ITEM 1 BUSINESS
OVERVIEW
Alliance Semiconductor Corporation was incorporated in California on February 4, 1985 and reincorporated in Delaware on October 26, 1993. Unless the context indicates otherwise, the terms "Alliance" and the "Company" refer to Alliance Semiconductor Corporation, a Delaware corporation, and its direct and indirect subsidiaries. The Company designs, develops and markets high performance memory and memory intensive logic products to the personal computer, networking, telecommunications, instrumentation and consumer markets.
Market trends, such an increased emphasis on high-throughput applications, including networking, graphics, multimedia, computer, consumer, and telecommunications products, have created opportunities for high performance memory products. The Company addresses these opportunities with its families of static random access memories ("SRAMs") and dynamic random access memories ("DRAMs"), characterized by high storage capacity (density), fast access times and low power consumption.
The semiconductor industry is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity and undercapacity, and accelerated erosion of selling prices. During much of fiscal 1999, 1998 and 1997 the market for certain of the Company's DRAM and SRAM devices continued to experience excess supply relative to demand, which resulted in a significant downward trend in average selling prices. Although the Company is unable to predict future trends in average selling prices, historically the semiconductor industry has experienced significant annual declines in average selling prices.
The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience (as it did throughout much of fiscal 1999, 1998 and 1997) rapid erosion in product pricing which is not within the control of the Company and which could have an adverse material effect on the Company's results of operations. The Company is unable to predict the future prices for its products.
- 2 -
Throughout this report, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal year ended March 31, 2000 contained 52 weeks while the fiscal years ended March 31, 1999 and March 31, 1998 contained 53 weeks and 52 weeks, respectively.
INDUSTRY BACKGROUND
Traditionally, large manufacturing companies, such as Samsung, Hyundai, Micron, NEC, Toshiba, Hitachi and Cypress Semiconductor, have dominated the markets for SRAMs and DRAMs. The majority of the memory products from these manufacturers have consisted of commodity products, which have relatively predictable, multi-year product life cycles and thus require more focus on process technology and production cost and less on design. In recent years, certain technology trends dramatically increased the performance requirements for SRAMs and DRAMs, creating new design challenges and market opportunities for emerging semiconductor companies. The proliferation of more powerful personal computers and workstations in recent years and the increasing emphasis on high-throughput networking, graphics, multimedia and telecommunications products have created mass market opportunities for high speed and low power SRAMs and high speed DRAMs.
SRAMs and DRAMs are forms of "volatile" memory, meaning that such devices retain their memory only when connected to a power supply. In contrast, flash memory is a form of "non-volatile" memory, which retains its memory even when the power supply is turned off. The demand for flash memory has increased in recent years. In addition to being a preferred method of storing the basic input/output system ("BIOS") for computers, a variety of applications make use of flash memory (for instance, cellular phone handsets often allow users to "store" frequently-dialed numbers in flash memory; such memory is retained when the handset power is turned off).
Embedded-memory applications are growing rapidly, as manufacturers of items from cell phones to toasters are introducing "smart" machines that use integrated circuits to improve performance. Embedding memory and logic on a single chip may produce significant advantages in size and speed.
TECHNOLOGY
The Company has focused on using innovative design techniques to develop high performance SRAMs and DRAMs that can be manufactured using a simple CMOS manufacturing process. The Company combines both SRAM and DRAM design approaches in creating its SRAM and DRAM products, and believes that merging these techniques enables it to design SRAMs that feature some of the density attributes of DRAMs and to design DRAMs that feature some of the speed attributes of SRAMs. Since its inception in 1985, the Company has accumulated substantial experience in designing SRAM and DRAM products.
The Company believes that the die sizes (the physical sizes of its complete, unpackaged, memory circuits) of many of its products are smaller than those of competing products, providing the Company with a key competitive advantage. Because yields increase significantly as die size decreases, the Company believes that its small die sizes have been a major contributor to its generally high manufacturing yields. Small die sizes also generally result in additional benefits, such as lower die cost, increased speed, greater reliability and lower power consumption.
In addition to having small die sizes, many of the Company's products are designed to be manufactured using a CMOS process with fewer steps than required for competitive memory products. The Company's competitors often require a greater number of mask steps and/or more complex manufacturing processes to achieve similar performance of such products. Because yields typically decline as manufacturing complexity and the number of process steps increase, the simpler manufacturing process utilized by the Company has contributed to its generally high manufacturing yields. The Company also believes that a simpler manufacturing process leads to faster time to market and shorter manufacturing cycle times.
The Company's development strategy is to leverage its proprietary design modules, which have been created using its design philosophies. These modules, which are scaleable in size, can be used by the Company as building blocks for new products, resulting in shorter design cycles. The Company believes that this design strategy also enables it to maximize the performance, yield and cost advantages of its basic designs and sustain them over time in successive generations of higher performance and higher density products.
- 3 -
PRODUCTS
HIGH SPEED CMOS SRAMS
Sales of the Company's SRAM products accounted for 43% of the Company's net revenues in fiscal 2000. During fiscal year's 1999 and 1998, SRAM products contributed approximately 58% and 27%, respectively, of the Company's net revenues. Focused on the telecommunications, networking and wireless markets, the Company currently offers SRAM products in broad range densities, packages, speed grades and low-power ranges from 64 Kbit to 4 Kbit with speeds as fast as 10ns and stand by power as low as 20uA. Currently the Company's volume SRAM products are manufactured using 0.35 and 0.25 micron technology, with development to 0.18 micron technology underway.
HIGH SPEED CMOS DRAMS
Sales of the Company's DRAM products accounted for 56% of the Company's net revenues in fiscal 2000. During fiscal years 1999 and 1998, DRAM products contributed 40% and 66%, respectively, of the Company's net revenues. During fiscal year 2000, the Company continued to increase its volume of production of 4 Mbit and 16 Mbit DRAM products in the 256 Kbit x 16 and 1 Mbit x 16 configurations using technologies down to 0.25 micron.
HIGH SPEED CMOS FLASH MEMORIES
During fiscal 2000, the Company changed its focus from 5V to 3V flash memory products (which use a single, nominal, 3-volt power supply for read and programming functions). The Company has sampled the 8 Mbit product with access times as fast as 80ns, and has achieved functional silicon on 4 Mbit product. To date, the Company has not derived significant revenue from flash memory products.
NETWORK HARDWARE ACCELERATORS
In fiscal year 1999, the Company announced that it expected to introduce the first product of an Internet Protocol Routing Processor ("IPRP") family that will leverage the Company's logic and embedded memory technology, to enable hardware accelerated wire speed routing of IP packets, in multi-ported Gigabit and Terabit routers. These IPRP devices could become integral components in mission critical and multimedia enhanced high-end routers, which are being deployed to build the next generation Internet infrastructure. The Company achieved working silicon of the first product of IPRP family during the quarter ended April 3, 1999. However, these prototypes did not achieve all the specifications necessary to introduce the product, including the desired speed. The Company spent the entire fiscal year 2000 redesigning the product and has not yet produced a marketable product. While the Company plans on continuing its effort to produce an IPRP product, there can be no assurance that the Company can or will do so.
PRODUCT DEVELOPMENT
Timely development and introduction of new products are essential to maintaining the Company's competitive position. The Company currently develops all of its products in-house and had on staff 79 development personnel (38 in the United States and 41 in India) as of April 1, 2000. 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 2000, 1999 and 1998, the Company spent approximately $14.6 million, $14.1 million and $15.3 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, or to develop and bring to market such new products in a timely and cost effective manner, or that the Company will be able to
- 4 -
respond effectively to new technological changes or new product announcements by others. There also can be no assurance that the Company can secure adequate foundry capacity for the production of such products, or obtain acceptable manufacturing yields necessary to enable the Company to offer products at competitive prices. Additionally, there can be no assurance that the Company's products will gain or maintain market acceptance. Such inabilities could materially and adversely affect the Company's results of operations.
The markets for SRAMs, DRAMs, and flash memory products are volatile and subject to rapid technological and price change. Any inventory of products for those markets may be subject to obsolescence and price erosion, which could materially and adversely affect the Company's results of operations.
CUSTOMERS
The Company's primary customers are major domestic and international manufacturers of personal computer and computer peripherals, consumer, networking, telecommunications and wireless products, including; 3Com, Pace Micro Technology, Lucent, Sony, IBM, Toshiba, Acer, Alcatel, Nokia, Solectron, Jabil, Newbridge Networks, Efficient Networks, General Instruments, Seagate, Brother and Pioneer. A decline in demand in these industries or lack of success in developing new markets or new products could have a material adverse effect on the Company's results of operations.
The Company believes that if its sales penetration into these markets increases, its customer base will diversify not only by product application but also geographically. There can be no assurance that such sales penetration into these markets will, in fact, increase. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. During fiscal year 2000, the Company moved all of its SRAM production out of Taiwan. The Company intends to sell its remaining SRAM inventory that was manufactured in Taiwan outside the United States. See Note 13 of Notes to Consolidated Financial Statements.
Sales to the Company's customers are typically made pursuant to specific purchase orders, which may be canceled by the customer without enforceable penalties. For the fiscal year ended March 31, 2000, one customer accounted for approximately 10% of the Company's net revenues. For the fiscal year ended March 31, 1999, two customers accounted for approximately 15% and 13% of the Company's net revenues. For the fiscal year ended March 31, 1998, one customer accounted for approximately 18% of the Company's net revenues. See Note 1 of Notes to Consolidated Financial Statements.
