-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HiLapbJcHzPQqfFE9uEc1Av6Covc8waGaZE8Y255fex+0T2x+adiXFJPwh+5MUf4 TUN1C3TfsHLvWo3nXdtgfQ== 0001047469-99-033280.txt : 19990823 0001047469-99-033280.hdr.sgml : 19990823 ACCESSION NUMBER: 0001047469-99-033280 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990615 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LATTICE SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000855658 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 930835214 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-18032 FILM NUMBER: 99697183 BUSINESS ADDRESS: STREET 1: 5555 NE MOORE COURT CITY: HILLSBORO STATE: OR ZIP: 97124-6421 BUSINESS PHONE: 5032688000 MAIL ADDRESS: STREET 1: 5555 NE MOORE COURT CITY: HILLSBORO STATE: OR ZIP: 97124 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (AMENDMENT NO. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 JUNE 15, 1999 ------------- Date of Report (Date of earliest event reported) LATTICE SEMICONDUCTOR CORPORATION -------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 000-18032 93-0835214 ---------------------- -------------------- ---------------------- (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.) 5555 NE MOORE COURT HILLSBORO, OR 97124-6421 ------------------------ (Address of principal executive offices) (503) 268-8000 -------------- (Registrant's telephone number, including area code) AMENDMENT NO. 1 The undersigned Registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report on Form 8-K, originally filed with the Securities Exchange Commission on June 25, 1999, reporting the acquisition by Registrant from Advanced Micro Devices, Inc., a Delaware Corporation, of all of the outstanding capital stock of Vantis Corporation, a Delaware Corporation, and the wholly-owned subsidiaries of Vantis, as set forth in the pages attached hereto: ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On June 15, 1999, Lattice Semiconductor Corporation, a Delaware Corporation ("Lattice") and the registrant herein, purchased all of the outstanding capital stock, $.01 par value of Vantis Corporation, a Delaware corporation, ("Vantis") from Advanced Micro Devices, Inc., a Delaware corporation ("AMD"), for an aggregate purchase price of $500,080,000. The acquisition was made pursuant a Stock Purchase Agreement entered into between Lattice and AMD on April 21, 1999. Following the acquisition, Vantis is now a wholly owned subsidiary of Lattice. The purchase price for the shares of Vantis was determined by arms'-length negotiation between Lattice and Advanced Micro Devices, and was funded in part with cash reserves held by Lattice, and in part with the proceeds of borrowings from ABN AMRO Bank, N.V., as administrative agent for a syndicate of banks. The ABN AMRO credit facilities consist of a $60 million three-year revolving credit facility, and a $220 million three-year term loan. Aggregate borrowings from the credit facilities for the acquisition were approximately $253,000,000 as of June 15, 1999. For a more complete description of the terms of the acquisition of Vantis please refer to the Stock Purchase Agreement, which is incorporated by reference as Exhibit 2.1, to our Current Report on Form 8-K, dated April 21, 1999. 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired. The required financial statements of the business acquired are set forth below. 3 Vantis Corporation Index to Consolidated Financial Statements Years ended December 29, 1996, December 28, 1997, and December 27, 1998
page ---- Report of Independent Auditors 5 Consolidated Financial Statements Consolidated Balance Sheets 6 Consolidated Statements of Income 7 Consolidated Statements of Stockholder's Equity and Division Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 10
4 Report of Independent Auditors The Board of Directors and Stockholder Vantis Corporation We have audited the accompanying consolidated balance sheets of Vantis Corporation as of December 28, 1997 and December 27, 1998, and the related consolidated statements of income, stockholder's equity and division equity, and cash flows for each of the three years in the period ended December 27, 1998. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vantis Corporation at December 28, 1997 and December 27, 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 27, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California February 8, 1999 5 Vantis Corporation Consolidated Balance Sheets
DECEMBER 28, DECEMBER 27, 1997 1998 ------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents $ 39,638 $ 25,053 Short-term investments 32,500 48,533 Accounts receivable, net of allowance for doubtful accounts of $400 in 1997 and $605 in 1998 12,512 26,947 Inventories: Work-in-process 7,078 6,760 Finished goods 4,219 3,029 ------------------------------------------- 11,297 9,789 Deferred income taxes 17,345 15,819 Prepaid expenses and other current assets 1,755 676 ------------------------------------------- Total current assets 115,047 126,817 Equipment and furniture 31,628 33,710 Accumulated depreciation (24,281) (27,436) ------------------------------------------- 7,347 6,274 Other assets 1,340 1,789 ------------------------------------------- Total assets $123,734 $134,880 ------------------------------------------- ------------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Payable to AMD (SEE NOTE 10) $ 56,608 $ 41,531 Accrued compensation and benefits 2,549 3,623 Accrued liabilities 678 5,596 Income tax payable (SEE NOTE 5) 3,990 1,666 Deferred income on shipment to distributors 21,902 27,425 ------------------------------------------- Total current liabilities 85,727 79,841 Deferred income taxes 265 71 Commitments and contingencies Stockholder's equity: Common stock, $0.01 par value: Authorized shares - 150,000,000 Issued and outstanding - 100,000,000 in 1997 and 1998 1,000 1,000 Capital in excess of par value 32,448 32,448 Retained earnings 4,294 21,506 Accumulated other comprehensive income - 14 ------------------------------------------- Total stockholder's equity 37,742 54,968 ------------------------------------------- Total liabilities and stockholder's equity $123,734 $134,880 ------------------------------------------- -------------------------------------------
SEE ACCOMPANYING NOTES. 6 Vantis Corporation Consolidated Statements of Income
YEARS ENDED DECEMBER 29, DECEMBER 28, DECEMBER 27, 1996 1997 1998 ----------------------------------------------------------------- (IN THOUSANDS) Net sales $248,094 $243,099 $204,997 Expenses: (SEE NOTE 10, REGARDING RELATED PARTY TRANSACTIONS WITH AMD) Cost of sales 134,942 125,736 101,442 Research and development 46,375 30,848 35,616 Marketing, general, and administrative 49,817 49,762 46,339 ----------------------------------------------------------------- 231,134 206,346 183,397 ----------------------------------------------------------------- Operating income 16,960 36,753 21,600 Interest and other, net - 516 4,419 ----------------------------------------------------------------- Income before income taxes 16,960 37,269 26,019 Income taxes 5,757 13,096 8,807 ----------------------------------------------------------------- Net income $ 11,203 $ 24,173 $ 17,212 ----------------------------------------------------------------- ----------------------------------------------------------------- Net income per basic and diluted share $ 0.17 --------------------- Common shares outstanding - basic and diluted 100,000 --------------------- ---------------------
SEE ACCOMPANYING NOTES. 7 Vantis Corporation Consolidated Statements of Stockholder's Equity and Division Equity
COMMON STOCK CAPITAL IN OTHER TOTAL DIVISION --------------------- EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDER'S EQUITY SHARES AMOUNT PAR VALUE EARNINGS INCOME EQUITY -------------------------------------------------------------------------------------------------- (IN THOUSANDS) Balance at December 31, 1995 $ 12,734 - $ - $ - $ - $ - $ - Net income and comprehensive income 11,203 - - - - - - Net financing provided from AMD 4,079 - - - - - - -------------------------------------------------------------------------------------------------- Balance at December 29, 1996 28,016 - - - - - - Net income and comprehensive income 19,879 - - - 4,294 - 4,294 Net financing provided to AMD (14,447) - - - - - - Issuance of common stock in exchange for transfer of assets from AMD (33,448) 100,000 1,000 32,448 - - 33,448 -------------------------------------------------------------------------------------------------- Balance at December 28, 1997 - 100,000 1,000 32,448 4,294 - 37,742 Net income - - - - 17,212 - 17,212 Other comprehensive income, net of tax: Unrealized gains on securities - - - - - 14 14 --------------- Comprehensive income - - - - - - 17,226 -------------------------------------------------------------------------------------------------- Balance at December 27, 1998 $ - 100,000 $1,000 $32,448 $21,506 $14 $54,968 -------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 8 Vantis Corporation Consolidated Statements of Cash Flows
