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 SEPTEMBER 30, 2001
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 November 9, 2001 there were 366,856,818 of the registrant's Common
Stock, $.01 par value, outstanding.
1
LSI LOGIC CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - Nine Month Periods Ended
September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 34
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 35
Item 5 Other Information 35
Item 6 Exhibits and Reports on Form 8-K 36
2
PART I
ITEM 1. FINANCIAL STATEMENTS
LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
(In thousands, except per-share amounts) 2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $ 423,219 $ 235,895
Short-term investments 351,444 897,347
Accounts receivable, less allowances of $11,182 and $8,297 224,186 522,729
Inventories 307,477 290,375
Deferred tax assets 54,663 54,552
Prepaid expenses and other current assets 166,206 71,342
----------- -----------
Total current assets 1,527,195 2,072,240
Property and equipment, net 991,215 1,278,683
Goodwill and other intangibles 1,379,733 580,861
Other assets 611,760 265,703
----------- -----------
Total assets $ 4,509,903 $ 4,197,487
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 145,299 $ 268,215
Accrued salaries, wages and benefits 102,312 87,738
Other accrued liabilities 250,164 181,199
Income tax payable 32,609 88,752
Current portion of long-term obligations and other short-term borrowings 200,317 1,030
----------- -----------
Total current liabilities 730,701 626,934
----------- -----------
Deferred tax liabilities 130,616 130,616
Other long-term obligations 958,587 936,058
----------- -----------
Total long-term obligations and deferred tax liabilities 1,089,203 1,066,674
----------- -----------
Commitments and contingencies (Note 12)
Minority interest in subsidiaries 6,281 5,742
----------- -----------
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized -- --
Common stock; $.01 par value; 1,300,000 shares authorized; 366,667 and
321,523 shares outstanding 3,667 3,215
Additional paid-in capital 2,879,487 1,931,564
Deferred stock compensation (152,806) (163,045)
Retained (deficit)/earnings (69,659) 672,152
Accumulated other comprehensive income 23,029 54,251
----------- -----------
Total stockholders' equity 2,683,718 2,498,137
----------- -----------
Total liabilities and stockholders' equity $ 4,509,903 $ 4,197,487
=========== ===========
See notes to unaudited consolidated financial statements.
3
LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share amounts) 2001 2000 2001 2000
--------- --------- ----------- -----------
Revenues $ 396,675 $ 727,578 $ 1,379,093 $ 1,987,092
--------- --------- ----------- -----------
Costs and expenses:
Cost of revenues 286,640 412,808 882,544 1,135,186
Additional excess inventory and related charges 50,038 -- 158,064 11,100
Research and development 135,634 101,669 381,813 268,699
Selling, general and administrative 80,128 79,099 236,579 224,418
Acquired in-process research and development 19,100 54,155 96,600 70,488
Restructuring of operations and other non-
recurring charges, net 132,531 -- 192,370 2,781
Amortization of non-cash deferred stock
compensation (*) 26,805 19,179 75,912 19,179
Amortization of intangibles 57,725 21,977 128,283 47,633
--------- --------- ----------- -----------
Total costs and expenses 788,601 688,887 2,152,165 1,779,484
--------- --------- ----------- -----------
(Loss)/ income from operations (391,926) 38,691 (773,072) 207,608
Interest expense (10,037) (10,176) (29,841) (31,392)
Interest income and other, net 3,881 18,709 16,602 37,345
Gain on sale of equity securities -- 15,309 5,302 64,795
--------- --------- ----------- -----------
(Loss)/ income before income taxes (398,082) 62,533 (781,009) 278,356
Provision/ (benefit) for income taxes -- 44,437 (39,198) 103,441
--------- --------- ----------- -----------
Net (loss)/ income $(398,082) $ 18,096 $ (741,811) $ 174,915
========= ========= =========== ===========
(Loss)/ earnings per share:
Basic $ (1.09) $ 0.06 $ (2.16) $ 0.57
========= ========= =========== ===========
Dilutive $ (1.09) $ 0.06 $ (2.16) $ 0.52
========= ========= =========== ===========
Shares used in computing per share amounts:
Basic 364,441 314,038 343,441 308,304
========= ========= =========== ===========
Dilutive 364,441 355,732 343,441 353,322
========= ========= =========== ===========
(*) Amortization of non-cash deferred stock compensation, if not shown
separately, of $621, $19,454 and $6,730 would have been included in cost of
revenues, research and development and selling, general and administrative
expenses respectively for the three months ended September 30, 2001.
Amortization of non-cash deferred stock compensation, if not shown separately,
of $1,469, $56,161 and $18,282 would have been included in cost of revenues,
research and development and selling, general and administrative expenses,
respectively for the nine months ended September 30, 2001.
See notes to unaudited consolidated financial statements.
