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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER: 0-11674
LSI LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2712976
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 433-8000
(REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of May 4, 2000, there were 306,972,942 of the registrant's Common Stock,
$.01 par value, outstanding.
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LSI LOGIC CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
PAGE
NO.
------
PART I . FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - March 31, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations - Three-Month Periods Ended
March 31, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows - Three-Month Periods Ended
March 31, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
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PART I
ITEM 1. FINANCIAL STATEMENTS
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
(In thousands, except per-share amounts) 2000 1999
------------- -------------
ASSETS
Cash and cash equivalents $ 299,594 $ 250,603
Short-term investments 568,635 410,730
Accounts receivable, less allowances of $7,220 and $11,346 396,758 275,620
Inventories 255,146 243,896
Deferred tax assets 66,212 66,212
Prepaid expenses and other current assets 75,554 41,223
------------- -------------
Total current assets 1,661,899 1,288,284
Property and equipment, net 1,255,417 1,323,501
Goodwill and other intangibles 281,787 293,631
Other assets 314,817 301,189
------------- -------------
Total assets $ 3,513,920 $ 3,206,605
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 195,185 $ 189,293
Accrued salaries, wages and benefits 74,040 77,277
Other accrued liabilities 112,878 110,229
Income tax payable 57,358 41,536
Current portion of long-term obligations 1,788 56,996
------------- -------------
Total current liabilities 441,249 475,331
------------- -------------
Deferred tax liabilities 75,771 75,771
Other long-term obligations 980,528 793,461
------------- -------------
Total long-term obligations and deferred tax liabilities 1,056,299 869,232
------------- -------------
Commitments and contingencies (Note 12)
Minority interest in subsidiaries 6,074 6,210
------------- -------------
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized -- --
Common stock; $.01 par value; 450,000 shares authorized; 306,611 and
299,572 shares outstanding 3,066 2,996
Additional paid-in capital 1,324,021 1,271,093
Retained earnings 521,795 435,552
Accumulated other comprehensive income 161,416 146,191
------------- -------------
Total stockholders' equity 2,010,298 1,855,832
------------- -------------
Total liabilities and stockholders' equity $ 3,513,920 $ 3,206,605
============= =============
See notes to unaudited consolidated condensed financial statements.
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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
(In thousands, except per share amounts) 2000 1999
--------- ---------
Revenues $ 615,186 $ 463,617
--------- ---------
Costs and expenses:
Cost of revenues 365,500 301,891
Research and development 80,229 76,523
Selling, general and administrative 70,240 61,489
Restructuring of operations and other non-recurring items, net 2,781 (1,977)
Amortization of intangibles 11,836 11,207
--------- ---------
Total costs and expenses 530,586 449,133
--------- ---------
Income from operations 84,600 14,484
Interest expense (10,893) (10,580)
Interest income and other, net 7,129 1,736
Gain on sale of equity securities 34,172 --
--------- ---------
Income before income taxes and
cumulative effect of change in accounting principle 115,008 5,640
Provision for income taxes 28,765 1,630
--------- ---------
Income before cumulative effect of change in accounting principle 86,243 4,010
Cumulative effect of change in accounting principle -- (91,774)
--------- ---------
Net income/(loss) $ 86,243 $ (87,764)
========= =========
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.28 $ 0.01
Cumulative effect of change in accounting principle -- (0.32)
--------- ---------
Net income/(loss) $ 0.28 $ (0.31)
========= =========
Diluted earnings per share:
Income before cumulative effect of change in
Accounting principle $ 0.25 $ 0.01
Cumulative effect of change in accounting principle -- (0.31)
--------- ---------
Net income/(loss) $ 0.25 $ (0.30)
========= =========
Shares used in computing per share amounts:
Basic 302,682 288,244
========= =========
Diluted 349,159 293,540
========= =========
See notes to unaudited consolidated condensed financial statements.
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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
(In thousands) 2000 1999
----------- -----------
Operating activities:
Net income/(loss) $ 86,243 $ (87,764)
Adjustments:
Depreciation and amortization 93,166 94,300
Write-off of unamortized preproduction costs -- 97,356
Non-cash restructuring charges/(benefits), net 2,781 (2,533)
Gain on sale of equity securities (34,172) --
Changes in:
Accounts receivable (122,668) (39,293)
Inventories (12,159) 5,372
Prepaid expenses and other assets (25,184) 9,597
Accounts payable 6,856 (12,329)
Accrued and other liabilities 16,049 (29,062)
----------- -----------
Net cash provided by operating activities 10,912 35,644
----------- -----------
Investing activities:
Purchase of debt and equity securities available-for-sale (401,472) (82,616)
Maturities and sales of debt and equity
securities available-for-sale 279,727 64,620
Purchases of equity securities (4,035) --
Proceeds from sale of equity securities 29,914 --
Purchases of property and equipment, net of retirement (23,710) (9,948)
----------- -----------
Net cash used in investing activities (119,576) (27,944)
----------- -----------
Financing activities:
Proceeds from borrowings 500,000 345,000
Repayment of debt obligations (375,423) (365,996)
Debt issuance costs (15,300) (9,488)
Issuance of common stock, net 51,894 5,110
----------- -----------
Net cash provided by/(used in) financing activities 161,171 (25,374)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (3,516) (521)
----------- -----------
Increase/(decrease) in cash and cash equivalents 48,991 (18,195)
----------- -----------
Cash and cash equivalents at beginning of period 250,603 210,306
----------- -----------
Cash and cash equivalents at end of period $ 299,594 $ 192,111
=========== ===========
See notes to unaudited consolidated condensed financial statements.
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LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments, except for the restructuring and other
non-recurring charges as discussed in Note 2), necessary to present fairly the
financial information included therein. While the Company believes that the
disclosures are adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
For financial reporting purposes, the Company reports on a 13 or 14 week
quarter with a year ending December 31. For presentation purposes, the
consolidated condensed financial statements refer to the quarter's calendar
month end for convenience. The results of operations for the quarter ended March
31, 2000 are not necessarily indicative of the results to be expected for the
full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
condensed financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
NOTE 2 - RESTRUCTURING AND OTHER NON-RECURRING ITEMS
On February 22, 2000, the Company entered into an agreement with a third
party to outsource certain testing services presently performed by the Company
at its Fremont facility. The agreement provides for the sale and transfer of
certain test equipment and related peripherals for total proceeds of
approximately $10.7 million. The Company recorded a loss of approximately $2.2
million associated with the agreement.
In March of 2000, the Company recorded approximately $1.1 million of
non-cash compensation related expenses resulting from a Separation Agreement
entered into during the quarter with a former employee and a $0.5 million
benefit for the reversal of reserves established in the second quarter of 1999
for merger related expenses in connection with the merger with SEEQ Technology,
Inc. ("SEEQ") discussed below.