YEARS ENDED ------------------------------------------------------------------------ DECEMBER 29, DECEMBER 28, DECEMBER 27, 1996 1997 1998 ------------------------------------------------------------------------ (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 11,203 $ 24,173 $ 17,212 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,721 3,888 3,802 Net loss on disposal of equipment and furniture - 2 226 Net decrease (increase) in deferred income taxes (25) (1,741) 1,332 Changes in operating assets and liabilities: Accounts receivable 5,312 12,600 (14,435) Inventories 1,071 (1,535) 1,508 Prepaid expenses, other current assets, and other assets (660) (1,548) 166 Payable to AMD 366 55,609 (15,077) Accrued compensation and benefits (1,015) 1,667 1,074 Accrued liabilities 251 (2) 4,918 Income tax payable (18,042) (1,792) (2,324) Deferred income on shipment to distributors (1,989) (2,982) 5,523 ------------------------------------------------------------------------ Net cash provided by operating activities 193 88,339 3,925 INVESTING ACTIVITIES Purchase of equipment and furniture (4,272) (1,754) (2,491) Maturities (purchase) of available-for-sale securities, net - (32,500) (16,019) ------------------------------------------------------------------------ Net cash used in investing activities (4,272) (34,254) (18,510) FINANCING ACTIVITIES Net financing provided (to) from AMD 4,079 (14,447) - ------------------------------------------------------------------------ Net cash provided by (used in) financing activities 4,079 (14,447) - ------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents - 39,638 (14,585) Cash and cash equivalents at beginning of year - - 39,638 ------------------------------------------------------------------------ Cash and cash equivalents at end of year $ - $ 39,638 $ 25,053 ------------------------------------------------------------------------ ------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ - $ - $ 9,808 ------------------------------------------------------------------------ ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 9 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 1. BACKGROUND AND BASIS OF PRESENTATION BACKGROUND In July 1997, Vantis Corporation (Vantis or the Company) was formed to separate the programmable logic device (PLD) division of Advanced Micro Devices, Inc. (AMD) from AMD's other operations. The PLD division of AMD was initially created as a result of the merger of Monolithic Memories, Inc. into AMD in 1988. On September 29, 1997, AMD transferred substantially all of the assets and liabilities and all of the operations of the PLD division of AMD excluding bipolar PLDs (the Business) to the Company. A summary of the assets transferred and liabilities assumed is as follows (IN THOUSANDS): Cash transferred from AMD $ 35,312 Other assets transferred from AMD 34,874 Liabilities assumed by Vantis (36,738) -------- Net equity $ 33,448 -------- --------
The Company is a wholly owned subsidiary of AMD as of December 27, 1998. The Company currently relies upon AMD for substantially all of its manufacturing, assembly, test, mark, and pack activities under agreements entered into between the Company and AMD in the fourth quarter of 1997. In addition, the Company receives administrative services from AMD (SEE NOTE 10). BASIS OF PRESENTATION The accompanying consolidated financial statements include the Company's operations as a division of AMD for the period from December 30, 1996 to September 28, 1997. The consolidated financial statements through September 28, 1997 have been presented as if the Company had existed as an entity separate from AMD. The consolidated balance sheet at December 29, 1996 has been prepared using the historical basis of accounting and included all of the assets and liabilities specifically identifiable to the Company, and for certain liabilities that are not specifically identifiable, estimates have been used to allocate a portion of AMD's liabilities to the Company. The statements of income, stockholder's equity and division equity, and cash flows for the year ended December 29, 1996 and through the period ended September 28, 1997 include all sales and expenses attributable to the Company, including certain corporate administration, finance, and management costs which have been allocated to the Company based on certain management assumptions (SEE NOTE 10). Prior to September 29, 1997, cash management for the Company was performed by AMD on a centralized basis. Accordingly, the Company had no cash and cash equivalents or investments in 1996. 10 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 1. BACKGROUND AND BASIS OF PRESENTATION (CONTINUED) BASIS OF PRESENTATION (CONTINUED) Beginning September 29, 1997, the date AMD transferred the Business to the Company, the corporate accounting systems of AMD tracked all financial transactions of the Company separately from those of AMD. Financial results subsequent to that date include the accounts and operations of the Company as a stand-alone company pursuant to certain agreements between the Company and AMD (SEE NOTE 10). In connection with the transfer of the Business to the Company by AMD, the Company issued 1,000 shares of the Company's common stock at $0.01 par value to AMD. On October 14, 1997, the Company effected a stock split of 100,000 shares of common stock for each share then outstanding, resulting in total capitalization of 100,000,000 shares of common stock at $0.01 par value. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR The Company reports on a 52- or 53-week fiscal year ending on the last Sunday in December, which resulted in a 52-week fiscal year for 1996, 1997, and 1998, that ended on December 29, December 28, and December 27, respectively. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. CASH EQUIVALENTS Cash equivalents consist of financial instruments that are readily convertible to cash and have original maturities of three months or less at the time of acquisition. 11 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS The Company invests its excess cash in high-quality instruments. All of the Company's marketable investments are classified as available-for-sale. Available-for-sale securities are reported at fair market value with the related unrealized gains and losses, net of tax, included as a component of accumulated other comprehensive income. The cost of securities sold is based upon the specific identification method. Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income. Interest and dividends on all securities are included in interest income. Investments consist of money market auction-rate preferred stocks and corporate bonds. INVENTORIES Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or market (net realizable) value. EQUIPMENT AND FURNITURE Equipment and furniture are stated at cost. Depreciation is provided using the straight-line basis over the estimated useful lives of the assets for financial reporting purposes and on accelerated methods for tax reporting purposes. The estimated useful lives of equipment and furniture for financial reporting purposes are three to five years. REVENUE RECOGNITION Net sales are stated net of discounts and allowances. Revenue from product sales direct to customers is recognized upon shipment. The Company defers the recognition of revenue and gross profit on shipments to distributors that have certain rights of return and price protection privileges on unsold product by the distributor until the distributor resells the product to the end customer. 12 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SOFTWARE REVENUE RECOGNITION Effective December 29, 1997, the Company adopted AICPA Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), as amended by SOP 98-4, "Deferral of the Effective Dates of a Provision of SOP 97-2" and SOP 98-9, "Modification of SOP 97-2," "Software Revenue Recognition with Respect to Certain Transactions," which was effective for transactions that the Company entered into in 1998. The effect of adopting SOP 97-2 did not have a material impact on the results of operations or financial position of the Company. SOFTWARE DEVELOPMENT COSTS Under Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed," certain software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model, which is typically demonstrated by initial beta shipment. The period between the achievement of technological feasibility and the general release of the Company's products has been of short duration. As of December 27, 1998, such capitalizable software development costs were insignificant, and all software development costs have been charged to research and development expense in the accompanying consolidated financial statements of income. ADVERTISING COSTS The Company expenses advertising costs in the period in which they are incurred. Advertising expense for 1996, 1997, and 1998 was approximately $5 million, $6 million, and $5 million, respectively. FOREIGN CURRENCY REMEASUREMENT Adjustments resulting from the process of remeasurement into U.S. dollars of the foreign currency financial statements of the Company's wholly owned foreign subsidiaries, for which the U.S. dollar is the functional currency, are included in operations and have not been material. 13 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARE Basic net income per share is based upon weighted average common shares outstanding. Diluted net income per share is computed using the weighted average common shares outstanding plus any potential common stock. There was no potential common stock outstanding for any of the periods presented. In July 1997, the Company was incorporated as a wholly owned subsidiary of AMD. Basic net income per share for the years ended December 29, 1996 and December 28, 1997 have not been presented because there were no common shares outstanding, and such information would not be meaningful. STOCK-BASED COMPENSATION The Company accounts for its stock option plans in accordance with provisions of the Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees" (APB Opinion No. 25). In 1995, the Financial Accounting Standards Board released the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 provides an alternative to APB Opinion No. 25 and is effective for fiscal years beginning after December 15, 1995. As allowed under FAS 123, the Company continues to account for its employee stock plans in accordance with the provisions of APB Opinion No. 25 (SEE NOTE 7). USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 14 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME Effective December 29, 1997, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of FAS 130 had no impact on the Company's net income or stockholder's equity and division equity. FAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments which, prior to adoption, were reported separately in stockholder's equity and division equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of FAS 130. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133), which is required to be adopted in years beginning after June 15, 1999. The Company does not usually use derivatives instruments, therefore the adoption of FAS 133 is not expected to affect its results of operations or financial position. 3. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, and trade receivables. The Company places its cash equivalents and short-term investments with high-credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Investments in certificates of deposit are acquired from banks having combined capital, surplus, and undistributed profits of not less than $200 million. Investments in commercial paper, corporate notes, and money market auction-rate preferred stocks of industrial firms and financial institutions are highly rated. 15 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 3. CONCENTRATIONS OF CREDIT RISK (CONTINUED) Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base thus spreading the trade credit risk. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs in depth credit evaluations of all new customers and requires letters of credit, bank guarantees, and advance payments, if deemed necessary. Bad debt expenses have not been material. One of the Company's distributors accounted for 24%, 25%, and 25% of net sales in 1996, 1997, and 1998, respectively. Another distributor accounted for 12%, 14%, and 13% of net sales in 1996, 1997, and 1998, respectively. 4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company held no cash and cash equivalents or short-term investments at December 29, 1996. The following summarizes available-for-sale securities included in cash and cash equivalents and short-term investments as of the respective dates (IN THOUSANDS):
DECEMBER 28, DECEMBER 27, 1997 1998 ---------------------------- Cash equivalents: Commercial paper $ 9,947 $ - Money market funds 27,600 21,000 ----------------------- Total cash equivalents $37,547 $21,000 ----------------------- ----------------------- Short-term investments: Money market auction-rate preferred stock $32,500 $43,500 Corporate notes - 5,033 ----------------------- Total short-term investments $32,500 $48,533 ----------------------- -----------------------
There were no realized or unrealized gains and losses in 1996 as the Company did not have any cash or investment balances. Unrealized gains and losses were $0 and $14,000 in 1997 and 1998, respectively. Realized gains and losses were immaterial in all the periods presented. 16 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 5. INCOME TAXES The income before income taxes shown for periods up to September 28, 1997 reflects the Company's operation as a division of AMD. The income tax expense and income taxes payable reported for these earlier periods represent what separate Company taxes would have been and were payable to AMD. Subsequent to September 28, 1997, the Company has been included in the consolidated federal income tax return of AMD and is responsible for its income taxes through a tax sharing arrangement with AMD, whereby federal and state taxes are allocated on a separate company basis. Provision for income taxes consists of the following (IN THOUSANDS):
YEARS ENDED 1996 1997 1998 ---------------------------------- Current: Federal $5,726 $14,202 $6,987 State 56 635 90 Foreign - - 398 Deferred: Federal (24) (1,660) 1,238 State (1) (81) 94 ---------------------------------- Provisions for income taxes $5,757 $13,096 $8,807 ---------------------------------- ----------------------------------
The following is a reconciliation between statutory federal income taxes and the provision for income taxes (IN THOUSANDS, EXCEPT PERCENT):
YEARS ENDED 1996 1997 1998 ----------------------------------------------------------------- TAX RATE TAX RATE TAX RATE ----------------------------------------------------------------- Statutory federal income tax provision $5,936 35.0% $13,044 35.0% $9,107 35.0% State taxes net of federal benefit 9 0.1% 326 0.9% (18) (0.1)% Other (188) (1.2)% (274) (0.8)% (282) (1.1)% ----------------------------------------------------------------- $5,757 33.9% $13,096 35.1% $8,807 33.8% ----------------------------------------------------------------- -----------------------------------------------------------------
17 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 5. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (IN THOUSANDS):
DECEMBER 28, DECEMBER 27, 1997 1998 ---------------------------- Deferred tax assets: Deferred distributor income $11,827 $10,120 Inventory reserves 4,596 3,270 Accrued liabilities not currently deductible 637 1,047 Other 285 2,150 ------------------------ Total deferred tax assets 17,345 16,587 Deferred tax liabilities: Depreciation (687) (687) Other 422 (152) ------------------------ Total deferred tax liabilities (265) (839) ------------------------ Net deferred tax assets $17,080 $15,748 ------------------------ ------------------------
The Company did not record a valuation allowance for all periods presented. Realization of the Company's net deferred tax assets is dependent on future taxable income. The Company believes that it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. 6. LINE OF CREDIT AGREEMENT In accordance with the Administrative Services Agreement entered into on September 29, 1997, between the Company and AMD, the Company obtained a revolving line of credit agreement with AMD under which it may borrow up to $15 million (SEE NOTE 10). Interest accrues monthly on the aggregate unpaid amount of any funds advanced to the Company by AMD. Such interest is based on the reference rates established by Bank of America at the draw date. The agreement and resultant available facility terminate on December 31, 1999. The Company has not drawn on the line of credit, leaving $15 million unused and available as of December 27, 1998. 18 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 7. STOCK-BASED BENEFIT PLANS EMPLOYEE STOCK PLANS The Company does not have an employee stock option or employee stock purchase plan. While employees of AMD, certain employees of the Company were granted options to purchase AMD common stock. As of August 1997, the Company's employees were no longer eligible to receive new grants under AMD employee stock option plans but continue to participate to the extent they held outstanding options in those plans. The Company's employees continue to participate in the employee stock purchase plan of AMD. AMD has several stock option plans under which certain employees of the Company have previously been granted nonqualified (NSOs) options to purchase AMD's common stock. Generally, options are exercisable within four years from the date of grant and expire ten years after the date of grant. Exercise prices of NSOs range from $4.25 to the fair market value of the common stock at the date of grant. On September 10, 1998, the Compensation Committee of the Board of Directors of AMD approved a stock option repricing program pursuant to which employees of AMD and the Company (excluding officers and vice presidents) could elect to cancel certain unexercised stock options in exchange for new stock options with an exercise price of $19.43, which was equal to 20 percent above the closing price of AMD's common stock on the New York Stock Exchange on September 10, 1998. Options repriced in accordance with the July 10, 1996 repricing program were not eligible to be repriced. For the Company's participants, approximately 66,000 options were eligible for repricing, of which approximately 39,000 were repriced. 19 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 7. STOCK-BASED BENEFIT PLANS (CONTINUED) EMPLOYEE STOCK PLANS (CONTINUED) On July 10, 1996, the Compensation Committee of the Board of Directors of AMD approved a stock option repricing program pursuant to which employees of AMD and the Company (excluding officers) could elect to cancel certain unexercised stock options in exchange for new stock options with an exercise price of $11.88, equal to the closing price of AMD's common stock on the New York Stock Exchange on July 15, 1996. For the Company's participants, approximately 478,431 options were eligible for repricing, of which 435,000 were repriced. The vesting schedules and expiration dates of repriced stock options were extended by one year, and certain employees canceled stock options for four shares of common stock in exchange for repriced options for three shares of common stock. The following is a summary of stock option activity for the Company's participants and related information. Stock option activity is presented as though the participants were Vantis employees when the Company was still a division of AMD. Grants and cancelations in accordance with the repricing programs, disclosed above, have been included in "grants" and "canceled" in the table below.