4
LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
(In thousands) 2001 2000
----------- -----------
Operating activities:
Net (loss)/income $ (741,811) $ 174,915
Adjustments:
Depreciation and amortization 395,830 292,172
Amortization of non-cash deferred stock compensation 75,912 19,179
Acquired in-process research and development 96,600 70,488
Non-cash restructuring and non-recurring charges, net 171,655 2,781
Loss on write down of equity securities 11,440 --
Gain on sale of equity securities (5,302) (64,795)
Changes in working capital components, net of assets
acquired and liabilities assumed in business combinations:
Accounts receivable, net 316,549 (178,952)
Inventories, net (5,029) (44,745)
Prepaid expenses and other assets (63,703) (56,934)
Accounts payable (130,376) 1,954
Accrued and other liabilities (26,224) 127,037
----------- -----------
Net cash provided by operating activities 95,541 343,100
----------- -----------
Investing activities:
Purchase of debt and equity securities available-for-sale (1,097,075) (1,014,639)
Maturities and sales of debt and equity securities
available-for-sale 1,587,649 699,474
Purchase of equity securities (10,819) (17,035)
Proceeds from sale of equity securities 7,926 62,163
Purchases of property and equipment, net of retirements (151,397) (120,218)
Increase in non-current assets and deposits (320,397) --
Acquisition of companies, net of cash acquired (177,677) (47,017)
----------- -----------
Net cash used in investing activities (161,790) (437,272)
------------ ------------
Financing activities:
Proceeds from borrowings 200,000 500,000
Repayment of debt obligations (1,068) (376,357)
Debt issuance costs (1,000) (15,300)
Issuance of common stock, net 55,058 109,627
Purchase of common stock under repurchase program -- (49,296)
----------- -----------
Net cash provided by financing activities 252,990 168,674
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 583 (6,924)
----------- -----------
Increase in cash and cash equivalents 187,324 67,578
----------- -----------
Cash and cash equivalents at beginning of period 235,895 250,603
----------- -----------
Cash and cash equivalents at end of period $ 423,219 $ 318,181
=========== ===========
See notes to unaudited consolidated financial statements.
5
LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of LSI Logic Corporation (the "Company" or "LSI"), the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments, except for additional excess
inventory and other related charges, acquired in-process research and
development and restructuring and other non-recurring charges as discussed in
Notes 2 and 3), 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, 2000.
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 financial statements refer to the quarter's calendar month end for
convenience. The results of operations for the quarter ended September 30, 2001
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
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
NOTE 2 - ACQUISITIONS
ACQUISITION OF THE RAID BUSINESS. On August 31, 2001, the Company finalized the
Asset Purchase Agreement with American Megatrends, Inc. ("AMI") Under the
agreement, the Company acquired certain tangible and intangible assets
associated with AMI's Redundant Array of Independent Disks, or RAID, business.
The acquisition will enhance product offerings and be included in the
Semiconductor segment. The acquisition was accounted for as a purchase and the
results of operations and estimated fair value of net liabilities acquired was
included in the Company's consolidated financial statements as of August 31,
2001, the effective date of the purchase, through the end of the period.
The Company paid approximately $224 million in cash, which included direct
acquisition costs of $2.5 million for legal and accounting fees. The Company
issued and will issue approximately 0.8 million restricted common shares to
certain RAID business employees retained as part of the purchase transaction.
The total purchase price was allocated to the estimated fair value of assets
acquired based on independent appraisals and management estimates as follows:
(In thousands)
Fair value of net liabilities acquired $ (1,440)
In-process research and development 19,100
Current technology 74,100
Trademarks 3,400
Excess of purchase price over net liabilities acquired 128,891
---------
Total purchase price excluding deferred compensation 224,051
Deferred stock compensation 16,400
---------
Total purchase price $ 240,451
=========
6
The Company calculated the value of the restricted common shares using the
closing price of its common stock on the date of consummation of the purchase.
The amount also includes a guarantee of $10 million in value. Deferred stock
compensation is included as a component of stockholders' equity and will be
amortized over the vesting period of approximately two years.
In-process research and development. In connection with the purchase of
RAID business, the Company recorded a $19.1 million charge to in-process
research and development during the third quarter of 2001. The amount was
determined by identifying research projects for which technological feasibility
had not been established and for which no alternative future uses existed. As of
the acquisition date, there were several projects that met the above criteria.
The projects were for development of RAID technology applications.
The value of the projects identified to be in progress were determined by
estimating the future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value. The percentage of completion
for the project was determined based on research and development expenses
incurred as of August 31, 2001, for the project as a percentage of total
research and development expenses to bring the project to technological
feasibility. The discount rate used was 20% for the projects. Development of
RAID technology applications was started in early 2000 and 2001. As of August
31, 2001, the Company estimated that the projects were from 12% to 62% complete.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology and trademarks is being amortized over their estimated useful lives
of 4 and 5.5 years, respectively, using the straight-line method. The excess of
purchase price over net assets acquired is not being amortized. The
identification of intangibles and amortization periods were determined in
accordance with the recent accounting pronouncements as described below.
Recent accounting pronouncements. In July 2001, the Financial Accounting
Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 (SFAS 141 and
SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets."
SFAS 141 replaces APB 16 and eliminates pooling-of-interests accounting
prospectively. It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under SFAS 142, goodwill will be tested annually and
whenever events or circumstances occur indicating that goodwill might be
impaired. SFAS 141 and SFAS 142 are effective for all business combinations
completed after June 30, 2001. Upon adoption of SFAS 142, amortization of
goodwill recorded for business combinations consummated prior to July 1, 2001
will cease, and intangible assets acquired prior to July 1, 2001 that do not
meet the criteria for recognition under SFAS 141 will be reclassified to
goodwill. Companies are required to adopt SFAS 142 for fiscal years beginning
after December 15, 2001, but early adoption is permitted. The Company will adopt
SFAS 142 on January 1, 2002, the beginning of fiscal 2002. In connection with
the adoption of SFAS 142, the Company will be required to perform a transitional
goodwill impairment assessment. The Company has not yet determined the impact
these standards will have on its results of operations and financial position.
Pro forma statement of earnings information has not been presented because
the effects of this acquisition was not material.
ACQUISITION OF C-CUBE. On March 26, 2001, the Company signed a definitive
merger agreement ("Merger Agreement") to acquire C-Cube Microsystems Inc.
