LSCC

Business Context and Reporting Period

Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended September 30, 1995 (the second quarter of fiscal 1996). The company designs and sells programmable logic devices (PLDs), primarily GAL products for the low-density market and ispLSI/pLSI families for the high-density market. The company does not manufacture its own wafers, relying on Seiko Epson and a new joint venture with United Microelectronics Corporation (UMC) for production.

Key Financial Metrics

Liquidity and Balance Sheet (as of Sept 30, 1995):

• Cash and Cash Equivalents: $26.5 million
• Short-term Investments: $86.1 million
• Total Current Assets: $177.8 million
• Total Current Liabilities: $39.8 million
• Wafer Supply Advance: $24.7 million (decreased from $31.3 million)
• Debt: No long-term debt reported; an unused $10 million unsecured demand bank credit facility is available.

Cash Flow (Six Months Ended Sept 30, 1995):

• Operating Cash Flow: $20.5 million provided
• Investing Cash Flow: $11.4 million used (primarily capital expenditures and short-term investments)
• Financing Cash Flow: $9.6 million provided (stock issuance)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 41% in Q2 and 39% for the six-month period compared to the prior year, driven by sales of new high-density products.
• Expense Increases: R&D expenses rose 20% and SG&A expenses rose 27% year-over-year due to new product development, sales force expansion, and higher commissions.
• Margin Compression: Gross margin percentage declined slightly (58.5% vs 59.5% in Q2) due to higher period costs associated with high-density product production, despite improved capacity utilization.
• Inventory Build: Inventories increased 49% to $21.1 million to support higher revenue levels and wafer receipt timing.
• International Sales: International revenue as a percentage of total revenue increased to 49% in Q2 FY1996 from 45% in the prior year.

Outlook, Risks, and Contingencies

Management Commentary and Strategy: Management expects continued revenue growth dependent on new product introductions and market acceptance. The company is investing heavily in R&D to maintain product leadership. A proposed public offering of up to 2,875,000 shares was filed on Form S-3 in October 1995.

Wafer Supply Risks: The company relies entirely on third-party wafer manufacturers (Seiko Epson and UMC). While current commitments are adequate for fiscal 1996, there are uncertainties regarding supply levels for fiscal 1997 due to industry-wide capacity constraints. A significant interruption in supply would materially adversely affect operations.

Intellectual Property: The company received a letter from a competitor alleging patent infringement regarding product packaging. While a license was offered, there is no assurance terms will be favorable. Management believes the outcome will not have a material adverse effect.

Currency Risk: Wafer purchases from Seiko Epson are denominated in Japanese yen. Significant fluctuations in the dollar-yen exchange rate could materially impact results.

Contingencies: The company agreed to invest $60 million in a joint venture with UMC to build a semiconductor facility in Taiwan, with production expected to begin in Q1 1996.

Investor Verification Checklist

• Verify the status of the proposed $60 million joint venture investment with UMC and the timeline for volume production.
• Confirm the adequacy of wafer supply commitments from Seiko Epson and UMC for fiscal 1997 given industry capacity constraints.
• Monitor the resolution of the patent infringement claim regarding product packaging and potential licensing costs.
• Track the success of the proposed Form S-3 stock offering filed in October 1995.
• Assess the impact of Japanese yen exchange rate fluctuations on future cost of goods sold.