Integration of SEEQ
- -------------------
In connection with the merger with SEEQ on June 22, 1999 accounted for as a
pooling of interest, the Company recorded approximately $2.9 million in
restructuring charges and $5.5 million in merger-related expenses which included
$0.5 million recorded by SEEQ in the first quarter of 1999. The merger expenses
related primarily to investment banking and other professional fees directly
attributable to the merger with SEEQ. The restructuring charge was comprised of
$1.9 million in write-downs of fixed assets which were duplicative to the
combined company, $0.5 million of exit costs relating to non-cancelable building
lease contracts and a $0.5 million provision for severance costs related to the
involuntary termination of certain employees. The exit costs and employee
severance costs were recorded in accordance with EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The fixed and other asset write-downs were recorded in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The restructuring actions as outlined by
the restructuring plan were completed. Approximately $0.5 million of severance
was paid to three employees terminated during 1999. During the three months
ended March 31, 2000, approximately $480,000 of lease payments were made related
to the non-cancelable building lease contracts.
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The following table sets forth the SEEQ restructuring reserves as of June
22, 1999, the merger date, and activity against the reserve since then:
Balance Balance
Balance December 31, March 31,
(In thousands) June 22, 1999 Utilized 1999 Utilized 2000
------------- ------------- ------------- ------------- -------------
Write-down of fixed assets(a) $ 1,854 $ (1,854) $ -- -- $ --
Non-cancelable building lease contracts 490 (10) 480 (480) --
Payments to employees for severance 516 (516) -- -- --
------------- ------------- ------------- ------------- -------------
Total $ 2,860 $ (2,380) $ 480 -- $ --
============= ============= ============= ============= -------------
(a) The amount utilized represents a write-down of fixed assets due to
impairment. The amount was accounted for as a reduction of the assets and
did not result in a liability.
NOTE 3 - LICENSE AGREEMENT
In the second quarter of 1999, the Company and Silterra Malaysia Sdn. Bhd.
(formerly known as Wafer Technology (Malaysia) Sdn. Bhd.) ("Silterra") entered
into a technology transfer agreement under which the Company grants licenses to
Silterra with respect to certain of the Company's wafer fabrication technologies
and provides associated manufacturing training and related services. In
exchange, the Company receives cash and equity consideration valued at $120
million over three years for which transfers and obligations of the Company are
scheduled to occur. The Company transferred technology to Silterra valued at $6
million in total for the three months ended March 31, 2000. The amount was
recorded as an offset to the Company's R&D expenses. In addition, the Company
provided engineering training with a value of $1 million for the three months
ended March 31, 2000. The amount was recorded as an offset to cost of revenues.
NOTE 4 - INVESTMENTS
All highly liquid investments purchased with an original maturity of ninety
days or less are considered to be cash equivalents and are classified as
held-to-maturity. Marketable short-term investments are generally classified and
accounted for as available-for-sale. Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reassesses the classification at each reporting date. Investments in debt and
equity securities classified as held-to-maturity are reported at amortized cost
plus accrued interest, and securities classified as available-for-sale are
reported at fair value with unrealized gains and losses, net of related tax,
recorded as a separate component of comprehensive income in shareholders' equity
until realized. Interest and amortization of premiums and discounts for debt and
equity securities are included in interest income. Gains and losses on
securities sold are determined based on the specific identification method and
are included in other income. For all investment securities, unrealized losses
that are other than temporary are recognized in net income. The Company does not
hold these securities for speculative or trading purposes. The Company also
holds investments in restricted shares of technology companies. These
non-marketable shares are recorded at cost.
As of March 31, 2000 and December 31, 1999, the Company held $119 million
and $55 million of debt securities, respectively, that were included in cash and
cash equivalents and $569 million and $411 million of debt and equity
securities, respectively, that were classified as short-term investments on the
Company's consolidated balance sheet. Debt securities consisted primarily of
U.S. and foreign corporate debt securities, commercial paper, auction rate
preferred stock, overnight deposits, certificate of deposit, and U.S. government
and municipal agency securities. Unrealized holding gains and losses of
held-to-maturity securities and available-for-sale debt securities were not
significant and accordingly the amortized cost of these securities approximated
fair market value at March 31, 2000 and December 31, 1999. Contract maturities
of these securities were within one year as of March 31, 2000. Realized gains
and losses for held-to-maturity securities and available-for-sale debt
securities were not significant for the three month periods ended March 31, 2000
and 1999.
At March 31, 2000 and December 31, 1999, the Company had marketable equity
securities with an aggregate carrying value of $192 million and $153 million,
$60 million and $25 million of which were classified as short-term
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investments on the Company's consolidated balance sheet, respectively. The
remaining balance was included in other long-term assets. The unrealized gain of
$112 million and $90 million, net of the related tax effect of $60 million and
$48 million, on these equity securities was included in accumulated
comprehensive income as of March 31, 2000 and December 31, 1999, respectively.
In the third quarter of 1999, the Company adopted a program of regular selling
of marketable equity securities. During the three month period ended March 31,
2000, the Company sold equity securities for approximately $30 million in the
open market, realizing a pre-tax gain of approximately $27 million. In addition,
the Company realized a pre-tax gain of approximately $7 million associated with
equity securities of a certain technology company that were acquired by another
technology company during the three month period ended March 31, 2000.
NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company has foreign subsidiaries, which operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in foreign currency exchange rates and interest rates. The Company
utilizes various hedge instruments, primarily forward contracts and currency
option contracts, to manage its exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies. The Company does not hold derivative financial
instruments for speculative or trading purposes.
The Company enters into forward contracts to hedge firm asset and liability
positions and cash flows denominated in non-functional currencies. The following
table summarizes by major currency the forward exchange contracts outstanding as
of March 31, 2000 and December 31, 1999. The buy amount represents the U.S.
dollar equivalent of commitments to purchase foreign currencies, and the sell
amount represents the U.S. dollar equivalent of commitments to sell foreign
currencies. Foreign currency amounts were translated at rates current at March
31, 2000 and December 31, 1999. These contracts will expire through December
2000.
March 31, December 31,
(In thousands) 2000 1999
------------- -------------
Buy/(Sell):
Japanese Yen $ 38,761 $ 22,194
Netherlands Guilder 25,210 43,145
Japanese Yen (14,649) (3,397)
These forward contracts are considered identifiable hedges, and recognition
of gains and losses is deferred until settlement of the underlying commitments.
Realized gains and losses are recorded as other income or expense when the
underlying exposure materializes or the hedged transaction is no longer expected
to occur. Realized gains and losses included in interest income and other were
not significant for the three month periods ended March 31, 2000 and 1999.
