which requires consideration of cost
components such as service cost, interest cost, expected return on plan
assets and amortization of net obligation at transition.
Income tax
Income tax is provided based on accounting income after adjusting for
permanent differences. The provision for income tax includes deferred tax
resulting from items reported in different periods for tax and financial
reporting purposes. A valuation allowance is provided for deferred tax
asset to the extent that it is more likely than not that the tax benefits
will not be realized. Deferred tax assets or liabilities are further
classified into current or noncurrent items and are presented in the
financial statements as net balance. Over or under provision of prior year
income tax liabilities are included in the current year income tax expense.
Revenue and expenses
Revenue is recognized when the products are delivered or services are
completed. Expenses are recognized as incurred.
9
3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES
Prior to 1996, the Company contributed an amount equal to 2% of total wages
on a monthly basis as pension expense. In 1996, the Company adopted R.O.C.
FASB No.18 and began recognizing net pension cost based on actuarial
valuation. The effect of the change in accounting principle was immaterial
because the Company was only set up in 1995.
4. CONTENTS OF SIGNIFICANT ACCOUNTS
(1) CASH AND CASH EQUIVALENTS
December 31
-------------------------------
1997 1996
---------- ----------
Cash:
Cash on hand $ 1,817 $ 1,056
Demand accounts 58,655 2,600
Checking accounts 16,607 11,871
Time deposits 5,342,348 4,526,801
---------- ----------
5,419,427 4,542,328
Cash equivalents:
Bonds with repurchase agreement 49,800 --
---------- ----------
$5,469,227 $4,542,328
========== ==========
(2) MARKETABLE SECURITIES
December 31
---------------------------
1997 1996
---------- ----------
Mutual funds $ 251,393 $ 150,250
Listed equity securities stocks 2,939,353 52,570
---------- ----------
$3,190,746 $ 202,820
========== ==========
(3) ACCOUNTS RECEIVABLE - NET
December 31
-------------------------
1997 1996
--------- ---------
Accounts receivable - third parties $ 959,159 $ 292,547
Less: Allowance for doubtful accounts (21,839) (5,908)
--------- ---------
$ 937,320 $ 286,639
========= =========
10
(4) INVENTORIES
December 31
-------------------------
1997 1996
--------- ---------
Raw materials, supplies and spare parts $ 226,426 $ 257,608
Work in process 315,274 247,877
Finished goods 58,189 30,201
--------- ---------
599,889 535,686
Less: Allowance for loss on obsolescence (88,403) (50,000)
--------- ---------
$ 511,486 $ 485,686
========= =========
(5) PROPERTY, PLANT AND EQUIPMENT
December 31, 1997
--------------------------------------------
Accumulated
Cost Depreciation Book value
------------ ------------ ------------
Machinery and equipment $ 10,169,495 $ (1,915,540) $ 8,253,955
Transportation equipment 3,206 (587) 2,619
Furniture and fixtures 130,771 (24,341) 106,430
Leasehold improvements 10,966 (2,315) 8,651
Other equipment 14,270 (2,178) 12,092
Construction in progress and
prepayments 2,460,306 -- 2,460,306
------------ ------------ ------------
$ 12,789,014 $ (1,944,961) $ 10,844,053
============ ============ ============
December 31, 1996
-------------------------------------------
Accumulated
Cost Depreciation Book value
----------- ----------- -----------
Machinery and equipment $ 8,611,439 $ (346,433) $ 8,265,006
Transportation equipment 2,563 (142) 2,421
Furniture and fixtures 87,661 (6,482) 81,179
Leasehold improvements 8,076 (960) 7,116
Other equipment 7,995 (590) 7,405
Construction in progress and
prepayments 662,007 -- 662,007
----------- ----------- -----------
$ 9,379,741 $ (354,607) $ 9,025,134
=========== =========== ===========
A. Please refer to note 6 for assets pledged as collateral.
B. Interest expense amounting to $24,321 and $40,881 were capitalized in
1997 and 1996, respectively.
11
(6) SHORT-TERM LOANS
December 31
---------------------------------
1997 1996
------------ ------------
Unsecured loans $ 1,911,632 $ 161,520
============ ===========
Annual interest rates 1.25% - 7.66% 1.34% - 6.81%
============ ============
(7) LONG-TERM LOANS
A. Long-term loans are summarized as follows:
December 31
--------------------------------
1997 1996
----------- -----------
Long-term loans $ 5,847,269 $ 4,329,498
Less: Current portion (656,744) --
----------- -----------
$ 5,190,525 $ 4,329,498
=========== ===========
B. Interest rates for long-term loans were floating rates. The range of
interest rates were 1.31% - 7.20% and 1.31% - 6.44% in 1997 and 1996,
respectively.
C. Please refer to note 6 for assets pledged as collateral.
(8) RETIREMENT PLAN
A. All of the regular employees of the Company are covered by the pension
plan. Under the plan, the Company contributes an amount equal to 2% of
total wages on a monthly basis to the pension fund deposited in the
Central Trust of China. Pension benefits are generally based on service
years (two points per year for service years under 15 years (including
15 years) and one point per year for service years over 15 years). Each
employee is limited up to 45 points. Retirement benefits are paid from
the fund previously provided.