("C-Cube"). In accordance with the Merger Agreement, the Company commenced an
exchange offer whereby it offered 0.79 of a share of common stock for each
outstanding share of C-Cube common stock. Under the terms of the Merger
Agreement, the exchange offer was followed by a merger in which the Company
acquired, at the same exchange ratio, the remaining shares of C-Cube common
stock not previously acquired in the exchange offer. Upon completion of the
merger, the Company assumed all options and warrants to purchase shares of
C-Cube common stock and converted them into options and warrants to purchase
shares of the Company's common stock. The merger was subject to customary
closing conditions, including the
7
tender for exchange of at least a majority of C-Cube's outstanding shares of
common stock (including for purposes of the calculation of the majority of
shares, certain outstanding options and warrants to purchase C-Cube shares). The
acquisition was effective May 11, 2001.
The Company issued approximately 40.2 million shares of its common stock,
10.6 million options and 0.8 million warrants in exchange for the outstanding
ordinary shares, options and warrants of C-Cube, respectively. The acquisition
is intended to enhance and accelerate the Company's digital video product
offerings in the Semiconductor segment.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of C-Cube and estimated fair value of assets acquired and
liabilities assumed were included in the Company's consolidated financial
statements as of May 11, 2001 through the end of the period.
The components of purchase price are as follows (in thousands):
Fair value of common shares issued $ 752,557
Fair value of options assumed 116,174
Fair value of warrants assumed 8,121
Direct acquisition costs 16,856
---------
Total purchase price $ 893,708
=========
The fair value of common shares issued was determined using a price of
approximately $18.73, which represents the average closing stock price for the
period of two days before and after the announcement of the merger. The fair
value of the options and warrants assumed was determined using the Black-Scholes
method. The portion of the intrinsic value of unvested options of C-Cube
relating to the vesting period following consummation of the transaction has
been allocated to deferred stock compensation. The Company calculated the
intrinsic value of the unvested options using the closing price of its common
stock on the date of consummation of the merger. Deferred stock compensation is
included as a component of stockholders' equity and will be amortized over the
remaining vesting period of the options. Direct acquisition costs consist of
investment banking, legal and accounting fees.
The total purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows (in thousands):
Tangible net assets acquired $ 64,315
Acquired in-process research and development 77,500
Current technology 74,000
Trademarks 20,500
Assembled workforce 36,000
Excess of purchase price over net assets acquired 572,120
---------
Total purchase price excluding deferred stock compensation 844,435
Deferred stock compensation 49,273
---------
Total purchase price $ 893,708
=========
In-process research and development. In connection with the purchase of
C-Cube, the Company recorded a $77.5 million charge to in-process research and
development. The amount was determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed. As of the acquisition date, there were various projects
that met the above criteria. The primary projects identified consisted of
digital video disc ("DVD"), recordable digital video ("DVD-R"), Consumer Set-Top
Box and Cable Modem.
The value of the projects identified to be in progress was determined by
estimating the future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and then applying
8
a percentage of completion to the calculated value. The net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the projects. The percentage of completion for the
projects was determined based on research and development expenses incurred as
of May 11, 2001 for the projects as a percentage of total research and
development expenses to bring the projects to technological feasibility. The
discount rate used was 27.5% for these projects. The development of these
projects started in early 1999. As of May 11, 2001, the Company estimated the
projects were approximately 84%, 62%, 61% and 69% complete for DVD, DVD-R,
Consumer Set-Top Box and Cable Modem, respectively.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology, trademarks, assembled workforce and excess of purchase price over
net assets acquired is being amortized over their estimated weighted average
useful life of six years using the straight-line method.
Pro forma results. The following pro forma summary is provided for
illustrative purposes only and is not necessarily indicative of the consolidated
results of operations for future periods or that actually would have been
realized had the Company and C-Cube been a consolidated entity during the
periods presented. The summary combines the results of operations as if C-Cube
had been acquired as of the beginning of the periods presented.
The summary includes the impact of certain adjustments such as amortization
of intangibles and non-cash deferred stock compensation. Additionally, the
in-process research and development charge of $77.5 million discussed above has
been excluded from the periods presented as it arose from the acquisition of
C-Cube. The restructuring and other non-recurring charges of $192 million were
included in the pro forma calculation as the charges did not relate to the
acquisition of C-Cube (See Note 3 of the Notes.)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
Revenues.............. $1,447,002 $ 2,178,159
Net (loss)/ income.... $ (798,228) $ 73,361
Basic EPS............. $ (2.20) $ 0.21
Diluted EPS........... $ (2.20) $ 0.19
NOTE 3 - RESTRUCTURING AND OTHER NON-RECURRING ITEMS
The Company recorded approximately $133 million and $192 million in
restructuring and other non-recurring charges for the three and nine months
ended September 30, 2001, respectively. Other non-recurring charges were
approximately $8 million for the nine months ended September 30, 2001.
Restructuring:
In September of 2001, the Company announced the consolidation of U.S.
manufacturing operations at Gresham, Oregon and the transfer of process research
and development from Santa Clara, California to Gresham, Oregon. The Company
also announced the closure of certain assembly activities in Fremont,
California. During the three months ended September 30, 2001, the Company
recorded a restructuring charge of $77 million for fixed asset write-downs due
to impairment in the U.S. that will be disposed of, losses on operating leases
for equipment and
9
facilities, severance for approximately 600 employees in the US, Europe and Asia
Pacific as well as other exit costs. The Company reclassified $15 million from
property, plant and equipment to other current assets to reflect the intention
to dispose of the assets within the next twelve months.