1996 1997 1998 ------------------ ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------------- ------------------- ------------------- (IN THOUSANDS) Options Outstanding at beginning of year 880 $19.97 974 $10.77 1,040 $14.43 Granted 624 $11.98 149 $35.55 39 $19.43 Canceled (502) $28.62 (1) $11.88 (77) $27.95 Exercised (28) $ 6.78 (82) $ 9.30 (83) $ 8.81 ----- ----- ----- Outstanding at end of year 974 $10.77 1,040 $14.43 919 $13.84 ----- ----- ----- ----- ----- ----- Options exercisable at end of year 360 535 631 Available for grant at beginning of year 751 3,845 - Available for grant at end of year 3,845 - -
20 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 7. STOCK-BASED BENEFIT PLANS (CONTINUED) EMPLOYEE STOCK PLANS (CONTINUED) Additional information about outstanding options to purchase AMD common stock held by employees of the Company at December 27, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- --------------------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE RANGE OF DECEMBER 27, CONTRACTUAL EXERCISE DECEMBER 27, EXERCISE EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE - ------------------------------------------------------------------------------ ---------------------------------- (IN THOUSANDS) $4.25 - $9.38 202 3.77 $ 6.70 176 $ 6.31 $10.63 - $11.88 411 6.59 $11.70 310 $11.72 $13.00 - $18.69 174 5.87 $13.81 112 $13.81 $19.43 - $39.75 132 8.75 $31.25 33 $35.94 ------- ------- $4.25 - $39.75 919 6.18 $13.84 631 $11.85 ------- ------- ------- -------
STOCK PURCHASE PLAN AMD has an employee stock purchase plan (ESPP) that allows participating U.S. employees to purchase, through payroll deductions, shares of AMD's common stock at 85 percent of the fair market value at specified dates. At December 27, 1998, 427,361 common shares remained available for issuance under the plan. A summary of stock purchased by the Company's employees under the plan is shown below.
1996 1997 1998 ------------------------------------------------------- (IN THOUSANDS, EXCEPT EMPLOYEE PARTICIPANTS) Aggregate purchase price $660 $795 $1,170 Shares purchased 52 37 75 Employee participants 99 122 156
21 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 7. STOCK-BASED BENEFIT PLANS (CONTINUED) STOCK-BASED COMPENSATION As permitted under FAS 123, the Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for the AMD stock-based awards to the Company's employees. Pro forma information regarding net income and net income per share is required by FAS 123 for awards granted after December 31, 1994, as if the Company had accounted for AMD stock-based awards to the Company's employees under the fair value method of FAS 123. The fair value of the AMD stock-based awards to the Company's employees was estimated using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because the AMD stock-based awards to the Company's employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based awards to the Company's employees. The fair value of the AMD stock-based awards to the Company's employees was estimated assuming no expected dividends and the following weighted average assumptions:
OPTIONS OUTSTANDING ESPP --------------------------------------- -------------------------------------- 1996 1997 1998 1996 1997 1998 --------------------------------------- -------------------------------------- Expected life (years) 2.66 3.47 2.93 0.25 0.25 0.25 Expected stock price volatility 47.15% 54.87% 66.61% 47.90% 69.17% 75.78% Risk-free interest rate 6.45% 6.30% 5.35% 5.29% 5.38% 5.16%
22 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 7. STOCK-BASED BENEFIT PLANS (CONTINUED) STOCK-BASED COMPENSATION (CONTINUED) For pro forma purposes, the estimated fair value of the AMD stock-based awards to Company employees is amortized over the options' vesting period (for options) and the three-month purchase period (for stock purchases under the ESPP). The Company's pro forma information follows:
1996 1997 1998 --------------------------------------------------------- (IN THOUSANDS, EXCEPT EMPLOYEE PARTICIPANTS) Net income - as reported $11,203 $24,173 $ 7,212 Net income - pro forma $10,122 $22,537 $15,959 Basic and diluted net income per share - as reported $ - $ - $ 0.17 Basic and diluted net income per share - pro forma $ - $ - $ 0.16
Because FAS 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. The weighted average grant date fair value of stock-based rewards was $5.02, $15.78, and $6.85 in 1996, 1997, and 1998, respectively. The weighted average grant date fair value of stock purchase rights under AMD employee stock purchase plan was $3.99, $8.49, and $6.20 in 1996, 1997, and 1998, respectively. 8. OTHER EMPLOYEE BENEFIT PLANS Through December 28, 1997, employees of the Company participated in several AMD retirement, employee benefit, and incentive plans. These plans included (i) a profit sharing plan, (ii) a stock bonus plan, (iii) a salary deferral 401(k) plan, and (iv) a key contributor bonus plan. Certain key employees and certain management of the Company also participated in various incentive arrangements based on individual performance and AMD's performance. 23 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 8. OTHER EMPLOYEE BENEFIT PLANS (CONTINUED) For the two years ended December 28, 1997, the Company's employees participated in the AMD retirement savings plan, commonly known as a 401(k) plan, that allows participating United States employees to contribute from one percent to 15 percent of their pre-tax salary subject to Internal Revenue Service limits. The Company made a matching contribution calculated at 50 cents on each dollar of the first 3 percent of participant contributions a maximum of 1.5 percent of eligible compensation. Effective January 1, 1998, the Company established the Vantis Corporation 401(k) plan. The provisions of the Vantis Corporation 401(k) plan are identical to those of the AMD retirement savings plan. The Company's contributions to the 401(k) plan of AMD were approximately $154,000 and $183,000 for 1996 and 1997, respectively. The Company's contributions to the 401(k) plan of the Company were $305,564 for the year ended December 27, 1998. The Company established a profit sharing plan and incentive plan that offer cash awards to its employees, on January 1, 1998. Under the profit sharing plan, eligible United States employees may receive a cash payment at the end of each quarter based on whether or not certain company target goals have been satisfied. The Company's contributions to the profit sharing plan were approximately $314,000 for the year ended December 27, 1998. The incentive plan offers awards to certain key employees and certain members of management based on both the Company's performance as well as individual performance. 9. COMMITMENTS Certain operating leases and lease commitments were assumed by the Company as part of the transfer of the Business effective September 29, 1997. The Company has also entered into purchase commitments with AMD for wafer fabrication and assembly, test, mark, and pack services as described in the respective agreements (SEE NOTE 10). 24 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 9. COMMITMENTS (CONTINUED) At December 27, 1998, the future minimum lease payments for each of the next five years and beyond under noncancelable long-term operating lease obligations and purchase commitments, primarily with AMD, are as follows (IN THOUSANDS):
OPERATING PURCHASE LEASE COMMITMENTS --------------------------------- 1999 $524 $28,555 2000 $458 $ 3,179 2001 $334 $ - 2002 $257 $ - 2003 $145 $ - Beyond 2003 $ - $ -
Rent expense incurred under operating leases was approximately $2 million for all periods presented. 10. RELATED PARTY TRANSACTIONS The Company and AMD have entered into various transactions and agreements in the ordinary course of business. Total costs recorded by the Company under the signed agreements, summarized below, were approximately $30 million in the fourth quarter of 1997 and $99 million for the year ended December 27, 1998. AMD paid nearly all expense and disbursement transactions of the Company for all periods presented. The payable to AMD represents amounts due AMD for the services performed for the Company by AMD as well as balances due AMD for amounts paid on behalf of the Company. 25 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 10. RELATED PARTY TRANSACTIONS (CONTINUED) COST ALLOCATIONS The statements of income for the period from December 30, 1996 to September 28, 1997 include all sales and expenses attributable to the Company, including a corporate allocation of the costs of facilities and employee benefits. These allocations are based on assumptions that management believes are reasonable under the circumstances. However, these allocations are not necessarily indicative of the costs that would have resulted if the Company had operated on a stand-alone basis during these periods nor are they necessarily indicative of future costs to support the operations of the Company. Pro rata allocations to the Company were based on factors, including net sales, budgeted sales, headcount, and direct operating expenses or activities. Allocated expenses were approximately $33 million and $16 million for fiscal years 1996 and 1997, respectively. All expenses for the year ended December 27, 1998 are based on the agreements described below or activity with third-party vendors. WAFER FABRICATION AGREEMENT The Company and AMD have entered into a Wafer Fabrication Agreement (the Wafer Fabrication Agreement) pursuant to which AMD has agreed to fabricate programmable logic semiconductor wafers for the Company. The Company is required to provide AMD with annual and quarterly forecasts of its die demand needs. AMD has agreed to respond to these forecasts with commitments (the AMD Commitment) to fabricate all or a portion of the forecasted amount of die. The Company has agreed to reimburse AMD for unrecovered costs of AMD resulting from any disparity between the Company's actual production demands and a certain percentage of the applicable AMD Commitment. The Wafer Fabrication Agreement expires on September 28, 2002 and, under certain conditions, may be terminated earlier by either party. 