Historically, the semiconductor industry in general, and the semiconductor memory business in particular, has experienced cyclical downturns in business that happen every few years. The industry experienced such a downturn in the mid 1990's and has been recovering over the last few years, as has the Company. The Company fully expects that another downturn will occur in the next few years. And while the Company is trying to take precautions so that it will not be carrying significant inventory (as happened in the last downturn) when the next downturn occurs, it is difficult to predict when the downturn will occur and customers start canceling orders. There can be no assurance that the Company will be able to manage its business in a manner so as to prepare for the next downturn, when it occurs. Additionally, even if the Company is able to prepare for the downturn, any such downturn will none-the-less have a significant and material negative impact on the Company's ability to sell products and results of operations and such a negative impact on the Company may last several years.
SALES AND MARKETING
The Company markets and distributes its products through a network of manufacturers' representatives and distributors throughout North America, Europe, Asia and the rest of the world.
The Company uses manufacturers' representatives and distributors who are not subject to minimum purchase requirements and who can discontinue marketing the Company's products at any time. Many of the Company's distributors are permitted to return a limited amount of product purchased in exchange for future orders. The loss of one or more manufacturers' representatives or distributors could have a material adverse effect on the Company's results of operations. The Company believes that its relations with its manufacturers' representatives and distributors generally are good.
- 5 -
The Company believes that customer service and technical support are important competitive factors in selling to major customers. The Company provides technical support to its customers worldwide. Distributors and manufacturers' representatives supplement the Company's efforts by providing additional customer service at a local level. The Company also works closely with its customers in qualification of its products and providing the needed quality and reliability data. The Company believes that close contact with its customers not only improves the customers' level of satisfaction but also provides important insights into future market directions.
International revenues accounted for approximately 59%, 50% and 41% of net revenues in fiscal 2000, 1999 and 1998, respectively. The Company expects that international sales will continue to represent a significant portion of net revenues. In addition, the Company's products are manufactured, assembled and tested by independent third parties primarily located in Asia and North America, and the Company has in the past, and intends in the future, to make investments in certain foundries in Asia or elsewhere in order to secure production capacity. Due to its international sales and independent third party manufacturing, assembly and testing operations, the Company is subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements, delay resulting from difficulty in obtaining export licenses of certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because the Company's international sales generally are denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive than competitors' products that are denominated in local currencies. Although the Company to date has not experienced any material adverse effect on its results of operations as a result of such regulatory, geopolitical and other factors, there can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. See Note 15 of Notes to Consolidated Financial Statements.
MANUFACTURING
The Company subcontracts its manufacturing to independent foundries, which allows the Company to avoid the significant capital investment required for wafer fabrication facilities. The Company, however, has entered into agreements providing for the investment of significant sums for the formation of companies to build and operate manufacturing facilities or to obtain guaranteed capacity, as described below. As a result, the Company focuses its resources on product design and development, quality assurance, marketing and sales, and customer support. The Company designs its products using proprietary circuit modules and standard fabrication processes in order to operate within the process parameters of its contract manufacturers.
The Company's major foundries are United Microelectronics Corporation ("UMC") in Taiwan and Japan, Chartered Semiconductor Manufacturing Ltd. ("Chartered") in Singapore and National Semiconductor Corporation in the United States. 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 and April 1995, the Company purchased shares of Chartered for approximately $51.6 million and entered into a manufacturing agreement under which Chartered would provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance so chooses.
In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the
- 6 -
purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19.0% of the outstanding shares and 25% of the total wafer capacity.
In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and acquired approximately 3.2% of the outstanding shares of USIC. The Company has the right to purchase approximately 3.7% of the manufacturing capacity of the facility.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000 Alliance owned approximately 283.3 million shares, or approximately 3.2%, of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively.
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 results of operations could be materially adversely affected. In addition, some of UMC's foundries are located in the Science-Based Industrial Park in Hsin-Chu City, Taiwan. The Company currently expects these foundries to supply the substantial portion of the Company's products in fiscal 2001. Disruption of operations at the Company's foundries for any reason, including work stoppages, fire, earthquakes as was the case in September 1999, or other natural disasters, could cause delays in shipments of the Company's products, and could have a material adverse effect on the Company's results of operations. In or about October 1997, a fire caused extensive damage to one of UMC's foundries, not used by the Company, which is located in the Hsin-Chu Science-Based Industrial Park. There have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse effect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations.
The Company is using multiple sources for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products, and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations.
The Company purchases semiconductor wafers from these foundries pursuant to various agreements. The Company believes that its relationship with each of these foundries is good. However, UMC and Chartered manufacture similar products which are sold to the Company's competitors.
Reliance on these foundries involves several risks, including; constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, costs and loss of production due to seismic activity, weather conditions and other factors. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations. There can be no assurance that problems affecting manufacturing yields of the Company's products will not occur in the future such as occurred during late in fiscal 1996.
- 7 -
The Company uses offshore subcontractors, which are located primarily in Taiwan and Singapore for die assembly and testing. In the assembly process, the silicon wafers are separated into individual dies that are then assembled into packages and tested in accordance with procedures developed by the Company. Following assembly, the packaged devices are further tested and inspected pursuant to the Company's quality assurance program before shipment to customers. While the timeliness, yield and quality of product deliveries from the Company's suppliers of assembly and test services have been acceptable to date, there can be no assurance that problems will not occur in the future. Any significant disruption in adequate supplies from these subcontractors, or any other circumstances that would require the Company to qualify alternative sources of supply, could delay shipment and result in the loss of customers, limitations or reductions in the Company's revenue, and other adverse effects on the Company's results of operations. Most of the Company's wafer foundries, assembly and testing facilities comply with the requirements of ISO 9000.
There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced by such suppliers. The occurrence of such price increases could have a material adverse effect on the Company's results of operations.
The Company also is subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. Shortages of raw materials or disruptions in the provision of services by the Company's assembly or testing houses or other circumstances that would require the Company to seek alternative sources of supply, assembly or testing could lead to constraints or delays in timely delivery of the Company's products. Such constraints or delays may result in the loss of customers, limitations or reductions in the Company's revenue or other adverse effects on the Company's results of operations. The Company's reliance on outside foundries and independent assembly and testing houses involves several other risks, including reduced control over delivery schedules, quality assurance and costs. Interruptions in supply at the Company's foundries or assembly or testing houses may cause delays in delivery of the Company's products. The occurrence of any supply or other problem resulting from the risks described above could have a material adverse effect on the Company's results of operations.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, product obsolescence and heightened international competition in many markets. Many of the Company's customers may be purchasing products from both the Company and the Company's competitors. The Company's principal competitors include Cypress Semiconductor Corporation; Integrated Device Technology, Inc.; Integrated Silicon Solutions, Inc.; Micron Technology, Inc.; AMD; NEC; Samsung; Toshiba; and other U.S., Japanese, Korean, and Taiwanese manufacturers. Most of the Company's competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than the Company. During an industry recession such as occurred in 1998, 1997 and 1996 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, sources of raw materials, efficiency of production, timing of new product introductions by competitors, protection of Company products by effective utilization of intellectual property laws and general market and economic conditions. There can be no assurance that the Company will be able to compete successfully in the future.
LICENSES, PATENTS AND MASKWORK PROTECTION
The Company seeks to protect its proprietary technology by filing patent applications in the United States and registering its circuit designs pursuant to the Semiconductor Chip Protection Act of 1984. As of June 21, 2000, the Company holds 54 United States patents covering certain aspects of its product designs or manufacturing technology, which patents expire between 2009 and 2018. The Company also has 24 pending United States
- 8 -
patent applications, six of which have been allowed and are expected to be issued as patents. No assurance can be given that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its products business. There can be no assurance that any existing or future patent applications by the Company will result in issued patents with the scope of the claims sought by the Company, or at all, that any current or future issued or licensed patents, trade secrets or know-how will afford sufficient protection against competitors with similar technologies or processes, or that any patents issued will not be infringed upon or designed around by others. In addition, there can be no assurance that others will not independently develop proprietary technologies and processes, which are the same as or substantially, equivalent or superior to those of the Company.
From time to time, the Company is contacted by companies who hold patents which they claim the Company infringes. As of June 19, 2000, the Company is in discussions with two companies who have made such claims. If the Company determines that the Company possibly infringes a patent and the patent appears valid, the Company will negotiate a license, if possible. There can be no assurance that the Company has not or will not infringe prior or future patents owned by others, that the Company will not need to acquire licenses under patents belonging to others for technology potentially useful or necessary to the Company, or that such licenses will be available to the Company, if at all, on terms acceptable to the Company.
Copyrights and maskwork protection are also key elements in the conduct of the Company's business. The Company also relies on trade secrets and proprietary know-how, which it seeks to protect by confidentiality agreements with its employees and consultants, and with third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that its trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will receive in the future, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties. The ultimate conclusion with respect to any alleged infringement must be determined by a court or administrative agency in the event of litigation, and there can be no assurance that a court or administrative agency would determine that the Company's products do not infringe the patents in question. Patent litigation is inherently uncertain and the Company cannot predict the result of any such litigation or the level of damages that could be imposed if it were determined that certain of the Company's products or processes infringe any of the patents in question. 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, and expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold, including Asia, Europe 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.
- 9 -
BACKLOG
Sales of the Company's products are made pursuant to standard purchase orders. Purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in the customers' requirements and to price renegotiations. In addition, orders typically may be canceled at the discretion of the buyer without enforceable penalty. The Company's business, in line with that of much of the semiconductor industry is characterized by short lead-time orders and quick delivery schedules. Also, the Company's actual shipments depend on the manufacturing capacity of the Company's foundries. Finally, capacity constraints or unexpected manufacturing delays may prevent the Company from meeting the demand for certain of its products. Therefore backlog is not necessarily indicative of future sales.
INVESTMENTS
CHARTERED SEMICONDUCTOR CORPORATION
In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2.", if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up", or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, in which the Company decided not to participate. The Companies shares are now subject to an additional three-month "lock-up" which expires in August 2000. In June 2000, the underwriter of the secondary offering released the Company from the lockup, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered.
Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business.
Since Chartered is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to Chartered. In addition, because Chartered is a semiconductor manufacturer, it is subject to additional risks, such at fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurances that the Company's investment in Chartered will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is very likely that Chartered, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of Chartered stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in Chartered.
UNITED MICROELECTRONICS CORPORATION
In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19% of the outstanding shares and 25% of the total wafer capacity.
In April 1998, the Company received approximately US$31.7 million In connection with the sale of 35 million shares of USC, and the Company had the right to receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence of certain potential future events, including the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, this right resulted in Alliance's receipt of approximately NTD 665 million (US$ 21.5 million) as a result of the merger between USC and UMC.
- 10 -
Following the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC made a stock distribution to its employees, thereby the Company's ownership in USC was reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million shares to the Company by way of dividend distribution as well as distributions to other entities. As a result of these distributions, the Company owned approximately 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights, the board seat, and certain contractual rights, Alliance had participated in both strategic and operating decisions of USC on a routine basis, had rights of approval with respect to major business decisions and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its proportionate share of equity income of USC of $9.5 million, $10.9 million, and $15.5 million, net of tax, respectively.
In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC has the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. The Company received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the Company owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As the Company no longer has an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expires in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger, the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short term portion of the investments. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% of the Company's holdings at March 31, 2000), is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment
- 11 -
will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004.
Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of UMC, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business.
Since UMC is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to UMC. In addition, because UMC is a semiconductor manufacturer, it is subject to additional risks, such as fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurance that the Company's investment in UMC will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is very likely that UMC, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of UMC stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in UMC, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in UMC.
MAVERICK NETWORKS, INC. / BROADCOM CORPORATION
In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for imbedded memory in an internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split.
Broadcom's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Broadcom's and the Company's, sometimes move as a group, it is likely that Broadcom's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in Broadcom will increase in value or even maintain its value.
ALLIANCE VENTURE MANAGEMENT, LLC
In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds by allowing them limited participation in the profits of the various investment funds through the management fees paid by the investment funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts.
- 12 -
At Alliance Venture Management's inception in November 1999, series A member units and series B member units in Alliance Venture Management were created. The unit holders of Series A units and Series B units receive management fees of 15% of investment gains realized by Alliance Ventures I and Alliance Ventures II, respectively. In February 2000, upon the creation of Alliance Ventures III, LP ("Alliance Ventures III"), the management agreement for Alliance Venture Management was amended to create series C member units which are entitled to receive a management fee of 16% of investment gains realized by Alliance Ventures III.
Each of the owners of the Series A, B and C member units paid the initial carrying value for their shares of the member units. While the Company owns 100% of the common units in Alliance Venture Management, it does not hold any series A, B or C member units and does not participate in the management fees generated by the management of the investment funds. Several of the Company's senior management hold the majority of the units of Alliance Venture Management.
After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.3 million in 10 companies, with a fund allocation of $20 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures, has invested approximately $4.4 million in 8 companies, from a total fund allocation of $15 million. As of March 31, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $2 million in one company, from a total fund allocation of $100 million.
Certain of the Company's officers have formed private venture funds which invest in some of the same investments as the Company. Additionally, an outside venture fund is being formed in which certain of the Company's officers and employees, as well as the Company itself, are planning to make similar venture investments.
Alliance Venture Management generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky, and many venture funds have a large percentage of investments decrease in value or fail. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these types of investments.
OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION
In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on a chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. As a result of the merger, the Company recognized approximately $69 million pre-tax, non-operating gain, in its fiscal fourth quarter ending March 31, 2000, based on the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date of the merger. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned 852,447 shares of Vitesse.
- 13 -
On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock that had been acquired by Alliance Ventures I in exchange for its sale of one million shares of Orologic as follows:
Alliance Ventures Management then immediately distributed the Vitesse shares to its unit holders.
Vitesse's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Vitesse's and the Company's, sometimes move as a group, it is likely that Vitesse's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in Vitesse will increase in value or even maintain its value.
MALLEABLE TECHNOLOGIES, INC. / PMC-SIERRA, INC.
In 1999, the Company made an investment in a start-up called Malleable Technologies, Inc. ("Malleable"). This investment was transferred to Alliance Venture I, LP, upon its creation. In June 2000, PMC-Sierra, Inc. ("PMC"), announced that it agreed to acquire Malleable. According to the terms of the proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC does not already own. In connection with the proposed merger, Alliance Ventures I will receive approximately 79,000 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company will report a gain based on the closing share price of PMC on the date of the merger. Based on the closing share price of PMC on June 14, 2000, the estimated pretax gain from this transaction is approximately $11 million.
PMC's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like PMC's and the Company's, sometimes move as a group, it is likely that PMC's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value.
THE INVESTMENT COMPANY ACT OF 1940
Following a special study after the stock market crash of 1929 and the ensuing Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The Act was primarily meant to regulate mutual funds, such as the families of funds offered by the Fidelity and Vanguard organizations (to pick two of many), and the smaller number of closed-end investment companies that are traded on the public stock markets. In those cases the funds in question describe themselves as being in the business of investing, reinvesting and trading in securities and generally own relatively diversified portfolios of publicly traded securities that are issued by companies that the investment companies do not control. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the people who establish and operate such investment companies, which constitute large pools of liquid assets that could be used improperly, or be not properly safeguarded, by the persons in control of them.
When the Act was written, its drafters (and Congress) also felt that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company without proclaiming that fact or being willing to voluntarily submit itself to regulation as an acknowledged investment company, and that investors in such a company could be just as much in need of protection as are investors in companies that are openly and deliberately established as investment companies. In order to deal with this perceived potential abuse, the Act and rules under it contain provisions and set forth principles that are designed to differentiate "true" operating companies from companies that may be considered to have sufficient investment-company-like characteristics to require regulation by the Act's complex procedural and substantive requirements. These provisions apply to companies that own or hold securities, as well as companies that invest, reinvest and trade in securities, and particularly focus on determining the primary nature of a company's activities, including whether an investing
- 14 -
company controls and does business through the entities in which it invests or, instead, holds its securities investments passively and not as part of an operating business. For instance, under what is, for most purposes, the most liberal of the relevant tests, a company may become subject to the Act's registration requirements if it either holds more than 45% of its assets in, or derives more than 45% of its income from, investments in companies that the investor does not primarily control or through which it does not actively do business. In making these determinations the Act generally requires that a company's assets be valued on a current fair market value basis, determined on the basis of securities' public trading price or, in the case of illiquid securities and other assets, in good faith by the company's board of directors.
The Company viewed its investments in Chartered, USC and USIC as operating investments primarily intended to secure adequate wafer manufacturing capacity; as previously noted, the Company's access to the manufacturing resources that it obtained in conjunction with those investments will decrease if the Company ceases to own at least 50% of its original investments in the enterprises, as modified, in the cases of USC and USIC, by their merger into UMC. In addition, the Company believes that, before USC's merger into UMC, the Company's investment in USC constituted a joint venture interest that the staff of the Securities and Exchange Commission (the "SEC") would not regard as a security for purposes of determining the proportion of the Company's assets that might be viewed as having been held in passive investment securities. However, because of the success during the last year of the Company's investments, including its strategic wafer manufacturing investments, at least from the time of the completion of the merger of USC and USIC into UMC in January 2000 the Company believes that it could be viewed as holding a much larger portion of its assets in investment securities than is presumptively permitted by the Act for a company that is not registered under it.
On the other hand, the Company also believes that the investments that it currently holds in Chartered and UMC, even though in companies that the Company does not control, should be regarded as strategic deployments of Company assets for the purpose of furthering the Company's memory chip business, rather than as the kind of financial investments that generally are considered to constitute investment securities. Applying certain other tests that the SEC utilizes in determining investment company status, the Company has never held itself out as an investment company; its historical development has focused almost exclusively on the memory chip business; the activities of its officers and employees have been overwhelmingly addressed to achieving success in the memory chip business; and until the past year, its income (and losses) have derived almost exclusively from the memory chip business. Accordingly, the Company believes that it should be regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities, and shortly expects to apply to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. However, if the Company's investments in Chartered and UMC are now viewed as investment securities, it must be conceded that an unusually large proportion of the Company's assets could be viewed as invested in assets that would, under most circumstances, give rise to investment company status. Therefore, while the Company believes that it has meritorious arguments as to why it should not be considered an investment company and should not be subject to regulation under the Act, there can be no assurance that the SEC will agree. And even if the SEC grants some kind of exemption from investment company status to the Company, it may place significant restrictions on the amount and type of investments the Company is allowed to hold, which might force the Company to divest itself of many of its current investments. Significant potential penalties may be imposed upon a company that should be registered under the Act but is not, and the Company intends to proceed expeditiously to resolve its status.
If the Company does not receive an exemption from the SEC, the Company would be required to register under the Act as a closed-end management investment company. In the absence of exemptions granted by the SEC (if it determines to do so in its discretion after an assessment of the public interest), the Act imposes a number of significant requirements and restrictions upon registered investment companies that do not normally apply to operating companies. These would include, but not be limited to, a requirement that at least 40% of the Company's board of directors not be "interested persons" of the Company as defined in the Act and that those directors be granted certain special rights with respect to the approval of certain kinds of transactions (particularly those that pose a possibility of giving rise to conflicts of interest); prohibitions on the grant of stock options that would be outstanding for more than 120 days and upon the use of stock for compensation (which could be highly detrimental to the Company in view of the competitive circumstances in which it seeks to attract and retain qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control the Company in entities in which the Company is also investing (which could require the Company to abandon or significantly restructure its management arrangements, particularly with respect to its investment activities). While the Company could apply
- 15 -
for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that the Company would deem practical. Additionally, the Company would be required to report its financial results in a different form from that currently used by the Company, which would have the effect of turning the Company's Statement of Operations "upside down" by requiring that the Company report its investment income and the results of its investment activities, instead of its operations, as its primary sources of revenue.