In April of 2001, the Company announced the closure of the Company's
Colorado Springs fabrication facility ("the facility") in August of 2001. In May
of 2001, the Company entered into a definitive agreement to sell the facility to
a third party. As part of the agreement, the Company agreed to purchase a
minimum amount of production wafers and die from the facility for a period of 18
months following the close of the transaction. During the quarter ended June 30,
2001, the Company recorded an impairment charge of $71 million relating to the
facility of which approximately $35 million was recorded in cost of sales and
$36 million was recorded in restructuring charges. The restructuring charges
consisted of fixed asset write-downs due to impairment, losses on operating
leases for equipment, severance for approximately 413 employees and other exit
costs. On August 1, 2001, the Company announced the termination of the agreement
to sell the facility. The facility is currently scheduled to close in the
fourth quarter of 2001. During the three months ended September 30, 2001, the
Company recorded an additional restructuring charge of $55 million for fixed
asset write-downs and other exit costs associated with the planned closure of
the facility. The additional asset write-downs during the third quarter of 2001
were incurred to reflect the new value of the facility's assets if sold on a
piecemeal basis rather than sold as a facility in continued use. In addition,
equipment market values continued to decline in the third quarter of 2001. The
Company has reclassified approximately $62 million from property, plant and
equipment to other current assets to reflect the intention to dispose of the
facility within the next twelve months.
The Company recorded approximately $16 million in additional restructuring
charges in the second quarter of 2001 primarily associated with the write-down
of fixed assets due to impairment in the U.S., Japan and Hong Kong that will be
disposed of and severance charges for approximately 240 employees in the U.S.,
Europe and Asia Pacific. As a result of the continued decline in the equipment
market during the third quarter of 2001, the Company recorded an additional
charge of $0.5 million during the third quarter of 2001 to reflect the fair
value of the equipment when sold.
The fair value of assets determined to be impaired was the result of
independent appraisals and the use of management estimates. Given that current
market conditions for the sale of older fabrication facilities and related
equipment may continue to deteriorate, there can be no assurance that the
Company will realize its current net book value for the assets. The Company will
reassess the realizability of the carrying value of these assets at the end of
each quarter until the assets are sold or otherwise disposed of and additional
adjustments may be necessary.
The following table sets forth the Company's restructuring reserves as of
September 30, 2001:
Restructuring
(In thousands) Balance Balance Expense Balance
June 30, September 30, September 30, September 30,
2001 Utilized 2001 2001 Utilized 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Write-down of excess assets(a) $ 1,407 $ -- $1,407 $100,782 $(96,263) $ 5,926
Lease terminations and
maintenance contracts(C) 14,253 (10,649) 3,604 12,659 -- 16,263
Other exit costs (C) 7,742 (7,702) 40 9,591 -- 9,631
Payments to employees for
severance(b) 4,084 (2,946) 1,138 9,498 (1,945) 8,691
------- -------- ------ -------- -------- -------
Total $27,486 $(21,297) $6,189 $132,530 $(98,208) $40,511
======= ======== ====== ======== ======== =======
(a) Amounts utilized in 2001 reflect a write-down of fixed assets in the U.S.,
Japan and Hong Kong due to impairment. The amounts were accounted for as a
reduction of the assets and did not result in a liability. The $5.9
million balance as of September 30, 2001 relates to machinery and
equipment decommissioning costs in the U.S.
(b) Amounts utilized represent cash payments related to the severance of
approximately 440 employees during the nine months ended September 30,
2001.
(c) Amounts utilized represent cash payments.
Other non-recurring:
10
The Company recorded approximately $8 million in other non-recurring
charges in the second quarter of 2001 associated with the write-down of
intangible assets due to impairment. The majority of the intangible assets were
originally acquired in the purchase of a division of NeoMagic in the second
quarter of 2000.
On February 22, 2000, the Company entered into an agreement with a third
party to outsource certain testing services performed by the Company at its
Fremont, California facility. The agreement provided 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 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 from 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").
NOTE 4 - 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 $2
million and $6 million for the three month periods ended September 30, 2001 and
2000, respectively, and $14 million and $18 million for the nine month periods
ended September 30, 2001 and 2000, respectively. 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 $2 million and $3 million for the nine
months ended September 30, 2001 and 2000, respectively. The Company recorded $1
million for the three months ended September 30, 2000. No engineering training
was provided during the third quarter of 2001. The amounts were recorded as an
offset to cost of revenues.
NOTE 5 - INVESTMENTS
As of September 30, 2001 and December 31, 2000, the Company held $105
million and $89 million of debt securities, respectively, that were included in
cash and cash equivalents and $351 million and $897 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, certificates 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 September 30, 2001 and December 31, 2000.
Contract maturities of these securities were within one year as of September 30,
2001. Realized gains and losses for held-to-maturity securities and
available-for-sale debt securities were not significant for the nine month
periods ended September 30, 2001 and 2000.
As of September 30, 2001 and December 31, 2000, the Company had marketable
equity securities with an aggregate carrying value of $24 million and $66
million, respectively, of which all securities were classified as other
long-term assets at September 30, 2001 and $60 million were classified as
short-term investments on the Company's consolidated balance sheet at December
31, 2000. The remaining balance was included in other long-term assets. As of
September 30, 2001, an unrealized gain of $8 million, net of the related tax
effect of $4 million, related to these equity securities was included in
accumulated other comprehensive income. As of December 31, 2000, an unrealized
gain of $31 million, net of the related tax effect of $17 million, on these
equity securities was included in accumulated other comprehensive income. During
the three month period ended September 30, 2001, the Company did not sell any
equity securities. During the nine month period ended September 30, 2001, the
Company sold equity securities for approximately $8 million in the open market,
realizing a pre-tax gain of approximately $5 million.