26 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 10. RELATED PARTY TRANSACTIONS (CONTINUED) ASSEMBLY, TEST, MARK AND PACK AGREEMENT AMD and the Company have entered into an Assembly, Test, Mark and Pack Agreement (the Assembly, Test, Mark and Pack Agreement) pursuant to which AMD has agreed to perform for the Company assembly, test, mark, pack, and related services on die consigned to AMD by the Company. The Company has agreed to provide AMD with annual and quarterly forecasts of its service needs, and AMD has agreed to respond with commitments to provide all or a portion of the Company's forecasted service needs for the first thirteen weeks of each quarterly forecast. AMD is not obligated to provide services at its facilities in excess of the maximum historical capacity at any such facility. The Assembly, Test, Mark and Pack Agreement expires on September 28, 2002 and under certain conditions may be terminated earlier by either party. ADMINISTRATIVE SERVICES AGREEMENT AMD and the Company have entered into an Administrative Services Agreement (the Administrative Services Agreement) pursuant to which AMD and its affiliates have agreed to provide, on a transitional basis, certain administrative services to the Company and its foreign subsidiaries. Such administrative services include communications, office services, finance, human resources, information technology, legal, and procurement services. The Administrative Services Agreement also provides for the lease to the Company, on a month-to-month basis, of certain office and test space and for a revolving line-of-credit to the Company by AMD in an aggregate unpaid amount not to exceed $15 million. The Administrative Services Agreement does not require AMD to provide any administrative services to the extent that the performance of such services becomes more expensive for AMD as a result of an organizational or operational change by the Company that was not contemplated by the parties at the time of the Administrative Services Agreement. The Administrative Services Agreement expires on December 31, 1999. The Company may terminate the provision of one or more services upon 90 days prior written notice to AMD. The Administrative Services Agreement under certain conditions may also be terminated earlier by either party. 27 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 10. RELATED PARTY TRANSACTIONS (CONTINUED) BIPOLAR PLD SALES AND MARKETING SERVICES AGREEMENT Pursuant to a Bipolar PLD Sales and Marketing Services Agreement between the Company and AMD (the Bipolar PLD Agreement), the Company has agreed to provide to AMD, as requested by AMD sales and marketing services for bipolar PLDs manufactured by AMD. Services under the Bipolar PLD Agreement currently include receipt and processing of orders, distribution of invoices, collection of receivables, marketing, and customer service and support. The Bipolar PLD Agreement provides that AMD will pay the Company a monthly fee in consideration of the services provided. The initial monthly fee, which may be reviewed annually, is a percentage of the gross revenues arising from sales by the Company of AMD bipolar PLDs. The Bipolar PLD Agreement expires on the earlier of December 31, 2002 or 90 days after AMD provides written notification to the Company. AMD anticipates that it will eventually phase out its manufacture and sale of bipolar PLDs. AMD FINANCING AGREEMENTS AMD has entered into a series of financing agreements that contain significant restrictive covenants. Failure to comply with certain such limitations would have a material adverse effect on AMD. Many of the covenants restrict the Company as a subsidiary of AMD to the same extent that AMD is restricted. As long as the Company is a majority-owned subsidiary of AMD, it remains subject to these covenants. Among other things, the Company will be restricted in its ability to (i) declare or pay dividends or make other distributions on account of the common stock; (ii) purchase, redeem, or otherwise acquire or retire for value the common stock; (iii) make investments other than certain strategic investments, investments in cash equivalents, investments in AMD or certain of its affiliates, or other investment specifically permitted by the terms of the financing agreement; (iv) incur indebtedness or issue preferred stock; (v) dispose of assets or issue or sell common stock or other equity interests of the Company; and (vi) create or incur liens on assets of the Company. 28 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 10. RELATED PARTY TRANSACTIONS (CONTINUED) PATENT CROSS LICENSE AGREEMENT Pursuant to a Patent Cross License Agreement between AMD and the Company (the Patent Cross License Agreement), AMD and the Company have each agreed to license to the other, every issued patent or patent that may be issued on applications filed prior to January 8, 2003. Each cross-license is a nonassignable and nontransferable (except as expressly permitted) worldwide, nonexclusive, royalty-free license without the right to grant sublicenses. The Patent Cross License Agreement also provides that all inventions developed jointly by AMD and the Company under the Wafer Fabrication Agreement and the Assembly, Test, Mark and Pack Agreement will be jointly owned by AMD and the Company. The Patent Cross License Agreement expires on the date of expiration of the last licensed patent to expire. The Patent Cross License Agreement may be terminated by either party upon the occurrence of certain events. 11. CONTINGENCIES AMD V. ALTERA COMPANY AMD and Altera are currently involved in litigation involving certain patent infringement claims. Vantis received all rights to the AMD-held patents as part of the Patent Cross License Agreement in September 1997. An agreement entered into between AMD and Vantis requires AMD to indemnify Vantis for any liability incurred by Vantis in connection with or as a result of this litigation. A further agreement between AMD and Vantis requires AMD to indemnify the Company against all damages, attorneys' fees, court costs, and other similar expenses owed to Altera pursuant to any final judgment or settlement of this litigation. Based upon information presently known to management, the Company does not believe that the ultimate resolution of this lawsuit will have a material adverse effect on the financial condition or results of operations of the Company. 29 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 OTHER MATTERS The Company is a defendant or plaintiff in various other actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. 12. YEAR 2000 READINESSS (UNAUDITED) Many current firmware programs and software systems are coded to accept only two digits for the year entry in a date code field. If any of our current firmware or software interpret a year entry of "00" in a date code field as the year 1900 rather than the Year 2000, system failures or miscalculations could result in disruptions of operations, including, among other things, a temporary inability to process transactions, issue invoices, or engage in other normal business activities. The Company has developed a multistep Year 2000 readiness plan. The plan includes development of corporate awareness, assessment of internal systems and suppliers, project planning, project implementation (including remediation, upgrading, and replacement), validation testing, and contingency planning. In March 1998, the Company performed a complete inventory of its computer systems, including engineering systems, work stations, servers, desktops, and all hardware and software. While this inventory revealed that not many of these systems will require substantial corrective action, the Company recently began upgrades designed to remedy those systems that were deemed to be noncompliant. These upgrades are scheduled for completion during the third quarter of 1999 and are estimated to cost approximately $100,000. The Company is initiating formal communication with significant suppliers to determine the extent to which its operations are vulnerable to those third parties' failure to remediate their own Year 2000 issues. Suppliers of hardware, software, or other products that might contain embedded processors will also be requested to provide information regarding the Year 2000 compliance status of their products. In order to protect against the acquisition of additional noncompliant products, the Company now requires suppliers to warrant that products sold or licensed to it are Year 2000 compliant. 