While the Company is working diligently to deal with these investment company issues, there can be no assurance that a manageable solution will be found. The SEC may be hesitant to grant an exemption from investment company status in the Company's situation, and it may not be feasible for the Company to operate in its present manner as a registered investment company. As a result, the Company might be required to divest itself of assets that it considers strategically necessary for the conduct of its operations, to reorganize as two or more separate companies, or both. Such divestitures or reorganizations could have a material adverse effect upon the Company's business and results of operations.
EMPLOYEES
As of April 1, 2000, the Company had 161 full-time employees, consisting of 79 in research and development, 5 in marketing, 15 in sales, 29 in administration and 33 in operations. Of the 79 research and development employees (38 in the US and 41 in India), 34 have advanced degrees. In 1997, the Company opened a design center in India. The Company believes that the Company's future success will depend, in part, on its ability to continue to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The Company's employees are not represented by any collective bargaining unit, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good.
The Company has recently experienced and may continue to experience growth in the number of its employees and the scope of its operating and financial systems, resulting in increased responsibilities for the Company's management. To manage future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate and manage its employees. There can be no assurance that the Company will be able effectively to manage future growth, and the failure to do so could have a material adverse effect on the Company's results of operations.
The Company will depend to a large extent on the continued contributions of its founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and President of the Company, and his brother C.N. Reddy, Executive Vice President 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 2000 and subsequently, a number of officers and design personnel left the Company to pursue various other opportunities. The future success of the Company will depend on its ability to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The loss of either of the Reddys or key design personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business. The Company is not insured against the loss of any of its key employees, nor can the Company assure the successful recruitment of new and replacement personnel.
ITEM 2
ITEM 2 FACILITIES
The Company's executive offices and its principal marketing, sales and product development operations are located in a 56,600 square foot leased facility in Santa Clara, California under a lease which expires in June 2006. The Company has an option to extend the lease for a term of five years. The Company also leases office space in Hsin-Chu, Taiwan to manage the logistics of the wafer fabrication, assembly and testing of the Company's products in Taiwan. The Company leases an engineering office in Bangalore, India, and has purchased a parcel of land in an office park under development in Hyderabad, India, for product development. Additionally, the Company leases sales offices in Natick, Massachusetts; Heathrow, Florida; San Diego, California: Berkshire, United Kingdom; Taipei, Taiwan; and Japan.
- 16 -
ITEM 3
Item 3 - Legal Proceedings, above), the deposit requirement, and the potential that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 1999 will be liquidated at the bond rate or deposit rate in effect at
- 20 -
the time of entry, may materially adversely affect the Company's ability to sell in the United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company manufactures (wafer fabrication) SRAMs in Singapore (and has manufactured SRAMs in the United States as well), and may be able to support its U.S. customers with such products, which are not subject to antidumping duties. There can be no assurance, however, that the Company will be able to do so.
In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs") fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing DRAMs was materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requested the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily determined that there was a reasonable indication that the imports of the products under investigation were injuring the United States industry. In May 1999, the DOC issued a preliminary affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after May 28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the preliminary "all others" rate) of the entered value of such DRAMs, an antidumping margin calculated by weight-averaging the antidumping margins of individually investigated respondent companies. The Company posted a bond to cover deposits on such entries. In October 1999 the DOC issued a final affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on December 8, 1999, the ITC issued a final negative determination of injury. Consequently, the investigation was terminated, the suspension of liquidation lifted, and the bond posted in September 1999 released. In January 2000, Micron filed an appeal in the CIT challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs were not causing material injury to the U.S. industry. On March 21, 2000, the appeal of the ITC decision was dismissed by the CIT.
The Company, through Alliance Venture Management, invests in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company invested.
As a result of the foregoing factors, as well as other factors affecting the Company's results of operations, past performance should not be considered to be a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. In addition, stock prices for many technology companies are subject to significant volatility, particularly on a quarterly basis. If revenues or earnings fail to meet expectations of the investment community, there could be an immediate and significant impact on the market price of the Company's Common Stock.
Due to the foregoing factors, it is likely that in some future quarter or quarters the Company's results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had approximately $34.8 million in cash and cash equivalents, an increase of $28.6 million from March 31, 1999; and approximately $615.9 million in net working capital, an increase of approximately $593.8 million from approximately $22.1 million at March 31, 1999.
Additionally, the Company had short-term investments in marketable securities whose fair value at March 31, 2000 was $883.3 million. Refer to Notes 2-5,7 and 16 of Notes to the Consolidated Financial Statements for further details.
- 30 -
During fiscal year 2000, operating activities used cash of $3.5 million. This was primarily the result of net income, the impact of non-cash items such as depreciation and amortization, non-cash investment gains related primarily to the merger of USC and USIC into UMC and Broadcom, net of deferred taxes, offset in part by growth in inventory and accounts receivable, accounts payable and taxes payable. Cash used in operating activities of $23.6 million in fiscal year 1999 was primarily due to the operating loss of $22 million, while the cash provided from operating activities in fiscal year 1998 of $6.9 million was primarily related to the growth in working capital items.
Investing activities provided cash in the amount of $38.9 million in fiscal 2000 as the result of the proceeds from the sale of a portion of the Company's holdings in Broadcom of $48.9 million, additional proceeds from the April 1998 sale of USC stock of $21.5 million, offset in part, by investments made by Alliance Ventures of $28.7 million. Investing activities in fiscal 1999 provided cash in the amount of $25.0 million as the result of proceeds from the sale of a portion of the Companies holdings in USC, which were offset, in part, by additional investments in USIC and other start-up companies and purchases of equipment. In fiscal 1998 investing activities used cash in the amount of $21.0 million which was primarily the result of additional investments in USC of $17.6 million and $2.4 million in purchases of equipment.
Net cash used in financing activities in fiscal 2000 was approximately $6.8 million compared to cash provided by financing activities in fiscal 1999 of approximately $1.8 million, and cash used in financing activities of approximately $0.2 million in fiscal 1998. The use of cash for financing activities in fiscal 2000 was primarily the result of repurchase of 720 thousand shares of the Company's common stock for $12.5 million offset, by a decrease in restricted cash of approximately $2.3 million, and proceeds from sale of common stock of approximately $4.7 million. Cash provided by financing activities in fiscal 1999 primarily reflects a decrease in restricted cash of approximately $1.3 million and net proceeds from the issuance of common stock, offset, in part, by principal lease payments of $1.5 million.
The Company believes these sources of liquidity, and financing opportunities available to it will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. However, it is possible that the Company may need to raise additional funds to fund its activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. The Company could raise such funds by selling some its short term investments, selling more stock to the public or to selected investors, or by borrowing money. The Company may not be able to obtain additional funds on terms that would be favorable to its shareholders and the Company, or at all. If the Company raises additional funds by issuing additional equity, the ownership percentages of existing shareholders would be reduced.
In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has entered into and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production capacity, the formation of joint ventures to own and operate foundries, as was the case with Chartered Semiconductor or UMC, or the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional equity or debt financing. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on satisfactory terms. Additionally, the Company has entered into and will continue to enter into various transactions, including the licensing of its integrated circuit designs in exchange for royalties, fees or guarantees of manufacturing capacity. Refer to Part I, Item 1 - Investments and Notes 3 and 4 in the Notes to the Consolidated Financial Statements.
- 31 -
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to the impact of foreign currency fluctuations and changes in market values of our investments. These investments operate in markets that have experienced significant exchange rate and market price fluctuations over the year ended March 31, 2000. These entities, in which we hold varying percentage interests, operate and sell their products in various global markets; however, the majority of their sales are denominated in U.S. dollars, and therefore, their foreign currency risk is reduced. We did not hold any derivative financial instruments for trading purposes as of March 31, 2000.
INVESTMENT RISK
As of March 31, 2000, our short-term investment portfolio consisted of marketable equity securities in Chartered Semiconductor, UMC, Broadcom Corporation, and Vitesse Semiconductor, the future whose value of which is subject to market value fluctuations. Refer to Notes 2,3,4,5 and 7 for further details.
FOREIGN CURRENCY RISK
Based on our overall currency rate exposure at March 31, 2000, a near term 10% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance that there will not be a material impact in the future.
As of June 20, 2000, the Company owned approximately 339.9 million shares of UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable in the United States, they are subject to foreign currency risk. The market value of these holdings on June 20, 2000 based on the price per share of NTD 87 and the NTD/US dollar exchange rate of NTD $30.833 per US$ is US$ 959 million. The value of these investments could be impacted by foreign currency fluctuations which could have a material impact on the financial condition and results of operations of the Company in the future.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS
The index to the Company's Consolidated Financial Statements and Schedules, and the report of the independent accountants appear in Part III of this Form 10-K. Selected quarterly financial data appears in Item 6 above.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- 32 -
=============================================================================== PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Other than the information required pursuant to Item 405 of Regulation S-K, the information required by this item concerning executive officers of the Company is set forth in Part I of this Form 10-K after Item 4.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the section captioned "Executive Compensation" contained in the Proxy Statement.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the section captioned "Certain Transactions" contained in the Proxy Statement.
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) (I) FINANCIAL STATEMENTS - See Index to Consolidated Financial Statements on page of this Form 10-K Annual Report.
(II) REPORT OF INDEPENDENT ACCOUNTANTS - See Index to Consolidated Financial Statements on of this Form 10-K Annual Report.