11
During the three and nine month periods ended September 30, 2000, the Company
sold equity securities for approximately $16 million and $62 million,
respectively, in the open market, realizing a pre-tax gain of approximately $15
million and $58 million, respectively. The Company realized a pre-tax loss of
approximately $4 million associated with two equity investments in certain
technology companies during the three months ended September 30, 2001. During
the nine month period ended September 30, 2001, the Company realized a pre-tax
loss of approximately $7 million associated with the decline in value of a
marketable equity security. The decline in value of the investments was
considered by management to be other than temporary. The Company realized a
pre-tax gain of approximately $7 million associated with equity securities of a
certain technology company that was acquired by another technology company
during the nine month period ended September 30, 2000. The Company does not
anticipate selling any marketable equity securities in the remaining three
months of 2001.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and 138 as of January 1, 2001. SFAS No. 133 requires
that an entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures 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.
All of the Company's derivative instruments are recorded at their fair value in
other current assets or other accrued liabilities. The transition adjustment
upon adoption of SFAS No. 133 was not material.
On the date a derivative contract is entered into, the Company designates
its derivative as either a hedge of the fair value of a recognized asset or
liability ("fair-value" hedge), as a hedge of the variability of cash flows to
be received ("cash-flow" hedge), or as a foreign-currency hedge. Changes in the
fair value of a derivative that is highly effective, and is designated and
qualifies as a fair-value hedge, along with the loss or gain on the hedged asset
or liability that is attributable to the hedged risk (including losses or gains
on firm commitments), are recorded in current period earnings. Changes in the
fair value of a derivative that is highly effective, and is designated and
qualifies as a cash-flow hedge, are recorded in other comprehensive income,
until earnings are affected by the variability of the cash flows. Changes in the
fair value of derivatives that are highly effective, and are designated and
qualify as a foreign-currency hedge, are recorded in either current period
earnings or other comprehensive income, depending on whether the hedge
transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to
be settled in a foreign currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction). As of September 30, 2001,
the Company had certain foreign currency fair-value and cash-flow hedges
outstanding. The Company's derivative instruments at December 31, 2000 were
designated as foreign currency fair-value hedges.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-flow or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company also
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged items. If it were
determined that a derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company would discontinue hedge
accounting prospectively, as discussed below.
The Company would discontinue hedge accounting prospectively when (1) it
is determined that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item (including firm commitments or
forecasted transactions); (2) the derivative expires or is sold, terminated or
exercised; (3) the derivative is no longer designated as a hedge instrument,
because it is unlikely that a forecasted transaction will occur; (4) the hedged
firm commitment no longer meets the definition of a firm commitment; or (5)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
12
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current-period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried as its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings.
The Company has foreign subsidiaries that 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.
Forward contracts
Forward contracts are used to hedge certain cash flows denominated in
non-functional currencies. These contracts expire within one to seven month
periods and are designated as foreign currency fair-value hedges in accordance
with SFAS No. 133. Changes in the fair value of forward contracts due to changes
in time value are excluded from the assessment of effectiveness and are
recognized in other income and expense. For the three and nine months ended
September 30, 2001, the change in time value of the forward contracts was not
significant. The Company did not record any gains or losses due to hedge
ineffectiveness for the three and nine month periods ended September 30, 2001.
Forward exchange contracts are also used to hedge certain foreign currency
denominated assets or liabilities. These derivatives do not qualify for SFAS No.
133 hedge accounting treatment. Accordingly, changes in the fair value of these
hedges are recorded immediately in earnings to offset the changes in fair value
of the assets or liabilities being hedged. The related gains and losses included
in other income and expense was not significant.
Option contracts
As of September 30, 2001, the Company held purchased currency option
contracts that were designated as foreign currency cash-flow hedges of
third-party yen revenue exposures. There were no option contracts outstanding as
of December 31, 2000. Changes in the fair value of currency option contracts due
to changes in time value are excluded from the assessment of effectiveness and
are recognized in other income and expense. For the three months ended September
30, 2001, the change in option time value was not significant. The change in
option time value was approximately $3 million for the nine months ended
September 30, 2001. The contracts expire over a three month period. For the
three and nine months ended September 30, 2001, an amount of $2.0 million and
$3.3 was reclassified to revenue, respectively. Unrealized gains of $1.1 million
were included in accumulated other comprehensive income and will be reclassified
to revenue over the next three month period as the forecasted transactions
occur. The Company did not record any gains or losses due to hedge
ineffectiveness for the three and nine month periods ended September 30, 2001.
13
NOTE 7 - BALANCE SHEET DETAIL
September 30, December 31,
(In thousands) 2001 2000
------------ -----------
Inventories:
Raw materials $ 37,263 $ 36,133
Work-in-process 104,318 129,394
Finished goods 165,896 124,848
---------- ----------
$307,477 $290,375
========== ==========
The Company recorded additional excess inventory and related charges of $50
million and $158 million for the three and nine month periods ended September
30, 2001. The additional excess inventory and related charges during the three
months ended September 30, 2001 were primarily associated with underutilization
charges related to a temporary idling of the Company's fabrication facilities.