30 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 12. YEAR 2000 READINESS (UNAUDITED) (CONTINUED) AMD is the primary wafer manufacturer and principal supplier of goods and services to the Company. Given this relationship with AMD, the Company, as a wholly owned subsidiary of AMD, has relied primarily on AMD's response to the Year 2000 issue. In particular, the Company is relying on AMD's analysis and efforts in the areas of order processing and management, manufacturing, shipping and distribution, and finance. The Company believes the failure of AMD or the Company to successfully resolve their Year 2000 issues could result in a shut-down of some or all of AMD's or the Company's operations, which could have a material adverse effect on the Company. AMD has developed a multistep Year 2000 readiness plan for its internal systems, including replacing its order management system with a Year 2000 compliant system and contracting with a software reengineering company specializing in Year 2000 problems to remediate noncompliant code in older applications and systems. AMD is also utilizing internal resources to reprogram or replace and test the software for Year 2000 modifications and is dedicating substantial resources to Year 2000 issues with respect to its wafer fabrication and wafer sort facilities worldwide. We are briefed weekly on the progress of these projects. If required modifications to AMD's order management existing software and conversions to new software are not made or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. AMD has contacted significant suppliers of hardware, software, or other products to obtain information regarding the Year 2000 compliance status of these third parties' products. To the extent that AMD's or our significant suppliers do not successfully achieve Year 2000 compliance on a timely basis, our business or operations could be materially and adversely affected. The Company does not currently have any information regarding the Year 2000 compliance status of its customers. In the event that a number of the Company's customers and suppliers do not successfully achieve Year 2000 compliance on a timely basis, the Company's business or operations could be adversely affected. 31 Vantis Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 27, 1998 12. YEAR 2000 READINESS (UNAUDITED) (CONTINUED) The Company is currently assessing its exposure to contingencies related to the Year 2000 issue for products it sells or has already sold; however, the Company does not expect these contingencies to have a material impact on its operations. To date, the Company has not evaluated the potential implications of noncompliant embedded technologies contained in noninformation technology systems, including general facility and security systems. The Company is also vulnerable to unquantifiable risks associated with external forces that threaten to affect industry and commerce in general, such as utility or transportation company Year 2000 compliance failures and related service interruptions. The Company has not yet developed a comprehensive contingency plan to address situations that may result if it is unable to achieve Year 2000 readiness of its critical operations. Development of contingency plans is in progress and is expected to be completed by September 30, 1999. The Company's failure to develop and implement, if necessary, an appropriate contingency plan could have a material adverse effect on its operations. The total cost of the Year 2000 project for the Company is currently estimated at approximately $500,000, which is not material to its results of operations or financial condition. The costs of the Year 2000 project are being funded through operating cash flows. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on the Company's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans, and other factors. Actual results could materially differ from those anticipated. 32 VANTIS CORPORATION INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT MARCH 28, 1999 AND FOR THE THREE MONTH PERIODS ENDED MARCH 28, 1999 AND MARCH 29, 1998 (UNAUDITED) Condensed Consolidated Balance Sheet at March 28, 1999 34 Condensed Consolidated Statements of Income for the Three Months Ended March 28, 1999 and March 29, 1998 35 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 28, 1999 and March 29, 1998 36 Notes to Condensed Consolidated Financial Statements 37
33 VANTIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 28, 1999 ----------- (THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 18,374 Short-term investments 58,490 Accounts receivable, net of allowance for doubtful accounts of $570 24,351 Inventory 8,346 Receivable from AMD 12,700 Prepaid expenses and other current assets 895 Deferred income taxes 16,605 -------- Total current assets 139,761 Equipment and furniture, net of accumulated depreciation 6,376 Other assets 6,198 -------- $152,335 -------- -------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Payable to AMD $ 45,497 Accrued compensation and benefits 4,383 Accrued liabilities 7,557 Income tax payable 4,712 Deferred income on shipments to distributors 29,096 -------- Total current liabilities 91,245 Other long term liabilities 1,250 Deferred income taxes 49 Commitments and contingencies Stockholder's equity: Common stock, $.10 par value: Authorized shares -- 150,000,000; issued and outstanding shares -- 100,000,000 1,000 Capital in excess of par 32,448 Retained earnings 26,303 Accumulated other comprehensive income 40 -------- Total stockholder's equity 59,791 -------- $152,335 -------- --------
See accompanying notes. 34 VANTIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED ------------------------ MARCH 28, MARCH 29, 1999 1998 --------- --------- (THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Net sales $47,157 $56,224 Expenses: Cost of sales 20,395 26,158 Research and development 11,924 10,483 Marketing, general and administrative 8,245 7,939 ------- ------- 40,564 44,580 ------- ------- Operating income 6,593 11,644 Interest and other, net 965 1,492 ------- ------- Income before income taxes 7,558 13,136 Income taxes 2,761 4,439 ------- ------- Net income $ 4,797 $ 8,697 ------- ------- ------- ------- Net income per basic and diluted share $ 0.05 $ 0.09 ------- ------- ------- ------- Common shares outstanding - basic and diluted 100,000 100,000 ------- ------- ------- -------
See accompanying notes. 35 VANTIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED ------------------------ MARCH 28, MARCH 29, 1999 1998 --------- --------- (THOUSANDS) (UNAUDITED) OPERATING ACTIVITIES Net income $ 4,797 $ 8,697 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 967 1,028 Deferred income taxes (808) -- Changes in operating assets and liabilities: Accounts receivable 2,596 (8,550) Inventory 1,443 (194) Prepaid expenses, other current assets and other assets (227) (1,218) Accrued liabilities 7,937 15,308 Income tax payable 3,046 4,381 Deferred income on shipment to distributors 1,671 671 -------- -------- Net cash provided by operating activities 21,422 20,123 INVESTING ACTIVITIES Purchases of property and equipment (944) (835) Purchases of software licenses (4,500) -- Maturities (purchases) of available-for-sale securities, net (9,957) (19,500) -------- -------- Net cash used in investing activities (15,401) (20,335) FINANCING ACTIVITIES Net financing provided to AMD (12,700) -- -------- -------- Net cash used for financing activities (12,700) -- -------- -------- Net decrease in cash and cash equivalents (6,679) (212) Cash and cash equivalents at beginning of period 25,053 39,638 -------- -------- Cash and cash equivalents at end of period $ 18,374 $ 39,426 -------- -------- -------- --------
See accompanying notes. 36 VANTIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 28, 1999 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 28, 1999 are not necessarily indicative of the result that may be expected for the year ended December 26, 1999. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended December 27, 1998. The Company uses a 52- to 53- week fiscal year ending on the last Sunday in December. The quarters ended March 28, 1999 and March 29, 1998 each included 13 weeks. The condensed consolidated financial statements include the accounts of Vantis Corporation and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. 37 VANTIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 28, 1999 AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities:
March 28, (Thousands) 1999 --------- Cash equivalents: Money market funds $13,000 Certificates of deposit 2,028 ------- Total cash equivalents $15,028 ------- ------- Short-term investments: Bank notes $ 5,059 Certificates of deposit 10,000 Commercial paper 43,431 ------- Total short-term investments $58,490 ------- -------
NET INCOME PER SHARE In connection with the transfer of the Business to the Company by AMD in September 1997, the Company issued 1,000 shares of the Company's common stock at $0.01 par value to AMD. On October 14, 1997, the Company effected a stock split of 100,000 shares of common stock for each share then outstanding, resulting in total capitalization of 100,000,000 shares of common stock outstanding at March 28, 1999. Basic net income per share is based upon weighted average common shares outstanding. Diluted net income per share is computed using the weighted average common shares outstanding plus any potential common stock. As of March 28, 1999, the weighted average common shares outstanding for computing net income per share is 100,000,000 shares. In April 1999, the Company approved and adopted the 1999 Performance Award Plan and the 1999 Leadership Award Plan. Under the terms of these plans, in April and June 1999, the Company issued approximately 10.9 million stock options to employees. The exercise price of the options is equal to the fair market value of the Company's common stock on the date of grant as determined by the board of directors. 38 VANTIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 28, 1999 COMPREHENSIVE INCOME The following are the components of comprehensive income:
Three Months Ended ----------------------------- March 28, March 29, (Thousands) (unaudited) 1999 1998 ------------- ----------- Net Income $4,797 $8,697 ------ ------ Unrealized gains on securities, net of tax: Unrealized holding gains arising during the period 26 - ------ ------ Other comprehensive income 26 - ------ ------ Comprehensive income $4,823 $8,697 ------ ------ ------ ------