During 1997, the Company has recognized pension cost amounting to
$17,793. The balance of the Company's employees' retirement fund in
Central Trust of China was $9,270 at December 31, 1997.
12
B. Based on actuarial assumptions for the year of 1997, the discount rate
and expected rate of return on plan asset are both 6.5% and the rate of
compensation increase is 8%. The funded status of pension plan is
listed as follows:
December 31, 1997
-----------------
Vested benefit obligation $ --
Non-vested benefit obligation (4,947)
--------
Accumulated benefit obligation (4,947)
Effect on projected salary increase (25,388)
--------
Projected benefit obligation (30,335)
Market-related value of plan assets 8,638
--------
Projected benefit obligation exceeds plan asset
(funding status) (21,697)
Unrecognized net obligation at transition 281
Unrecognized pension gain or loss 11,360
--------
Accrued pension liability $(10,056)
========
(9) COMMON STOCK
The Company increased its capital by issuing 500,000,000 shares of
common stock for cash at the par value of $10 per share which was
approved through a resolution of the Board of Directors in their
meeting on June 21, 1996. The Company has completed the amendment
procedures for registration. After the capitalization, issued and
outstanding shares of common stocks is 1,000,000,000 shares.
(10) RETAINED EARNINGS
A. According to the Company's Articles of Incorporation, current year's
earnings, if any, shall be distributed in the following order:
(1) paying all taxes and dues;
(2) covering prior years' operating losses, if any;
(3) setting aside 10% of the remaining amount, after deducting (1)
and (2), as legal reserve;
(4) allocating not over 10% of par value of common stocks as
interest of capital to common stockholders;
(5) allocating 1% of the remaining amount, after deducting (1),
(2), (3) and (4) above from the current year's earnings, as
directors' and supervisors' fees;
(6) allocating not below 10% of the remaining amount, after
deducting (1), (2), (3) and (4) above from the current year's
earnings, as employees' bonus; and
(7) distributing the remaining amount in accordance with the
resolution of directors' meeting and stockholders' meeting.
13
(11) INCOME TAX
A. Income tax benefits for 1997 and 1996 are computed as follows:
1997 1996
--------- ---------
Current income tax for short-term negotiable
income $ 5,576 $ 1,409
Increase in deferred tax assets (684,882) (416,895)
Increase in allowance for valuation on
deferred tax assets 161,923 --
Increase in deferred tax liabilities 433,326 164,867
--------- ---------
Income tax benefit $ (84,057) $(250,619)
========= =========
B. Deferred income tax assets and liabilities as of December 31, 1997 and
1996 are as follows:
December 31
---------------------------
1997 1996
----------- -----------
Deferred income tax assets - current $ 228,270 $ 21,952
=========== ===========
Deferred income tax assets - noncurrent $ 1,262,960 $ 784,395
Allowance for valuation on deferred income
tax assets - noncurrent (548,423) (386,500)
----------- -----------
714,537 397,895
Deferred income tax liabilities-noncurrent (611,435) (178,109)
----------- -----------
$ 103,102 $ 219,786
=========== ===========
C. Components of deferred income tax assets and liabilities as of December
31, 1997 are as follows:
Amount Tax Effect
----------- -----------
Temporary taxable differences $(3,057,175) $ (611,435)
Temporary deductible differences 2,097,640 419,528
Investment tax credits -- 1,071,702
Allowance for valuation on deferred income
tax assets - noncurrent -- (548,423)
----------- -----------
$ (959,535) $ 331,372
=========== ===========
D. Pursuant to the "Statute For The Establishment and Administration of
Science-Based Industrial Park", the Company has been granted several
periods of tax holidays with respect to income derived from approved
investments.
E. The Company's income tax return for 1995 have been assessed and
approved by the Tax Authority.
14
(12) EARNINGS PER SHARE
1997 1996
------------- -----------
Net income (A) $ 4,030,215 $ 15,425
============= ==========
Common stock outstanding at the end of year
(Expressed in thousand shares) (B) 1,000,000 1,000,000
============= ==========
Weighted average outstanding common stock
(Expressed in thousand shares) (C) 1,000,000 747,945
============= ==========
Earnings per share (Expressed in New Taiwan
dollars) (A/B) $ 4.03 $ 0.015
============= ==========
Earnings per share based on weighted average
outstanding common stock (Expressed in New
Taiwan dollars) (A/C) $ 4.03 $ 0.02
============= ==========
5. RELATED PARTY TRANSACTION
(1) Names and Relationships of Related Parties
Name of the related parties The relationship with the Company
----------------------------------- ----------------------------------
United Microelectronics Co., Ltd. The major investor of the Company.
United Integrated Circuit Co., Ltd. Common board chairman.
United Silicon Inc. "
AMIC Technology, Inc. The affilliate of UMC
Novatek Microelectronics Corp. Common major investor
Faraday Technology, Inc. "
S3 Inc. The major investor of the Company
S3 International Ltd. 100% investee of S3 Inc.