The charges for the nine months ended September 30, 2001 were due to the above
coupled with the closure of the Company's Colorado Springs fabrication
facility (See Note 3) and a sudden and significant decrease in forecasted
revenue and was calculated in accordance with the Company's policy, which is
primarily based on inventory levels in excess of 12-month judged demand for
each specific product.
NOTE 8 - DEBT
September 30, December 31,
(In thousands) 2001 2000
------------- ------------
2000 Convertible Subordinated Notes $ 500,000 $ 500,000
1999 Convertible Subordinated Notes 344,935 345,000
Notes payable to banks 200,000 --
Capital lease obligations 1,273 2,341
----------- ---------
1,046,208 847,341
Current portion of long-term debt, capital lease obligations and
short-term borrowings (200,317) (1,030)
----------- ---------
Long-term debt and capital lease obligations $ 845,891 $ 846,311
=========== =========
On October 30, 2001, the Company issued $450 million of 4% Convertible
Subordinated Notes (the "2001 Convertible Notes") due in 2006. The Company has
granted the initial purchaser an option to purchase an additional $67.5 million
aggregate principal amount of the 2001 Convertible Notes within 30 days of the
issuance date. The 2001 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 $26.339 per share and are
redeemable at the Company's option, in whole or in part, at any time on or after
November 6, 2004. Each holder of the 2001 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 $13.5 million for debt issuance costs related to the
2001 Convertible Notes. The debt issuance costs are being amortized using the
interest method. The net proceeds from the 2001 Convertible Notes were used to
repay bank debt outstanding with a balance of approximately $200 million as of
September 30, 2001 as described below.
On September 28, 2001, the Company entered into a Credit Agreement with
Bank of America, N.A. and Banc of America Securities LLC that provides for
borrowings up to $200 million through September 26, 2002. The Company borrowed
$200 million under the Credit Agreement as of September 30, 2001, with an
interest rate based on LIBOR. The obligation was secured by inventory and
accounts receivable. The Credit Agreement required that the Company maintain a
minimum tangible net worth and minimum cash reserves. At September 30, 2001, the
Company was in compliance with all financial covenants. In October 2001, the
borrowings outstanding under the
14
Credit Agreement were repaid in full with the proceeds of the 2001 Convertible
Notes and the Credit Agreement was terminated.
On March 14, 2001, the Second Amended and Restated Credit Agreement was
amended to reduce the total revolving commitment by $165 million from $240
million to $75 million. On the effective date of this reduction, the revolving
commitment of each lender was reduced accordingly. The Second Amended and
Restated Credit Agreement was terminated in August of 2001.
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 the option of the holder, at any time 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.
NOTE 9 - RECONCILIATION OF BASIC AND DILUTED (LOSS)/ 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:
Three Months Ended September 30,
------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------
Per-Share Per-Share
(In thousands except per share amounts) Loss* Shares+ Amount Income* Shares+ Amount
------------------------------------------------------------------------------------
Basic EPS:
Net (loss)/ income available to
Common stockholders $(398,082) 364,441 $ (1.09) $18,096 314,038 $ 0.06
-------- --------
Effect of dilutive securities:
Stock options -- -- -- -- 19,686 --
4-1/4% Convertible
Subordinated Notes -- -- -- 2,750 22,008 --
Diluted EPS:
Net (loss)/ income available to
Common stockholders $(398,082) 364,441 $ (1.09) $20,846 355,732 $ 0.06
-------- --------
* Numerator
+ Denominator
Options to purchase approximately 72,436,345 shares were outstanding at
September 30, 2001 and were excluded from the computation of diluted shares
because of their antidilutive effect on earnings per share for the three months
ended September 30, 2001. The exercise price of these options ranged from $0.01
to $72.25 at September 30, 2001. Options to purchase approximately 10,230,209
shares were outstanding as of September 30, 2000, but were excluded from the
computation of diluted shares for the three months ended September 30, 2000
because the exercise price of these options was greater than the average market
price of common shares for the three month period then ended. The exercise price
of these options ranged from $40.13 to $60.63 at September 30, 2000.
For the three months ended September 30, 2001, common equivalent shares of
22,003,317 and interest expense of $2.7 million, net of taxes, associated with
the 1999 Convertible Notes were excluded from the calculation of
15
diluted shares because of their antidilutive effect on earnings per share.
Common equivalent shares of 7,113,944 and interest expense of $3.8 million, net
of taxes, associated with the 2000 Convertible Notes were also excluded from the
calculation of diluted shares because of their antidilutive effect on earnings
per share. For the three months ended September 30, 2000, common equivalent
shares of 7,113,944 and interest expense of $3.8 million, 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.
Nine months Ended September 30,
---------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------
Per-Share Per-Share
(In thousands except per share amounts) Loss* Shares+ Amount Income* Shares+ Amount
---------------------------------------------------------------------------------------
Basic EPS:
Net (loss)/ income available to
Common stockholders $(741,811) 343,441 $ (2.16) $174,915 308,304 $ 0.57
-------- --------
Effect of dilutive securities:
Stock options -- -- -- -- 23,010 --
4-1/4% Convertible
Subordinated Notes -- -- -- 8,248 22,008 --
Diluted EPS:
Net (loss)/income available to
Common stockholders $(741,811) 343,441 $ (2.16) $183,163 353,322 $ 0.52
-------- --------
* Numerator
+ Denominator
Options to purchase approximately 72,436,345 shares were outstanding at
September 30, 2001 and were excluded from the computation of diluted shares
because of their antidilutive effect on earnings per share for the nine months
ended September 30, 2001. The exercise price of these options ranged from $0.01
to $72.25 at September 30, 2001. Options to purchase approximately 6,002,628
shares were outstanding as of September 30, 2000, but were excluded from the
computation of diluted shares for the nine months ended September 30, 2000
because the exercise price of these options was greater than the average market
price of common shares for the nine month period then ended. The exercise price
of these options ranged from $52.13 to $72.25 at September 30, 2000.