(2) (I) SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS - See Index to Consolidated Financial Statements on of this Form 10-K Annual Report.
(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 Year Ended December 31, 1998.
(3) EXHIBITS - See Exhibit Index on page 34 of this Form 10-K Annual Report.
- 33 -
=============================================================================== EXHIBIT INDEX
+ 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.
- 34 -
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN PORTIONS OF THIS DOCUMENT. (A)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 33-69956-LA) DECLARED EFFECTIVE BY THE COMMISSION ON NOVEMBER 30, 1993. (B)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S ANNUAL REPORT ON FORM 10-KSB FILED WITH THE COMMISSION ON JUNE 29, 1994. (C)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 33-90346-LA) DECLARED EFFECTIVE BY THE COMMISSION ON MARCH 28, 1995. (D)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON APRIL 28, 1995. (E)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON JULY 24, 1995. (F)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON OCTOBER 23, 1995. (G)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON AUGUST 13, 1996. (H)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON NOVEMBER 12, 1996. (I)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-13461) FILED WITH THE COMMISSION ON OCTOBER 4, 1996. (J)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON FEBRUARY 11, 1997. (K)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S ANNUAL REPORT ON FORM 10-K FILED WITH THE COMMISSION ON JUNE 27, 1997. (L)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON MARCH 19, 1998. (M) THE DOCUMENT REFERRED TO IS FILED HEREWITH.
- 35 -
=============================================================================== SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE SEMICONDUCTOR CORPORATION
June 28, 2000 By: /S/ N. DAMODAR REDDY ------------------------------------ N. Damodar Reddy Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
June 28, 2000 By: /S/ DAVID EICHLER ------------------------------- David Eichler Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints N. Damodar Reddy and Bradley A. Perkins or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ N. DAMODAR REDDY Director, Chairman of the Board, June 28, 2000 - ------------------------- N. Damodar Reddy President and Chief Executive Officer
/S/ DAVID EICHLER Vice President, Finance and June 28, 2000 - ------------------------- David Eichler Administration and Chief Financial Officer
/S/ C. N. REDDY Director, Chief Operating June 28, 2000 - ------------------------- C. N. Reddy Officer and Secretary
/S/ SANFORD L. KANE Director June 28, 2000 - ------------------------- Sanford L. Kane
/S/ JON B. MINNIS Director June 28, 2000 - ------------------------- Jon B. Minnis
- 36 -
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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States 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/ PRICEWATERHOUSECOOPERS LLP
San Jose, California April 25, 2000
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(1) At March 31, 2000, the Company held 720,000 shares in treasury stock, which have not been retired. After taking in account these treasury shares, the net outstanding shares at March 31, 2000 was 41,686,105.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
ALLIANCE SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Alliance Semiconductor Corporation (the "Company" or "Alliance"), a Delaware corporation, designs, develops and markets high performance memory products and memory intensive logic products. The Company sells its products to the desktop and portable computing, networking, telecommunications, instrumentation and consumer markets.
The semiconductor industry is highly cyclical and has been subject to significant rapid technological changes at various times that have been characterized by diminished product demand, production overcapacity, product shortages due to production undercapacity and accelerated erosion of selling prices. The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience rapid erosion in product pricing (such as that occurred with SRAM and DRAM pricing during fiscal year 1999, 1998 and 1997), which is not within the control of the Company and which could have an adverse material effect on the Company's results of operations. The Company is unable to predict future prices for its products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries, including Alliance Venture Management, LLC, Alliance Ventures, LP I, II and III (See Note 6). All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
For purposes of presentation, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal year ended March 31, 2000 contained 52 weeks while the fiscal years ended March 31, 1999 and March 31, 1998 contained 53 weeks and 52 weeks, respectively. Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal year 2000 presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and highly liquid money market instruments with banks and financial institutions. The Company considers all highly liquid debt investments with maturity from the date of purchase of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash, in the form of certificates of deposit, support stand-by letters of credit, which in turn are used to secure customs duties and other purchase commitments.
SHORT TERM INVESTMENTS
The Company accounts for its short term investments in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2000, all short-term investment securities were designated as available-for-sale in accordance with SFAS 115.
Available-for-sale securities are carried at fair value, using available market information with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the balance sheet.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on the estimated net realizable value. The Company also evaluates its open purchase order commitments on an on-going basis and accrues for any expected loss if appropriate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated economic useful lives of the assets, which range from three to seven years. Upon disposal, the cost of the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the result of operations.
LONG-LIVED ASSETS
Long-lived assets held by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of carrying amounts to future net cash flows an asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount to which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset.
REVENUE RECOGNITION
Revenue from product sales, including sales to distributors, is recognized upon shipment, net of accruals for estimated sales returns and allowances.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the research and development of semiconductor devices are expensed as incurred, including the cost of prototype wafers and new production mask sets.
INCOME TAXES
The Company accounts for its income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of the assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short and long term investments and accounts receivable.
Cash is deposited with one major bank in the United States while cash equivalents are deposited with two major financial institutions in the United States. The Company attempts to limit its exposure to these investments by placing such investments with several financial institutions and performs periodic evaluations of these institutions.
Short and long term investments are subject to declines in market as well as risk associated with the underlying investment. The Company evaluates its investments from time to time in terms of credit risk since a substantial portion of its assets are now in the form of investments, not all of which are liquid, and may enter into full or partial hedging strategies involving financial derivative instruments to minimize market risk. During fiscal year 2000, the Company entered into a number of "cashless collar" and "covered call" option transactions to partially hedge its holdings in Broadcom Corporation. The Company may enter into other similar transactions in the future.
The Company sells its products to original equipment manufacturers and distributors throughout the world. The Company performs ongoing credit evaluations of its customers and, on occasion, may require letters of credit from its non-US customers. The following table summarizes the revenues from customers, all of which were third parties, in excess of 10% of total net revenues, for fiscal year 2000, 1999 and 1998, respectively:
At March 31, 2000 Customer A accounted for 8% of accounts receivable, net.
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 $53.0 million, $24.0 million, and $48.5 million of net revenues for the years ended March 31, 2000, March 31, 1999 and March 31, 1998, 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"). Refer to Note 10.
NET INCOME (LOSS) PER SHARE
Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options.
Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below:
Due to the Company's net loss from continuing operations in 1999 and 1998, a calculation of EPS assuming dilution is not required for those years. At March 31, 1999 there were 2,741,298 options outstanding to purchase common stock at a weighted average price of $5.37 per share and at March 31, 1998, there were 3,675,431 options outstanding to purchase common stock at a weighted average price of $5.81 per share. The outstanding options at March 31, 1999 and 1998 were excluded from the diluted loss per share computations because their effect would be anti-dilutive.
COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. Total accumulated comprehensive income for fiscal year 2000 was $804.6 million compared to total accumulated comprehensive losses of $27.5 million and $18.6 million for fiscal years 1999 and 1998 respectively. The components of accumulated comprehensive income (loss) are shown in the consolidated statements of shareholders' equity.
SEGMENT REPORTING
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The Company operates in one reportable segment, memory products.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Upon adoption of SFAS No. 133, the Company will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. The Company believes the adoption of this statement will not have a significant effect on the results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company has complied with SAB 101 for all periods presented.
In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation an interpretation of APB Opinion No. 25". This interpretation has provisions that are effective on staggered dates, some of which began after December 15,1998 and others that become effective after June 30, 2000. The adoption of this interpretation is not expected to have a material impact on the financial statements.
NOTE 2. BALANCE SHEET COMPONENTS
SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale securities at March 31, 2000 (in thousands):
LONG-TERM INVESTMENTS
At March 31, 2000, the Company's long term investments were as follows (in thousands):
ACCOUNTS RECEIVABLE
INVENTORIES
PROPERTY AND EQUIPMENT
Depreciation and amortization expense for fiscal years 2000, 1999 and 1998 were $4.4 million, $3.8 million and $3.5 million, respectively.
Property and equipment includes $2.5 million and $4.7 million of assets under capital leases at March 31, 2000 and 1999, respectively. Accumulated depreciation of assets under capital leases totaled $0.7 million and $3.5 million at March 31, 2000 and 1999, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income at March 31, 2000 were as follows:
NOTE 3. INVESTMENT IN CHARTERED SEMICONDUCTOR MANUFACTURING LTD. ("CHARTERED")
In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs."
These shares were subject to a six-month "lock-up", or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, which Alliance decided not to participate in and as a result, the Company's shares are now subject to an additional three-month "lock-up" which expires in August 2000. In June 2000, the underwriter of the secondary offering released the Company from the lock-up, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered. If the Company sells more that 50% of its original holdings in Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Additionally, because of the potential loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can realize its value on its investment in Chartered.
Prior to the fiscal third quarter of fiscal year 2000, the Company recorded its investment in Chartered as a long-term investment using the cost method of accounting. The Company now records its investment as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $89.1 million, which is net of deferred tax of approximately $61.1 million, as part of accumulated other comprehensive income in the stockholder's equity section of the balance sheet.
NOTE 4. INVESTMENT IN UNITED MICROELECTRONICS CORPORATION ("UMC")
In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19.0% of the outstanding shares and 25% of the total wafer capacity. In April 1998, the Company sold 35 million shares of USC to an affiliate of UMC and received approximately US$31.7 million. In connection with the sale, the Company had the right to receive an additional NTD 665 million upon the occurrence of certain potential future events, which included the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, Alliance received approximately NTD 665 million (US$21.5 million) as a result of the merger between USC and UMC, described below.
Subsequent to the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC also made a stock distribution to its employees thereby reducing the Company's ownership in USC to 14.8% of the outstanding shares.
Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights, the board seat, and certain contractual rights, Alliance had participated in both strategic and operating decisions of USC on a routine basis, had rights of approval with respect to major business decisions and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its proportionate share of equity income of USC of $9.5 million, $10.9 million, and $15.5 million, net of tax, respectively.