(2) Significant Related Party Transactions
a. Sales
1997 1996
------------------------ ------------------------
Percentage Percentage
Amount of net sales Amount of net sales
---------- ------------ ---------- ------------
United Microelectronics
Co., Ltd. $2,503,897 26% $ 971,397 60%
United Integrated Circuit
Co., Ltd. 302,866 3% -- --
Others 425,071 4% -- --
---------- ---------- ---------- ----------
$3,231,834 33% $ 971,397 60%
========== ========== ========== ==========
15
The above sales are dealt with certain discount in the ordinary
course of business similar to those with other companies. The actual
collection period is appoximately two months.
b. Purchases
1997 1996
-------------------- --------------------
Percentage Percentage
of net of net
Amount purchases Amount purchases
------ --------- ------ ---------
United Microelectronics
Co., Ltd. $15,912 2% $63,089 12%
======= ======= ======= =======
The above purchases are dealt with in the ordinary course of business
similar to those with other companies and are payable after three months
from purchase date.
c. Notes receivable
December 31, 1997 December 31, 1996
-------------------- --------------------
Percentage Percentage
of notes of notes
Amount receivable Amount receivable
------ ---------- ------ ----------
United Microelectronics
Co., Ltd. $ 781 100% $196,616 100%
======== ======== ======== ========
d. Accounts receivable
December 31, 1997 December 31, 1996
----------------------- ----------------------
Percentage Percentage
of accounts of accounts
Amount receivable Amount receivable
------ ---------- ------ ----------
United Microelectronics
Co., Ltd. $ 218,633 12% $ 367,625 56%
United Integrated
Circuit Co., Ltd. 317,533 17% 440 --
S3 International Ltd. 263,252 14% -- --
Others 148,453 8% -- --
--------- --------- --------- ---------
947,871 51% 368,065 56%
Less:Allowance for doubtful
accounts (8,207) (1%) -- --
--------- --------- --------- ---------
$ 939,664 50% $ 368,065 56%
========= ========= ========= =========
16
e. Notes payable
December 31, 1997 December 31, 1996
------------------- -------------------
Percentage Percentage
of notes of notes
Amount payable Amount payable
------- ------- ------- -------
United Microelectronics
Co., Ltd. $25,992 21% $44,046 29%
======= ======= ======= =======
f. Accounts payable
December 31, 1997 December 31, 1996
-------------------- -------------------
Percentage Percentage
of accounts of accounts
Amount payable Amount payable
------ ------- ------ -------
United Microelectronics
Co., Ltd. $ 9,428 2% $-- --
United Integrated
Circuit Co., Ltd. 12,057 2% -- --
------- ------- ------- ---------
$21,485 4% $-- --
======= ======= ======= =========
g. Accrued expenses
December 31, 1997 December 31, 1996
----------------------- ---------------------
Percentage Percentage
of accrued of accrued
Amount expenses Amount expenses
---------- ---------- --------- ----------
United Microelectronics
Co., Ltd. $77,387 13% $61,106 21%
======= ======= ======= =======
h. Property transaction
In May 1997, the Company sold one set of machinery and equipment to United
Integrated Circuit Co., Ltd. for $9,180. The gain on the transaction was
$40.
i. Other transaction
The other transaction with United Microelectronics Co., Ltd. in 1997 and
1996 was as follows:
Item 1997 1996
----- ---- ----
Rental expense $ 199,329 $ 153,128
========== ==========
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6. ASSETS PLEDGED AS COLLATERAL
Book Value as of December 31
--------------------------------
1997 1996 Subject of collateral
------------ ------------ ---------------------
Machinery and equipment $ 6,272,029 $ 2,418,834 Long-term loan
============ ============
7. COMMITMENTS AND CONTINGENCY
a. The Company's unused letters of credit for import machinery were
approximately USD58,541 thousand dollars, JPY4,691,732 thousand dollars,
and GBP15 thousand dollars at December 31, 1997.
b. The Company has signed several contracts for the purchase of equipment
amounting to USD193,202 thousand dollars, JPY16,033,030 thousand dollars,
and DEM103 thousand dollars. As of December 31, 1997, the amount of
outstanding obligations for these contracts are USD61,278 thousand
dollars, JPY8,981,532 thousand dollars, and DEM43 thousand dollars.
c. The DOC of the United States of America (U.S.A.) had made a preliminary
investigation on September 24, 1997 on the changes that static random
access memory (SRAM) manufactured in Taiwan were being sold at less than
fair market value, i.e. dumping prices, and the discussion on imposing
duties on those SRAM is on-going. The final determination will depend on
the result of further investigation. Since the Company does not sell or
export any significant volume of SRAM products to the U.S.A., the
Company's management is of the opinion that the outcome of the
investigation will not have a material adverse financial or operational
effect to the Company.
8. COMPARATIVE FIGURES RECLASSIFICATION
Certain accounts in the 1996 financial statements have been reclassified to
conform with the presentation adopted for the 1997 financial statements.
18