For the nine months ended September 30, 2001, common equivalent shares of
22,003,317 and interest expense of $8.2 million, net of taxes, associated with
the 1999 Convertible Notes were excluded from the calculation of diluted shares
because of their antidilutive effect on earnings per share. Common equivalent
shares of 7,113,944 and interest expense of $11.3 million, net of taxes,
associated with the 2000 Convertible Notes were also excluded from the
calculation of diluted shares because of their antidilutive effect on earnings
per share. For the nine months ended September 30, 2000, common equivalent
shares of 5,872,237 and interest expense of $9.3 million, 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.
NOTE 10 - COMPREHENSIVE (LOSS)/INCOME
Comprehensive (loss)/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 (loss)/ income and comprehensive (loss)/
income for the Company arises from foreign currency translation adjustments,
unrealized gains and losses on derivative instruments designated as and
qualifying as cash-flow hedges and unrealized gains and losses on
available-for-sale securities, net of applicable taxes. Comprehensive (loss)/
income, net of taxes for the current reporting period and comparable period in
the prior year is as follows:
16
Three Months Ended Nine months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
--------------------------------------------------------------
Net (loss)/ income $(398,082) $ 18,096 $(741,811) $ 174,915
Change in unrealized gain on derivative instruments
designated as and qualifying as cash-flow hedges (4,093) -- 833 --
Change in unrealized gain on available for
sale securities (16,758) 1,805 (23,599) 14,259
Change in foreign currency translation adjustments 15,035 (6,147) (8,496) (15,591)
==============================================================
Comprehensive (loss)/ income $(403,898) $ 13,754 $(773,033) $ 173,583
==============================================================
NOTE 11 - 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,
application-specific standard products including RAID host bus adapters 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. The proportion
of revenues from ASIC design and related services compared to semiconductor
product sales varies among customers depending upon their specific
requirements. 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 RAID subsystems and related software.
The following is a summary of operations by segment for the three and nine
months ended September 30, 2001 and 2000:
Three months ended Nine months ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
----------------------------------------------------------------
REVENUES:
Semiconductor $ 351,369 $618,390 $ 1,220,228 $1,696,062
SAN Systems 45,306 109,188 158,865 291,030
----------------------------------------------------------------
Total $ 396,675 $727,578 $ 1,379,093 $1,987,092
================================================================
(LOSS)/INCOME FROM OPERATIONS:
Semiconductor $(375,566) $ 20,377 $ (726,706) $ 169,813
SAN Systems (16,360) 18,314 (46,366) 37,795
----------------------------------------------------------------
Total $(391,926) $ 38,691 $ (773,072) $ 207,608
================================================================
Intersegment revenues for the periods presented above were not significant.
Restructuring of operations and other non-recurring items were included in the
both segments for the applicable periods.
One customer represented 21% and 11% of the Company's total consolidated
revenues for each of the three month periods ended September 30, 2001 and 2000,
respectively. In the Semiconductor segment, one customer represented 23% of
total Semiconductor revenues for the three month period ended September 30,
2001, and two customers represented 11% and 10% of total Semiconductor revenues
for the three month period ended September
17
30, 2000. In the SAN Systems segment, there were three customers with revenues
representing 24%, 20% and 10% of total SAN Systems revenues for the three month
period ended September 30, 2001. For the three month period ended September 30,
2000, there were three customers with revenues representing 35%, 16% and 12% of
total SAN Systems revenues, respectively.
One customer represented 18% and 12% of the Company's total consolidated
revenues for each of the nine month periods ended September 30, 2001 and 2000,
respectively. In the Semiconductor segment, one customer represented 21% of
total Semiconductor revenues for the nine month period ended September 30, 2001.
No customer represented 10% or more of total revenues for the nine month period
ended September 30, 2000. In the SAN Systems segment, there were four customers
with revenues representing 21%, 17%, 16% and 11% of total SAN Systems revenues,
respectively for the nine month period ended September 30, 2001. For the nine
month period ended September 30, 2000, there were four customers with revenues
representing 29%, 19%, 14% and 12% of total SAN Systems revenues, respectively.
The following is a summary of total assets by segment as of September 30,
2001 and December 31, 2000:
September 30, December 31,
(In thousands) 2001 2000
------------------------------
TOTAL ASSETS:
Semiconductor $4,184,770 $3,851,849
SAN Systems 325,133 345,638
----------------------------
Total $4,509,903 $4,197,487
============================
Revenues from domestic operations were $221 million, representing 56% of
consolidated revenues for the third quarter of 2001 compared to $453 million,
representing 62% of consolidated revenues for the same period of 2000.
Revenues from domestic operations were $760 million, representing 55% of
consolidated revenues for the first nine months of 2001 compared to $1,228
million, representing 62% of consolidated revenues for the same period of 2000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In September 2001, the Company amended the master lease and security
agreements ("lease transactions") entered into in April of 2001 and March of
2000 as described below. Pursuant to the amendments, we participated as a lender
in the lease transactions and collateralized a portion of the lease balance with
cash on deposit with one of the primary lenders. As of September 30, 2001, the
Company's participation of $261 million and collateral of $59 million was
recorded as other non-current assets. Under the amended lease, the Company is
required to maintain compliance with certain financial covenants. The Company
was in compliance with these covenants as of September 30, 2001.