In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested
approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC and had the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000.
In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000 Alliance Semiconductor owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As a result of the merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment.
During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US$ 3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued approximately $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold.
According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expires in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available-for-sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend.
Subsequent to the completion of the merger the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short term portion of the investments. As the portion of the investment in UMC which is restricted beyond twelve months (approximately 50% of the Company's holdings at March 31, 2000) is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004.
Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported.
Note 5. INVESTMENT IN MAVERICK NETWORKS, INC. / BROADCOM CORPORATION
In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for imbedded memory in a internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000,
the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split.
The Company records its investment in Broadcom as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned approximately 487,522 shares of Broadcom and recorded an additional unrealized gain of approximately $23.4 million, which is net of deferred tax of approximately $16.1 million, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet.
Note 6. ALLIANCE VENTURE MANAGEMENT, LLC
In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds, by allowing them limited participation in the profits of the various investment funds, through the management fees paid by the investment funds.
In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Venture I") and Alliance Ventures II ("Alliance Venture II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts. In February 2000, the Company formed Alliance Ventures III ("Alliance Venture III"), a California limited partnership. The Company, as the sole limited partner, owns 100% of the shares of this partnership. Alliance Venture Management acts as the general partner of this partnership and receives a management fee of 16% of the profits from this partnership for its managerial efforts. Several of the Company's senior management hold a majority of the units of Alliance Venture Management.
After Alliance Ventures I, was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.3 million in 10 companies, and Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $4.4 million in 8 companies, with a total fund allocation of $15 million. As of March 31, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $2 million in one company, with a total fund allocation of $100 million.
Several of these investments are accounted for as the equity method due to the Company's ability to exercise its influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of these venture funds was $368,000 for the year ended March 31, 2000.
Note 7. INVESTMENT IN OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION
In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on a chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. See Note 6. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. As a result of the merger, the Company recognized approximately $69 million pre-tax, non-operating gain, in its fiscal fourth quarter ending March 31, 2000, based on the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date of the merger.
The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned 852,447 shares of Vitesse.
On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock that had been acquired by Alliance Ventures I in exchange for its sale of one million shares of Orologic as follows:
Alliance Ventures Management then immediately distributed the Vitesse shares to its unit holders.
NOTE 8. LONG TERM OBLIGATIONS, LEASES AND COMMITMENTS
OPERATING LEASES
The Company leases its headquarters facility under an operating lease that expires in June 2006. Under the terms of the lease, the Company is required to pay property taxes, insurance and maintenance costs. In addition, the Company also leases sales and design center offices under operating leases, which expire between 2000 and 2007.
Future minimum fiscal rental payments under non-cancelable leases are as follows:
Rent expense for fiscal 2000, 1999, and 1998 was $1,386,000, $635,000, and $484,000, respectively.
CAPITAL LEASES
At March 31, 2000, equipment under capital leases amounted to approximately $2.5 million compared to $4.7 million at March 31, 1999. The original lease terms range from three to five years.
The following is a schedule of future minimum fiscal lease payments under capital leases:
LETTERS OF CREDIT
At March 31, 2000, approximately $2.8 million in standby letters of credit were outstanding and expire through March 30, 2001, secured by restricted cash.
NOTE 9. PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
In addition to the provision (benefit) for taxes noted above, deferred taxes of $ $6.4 million, and $8.3 million for the years ended March 31, 1999 and 1998, respectively, are recorded as part of the equity in income of USC.
Deferred tax assets (liabilities) comprise the following:
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:
Due to the uncertainty of the realization of the deferred tax assets, the Company provided a full valuation allowance on the deferred tax assets at March 31, 1999. In the first quarter of fiscal 2000, when the Company recognized a gain of $51.6 million related to the sale of Maverick Networks to Broadcom Corporation, the Company released the entire $17.8 million valuation allowance and recorded the tax benefit as an offset to income during fiscal 2000. The tax benefit associated with the previous exercises of non-qualified stock options and disqualifying dispositions of incentive stock options reduced taxes currently payable by $3.5 million in fiscal year 2000 and $0 in fiscal years 1999 and 1998.
Note 10. STOCK OPTION PLANS
1992 STOCK OPTION PLAN
In April 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") and reserved 5,625,000 shares of Common Stock for issuance to employees and consultants of the Company. The Board of Directors may terminate the Plan at any time at its discretion. On September 30, 1993, the number of shares of Common Stock reserved for issuance under the Plan was increased to 7,875,000 and on September 14, 1995, the number of shares reserved for issuance under the Plan was increased to 9,000,000. On August 31, 1999, the number of shares reserved for issuance under the Plan was increased by 2,000,000 to 11,000,000. The Option Plan, which has a term of ten years, provides for incentive as well as nonqualified stock options.
Incentive stock options may not be granted at less than 100 percent of the estimated fair value, as determined by the Board of Directors, of the Company's Common Stock at the date of grant and the option term may not exceed 10 years. For holders of more than 10 percent of the total combined voting power of all classes of the Company's stock, options may not be granted at less than 110 percent of the estimated fair value of the Common Stock at the date of grant and the option term may not exceed five years.
DIRECTORS' STOCK OPTION PLAN
On September 30, 1993, the Company adopted its 1993 Directors' Stock Option Plan ("Directors' Plan"), under which 900,000 shares of Common Stock have been reserved for issuance. The Directors' Plan provides for the automatic grant to each non-employee director of the Company (but excluding persons on the Company's Board of Directors in November 1993) of an option to purchase 22,500 shares of Common Stock on the date of such director's election to the Company's Board of Directors. Thereafter, such director will receive an automatic annual grant of an option to purchase 11,250 shares of Common Stock on the date of each annual meeting of the Company's stockholders at which such director is re-elected. The maximum number of shares that may be issued to any one director under this plan is 90,000. Such options will vest ratably over four years from their respective dates of grant.
The following table summarizes grant and stock option activity under the Plan and the Directors' Plan for fiscal years 2000, 1999 and 1998:
As of March 31, 2000, options to purchase approximately 350,037 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 2000, 1999, and 1998 was $8.57, $2.44 and $4.90 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, 2000, and related weighted average exercise price and contractual life information are as follows:
The following assumptions are included in the estimated grant date fair value calculations for stock options:
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Company and its shareholders approved an Employee Stock Purchase Plan ("ESPP"), which allows eligible employees of the Company and its designated subsidiaries to purchase shares of Common Stock through payroll deductions. The ESPP consists of a series of 12-month offering periods composed of two consecutive 6-month purchase periods. The purchase price per share is 85% of the fair market value of the Common Stock, at the date of commencement of the offering period, or at the last day of the respective 6-month purchase period, whichever is lower. Purchases are limited to 10% of an eligible employee's compensation, subject to a maximum annual employee contribution and limited to a $25,000 fair market value. Of the 750,000 shares of Common Stock authorized under the ESPP, 119,765, 171,676, and 96,922 shares were issued during fiscal 2000, 1999, and 1998, respectively.
Compensation costs (included in pro forma net income (loss) and pro forma net income (loss) per share amounts) for the grant date fair value, as defined by SFAS 123, of the purchase rights granted under the ESPP, were calculated using the Black-Scholes model. The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the ESPP;
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 2000, 1999 and 1998 was $2.24, $2.55 and $3.04 per share, respectively.
PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME (LOSS) PER SHARE
Had the Company recorded compensation expense based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under the Plan, the Directors' Plan and its ESPP, the Company's pro forma net income (loss) and pro forma net income (loss) per share for the years ended March 31, 2000, 1999 and 1998, would have been as follows (in thousands, except per share data):
NOTE 11. 401(K) SALARY SAVINGS PLAN
Effective May 1992, the Company adopted the Salary Savings Plan (the "Savings Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby eligible employees may contribute up to 15% of their earnings, not to exceed amounts allowed under the Code. Effective April 1999, the Company agreed to match up to 50% of the first 6% of the employee contribution to a maximum of two thousand dollars annually per employee. The Company's matching contribution vests over five years. In fiscal year 2000 the Company contributed approximately $131,000. There were no contributions made in fiscal 1999 and 1998.
NOTE 12. LEGAL MATTERS
In March 1996, a putative class action lawsuit was filed against the Company and certain of its officers and directors and others in the United States District Court for the Northern District of California, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. The complaint alleged that the Company, N.D. Reddy and C.N. Reddy also had liability under Section 20(a) of the Exchange Act. The complaint, brought by an individual who claimed to have purchased 100 shares of the Company's common stock on November 2, 1995, was putatively brought on behalf of a class of persons who purchased the Company's common stock between July 11, 1995 and December 29, 1995. In April 1997, the Court dismissed the complaint, with leave to file an amended complaint. In June 1997, plaintiff filed an amended complaint against the Company and certain of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to dismiss the amended complaint. In March 1998, the court ruled in defendants' favor as to all claims but one, and dismissed all but one claim with prejudice. In April 1998, defendants requested reconsideration of the ruling as to the one claim not dismissed. In June 1998, the parties stipulated to dismiss the remaining claim without prejudice, on the condition that in the event the dismissal with prejudice of the other claims is affirmed in its entirety, such remaining claim shall be deemed dismissed with prejudice. In June 1998, the court entered judgment dismissing the case pursuant to the parties' stipulation. Plaintiffs have appealed the court's ruling dismissing the claims and the parties have filed appeal briefs. The Company intends to continue to defend vigorously against any claims asserted against it, and believes it has meritorious defenses. Due to the inherent uncertainty of litigation, the Company is not able to reasonably estimate the potential losses, if any, that may be incurred in relation to this litigation.