Currency option contracts are treated as hedges of third-party yen revenue
exposures. At March 31, 2000, total outstanding purchased currency option
contracts were $195 million. These contracts expire in various dates through
December 2000. At December 31, 1999, there were no purchased currency option
contracts outstanding. Recognition of gains is deferred until the exposure
underlying the option is recorded. Option premiums are amortized over the lives
of the contracts. Realized gains and losses are recorded as an offset to revenue
and were not significant for the three month periods ended March 31, 2000 and
1999. There were no deferred premiums outstanding as of December 31, 1999. The
deferred premiums on all outstanding options were $7.3 million as of March 31,
2000, and are included in other current assets.
During the three months ended March 31, 2000, the Company hedged its
minority equity position in a publicly traded company. The hedge took the form
of a cashless collar and was constructed as a series of purchased put and sold
call options, with the cost of the purchased puts exactly offset by the premium
earned on the sold calls. The collar expired on March 16, 2000.
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In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 by one year. Upon adoption of SFAS No. 133, the Company will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle.
While the Company believes the adoption of this statement will not have a
significant effect on the Company's results of operations, the impact of the
adoption of SFAS No. 133 as of the effective date cannot be reasonably estimated
at this time.
NOTE 6 - BALANCE SHEET DETAIL
March 31, December 31,
(In thousands) 2000 1999
------------- -------------
Inventories:
Raw materials $ 21,599 $ 20,294
Work-in-process 104,276 139,698
Finished goods 129,271 83,904
------------- -------------
$ 255,146 $ 243,896
============= =============
NOTE 7 -DEBT
March 31, December 31,
(In thousands) 2000 1999
------------- -------------
Notes payable to banks $ 95 $ 379,823
Convertible Subordinated Notes 845,000 345,000
Capital lease obligations 3,470 3,948
------------- -------------
848,565 728,771
Current portion of long-term debt, capital
lease obligations and Short-term borrowings (1,788) (56,996)
------------- -------------
Long-term debt and capital lease obligations $ 846,777 $ 671,775
============= =============
On February 18, 2000, the Company issued $500 million of 4% Convertible
Subordinated Notes (the "2000 Convertible Notes") due in 2005. The 2000
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at any time following issuance into shares of the Company's common
stock at a conversion price of $70.2845 per share and are redeemable at the
Company's option, in whole or in part, at any time on or after February 20,
2003. Each holder of the 2000 Convertible Notes has the right to cause the
Company to repurchase all of such holder's convertible notes at 100% of their
principal amount plus accrued interest upon the occurrence of certain events and
in certain circumstances. Interest is payable semiannually. The Company paid
approximately $15.3 million for debt issuance costs related to the 2000
Convertible Notes. The debt issuance costs are being amortized using the
interest method. The net proceeds from the 2000 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $380 million as of
December 31, 1999 as described below.
During March of 1999, the Company issued $345 million of 4 1/4% Convertible
Subordinated Notes (the "1999 Convertible Notes") due in 2004. The 1999
Convertible Notes are subordinated to all existing and future senior debt, are
convertible 60 days following issuance into shares of the Company's common stock
at a conversion price of
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$15.6765 per share and are redeemable at the option of the Company, in whole or
in part, at any time on or after March 20, 2002. Each holder of the convertible
notes has the right to cause the Company to repurchase all of such holder's
convertible notes at 100% of their principal amount plus accrued interest upon
the occurrence of certain events and in certain circumstances. Interest is
payable semiannually. The Company paid approximately $9.5 million for debt
issuance costs related to the 1999 Convertible Notes. The amount was capitalized
in other assets and is being amortized over the life of the 1999 Convertible
Notes using the interest method. The net proceeds of the 1999 Convertible Notes
were used to repay existing debt obligations as described below.
On August 5, 1998, the Company entered into a credit agreement with ABN AMRO
Bank N.V. ("ABN AMRO"). The credit agreement was restated and superseded by the
Amended and Restated Credit Agreement dated as of September 22, 1998 by and
among the Company, LSI Logic Japan Semiconductor, Inc. ("JSI"), ABN AMRO and
thereafter syndicated to a group of lenders determined by ABN AMRO and the
Company. The credit agreement consisted of two credit facilities: a $575 million
senior unsecured reducing revolving credit facility ("Revolver"), and a $150
million senior unsecured revolving credit facility ("364-day Facility").
On August 5, 1998, the Company borrowed $150 million under the 364-day
Facility and $485 million under the Revolver. On December 22, 1998, the Company
borrowed an additional $30 million under the Revolver. The credit facilities
allowed for borrowings at adjustable rates of LIBOR/TIBOR with a 1.25% spread.
As of March 31, 1999, the spread changed to 1%. Interest payments are due
quarterly. The 364-day Facility expired on August 3, 1999 by which time
borrowings outstanding were fully paid in accordance with the credit agreement.
The Revolver is for a term of four years with the principal reduced quarterly
beginning on December 31, 1999. In November 1999, an amendment was made to the
credit agreement whereby mandatory repayments would not exceed the amount
necessary to reduce the commitment to $241 million. The Revolver includes a term
loan sub-facility in the amount of 8.6 billion yen made available to JSI over
the same term. The yen term loan sub-facility is for a period of four years with
no required payments until it expires on August 5, 2002. Pursuant to the
restated credit agreement, on August 30, 1998, JSI repaid its existing 11.4
billion yen ($79.2 million) credit facility and borrowed 8.6 billion yen ($84
million at December 31, 1999) bearing interest at adjustable rates. In March of
1999, the Company repaid the full $150 million outstanding under the 364-day
Facility and $186 million outstanding under the Revolver using the proceeds from
the 1999 Convertible Notes as described above. Borrowings outstanding under the
Revolver including the yen sub-facility were approximately $380 million as of
December 31, 1999. The Company repaid the outstanding balance for the Revolver
in February 2000. As of December 31, 1999, the interest rate for the Revolver
and the yen sub-facility was 7.07% and 1.29%, respectively.
In accordance with the terms of its existing credit agreement, the Company
must comply with certain financial covenants related to profitability, tangible
net worth, liquidity, senior debt leverage, debt service coverage and
subordinated indebtedness. As of March 31, 2000 and December 31, 1999, the
Company was in compliance with these covenants.