2. SALE OF COMPANY On April 21, 1999, Advanced Micro Devices, Inc., the parent company of Vantis Corporation, entered into an agreement with Lattice Semiconductor Corporation to sell all of the stock of the Company for approximately $500 million plus assumption of liabilities and other costs incurred by the buyer. The purchase price is subject to change during the six months following the acquisition date. The transaction was completed on June 15, 1999 and was accounted for as a purchase by the buyer. Therefore the basis of carrying assets and liabilities used in the financial statements may not be indicative of the basis used in the financial statements of Lattice Semiconductor Corporation. 3. INVENTORY Inventory consists of the following at March 28, 1999: Finished goods $2,906 Work in process 5,440 ------ $8,346 ------ ------
39 VANTIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 28, 1999 4. ADVANCE TO AMD During March 1999 the Company advanced approximately $12.7 million to AMD. This amount was repaid in April 1999 with interest at approximately 4.5% per annum. 5. PREPAID SOFTWARE LICENSE AGREEMENT In 1998, the Company entered into a license agreement with a software company requiring the payment of $4.5 million in license fees over time upon the satisfactory development and delivery of the software to the Company. Initial software acceptance and delivery of the software was completed during the first calendar quarter of 1999. Accordingly, a prepaid software license asset of $4.5 million is included in Other assets, and is being amortized on the straight line method over three years which represents the estimated useful life of the software. As of March 28, 1999, $500,000 of the license fee has been paid, $2.75 million is due within the next twelve months and is recorded as a current liability, and $1.25 million is due in equal consecutive quarterly installments of $250,000 beginning in June, 2000, and is recorded as a long-term liability in the accompanying condensed consolidated balance sheet. 6. CONTINGENCIES AMD V. ALTERA CORPORATION ADVANCED MICRO DEVICES, INC. V. ALTERA CORPORATION (CASE NO. C-94-20567-RMW,N.D. CAL.). This litigation, which began in 1994, involves multiple claims and counterclaims for patent infringement relating to Vantis and Altera programmable logic devices. In April 1999, the Federal Court of Appeal reversed earlier jury and Court decisions and held that Altera is not licensed to the eight AMD patents-in-suit. These eight AMD patents were subsequently assigned to Vantis. Also in April 1999, following the decision of the Federal Court of appeal, Altera filed a petition for rehearing. In June 1999, the Federal Court of Appeal denied Altera's petition for rehearing. In connection with the acquisition of Vantis by Lattice Semiconductor Corporation, Lattice agreed to assume both the claims against Altera and the claims by Altera against AMD. 40 (b) Pro Forma Financial Information. ---------------------- The following unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and do not purport to be indicative of the consolidated financial position or results of operations for future periods or the results that actually would have been realized had Lattice Semiconductor Corporation ("Lattice") and Vantis Corporation ("Vantis") been a consolidated company during the specified periods. Further, non recurring Purchase Accounting adjustments are excluded from the pro forma adjustments in the unaudited pro forma condensed Statement of Operations. The unaudited pro forma condensed consolidated financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with the historical consolidated financial statements and the notes thereto of Lattice which were previously reported in Lattice's Annual Report on Form 10-K for the year ended April 3, 1999 and the Quarterly Report on Form 10-Q for the quarter ended July 3, 1999, which are hereby incorporated by reference, and the consolidated financial statements and the notes thereto for the three years ended December 27, 1998 and the Unaudited Condensed Consolidated Statements and the notes thereto for the three month period ended March 28, 1999, of Vantis included elsewhere in this Current Report on Form 8-K. The following unaudited pro forma condensed consolidated financial statements are based on the respective historical audited and unaudited consolidated financial statements and the notes thereto of Lattice and Vantis after giving effect to the acquisition of Vantis using the purchase method of accounting and the assumptions and adjustments described below. The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The preliminary purchase price allocation is based on an independent appraisal and management estimates. The purchase price allocation is subject to further refinement and change over the next year. Management is in the process of completing its plans related to the integration of Vantis, and accordingly, the amounts recorded related to Vantis are based on management's current estimate of those costs. This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 41 The required pro forma unaudited financial information is set forth below.
PRO FORMA FINANCIAL INFORMATION Table of Contents page Unaudited Pro Forma Condensed Consolidated Balance Sheet - April 3, 1999 43 Unaudited Pro Forma Condensed Consolidated Statement of Operations - Year ended April 3, 1999 44 Unaudited Notes to Pro Forma Condensed Consolidated Financial Statements 45
42 LATTICE SEMICONDUCTOR CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET April 3, 1999 (in thousands)
Pro Forma Pro Forma Lattice Vantis Adjustments Combined --------- --------- --------------- ---------- ASSETS Cash and short term investments (Note 1) $319,434 $ 76,864 $(260,562) A $135,736 Accounts receivable, net 23,788 24,351 48,139 Inventories 17,683 8,346 500 B 26,529 Other current assets 20,461 30,200 (16,605) B 34,056 --------- --------- ---------- --------- Total current assets 381,366 139,761 (276,667) 244,460 Property plant and equipment, net 44,993 6,376 3,854 B 55,223 Foundry investments, advances and other assets 114,537 6,198 2,951 C 123,686 Intangible assets, net 422,533 A 422,533 Deferred income taxes 32,486 E 32,486 --------- --------- ---------- --------- Total assets $540,896 $152,335 $ 185,157 $878,388 --------- --------- ---------- --------- --------- --------- ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 32,184 $ 57,437 $ 58,274 A $147,895 Bank borrowings 25,000 C 25,000 Deferred income on sales to distributors 19,993 29,096 (29,096) B 19,993 Income taxes payable 4,985 4,712 (4,712) B 4,985 --------- --------- ---------- --------- Total current liabilities 57,162 91,245 49,466 197,873 Bank borrowings and other long term liabilities 1,299 227,999 C 229,298 --------- --------- ---------- --------- Total liabilities 57,162 92,544 277,465 427,171 --------- --------- ---------- --------- Stockholders' equity: Stock and Paid-in Capital 223,526 33,488 (9,488) F G 247,526 Retained earnings 260,208 26,303 (82,820) F 203,691 --------- --------- ---------- --------- Total stockholders' equity 483,734 59,791 (92,308) 451,217 --------- --------- ---------- --------- Total liabilities and stockholders' equity $540,896 $152,335 $ 185,157 $878,388 --------- --------- ---------- --------- --------- --------- ---------- ---------
The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements. 43 LATTICE SEMICONDUCTOR CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED April 3, 1999 (in thousands)
Pro Forma Pro Forma Lattice Vantis Adjustments Combined -------- -------- -------------- --------- Revenue $200,072 $195,930 $396,002 Costs and expenses: Costs of products sold 78,440 95,678 174,118 Research and development 33,190 35,922 69,112 Selling, general and administrative 36,818 47,781 84,599 Amortization of intangibles $ 84,500 A 84,500 --------- --------- ---------- ---------- Total operating expenses 148,448 179,381 84,500 412,329 Income (loss) from operations 51,624 16,549 (84,500) (16,327) Other income (expense), net 10,668 3,892 (27,444) C D (12,884) --------- --------- ---------- ---------- Income (loss) before income taxes 62,292 20,441 (111,944) (29,211) Provision (benefit) for income taxes 20,246 7,129 (36,723) E (9,348) --------- --------- ---------- ---------- Net income (loss) $ 42,046 $ 13,312 $ (75,221) $ (19,863) --------- --------- ---------- ---------- --------- --------- ---------- ---------- Basic earnings (loss) per share $1.79 ($0.85) --------- ---------- --------- ---------- Diluted earnings (loss) per share $1.77 ($0.85) --------- ---------- --------- ---------- Shares used in computing basic earnings (loss) per share 23,487 23,487 --------- ---------- --------- ---------- Shares used in computing diluted earnings (loss) per share (Note 3) 23,819 23,487 --------- ---------- --------- ----------
The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements. 44 LATTICE SEMICONDUCTOR CORPORATION UNAUDITED NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Note 1. Basis of Presentation On June 15, 1999, Lattice Semiconductor Corporation ("Lattice") completed the acquisition of all of the outstanding capital stock of Vantis Corporation ("Vantis") from Advanced Micro Devices, Inc. ("AMD"). The transaction was completed pursuant to a Stock Purchase Agreement dated as of April 21, 1999 between Lattice and AMD. We paid approximately $500 million in cash for all of the outstanding capital stock of Vantis. In addition, we exchanged our stock options for all of the options outstanding under Vantis employee stock option plans. The components of purchase price are as follows (millions): Bank term and line of credit bearing interest at adjustable rates $250.3 Cash 249.8 Other liabilities assumed 34.5 Fair value of options assumed 24.0 Estimated direct acquisition costs 10.8 Exit costs 8.3 Preacquisition contingencies 5.4 ------ Total $583.1 ------ ------