In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a wholly owned subsidiary of the Company, was served with a complaint filed in Federal Court alleging that ASIC had 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. In April 1996, the Court allowed AMD to expand its claims to include several new flash products which had been recently announced by the Company. In January and February 2000, both parties filed for motions for summary judgment. 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. A trial date is currently set for September 2000. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations.
In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. The appeal brief and reply briefs have been filed and the parties are awaiting oral arguments before the Court in June 2000.
NOTE 13. ANTIDUMPING PROCEEDING (TAIWAN-MANUFACTURED SRAMS AND DRAMS)
In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated
in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999 the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination will be transmitted to the CIT on June 26, 2000 for consideration. The decision of the CIT can be further appealed to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. In April 2001, the Company will have an opportunity to request a review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties, if any, owed on imports from April 2000 through March 2001 will remain undetermined until the conclusion of the review in early 2002. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. At March 31, 2000, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs.
In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that DRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing DRAMs was materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requested the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily determined that there was a reasonable indication that the imports of the products under investigation were injuring the United States industry. In May 1999 the DOC issued a preliminary affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after May 28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the preliminary "all others" rate) of the entered value of such DRAMs, an antidumping margin calculated by weight-averaging the antidumping margins of individually investigated respondent companies. The Company posted a bond to cover deposits on such entries. In October 1999 the DOC issued a final affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on December 8, 1999, the ITC issued a final negative determination of injury. Consequently, the investigation was terminated, the suspension of liquidation lifted, and the bond posted in September 1999 released. In January 2000, Micron filed an appeal in the CIT challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs were not causing material injury to the U.S. industry. On March 21, 2000 the Appeal of the ITC decision was dismissed by the CIT.
NOTE 14. RELATED PARTY TRANSACTIONS
On May 18, 1998, the Company provided loans to two of its officers and a director aggregating $1,735,000. The officer loans were used for the payment of taxes resulting from the gain on the exercise of non-qualified stock options. The loan to a director was used for the exercise of stock options. Under these loans, both principal and
accrued interest were due on December 31, 1999, with accrued interest at rates ranging from 5.50% to 5.58% per annum. The loan to the director was paid at December 31, 1999. The officer loans were extended to December 31, 2000. As of March 31, 2000, $1,615,000 was outstanding under these loans with accrued interest of $163,000.
In fiscal year 2000, the Company made wafer purchases from USC of approximately $15.1 million prior to the merger with UMC in January 2000. After the completion of the merger in January 2000, the Company purchased $1.5 million of wafers from UMC. In fiscal year 1999, the Company made wafer purchases $8.8 million, from USC.
NOTE 15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment, memory products. The memory products segment includes; Static Random Access Memories ("SRAMs"), Dynamic Random Access Memories ("DRAMs"), and Flash Memories ("Flash").
The following illustrates revenues by geographic locations. Revenues are attributed to countries based on the customer's location.
International net revenues in fiscal 2000 increased by 121% over fiscal 1999. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest increase in international net revenues was to customers in Europe, which increased approximately 195% over fiscal year 1999. The increase was due to an overall increase in product demand and higher average selling prices, in the respective areas. International revenues declined 51% from fiscal 1998 to fiscal 1999. The largest decrease in international net revenues was to customers in Taiwan, which decreased 76%. This decrease was due to an overall decrease in product demand and lower selling prices in the respective areas.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In June 2000, PMC-Sierra, Inc. ("PMC"), announced that it agreed to acquire Malleable Technologies, Inc. ("Malleable"). According to the terms of the proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC does not already own. In connection with the proposed merger, Alliance Ventures I will receive approximately 79,000 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company will report a gain based on the closing share price of PMC on the date of the merger. Based on the closing share price of PMC on June 14, 2000, the estimated pretax gain from this transaction is approximately $11 million. There is no assurance that this acquisition will be completed or that the realized gain amount will be equal or exceed the reported gain amount on the closing date of the merger.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Alliance Semiconductor Corporation:
Our audits of the consolidated financial statements referred to in our report dated April 25, 2000, appearing in this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(2)(I) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California April 25, 2000
Financial Statements of United Semiconductor Corporation for the Fiscal Year Ended December 31, 1998 and December 31, 1997.
UNITED SEMICONDUCTOR CORPORATION FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
2/F No. 11 Innovation Rd., 1 Science-Based Industrial Park Hsinchu, Taiwan, Republic of China Tel:(03) 578-0205 Fax:(03) 577-7985
January 22, 1999 (99)B.L36P4065
To the Board of Directors of United Semiconductor Corporation
We have examined the accompanying balance sheets of United Semiconductor Corporation as of December 31, 1998 and 1997, 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 in the United States 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 financial statements examined by us present fairly the financial position of United Semiconductor Corporation as of December 31, 1998 and 1997, 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/ PRICEWATERHOUSECOOPERS
~1~
~2~
~3~
~4~
~5~
~6~
UNITED SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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, 1998, the paid-in capital is $13,367,809. 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; and
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 readily convertible to known amounts of cash and with maturity dates that do not present significant 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.
~7~
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.
Long-term investments
A. If the investee company is listed and the Company owns less than 20% of the outstanding shares and has no significant influence on operational decisions of the listed company, such investment is accounted for by the lower of cost or market value method. The unrealized loss resulting from the decline in market value of such investment is deducted from stockholders' equity. The Company's investment in a company which is not listed is accounted for under the cost method.
B. Investment income or loss from investments in both listed and unlisted companies is accounted for under equity method provided that the Company owns over 20% of the outstanding shares or has significant influence on operational decisions of the listed and unlisted companies.
C. For long-term investments in which the Company owns more than 50% of the subsidiary, consolidated financial statements are prepared, if the total assets and the operating income of the subsidiary are less than 10% of the respective nonconsolidated total assets and income of the Company, the subsidiary's financial statements are not consolidated and instead are accounted for using the equity method. Irrespective of the above test, when the total combined assets or operating income of all such nonconsolidated subsidiaries constitute more than 30% of the Company's nonconsolidated total assets or income, then each individual subsidiary with total assets or operating income greater than 3% of the Company's respective nonconsolidated total assets and income is included in the consolidation.
D. In evaluation of overseas long-term investment, the cumulative translation adjustment derived form the investee's foreign currency financial statements is treated as adjusted item of the Company's stockholders' equity account.
Property, plant and equipment
A. Property, plant and equipment are stated at cost. Interest incurred on loans used to finance the construction of property and plant is capitalized and depreciated accordingly.
~8~
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 assets
A. Technology knowhow was provided by a major shareholder as part of paid-in capital. The asset is amortized over five years on the straight-line method starting from the date of operation.
B. Royalties are stated at cost and amortized on a straight-line basis over the contract period.
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
A. The Company has a non-contributory and funded defined benefit retirement plan covering all its regular employees.
B. 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 and from investment tax credits. 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 years' income tax liabilities are included in the current year's income tax expense.
3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES None.
4. CONTENTS OF SIGNIFICANT ACCOUNTS
~9~
(1) CASH AND CASH EQUIVALENTS
December 31 --------------------------- 1998 1997 ---------- ---------- Cash: Cash on hand $ 2,355 $ 1,817 Demand accounts 387,694 58,655 Checking accounts 169,402 16,607 Time deposits 6,054,016 5,342,348 ---------- ---------- 6,613,467 5,419,427
Cash equivalents: Bonds with repurchase agreement 903,440 49,800 ---------- ---------- $7,516,907 $5,469,227 ========== ==========
(2) MARKETABLE SECURITIES
December 31 --------------------------- 1998 1997 ---------- ---------- Mutual funds $ 199,040 $ 251,393 Listed equity securities stocks 2,939,353 2,939,353 ---------- ---------- $3,138,393 $3,190,746 ========== ==========
(3) ACCOUNTS RECEIVABLE - NET December 31 ------------------------ 1998 1997 --------- --------- Accounts receivable -- third parties $ 863,417 $ 959,159 Less: Allowance for doubtful accounts (20,982) (21,839) Allowance for sales returns and discounts (64,036) -- --------- --------- $ 778,399 $ 937,320 ========= =========
(4) INVENTORIES December 31 ------------------------ 1997 1998 --------- --------- Raw materials, supplies and spare parts $ 88,653 $ 226,426 Work in process 445,414 315,274 Finished goods 171,737 58,189 --------- --------- 705,804 599,889
Less: Allowance for loss on obsolescence (40,460) (88,403) --------- --------- $ 665,344 $ 511,486 ========= =========
~10~
Interest expense amounting to $118,745 and $24,321 were capitalized in 1998 and 1997, respectively.
~11~
(7) SHORT-TERM LOANS
December 31 --------------------------------- 1998 1997 ------------- ------------- Unsecured loans $ 781,944 $ 1,911,632 ============= ============= Annual interest rates 0.73% - 8.22% 1.25% - 7.66% ============= =============
(8) LONG-TERM LOANS
December 31 ------------------------------------- 1998 1997 ------------- ------------- Long-term loans $ 8,613,047 $ 5,847,269 Less: Current portion (1,571,458) (656,744) ------------- ------------- $ 7,041,589 $ 5,190,525 ============= ============= Annual interest rates 1.25% - 7.60% 1.31% - 7.20% ============= =============
(9) 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 15 years and below and one point per year for service years over 15 years). Each employee is limited up to 45 points. During 1998 and 1997, the Company recognized pension cost amounting to $22,262 and $17,793, respectively. The balances of the Company's employees' retirement fund in Central Trust of China was $18,068 and $9,270 at December 31, 1998 and 1997, respectively.