NOTE 8 -RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
per share amount computations as required by SFAS No. 128 "Earnings Per Share"
("EPS") is as follows:
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Three Months Ended March 31,
----------------------------------------------------------------------------------
2000 1999
------------------------------------- ---------------------------------------
Per-Share Per-Share
(In thousands except per share amounts) Income* Shares+ Amount Income* Shares+ Amount
-------- ------- --------- -------- ------- ---------
Basic EPS:
Net income before cumulative
effect of change in accounting
principle $ 86,243 302,682 $ 0.28 $ 4,010 288,244 $ 0.01
-------- --------
Cumulative effect of change
in accounting principle -- -- (91,774) 288,244 (0.32)
Net income/(loss) available to
Common stockholders 86,243 302,682 0.28 (87,764) 288,244 (0.31)
-------- --------
Effect of dilutive securities:
Stock options 24,469 5,296
4 1/4% Convertible
Subordinated Notes 2,750 22,008 -- --
Diluted EPS:
Net income before cumulative
effect of change in accounting
principle (adjusted for assumed
conversion of debt) 88,993 349,159 0.25 4,010 293,540 0.01
-------- --------
Cumulative effect of change in
Accounting principle -- -- -- (91,774) 293,540 (0.31)
-------- --------
Net income/(loss) available to
Common stockholders $ 88,993 349,159 $ 0.25 $(87,764) 293,540 $ (0.30)
-------- --------
* Numerator
+ Denominator
Of the total options outstanding, approximately 24,000 shares and 15,380,000
shares were excluded from the computation of diluted shares for the three months
ended March 31, 2000 and 1999, respectively, because the exercise prices of
these options were greater than the average market price of common shares for
the respective three month periods. The exercise price of these options was
$66.13 at March 31, 2000 and ranged from $12.50 to $20.94 at March 31, 1999,
respectively. For the three months ended March 31, 2000, common equivalent
shares of 3,442,231 and interest expense of $1,750,000, net of taxes associated
with the 2000 Convertible Notes were excluded from the calculation of diluted
shares because of their antidilutive effect on earnings per share. For the three
months ended March 31, 1999, common equivalent shares of 2,529,594 and interest
expense of $305,469, net of taxes associated with the 1999 Convertible Notes
(See Note 7), were excluded from the calculation of diluted shares because of
their antidilutive effect on earnings per share.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income is defined as a change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The primary difference between net income and comprehensive income, for the
Company, arises from foreign currency translation adjustments and unrealized
gains on available-for-sale securities, net of applicable taxes. Comprehensive
income for the current reporting period and comparable period in the prior year
is as follows:
Three months ended March 31,
(In thousands) 2000 1999
------------- -------------
Comprehensive income/(loss) $ 96,292 $ (89,426)
============= =============
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NOTE 10 -SEGMENT REPORTING
The Company operates in two reportable segments: the Semiconductor segment
and the Storage Area Network ("SAN") Systems segment. In the Semiconductor
segment, the Company designs, develops, manufactures and markets integrated
circuits, including application-specific integrated circuits, (commonly known in
the industry as ASICs), application-specific standard products and related
products and services. Semiconductor design and service revenues include
engineering design services, licensing of our advanced design tools software,
and technology transfer and support services. The Company's customers use these
services in the design of increasingly advanced integrated circuits
characterized by higher levels of functionality and performance. In the SAN
Systems segment, the Company designs, manufactures, markets and supports high
performance data storage management and storage systems solutions and a complete
line of Redundant Array of Independent Disk ("RAID") systems, subsystems and
related software.
The following is a summary of operations by segment for the three month
ended March 31, 2000 and 1999:
Three month ended
March 31,
(In thousands) 2000 1999
------------- -------------
REVENUES:
Semiconductor $ 530,387 $ 396,107
SAN Systems 84,799 67,510
------------- -------------
Total $ 615,186 $ 463,617
============= =============
INCOME FROM OPERATIONS:
Semiconductor $ 73,001 $ 8,900
SAN Systems 11,599 5,584
------------- -------------
Total $ 84,600 $ 14,484
============= =============
Intersegment revenues for the periods presented above were not significant.
Restructuring of operations and other non-recurring items were included in the
Semiconductor segment.
One customer represented approximately 12% of the Company's total
consolidated revenues for the three months ended March 31, 2000. No customers
represented 10% or more of the Company's total consolidated revenues for the
three month period ended March 31, 1999. In the Semiconductor segment, one
customer represented approximately 11% of total Semiconductor revenues for the
three months ended March 31, 2000. No customers represented 10% or more of total
Semiconductor revenues for the three months ended March 31, 1999. In the SAN
Systems segment, there were four customers with revenues representing
approximately 24%, 23%, 18% and 11% of total SAN Systems revenues for the three
months ended March 31, 2000, respectively. During the three months ended March
31, 1999, there were three customers with revenues representing approximately
27%, 23% and 19% of total SAN systems revenues, respectively.
The following is a summary of total assets by segment as of March 31, 2000
and December 31, 1999:
March 31, December 31,
(In thousands) 2000 1999
------------- -------------
TOTAL ASSETS:
Semiconductor $ 3,321,424 $ 3,051,865
SAN Systems 192,496 154,740
------------- -------------
Total $ 3,513,920 $ 3,206,605
============= =============
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Revenues from domestic operations were $361 million, representing 59% of
consolidated revenues, for the first quarter of 2000 compared to $281 million,
representing 61% of consolidated revenues, for the same period of 1999.
NOTE 11 -LEGAL MATTERS
A discussion of certain pending legal proceedings is included in Item 3 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The information provided therein remains unchanged.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such
litigations and claims cannot be predicted with certainty, the final outcome of
such matters is not expected to have a significant adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 12 -COMMITMENTS AND CONTINGENCIES
In March 2000, the Company entered into a master lease and security
agreement with a group of companies ("Lessor") for up to $250 million for
certain wafer fabrication equipment. Each lease supplement pursuant to the
transaction will have a lease term of three years with two consecutive renewal
options. The Company may, at the end of any lease term, return, or purchase at a
stated amount all the equipment. Upon return of the equipment, the Company must
pay the Lessor a termination value. There were no significant gains or losses
from these leasing transactions for the three months ended March 31, 2000.
Through March 31, 2000, the Company has drawn down $53 million as the first
supplement pursuant to the agreement. Minimum rental payments under these
operating leases, including option periods, are $12.0 million in 2001, $11.4
million in 2002, $9.4 million in 2003, $8.6 million in 2004 and $2.1 million in
2005. Under this lease, the Company is required to maintain compliance with
certain financial covenants. The Company was in compliance with these covenants
as of March 31, 2000.
NOTE 13 -SUBSEQUENT EVENTS
On April 13, 2000, the Company entered into an Asset Purchase Agreement with
NeoMagic Corporation ("NeoMagic"). Under the agreement, the Company acquired
certain tangible and intangible assets associated with NeoMagic's DVD Drive
Electronics line of business for consideration of approximately $14.5 million in
cash. The acquisition is intended to enhance and accelerate the Company's
set-top decoder and DVD product offerings. The acquisition will be accounted for
as a purchase. In addition, the Company offered employment to former NeoMagic
engineers in the United States and United Kingdom.