The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The estimate of fair value of the assets acquired is based on an independent appraisal and management estimates. The purchase price allocation is subject to further refinement and change over the next year. Management is in the process of completing its integration plans related to Vantis, and accordingly, the amounts recorded are based on management's current estimate of those costs. The allocation of purchase price is discussed further in Note 2. The pro forma unaudited condensed consolidated statement of operations is presented using Lattice's audited condensed consolidated statement of operations for the twelve months ended April 3, 1999 combined with Vantis's unaudited condensed consolidated statement of operations for the twelve months ended March 28, 1999 assuming the transaction occurred on March 29, 1998. The pro forma unaudited condensed consolidated balance sheet gives effect to the acquisition as if the transaction had taken place on April 3, 1999 and combines Lattice's 45 audited April 3, 1999 condensed consolidated balance sheet amounts with Vantis's unaudited March 28, 1999 condensed consolidated balance sheet amounts. For financial reporting purposes, Lattice and Vantis report on 13 or 14 week quarters with their years ending April 3, 1999 and December 27, 1998, respectively. There were no transactions between Lattice and Vantis during the period presented and there are no significant differences between the accounting policies of Lattice and Vantis. The pro forma unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Lattice, which were previously reported in Lattice's Annual Report on Form 10-K/A for the year ended April 3, 1999 and its Quarterly Report on Form 10-Q for the quarter ended July 3, 1999, incorporated herein by reference, and with the financial statements and notes thereto of Vantis included elsewhere in this Form 8-K/A. These pro forma statements are based on such consolidated financial statements after giving effect to the transaction under the purchase method of accounting and the assumptions and adjustments described below. The pro forma information does not purport to be indicative of the results which would have been reported if the purchase had been in effect for the periods presented or which may result in the future. Note 2. Pro Forma Adjustments The pro forma adjustments are based on a preliminary allocation of the purchase price to the assets acquired and liabilities assumed. This allocation is subject to refinement and change over the next year. The allocation of the purchase price is based on an independent appraisal of certain assets as well as management estimates of fair value. It also reflects the results of an integration plan, which includes elimination of duplicative facilities, elimination of duplicative sales representatives and distributors, employee separations resulting from changes in responsibilities, employee relocation and other integration actions. The accruals recorded related to the integration of Vantis operations are in accordance with Emerging Issue Task Force No. 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination." This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other risks detailed in our Annual Report on Form 10-K/A for the year ended April 3, 1999 and our Quarterly Reports on Form 10-Q for the quarter ended July 3, 1999 and other reports filed with the Securities Exchange Commission from time to time. Actual results could differ materially from those projected in these forward-looking statements as a result of the risks described above as well as other risk factors set forth in our periodic reports both previously and hereafter filed with the Securities Exchange Commission. 46 (A) To reflect the allocation of purchase price to net assets acquired and liabilities assumed. The purchase price was allocated as follows: Acquisition of Vantis. We completed the acquisition of all of the outstanding capital stock of Vantis from AMD on June 15, 1999. We paid approximately $500.1 million in cash for all of the outstanding capital stock of Vantis. Additionally, we paid approximately $10.8 million in estimated direct acquisition costs, we accrued an additional $5.4 million of pre-acquisition contingencies, we accrued $8.3 million in exit costs and recorded normal accruals of $34.5 million related to the Vantis business. The cash adjustment in the pro forma condensed consolidated Balance Sheet is cash paid to the seller and estimated direct acquisition costs. This purchase was financed using a combination of cash reserves and a new credit facility bearing interest at adjustable rates (Note C.) In addition, we assumed all of the options outstanding under Vantis employee stock plans with a calculated Black-Scholes value of approximately $24.0 million. The total purchase price of Vantis was $583.1 million. The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on an independent appraisal and management estimates. The purchase price and the related allocation are subject to further refinement and change over the next year. The total purchase price was allocated as follows (in millions): Current technology $210.3 Excess of purchase price over net assets assumed 158.8 In-process research and development 89.0 Fair value of other tangible net assets 61.3 Assembled workforce, customer list, patents and trademarks 53.5 Fair value of property, plant and equipment 10.2 ------ Total $583.1 ------ ------
Vantis Integration We have taken certain actions to integrate the Vantis operations and, in certain instances, to consolidate duplicative operations. Accrued exit costs related to Vantis were recorded as an adjustment to the fair value of net assets in the purchase price allocation. Accrued exit costs include $4.2 million related to Vantis office closures, $2.5 million related to integration costs for Vantis employees and $1.6 million in other exit costs primarily relating to the termination of Vantis foreign distributors. These accruals are based upon our current estimates and are in accordance with Emerging Issue Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination". There was no activity against these exit costs for the period June 16, 1999 to July 3, 1999. 47 In-Process Research and Development The value assigned to IPR&D was determined by identifying individual research projects for which technological feasibility had not been established. These include semiconductor projects with a value after application of the SEC's IPR&D valuation methodology of $77.2 million and a process technology project with a value of $11.8 million. Useful lives of intangible assets The estimated weighted average useful life of the intangible assets for current technology, assembled workforce, customer lists, trademarks, patents and residual goodwill, created as a result of the acquisition, is approximately five years. (B) Adjustment to eliminate Vantis deferred income, and deferred and current income taxes, and to adjust inventory and property, plant and equipment to fair value. (C) Adjustment to record the current ($25 million) and long-term ($195 million) portion of the term loan and the $33 million revolving line of credit entered into on June 15, 1999 on the unaudited pro forma condensed consolidated balance sheet as of April 3, 1999. The term loan bears interest at adjustable rates and an increase or decrease in the interest rate by 1/4% would have an insignificant effect to the unaudited pro forma condensed consolidated statements of operations presented. The unaudited pro forma condensed consolidated statements of operations include an adjustment to record interest expense for the periods presented related to the incremental borrowing entered into by Lattice to finance the Vantis acquisition using an assumed rate of 7%. Amortization of capitalized debt issuance costs are $984,000 for the period presented. Costs and expenses related to the issuance of this debt totalled approximately $3 million and are capitalized and amortized over the life of the loan using the interest method. (D) Adjustment to reflect the reversal of interest income on the pro forma adjustment to cash resulting from the acquisition. The assumed rate of return on the cash balance was approximately 3.5% which is based upon the estimated rate of return on short-term investments for Lattice. (E) Adjustment to reflect the tax effect of the pro forma adjustments at the combined rate of Lattice and Vantis during the period presented. (F) Adjustment to eliminate Vantis stockholder's equity previously recorded and to reflect in-process research and development charge. 48 (G) Adjustment to stockholders' equity to record the Black-Scholes value of the Vantis stock options converted to Lattice stock options as a result of the transaction. Assumptions used in the Black-Scholes calculations are: volatility - 43.9%; risk free interest rate - 4.7%; expected option life from vesting date - 1.3 years; unvested option forfeiture rate - 27%. Note 3. Pro Forma Earnings (Loss) Per Share Basic pro forma earnings (loss) per share was calculated based on shares of Lattice's Common Stock outstanding at April 3, 1999. Diluted earnings per share are the same as basic shares outstanding because including common stock equivalents would be anti-dilutive. (A) Exhibits. 23.1 Consent of Ernst and Young LLP, Independent Auditors SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. LATTICE SEMICONDUCTOR CORPORATION Date: August 20, 1999 By: /s/ Stephen Skaggs --------------------------------- Name: STEPHEN A. SKAGGS Title: Chief Financial Officer 49 EX-23.1 2 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-33933, 33-35259, 33-38521, 33-76358, 33-51232, 33-69496, 333-15737, 333-40031, 333-69467, and 333-81035) and the Registration Statements on Form S-3 (Nos. 33-57512, 333-15741, and 333-40043) of Lattice Semiconductor Corporation and in the related prospectuses of our report dated February 8, 1999, with respect to the consolidated financial statements of Vantis Corporation included in the Form 8-K/A of Lattice Semiconductor Corporation dated June 15, 1999. /s/ Ernst & Young LLP San Jose, California August 18, 1999 50 -----END PRIVACY-ENHANCED MESSAGE-----