B. Based on actuarial assumptions for the years of 1998 and 1997, both the discount rate and expected rate of return on plan asset are 6.25% and 6.5%, respectively and the rates of compensation increase are both 8%. The unrecognized net obligation at transition is amortized equally over 15 years. The funded status of pension plan is listed as follows:
~12~
December 31 ---------------------- 1998 1997 -------- -------- Vested benefit obligation $ -- $ -- Non-vested benefit obligation (11,417) (4,947) -------- -------- Accumulated benefit obligation (11,417) (4,947) Effect on projected salary increase (57,082) (25,388) -------- -------- Projected benefit obligation (68,499) (30,335) Market-related value of plan assets 18,068 8,638 -------- -------- Projected benefit obligation exceeds plan asset (50,431) (21,697) Unrecognized net obligation at transition 260 281 Unrecognized pension gain or loss 26,647 11,360 -------- -------- Accrued pension liability $(23,524) $(10,056) ======== ========
(10) COMMON STOCK
A. As of December 31, 1998, the Company's authorized capital was $23,000,000, representing 2,300,000 thousand shares, with par value of NT$10. The total issued and outstanding capital at December 31, 1998 and 1997 were $13,367,809 and $10,000,000, respectively.
B. Based on the resolution of the shareholders' meeting on May 26, 1998, the Company issued new shares of 336,781 thousand shares from the capitalization of retained earnings of $3,000,000 and employees' bonus of $367,809. The Company has completed the amendment procedures for registration.
(11) 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 the 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 supervisor's renumeration;
(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
~13~
(7) distributing the remaining amount in accordance with the resolution of the board of directors and stockholders.
(12) INCOME TAX
A. Income tax receivable at December 31, 1998 and 1997 was derived as follows:
1998 1997 -------- -------- Income tax expense (benefit) $ 69,803 $(84,057) Net effect of the change in deferred income tax assets and liabilities (54,187) 89,634 Adjustment of prior year's income tax expense (3,101) -- Withholding income tax (34,994) (51,259) Tax on interest which is subject to separate withholding income tax (1,744) (242) -------- -------- Income tax receivable (shown in other current assets) $(24,223) $(45,924) ======== ========
B. Deferred income tax assets and liabilities as of December 31, 1998 and 1997 were as follows
December 31 --------------------------- 1998 1997 ----------- ----------- Deferred income tax assets -- current $ 43,335 $ 228,270 Deferred income tax liabilities -- current (4,271) -- ----------- ----------- 39,064 228,270 ----------- ----------- Deferred income tax assets -- noncurrent 1,526,536 1,262,960 Deferred income tax liabilities -- noncurrent (470,012) (611,435)
Valuation allowance for deferred income tax assets -- noncurrent (818,403) (548,423) ----------- ----------- 238,121 103,102 ----------- ----------- $ 277,185 $ 331,372 =========== ===========
~14~
D. The Company's income tax return for 1996 has been assessed and approved by the Tax Authority.
E. Pursuant to the "Statute For The Establishment and Administration of Science-Based Industrial Park", the Company was granted several periods of tax holidays with respect to income derived from approved investments. The tax holidays will be expired on December, 2001.
F. As of December 31, 1998, the unused investment tax credits amounting to $1,499,500 resulting from the acquisition of equipment and expenditures on research and development will expire on December 31, 2002.
G. As of December 31, 1998, the Company's deductible credit account balance for shareholders' income tax is $36,733. The ending balance of unappropriated earnings amounting to $4,022,045, of which $3,748,549 came from the year of 1998 and $273,496 came from and before the years of 1997. The estimated ratio of deductible tax credit for the appropriation of 1998's earnings is 0.33%.
(13) EARNINGS PER SHARE
1998 1997 ----------- ----------- Net income $ 3,748,549 $ 4,030,215 =========== =========== Weighted average outstanding common stock (Expressed in thousand shares) 1,336,781 1,000,000 =========== =========== Retroactively adjusted weighted average outstanding common stock (Expressed in thousand shares) 1,336,781 1,336,781 =========== =========== Earnings per share (Expressed in New Taiwan dollars) $ 2.80 $ 4.03 =========== =========== Retroactively adjusted weighted average earnings per share $ 2.80 $ 3.01 =========== ===========
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. (UMC) The major investor of the Company United Integrated Circuits Corporation Common board chairman United Silicon Incorporated Common board chairman Utek Semiconductor Inc. Common board chairman AMIC Technology, Incorporated The affiliate of UMC Faraday Technology Corporation Common major investor NOVATEK Microelectronics Corp. Common major investor Integrated Technology Express Common major investor MediaTek Incorporation Common major investor Industrial Bank of Taiwan The Company is the promoter Chiao Tung Bank The Company's chairman is a board member of the Bank S3 Inc. A director of the Company S3 International Ltd. 100% investee of S3 Inc. ALLIANCE Semiconductor Corp. (Alliance) A director of the Company UMC-USA The investee of the Company
~15~
(2) Significant Related Party Transactions
a. Sales
1998 1997 ------------------------- ------------------------- Percentage Percentage Amount of net sales Amount of net sales ---------- ------------ ---------- ------------ United Microelectronics Co., Ltd. $1,562,443 13% $2,503,897 26% United Integrated Circuit Co., Ltd. 229,583 2% 302,866 3% S3 International Ltd. 1,456,778 12% -- -- Alliance 271,453 2% -- -- Others 108,098 1% 425,071 4% ---------- ---------- ---------- ---------- $3,628,355 30% $3,231,834 33% ========== ========== ========== ==========
The above sales are dealt with in the ordinary course of business similar to those with other companies. The actual collection period is appoximately two months.
b. Purchases
1998 1997 --------------------- -------------------- Percentage Percentage of net of net Amount purchases Amount purchases -------- --------- -------- --------- United Microelectronics Co., Ltd. $ 69,942 3% $ 15,912 2% United Silicon Incorporated 17,115 1% -- -- United Integrated Circuit Co., Ltd. 19,060 1% -- -- -------- -------- -------- -------- $106,117 5% $ 15,912 2% ======== ======== ======== ========
The above purchases are dealt with in the ordinary course of business similar to those with other companies and are payable after two months from the date of transaction entries.
c. Notes receivable
1998 1997 ------------------- ------------------- Percentage Percentage of notes of notes Amount receivable Amount receivable ------ ---------- ------ ---------- United Microelectronics Co., Ltd. $ -- -- $ 781 100% AMIC Technology Incorporated 6,736 79% -- -- Faraday Technology Corporation 812 10% -- -- Integrated Technology Express 804 9% -- -- ------ ------ ------ ------ 8,352 98% $ 781 100% ====== ====== ====== ======
~16~
e. Notes payable
1998 1997 ---------------- ------------------- Percentage Percentage of notes of notes Amount payable Amount payable ------ ------- ------ ------- United Microelectronics Co., Ltd. $ -- -- $25,992 21% ====== == ======= =======
f. Accounts payable
1998 1997 ------------------- ------------------- Percentage Percentage of accounts of accounts Amount payable Amount payable ------ ------- ------ ------- United Microelectronics Co., Ltd. $20,776 4% $ 9,428 2% United Integrated Circuit Co., Ltd. 1,281 -- 12,057 2% United Silicon Incorporated 1,577 1% -- -- ------- ------- ------- ------- $23,634 5% $21,485 4% ======= ======= ======= =======
~17~
g. Accrued expenses
1998 1997 -------------------- -------------------- Percentage Percentage of accrued of accrued Amount expenses Amount expenses -------- -------- -------- -------- United Microelectronics Co., Ltd. $190,761 24% $ 77,387 13% Others 197 -- -- -- -------- -------- -------- -------- $190,958 24% $ 77,387 13% ======== ======== ======== ========
h. Property transaction
1998: None.
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.
~18~
7. COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company's unused letters of credit for import of machinery were approximately USD25,510 thousand dollars, JPY3,516,992 thousand dollars, and DEMl20 thousand dollars at December 31, 1998.
b. The Company has signed several contracts for the purchase of equipment amounting to USD1,204,098 thousand dollars, TPY91,153,936 thousand dollars, and DEM703 thousand dollars. As of December 31, 1998, the amount of unrecorded outstanding obligations under these contracts are USD1,101,281 thousand dollars, JPY77,117,921 thousand dollars, and DEM120 thousand dollars.
c. On September 24, 1997, the Department of Commerce (DOC) of the United States of America (USA) made a preliminary determination that Static Random Access Memory (SRAM) manufactured in Taiwan are being sold at less than fair market value, i.e. dumped prices. In March, 1998, the DOC issued its final determination, setting the duty rate at 41.75% for "all others" not named as direct participants in the investigation (such as customers who used the Company to fabricate SRAM). Management believes that this final ruling of the case will not have a material adverse effect on the Company's financial position because the volume of SRAM products exported by the Company to the USA is not significant.
~19~
d. On December 7, 1998, the International Trade Commission (ITC) of the USA issued a statement to the DOC that there was a reasonable indication that the U.S. industry is suffering a material injury as a result of Dynamic Random Access Memory (DRAM), which are manufactured in Taiwan and being sold at less than fair market value in the USA. Based on the precedent set in the SRAM investigation described above, the Company expects that foundry customers who were not participants in the investigation will also be subject to the "all other" rate with respect to DRAM. Management believes that the final outcome of the investigation will not have a material adverse effect to the Company's financial position because the Company's volume of export sales of DRAM to the USA is not significant.
e. A number of third parties hold patents in the area of semiconductor processing, and some have notified the Company demanding that the Company obtain a license for various semiconductor fabrication techniques and circuit designs. The third parties involved include Texas Instruments, EMI, Intel, Chou H. Li, NEC, and Sanyo. Management has indicated a willingness to obtain licenses wherever required and necessary to continue its business.
8. COMPARATIVE FIGURES RECLASSIFICATION
Certain accounts in the 1997 financial statements have been reclassified to conform with the presentation adopted for the 1998 financial statements.
~20~