On April 27, 2000, the Company entered into an Asset Purchase Agreement with
Cacheware, Inc. ("Cacheware"). Under the agreement, the Company acquired certain
tangible and intangible assets associated with Cacheware's storage area network
("SAN") business for consideration of approximately $23 million in cash. The
acquisition is intended to provide a key technology to enhance the Company's SAN
solutions for fault tolerant applications while providing a roadmap for
integrating the functionality into the Company's RAID controllers. The
acquisition will be accounted for as a purchase. In addition, the Company
offered employment to former Cacheware engineers in the United States.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We believe that our future operating results will continue to be subject to
quarterly variations based upon a wide variety of factors detailed in Risk
Factors in Part I of our Annual Report on Form 10-K for the year ended December
31, 1999. These factors include, among others:
- Cyclical nature of both the semiconductor and SAN systems industries and
the markets addressed by our products;
- Availability and extent of utilization of manufacturing capacity;
- Price erosion;
- Competitive factors;
- Timing of new product introductions;
- Changes in product mix;
- Fluctuations in manufacturing yields;
- Product obsolescence;
- Business and product market cycles;
- Economic and technological risks associated with our acquisition and
alliance activities; and
- The ability to develop and implement new technologies.
Our operating results could also be impacted by sudden fluctuations in
customer requirements, currency exchange rate fluctuations and other economic
conditions affecting customer demand and the cost of operations in one or more
of the global markets in which we do business. We operate in a technologically
advanced, rapidly changing and highly competitive environment. We predominantly
sell custom products to customers operating in a similar environment.
Accordingly, changes in the conditions of any of our customers may have a
greater impact on our operating results and financial condition than if we
predominantly offered standard products that could be sold to many purchasers.
While we cannot predict what effect these various factors may have on our
financial results, the aggregate effect of these and other factors could result
in significant volatility in our future performance. To the extent our
performance may not meet expectations published by external sources, public
reaction could result in a sudden and significantly adverse impact on the market
price of our securities, particularly on a short-term basis.
We have international subsidiaries and distributors which operate and sell
our products globally. Further, we purchase a substantial portion of our raw
materials and manufacturing equipment from foreign suppliers and incur labor and
other operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries. We utilize forward exchange and purchased currency option contracts
to manage our exposure associated with net asset and liability positions and
cash flows denominated in non-functional currencies. (See Note 5 of the Notes to
Unaudited Consolidated Condensed Financial Statements referred to hereafter as
"Notes.") There is no assurance that these hedging transactions will eliminate
exposure to currency rate fluctuations that could affect our operating and/or
cash flows.
Our corporate headquarters and some of our manufacturing facilities are
located near major earthquake faults. As a result, in the event of a major
earthquake, we could suffer damages which could significantly and adversely
affect our operating results and financial condition.
While management believes that the discussion and analysis in this report is
adequate for a fair presentation of the information, we recommend that you read
this discussion and analysis in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 1999.
Statements in this discussion and analysis include forward looking
information statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,
as amended. These statements involve known and unknown risks and uncertainties.
Our actual results in
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future periods may be significantly different from any future performance
suggested in this report. Risks and uncertainties that may affect our results
may include, among others:
- Fluctuations in the timing and volumes of customer demand;
- Currency exchange rates;
- Availability and utilization of our manufacturing capacity;
- Timing and success of new product introductions; and
- Unexpected obsolescence of existing products.
We operate in an industry sector where security values are highly volatile
and may be influenced by economic and other factors beyond our control. See
additional discussion contained in "Risk Factors" set forth in Part I of our
Annual Report on Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
On January 25, 2000, we announced a two-for-one common stock split, which
was declared by the Board of Directors as a 100% stock dividend payable to
stockholders of record on February 4, 2000 as one new share of common stock for
each share held on that date. The newly issued common stock shares were
distributed on February 16, 2000. In the following discussion and analysis, all
references to number of shares, per share amounts and market prices of our
common stock have been restated to give retroactive recognition to the
two-for-one common stock split announced on January 25, 2000 for all periods
presented.
Where more than one significant factor contributed to changes in results
from year to year, we have quantified material factors throughout the MD&A where
practicable.
REVENUE. We operate in two reportable segments: the Semiconductor segment
and the Storage Area Network ("SAN") Systems segment. In the Semiconductor
segment, we design, develop, manufacture and market integrated circuits,
including application-specific integrated circuits, (commonly known in the
industry as ASICs), application-specific standard products and related products
and services. Semiconductor design and service revenues include engineering
design services, licensing of our advanced design tools software, and technology
transfer and support services. Our customers use these services in the design of
increasingly advanced integrated circuits characterized by higher levels of
functionality and performance. In the SAN Systems segment, we design,
manufacture, market and support high-performance data storage management and
storage systems solutions and a complete line of Redundant Array of Independent
Disk ("RAID") systems, subsystems and related software.
(See Note 10 of the Notes.)
Total revenues for the first quarter of 2000 increased $151.6 million or 33%
to $615.2 million from $463.6 million for the same period of 1999 on a
consolidated basis. Revenues for the Semiconductor segment increased $134.3
million or 34% to $530.4 million for the first quarter of 2000 from $396.1
million for the same period of 1999. Significant factors which contributed to
this revenue growth included increased demand for products used in
communications applications and network computing applications in the U. S. and
Europe. We expect demand for products used in communications and network
computing applications, specifically networking and broadband including optical
switching, wireless, set-top boxes and other applications, to remain strong for
the rest of the year based primarily on expected growth of the Internet
infrastructure and wireless communications applications. Revenues for the SAN
Systems segment increased $17.3 million or 26% to $84.8 million for the first
quarter of 2000 from $67.5 million for the same period of 1999 due to
introduction of new products and continued growth in older ones primarily as a
result of rapid growth of the Internet. There were no significant intersegment
revenues during the periods presented.
One customer represented 12% of our total consolidated revenues for the
three month period ended March 31, 2000. No customers represented 10% or more of
our total consolidated revenues for the three month period ended March 31, 1999.
In the Semiconductor segment, one customer represented 11% of total
Semiconductor revenues for the three month period ended March 31, 2000. No
customers represented 10% or more of total Semiconductor
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revenues for the three month period ended March 31, 1999. In the SAN Systems
segment, there were four customers with revenues representing 24%, 23%, 18% and
11% of total SAN Systems revenues for the three month period ended March 31,
2000. For the three month period ended March 31, 1999, there were three
customers with revenues representing 27%, 23% and 19% of total SAN Systems
revenues.
