BASIS OF PRESENTATION. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The Company's fiscal year ends on the Saturday nearest March 31. For ease of presentation, March 31 has been utilized as the fiscal year-end for all financial statement captions. Certain amounts from the prior year have been reclassified to conform to the current year presentation. Reclassifications had no effect on previously reported statements of financial position or results of operations.

CASH EQUIVALENTS AND INVESTMENTS. Cash and cash equivalents consist of cash on deposit with banks, tax-advantaged municipal bonds, and investments in money market instruments with insignificant interest rate risk and original maturities at date of acquisition of 90 days or less. Short-term investments consist of tax-advantaged municipal bonds, tax-advantaged auction rate preferred municipal bonds and corporate bonds with maturities greater than 90 days but less than one year from the balance sheet date. Restricted investments consist of US Treasury Securities held as collateral relating to leases for the Company's facilities. See Note 6 of Notes to Consolidated Financial Statements. The Company invests its cash, cash equivalents and short-term investments through various banks and investment banking institutions. This diversification of risk is consistent with Company policy to maintain liquidity and ensure the safety of principal.

Management classifies investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date, although classification is generally not changed. Securities are classified as held-to-maturity when the Company has the positive intent and the ability to hold the securities until maturity. Held-to-maturity securities are carried at cost adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as any interest on the securities, is included in interest income. Securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains or losses, net of tax, included as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income. The fair values for marketable debt and equity securities are based on quoted market prices. The cost of securities matured or sold is based on the specific identification method.

INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value) and are comprised of the following at March 31, 1998 and 1997:

(In thousands) 1998 1997
Raw materials $ 5,976 $ 4,952
Work-in-progress 24,845 30,898
Finished goods 24,468 26,517
  $55,289 $62,367

ADVANCES FOR WAFER PURCHASES. In fiscal 1997, the Company signed an agreement with Seiko Epson, a primary wafer supplier. This agreement was amended in fiscal 1998 and now provides for an advance to Seiko Epson of $150.0 million. In conjunction with the agreement, $60.0 million was paid in fiscal 1997 and an additional $90.0 million was paid in fiscal 1998. Repayment of this advance is in the form of wafer deliveries, which began during the fourth quarter of fiscal 1998. Specific wafer pricing is in US dollars and is based upon the prices of similar wafers manufactured by other, specifically identified, leading-edge foundry suppliers. The advance payment provision also provides for interest to be paid to the Company in the form of free wafers.

PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets of three to five years for machinery, equipment, furniture and fixtures and up to thirty years for buildings.

REVENUE RECOGNITION. Net revenues are stated net of discounts and allowances. Revenue from product sales direct to customers and foreign distributors is generally recognized upon shipment. However, the Company defers the recognition of revenue and the related cost of revenue on shipments to domestic distributors that have certain rights of return and price protection privileges on unsold product until the distributor sells the product.

FOREIGN CURRENCY TRANSLATION. The US dollar is the functional currency for the Company's Ireland manufacturing facility. Assets and liabilities that are not denominated in the functional currency are remeasured into US dollars, and the resulting gains or losses are included in net income. The functional currency is the local currency for each of the Company's other foreign subsidiaries and the USIC joint venture. Assets and liabilities are translated at month-end exchange rates, and statements of operations are translated at the average exchange rates during the year. Exchange gains or losses arising from translation of foreign currency denominated assets and liabilities are included as a component of stockholders' equity.

DERIVATIVE FINANCIAL INSTRUMENTS. As part of its ongoing asset and liability management activities, the Company periodically enters into certain derivative financial arrangements to reduce financial market risks. These instruments are used to hedge foreign currency, equity and interest rate market exposures of underlying assets and liabilities. The Company does not enter into derivative financial instruments for trading purposes.

The Company periodically enters into currency forward or option contracts to minimize foreign exchange risk relating to the Company's wafer purchases that are denominated in yen. These contracts are accounted for as identifiable hedges against wafer purchases. Realized gains or losses are recognized upon maturity of the contracts and are included in cost of sales. The Company also periodically enters into foreign exchange forward contracts to minimize the impact of future exchange fluctuations in foreign currency firm commitments. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent US dollar payment equal to the value of such exchange. These contracts are accounted for as hedges of an identifiable foreign currency commitment. Realized gains or losses are recognized upon maturity of the contracts and offset the underlying asset or liability.

The Company has entered into an interest rate swap agreement in order to mitigate the interest rate risks whereby the long-term debt fixed interest rate liability is matched against the Company's short-term variable interest rate assets. The liability interest rate swap agreement involves the exchange of fixed interest rate payments for variable interest rate payments over the life of the agreement without an exchange of the notional amount. The differential to be paid or received as the variable interest rate changes is accrued and recognized as interest expense. The related amounts payable or receivable from the third party is included in other liabilities or assets. The fair value of the swap agreement and changes in the fair value as a result of changes in market interest rates are not material. See Note 5 of Notes to Consolidated Financial Statements.

EMPLOYEE STOCK PLANS. The Company accounts for its stock option and employee stock
purchase plans in accordance with provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In addition the Company discloses pro forma information related to its stock plans according to Financial Accounting Standards Board's Statement No. 123, "Accounting for Stock-Based Compensation" (FASB 123). See Note 8 of Notes to Consolidated Financial Statements.

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 liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. Such estimates relate to the useful lives of fixed assets and intangible assets, allowances for doubtful accounts, pricing adjustments, customer returns, inventory reserves, potential reserves relating to litigation matters as well as other accruals or reserves. Actual results may differ from those estimates, and such differences may be material to the financial statements.

NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (FASB 130), "Reporting Comprehensive Income." FASB 130 establishes standards for the reporting and disclosure of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity (net assets) during the period from non-owner sources. The Company is required to adopt FASB 130 in fiscal 1999. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of FASB 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows.

Also in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (FASB 131), "Disclosures about Segments of an Enterprise and Related Information." FASB 131 revises previous standards related to the way public companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is required to adopt FASB 131 in fiscal 1999. The adoption of FASB 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows.

CONCENTRATIONS OF CREDIT RISK. The Company attempts to mitigate the concentration of credit risk in its trade receivables with respect to the high-technology industry with the Company's credit evaluation process, relatively short collection terms, distributor agreements, sales among various end-user applications throughout the high-technology market and the geographical dispersion of sales. The Company generally does not require collateral. Bad debt write-offs have been insignificant for all years presented.

CONCENTRATION OF OTHER RISKS. The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, conditions relating to technology companies, conditions specific to the semiconductor industry, decreases in average selling prices over the life of any particular product, the timing of new product introductions (by the Company, its competitors and others), the ability to manufacture sufficient quantities of a given product in a timely manner, the timely implementation of new manufacturing process technologies, the ability to safeguard patents and intellectual property from competitors, and the impact of new technologies resulting in rapid escalation of demand for some products in the face of equally steep decline in demand for others. Based on the factors noted herein, the Company may experience substantial period-to-period fluctuations in future operating results.

Return to Notes to Consolidated Financial Statements