Revenues from domestic operations were $361 million, representing 59% of
consolidated revenues, for the first quarter of 2000 compared to $281 million,
representing 61% of consolidated revenues, for the same period of 1999.
OPERATING COSTS AND EXPENSES. Key elements of the consolidated statements of
operations, expressed as a percentage of revenues, were as follows:
Three month period
ended March 31,
CONSOLIDATED: 2000 1999
-------- --------
Gross profit margin 41% 35%
Research and development 13% 17%
Selling, general and administrative 11% 13%
Income from operations 14% 3%
Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:
Three month period
ended March 31,
SEMICONDUCTOR SEGMENT: 2000 1999
-------- --------
Gross profit margin 41% 36%
Research and development 14% 18%
Selling, general and administrative 11% 14%
Income from operations 14% 2%
Three month period
ended March 31,
SAN SYSTEMS SEGMENT: 2000 1999
-------- --------
Gross profit margin 36% 30%
Research and development 7% 10%
Selling, general and administrative 13% 9%
Income from operations 14% 8%
GROSS MARGIN. We have advanced wafer manufacturing operations in Oregon,
Colorado, California and Japan. This allows us to maintain our ability to
provide products to customers with minimal disruption in the manufacturing
process due to economic and geographic risks associated with each geographic
location. During 1999, we entered into a technology transfer agreement with
Silterra Malaysia Sdn. Bhd. (formerly known as Wafer Technology (Malaysia) Sdn.
Bhd.) ("Silterra") under which we grant licenses to Silterra with respect to
certain of our wafer fabrication technologies and provide associated
manufacturing training and related services. In exchange, we will receive cash
and equity consideration valued at $120.0 million over three years during which
transfers and the performance of our obligations are scheduled to occur. (See
Note 3 of the Notes.) During the first quarter of 2000, we provided engineering
training in accordance with the agreement. The engineering training was valued
at $1.0 million and was recorded as a credit to cost of revenues. No such
benefit was recorded during the first quarter of 1999. We will provide an
additional $5.0 million of engineering training over the remaining contract term
of two years, which will be recorded as a credit to cost of revenues.
The gross margin percentage increased to 41% in the first quarter of 2000
from 35% in the same period of 1999 on a consolidated basis. The gross margin
percentage for the Semiconductor segment was 41% in the first quarter of 2000
compared to 36% in the same period of 1999. The increase primarily reflected a
combination of the following factors:
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- Increased production capacity utilization at our fabrication facility in
Gresham, Oregon, which commenced operations in December of 1998; and
- Our focus on higher margin products used in communications and network
computing applications.
The increase in the gross margin was offset in part by a $11.1 million
charge associated with the elimination of a non-strategic product area. The
increase was also offset in part by an increase in compensation related
expenses.
The gross margin percentage for the SAN Systems segment was 36% in the first
quarter of 2000 compared to 30% in the same period of 1999. The increase was
primarily attributable to the following factors:
- Increased revenues in higher margin products in the first quarter of 2000;
and
- Lower manufacturing variances in the first quarter of 2000 compared to
the same period of 1999.
The increase in gross margin for SAN Systems segment was offset in part by
increased compensation related expenses.
Our operating environment, combined with the resources required to operate
in the semiconductor industry, requires that we manage a variety of factors.
These factors include, among other things:
- Product mix;
- Factory capacity and utilization;
- Manufacturing yields;
- Availability of certain raw materials;
- Terms negotiated with third-party subcontractors; and
- Foreign currency fluctuations.
These and other factors could have a significant effect on our gross margin
in future periods. We are targeting our overall gross margin percentage to
increase to 48% by the end of 2000.
Changes in the relative strength of the yen may have a greater impact on our
gross margin than other foreign exchange fluctuations due to our wafer
fabrication operations in Japan. Although the yen strengthened (the average yen
exchange rate for the first quarter of 2000 appreciated 10% from the same period
of 1999), the effect on gross margin and net income was not significant because
yen-denominated sales offset a substantial portion of yen-denominated costs
during the period. Moreover, we hedged a portion of our remaining yen exposure.
(See Note 5 of the Notes.) Future changes in the relative strength of the yen or
mix of foreign-denominated revenues and costs could have a significant effect on
our gross margin or operating results.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
increased $3.7 million or 5% to $80.2 million during the first quarter of 2000
as compared to $76.5 million during the same period of 1999 on a consolidated
basis. R&D expenses for the Semiconductor segment increased $4.4 million or 6%
to $74.2 million in the first quarter of 2000 from $69.8 million in the same
period of 1999. The increase was primarily attributable to expenditures related
to the continued development of advanced sub-micron products and process
technologies and increased compensation expenses. The increase was offset in
part by a $6.0 million research and development benefit associated with a
technology transfer agreement entered into with Silterra in Malaysia during
1999. (See Note 3 of the Notes.) No benefit was recorded during the first
quarter of 1999. We will receive an additional $44.0 million in cash from
Silterra over the remaining contract term of two years as consideration for
technology to be transferred. The benefit will be recorded to research and
development.
R&D expenses for the SAN Systems segment decreased $0.6 million or 10% to
$6.1 million in the first quarter of 2000 from to $6.7 million in the same
period of 1999.
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As a percentage of revenues, R&D expenses were 13% in the first quarter of
2000 as compared to 17% in the same period of 1999 on a consolidated basis. R&D
expenses as a percentage of revenues for the Semiconductor segment decreased to
14% in the first quarter of 2000 from 18% in the same period of 1999. R&D
expenses as a percentage of revenues for the SAN Systems segment also decreased
to 7% in the first quarter of 2000 from 10% in the same period of 1999. As we
continue our commitment to technological leadership in our markets, we are
targeting our R&D investment in 2000 to be approximately 14% of revenues on a
consolidated basis.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased $8.7 million or 14% to $70.2 million during the
first quarter of 2000 as compared to $61.5 million in the same period of 1999 on
a consolidated basis. SG&A expenses for the Semiconductor segment increased $4.0
million or 7% to $59.4 million in the first quarter of 2000 from $55.4 million
in the same period of 1999. SG&A expenses for the SAN Systems segment increased
$4.8 million or 78% to $10.9 million in the first quarter of 2000 from $6.1
million in the same period of 1999. The increase in SG&A was primarily
attributable to an increase in compensation and commission expenses for sales
personnel.
As a percentage of revenues, SG&A expenses decreased to 11% in the first
quarter of 2000 from 13% in the same period of 1999 on a consolidated basis.
SG&A expenses as a percentage of revenues for the Semiconductor segment
decreased to 11% in the first quarter of 2000 from 14% in the same period of
1999. SG&A expenses as a percentage of revenues for the SAN Systems segment
increased to 13% in the first quarter of 2000 from 9% in the same period of
1999. We expect that SG&A expenses as a percentage of revenues will remain
relatively flat at approximately 11% of revenues on a consolidated basis in
2000.
RESTRUCTURING OF OPERATIONS AND OTHER NON-RECURRING ITEMS. We recorded
restructuring of operations and other non-recurring net charges of $2.8 million
during the first quarter of 2000. The net charges reflected the combination of
the following:
- On February 22, 2000, we entered into an agreement with a third party to
outsource certain testing services presently performed by the Company at
its Fremont facility. The agreement provides for the sale and transfer
of certain test equipment and related peripherals for total proceeds of
approximately $10.7 million. The Company recorded a loss of
approximately $2.2 million associated with the agreement. (See Note 2
of the Notes.)
- In March of 2000, the Company recorded approximately $1.1 million of
non-cash compensation related expenses resulting from a Separation
Agreement entered into during the quarter with a former employee and a
$0.5 million benefit for the reversal of reserves established in the
second quarter of 1999 for merger related expenses in connection with
the merger with SEEQ Technology, Inc. ("SEEQ") discussed below.
On June 22, 1999, we and SEEQ were combined in a transaction accounted for
as a pooling of interest. For description of the business combination, see our
Annual Report on Form 10-K for the year ended December 31, 1999.
The restructuring of operations and other non-recurring net benefit of $2.0
million recorded in the three month period ended March 31, 1999 consisted of
$2.5 million of reversal of restructuring reserves originally established in the
third quarter of 1998 and $0.5 million of merger expenses booked by SEEQ. For
description of the restructuring program established in 1998, see our Annual
Report on Form 10-K for the year ended December 31, 1999. For a discussion of
SEEQ integration expenses, see Note 2 of the Notes.
AMORTIZATION OF INTANGIBLES. Amortization of goodwill and other intangibles
increased $0.6 million or 6% to $11.8 million in the first quarter of 2000 from
$11.2 million in the same period of 1999. The increase was primarily related to
additional amortization of goodwill associated with the acquisition of ZSP
Corporation ("ZSP") in April of 1999. For description of the acquisition of ZSP,
see our Annual Report on Form 10-K for the year ended December 31, 1999.
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INTEREST EXPENSE. Interest expense increased $0.3 million to $10.9 million
in the first quarter of 2000 from $10.6 million in the same period of 1999. The
increase was primarily attributable to increased debt outstanding during the
first quarter of 2000 as compared to the same period of 1999 and higher interest
rates on the remaining balance of $575 million senior unsecured reducing
revolving credit facility (the "Revolver"). (See Note 7 of the Notes.)
INTEREST INCOME AND OTHER, NET. Interest income and other increased $5.4
million to $7.1 million in the first quarter of 2000 from $1.7 million in the
same period of 1999. The increase was primarily attributable to approximately
$6.0 million higher interest income in the first quarter of 2000 as compared to
the same period of 1999 due to higher average balance of interest-generating
cash, cash equivalents and short-term investments and higher interest rates
during the first quarter of 2000, offset in part by increased foreign exchange
losses in the first quarter of 2000 as compared to the same period of 1999. The
lower average balances of interest-generating cash, cash equivalents and
short-term investments in the first quarter of 1999 resulted primarily from cash
outlays associated with the purchase of Symbios, Inc. ("Symbios") in August of
1998. For description of the acquisition of Symbios, see our Annual Report on
Form 10-K for the year ended December 31, 1999.
GAIN ON SALE OF EQUITY SECURITIES. In the third quarter of 1999, we adopted
a program of regular selling of marketable equity securities. During the first
quarter of 2000, we sold certain marketable equity securities for $29.9 million
in the open market, realizing a pre-tax gain of approximately $27.4 million. We
also recognized a $6.8 million pre-tax gain associated with equity securities of
a certain technology company that was acquired by another technology company.
There was no sale of marketable equity securities during the first quarter of
1999.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes for the first quarter of 2000 and 1999 with an effective rate of 25% and
29%, respectively. The first quarter rate in 1999 was primarily impacted by the
acquisition of SEEQ. Our effective rate can be above or below the U.S. statutory
rate due to non-deductible in-process research and development ("IPR&D") and
merger and restructuring charges offset in part by earnings of our foreign
subsidiaries taxed at lower rates and the utilization of prior loss carryovers
and other tax credits.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In April 1998, the
Accounting Standards Executive Committee ("AcSEC") released Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities." The
SOP became effective for fiscal years beginning after December 15, 1998 and
required companies to expense all costs incurred or unamortized in connection
with start-up activities. Accordingly, we expensed the unamortized preproduction
balance of $91.8 million associated with the Gresham manufacturing facility in
Oregon, net of tax, on January 1, 1999 and have presented it as a cumulative
effect of a change in accounting principle in accordance with SOP No. 98-5.
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments increased $206.9 million
or 31% to $868.2 million as of March 31, 2000 from $661.3 million as of December
31, 1999. The increase was primarily a result of proceeds from issuance of the
2000 Convertible Notes, net of repayment of the existing debt, and proceeds from
our employee stock option and purchase plans, partially offset by capital
expenditures. The increase was also attributable to proceeds from the sale of
marketable equity securities in the open market. In the third quarter of 1999,
we adopted a program of regular selling of marketable equity securities.
Short-term investments include $60 million of marketable equity securities which
we plan to sell within the next 12 months. (See Note 4 of the Notes.)
WORKING CAPITAL. Working capital increased $407.7 million or 50% to $1.2
billion as of March 31, 2000 from $813.0 million as of December 31, 1999. The
increase was primarily a result of the following factors:
- $157.9 million higher short-term investments primarily attributable to
$121.7 million of purchases of debt and equity securities, net of sales
and maturities, with the proceeds from the 2000 Convertible Notes and
$35.0
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million of marketable equity securities reclassified from long-term
assets as we plan to sell them within the next 12 months;
- $121.1 million higher net accounts receivable primarily due to increased
revenue and the timing of shipments when comparing the first quarter of
2000 to the fourth quarter of 1999. Shipments during the fourth quarter
of 1999 were more linear throughout the quarter whereas during the first
quarter of 2000, shipments increased towards the end of the quarter; and
- $55.2 million lower current portion of long-term obligations resulting
from repayment of the Revolver. (See Note 7 of the Notes.)
CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES. During the first
quarter of 2000, we generated $10.9 million of net cash and cash equivalents
from operating activities compared to $35.6 million generated during the first
quarter of 1999. The decrease in net cash and cash equivalents provided by
operating activities was primarily attributable to an increase in accounts
receivable, inventories, prepaid expenses and other assets. The increase in
inventories reflects the expectation of continued higher sales in 2000. The
increase in prepaid expenses and other assets was primarily attributable to
$10.7 million of fixed assets held for sale reclassified to current assets from
fixed assets (see Note 2 of the Notes) and a $7.3 million increase in
capitalized premiums on currency option contracts, net of amortization, during
the period. Option premiums are amortized over the lives of the contracts. (See
Note 5 of the Notes.)
The decreased net cash from operations during the first quarter of 2000 as
compared to the same period of 1999 was offset in part by higher net income
(before depreciation and amortization, write-off of unamortized preproduction
costs, non-cash restructuring charges and gains and losses on stock
investments), an increase in accounts payable and accrued and other liabilities.
The increase in accounts payable was due to timing of invoice receipt and
payment. The increase in accrued and other liabilities was primarily
attributable to higher income tax payable due to a provision for income taxes
for the current period, net of payment.
CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES. Net cash and cash
equivalents used in investing activities was $119.6 million in the first quarter
of 2000, compared to $27.9 million in the same period of 1999. The increase in
net cash used in investing activities was primarily attributable to higher
purchases of debt and equity securities available-for-sale and others, net of
maturities and sales. The increase was also attributable to higher capital
expenditures.
We believe that maintaining technological leadership in the highly
competitive worldwide semiconductor industry requires substantial ongoing
investment in advanced manufacturing capacity. Net capital additions were $23.7
million in the first quarter of 2000 and $9.9 million in the same period of
1999. In order to maintain our position as a technological market leader, we
expect to increase the level of capital expenditures to $450 million in 2000
which includes approximately $200 million associated with the master lease and
security agreement discussed in Note 12 of the Notes.
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES. Net cash and
cash equivalents provided by financing activities during the first quarter of
2000 totaled $161.2 million compared to $25.4 million used in the same period of
1999. The increase was primarily attributable to proceeds from the 2000
Convertible Notes, net of repayment of the Revolver (see Note 7 of the Notes)
and higher proceeds from our employee stock option and purchase plans during the
period. The increase was offset in part by debt issuance costs paid associated
with the 2000 Convertible Notes.
On February 18, 2000, we issued the 2000 Convertible Notes due in 2005. The
2000 Convertible Notes are subordinated to all existing and future senior debt,
are convertible at anytime following issuance into shares of our common stock at
a conversion price of $70.2845 per share and are redeemable at our option, in
whole or in part, at any time on or after February 20, 2003. Each holder of the
2000 Convertible Notes has the right to cause us to repurchase all of such
holder's convertible notes at 100% of their principal amount plus accrued
interest upon the occurrence of certain events and in certain circumstances.
Interest is payable semiannually. We paid approximately
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$15.3 million for debt issuance costs related to the 2000 Convertible Notes. The
debt issuance costs are being amortized using the interest method. We used the
net proceeds from the 2000 Convertible Notes to repay bank debt outstanding with
a balance of $380 million as of December 31, 1999. (See Notes 7 of the Notes.)
The remaining balance of the proceeds was used to augment our growing cash
position and to further strengthen of our liquidity position.
During March of 1999, we issued the 1999 Convertible Notes due in 2004. The
1999 Convertible Notes are subordinated to all existing and future senior debt,
are convertible in 60 days following issuance into shares of our common stock at
a conversion price of $15.6765 per share and are redeemable at our option, in
whole or in part, at any time on or after March 20, 2002. Each holder of the
1999 Convertible Notes has the right to cause us to repurchase all of such
holder's convertible notes at 100% of their principal amount plus accrued
interest upon the occurrence of certain events and in certain circumstances.
Interest is payable semiannually. We paid approximately $9.5 million for debt
issuance costs related to the 1999 Convertible Notes. The debt issuance costs
are being amortized using the interest method. We used the net proceeds from the
1999 Convertible Notes to repay existing debt obligations. (See Notes 7 of the
Notes.)
In accordance with the terms of our existing credit arrangement, we must
comply with certain financial covenants related to profitability, tangible net
worth, liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. As of March 31, 2000, we were in compliance with these covenants.
In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. We may seek additional
equity or debt financing from time to time. We believe that our existing liquid
resources and funds generated from operations, combined with funds from such
financing and our ability to borrow funds, will be adequate to meet our
operating and capital requirements and obligations through the foreseeable
future. However, we cannot be certain that additional financing will be
available on favorable terms. Moreover, any future equity or convertible debt
financing will decrease the percentage of equity ownership of existing
stockholders and may result in dilution, depending on the price at which the
equity is sold or the debt is converted.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 by one year. Upon adoption of SFAS No. 133, we will be required to
adjust hedging instruments to fair value in the balance sheet, and recognize the
offsetting gain or loss as transition adjustments to be reported in net income
or other comprehensive income, as appropriate, and presented in a manner similar
to the cumulative effect of a change in accounting principle. While we believe
the adoption of this statement will not have a significant effect on our results
of operations, the impact of the adoption of SFAS No. 133 as of the effective
date cannot be reasonably estimated at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the market risk disclosures during
the three month period ended March 31, 2000 as compared to the discussion in
Part II of our Annual Report on Form 10-K for the year ended December 31, 1999.
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PART II
ITEM 1.LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 for a discussion
of certain pending legal proceedings. The information provided at such reference
regarding those matters remains unchanged. The Company continues to believe that
the final outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations. No assurance
can be given, however, that these matters will be resolved without the Company
becoming obligated to make payments or to pay other costs to the opposing
parties, with the potential for having an adverse effect on the Company's
financial position or its results of operations.
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended to be presented at the Company's 2001
annual meeting of stockholders must be received at the Company's principle
executive offices not later than November 24, 2000 in order to be included in
the Company's proxy statement and form of proxy relating to the 2001 annual
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
27.1 Financial Data Schedules
10.23 Master Lease and Security Agreement
(b) Reports on Form 8-K
On January 26, 2000, pursuant to Item 5 to report information set forth in
the Registrant's press release dated January 25, 2000.
On February 15, 2000, pursuant to Item 7 to file the Underwriting Agreement
dated February 14, 2000 between LSI Logic Corporation and J.P. Morgan
Securities, Inc., and related documents.
On February 24, 2000, pursuant to Item 7 to file the Subordinated Indenture
and Supplemental Indenture both dated February 15, 2000, between LSI Logic
Corporation and State Street Bank of California, N.A., as trustee.
On April 27, 2000, pursuant to Item 5 to report information set forth in the
Registrant's press release dated April 25, 2000.
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SIGNATURES
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 thereunto duly authorized.
LSI LOGIC CORPORATION
(Registrant)
Date: May 15, 2000 By /s/ R. Douglas Norby
------------------------------
R. Douglas Norby
Executive Vice President Finance &
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
10.23 Master Lease and Security Agreement
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