In April 2001, the Company entered into a master lease and security
agreement with a group of companies ("Lessor") for up to $230 million for
certain wafer fabrication equipment. Each lease supplement pursuant to the
transaction will have a lease term of five years with two consecutive renewal
options at the Lessor's option. 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. In April 2001,
the Company has drawn down $60 million as the first supplement pursuant to the
agreement. Subsequently, the Company drew down $33 million in May 2001 as the
second supplement and $52 million in September 2001 for the third supplement.
Minimum rental payments under this operating lease, excluding option periods,
are $0.9 million each in 2002, 2003, 2004 and 2005.
18
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. Through September 30, 2001, the Company has drawn
down a total of $250 million under five lease supplements pursuant to the
agreement. Minimum rental payments under these operating leases, excluding
option periods, are $2.3 million in 2002, $1.8 million in 2003, $0.9 million in
2004 and $0.5 million in 2005.
NOTE 13 - LEGAL MATTERS
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, 2000 for a discussion
of certain pending legal proceedings. In addition, the Company is a party to
other litigation matters and claims that are normal in the course of its
operations. The information provided at such reference regarding those matters
remains substantially unchanged except as set forth herein.
Regarding the pending litigation initiated by the Lemelson Medical,
Education & Research Foundation, Limited Partnership against certain electronics
industry companies, including LSI, that was described in the Company's prior
reports, the court has completed its review of motion papers filed in connection
with Cypress Semiconductor's and plaintiff's cross-motions for summary judgment
with respect to the 4,390,586 patent and granted a motion for oral arguments to
be held in mid-December. These activities are ongoing and, as of yet, no trial
date has been set.
The information in Item 3 pertaining to the proceedings that are pending
in the Court of Queen's Bench of Alberta, Judicial District of Calgary (the
"Court") between the Company, its Canadian subsidiary ("LSI Canada") and certain
former shareholders of LSI Canada is updated as follows. Following a hearing
held in March 2001, the Court dismissed the motion of the former shareholders
that challenged the propriety of the fair value proceedings initiated by LSI
Canada and the jurisdiction of the Court to adjudicate the matter. In addition,
the Court ruled that the portions of the application of the former shareholders
to initiate a claim based upon allegations that actions of LSI Logic Corporation
and certain named (former) directors and a (former) officer of LSI Canada were
oppressive of the rights of minority shareholders in LSI Canada are struck and
the balance are stayed. The Court also directed the litigants to recommence
preparation for trial in the fair value proceeding and advised the litigants of
the Court's intention to schedule a date for trial of that matter as soon as
practicable. While we cannot give any assurances regarding the resolution of
these matters, we believe that the final outcome will not have a material
adverse effect on our consolidated results of operations or financial condition.
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.
U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands, in a business wire dated October 17, 2001, stated that it had filed
suits in the U.S. District Court in New York against eight companies, including
the Company, for allegedly infringing and inducing others to infringe on Philips
U.S. Patent Number 4,689,740. This patent is directed to devices and methods
used with the Inter-Integrated Circuit Bus. To date, the Company has not been
served with a complaint by U.S. Philips Corporation, and as of such date, it has
no additional information with respect to this suit.
In addition, the Company is a party to other litigation matters and
claims, which are normal in the course of its operations. 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.
19
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, 2000. These factors include, among others:
- Cyclical nature of both the Semiconductor and the Storage Area
Network ("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 that 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 6 of the Notes to
Unaudited Consolidated 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 results.
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 that could significantly and adversely
affect our operating results and financial condition.
Our operations depend upon a continuing adequate supply of electricity,
natural gas and water. These energy sources have historically been available on
a continuous basis and in adequate quantities for our needs. However, given the
current power shortage in California, it is possible that the shortage may
spread to other areas of the country, including Oregon. An interruption in the
supply of raw materials or energy inputs for any reason would have an adverse
effect on our manufacturing operations.
20
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, 2000.
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 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, 2000.
ACQUISITIONS AND OTHER
On August 31, 2001, the Company finalized the Asset Purchase Agreement
with American Megatrends, Inc. ("AMI") (See Note 2 of the Notes). Under the
agreement, the Company acquired certain tangible and intangible assets
associated with AMI's Redundant Array of Independent Disks, or RAID, business.
The acquisition will enhance product offerings and is included in the
Semiconductor segment. The acquisition was accounted for as a purchase and the
results of operations and estimated fair value of net liabilities acquired was
included in the Company's consolidated financial statements as of August 31,
2001, the effective date of the purchase, through the end of the period.
On March 26, 2001, we signed a definitive merger agreement ("Merger
Agreement") to acquire C-Cube Microsystems Inc. ("C-Cube") in a transaction
accounted for as a purchase (See Note 2 of the Notes). In accordance with the
Merger Agreement, we commenced an exchange offer whereby we offered 0.79 of a
share of common stock for each outstanding share of C-Cube common stock. Under
the terms of the Merger Agreement, the exchange offer was followed by a merger
in which we acquired, at the same exchange ratio, the remaining shares of C-Cube
common stock not previously acquired in the exchange offer. The acquisition was
effective as of May 11, 2001.
On April 4, 2001, we announced a co-development and foundry supply
agreement with Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC") to
combine their efforts for development of advanced process technologies and to
collaborate on state-of-the-art manufacturing. Under the agreement, both
companies will deploy a jointly developed 0.13-micron process technology. We
will support customer design programs for leading-edge system-on-a-chip products
using this advanced process. Resulting products will be produced in both ours
and TSMC's manufacturing facilities. The two companies have also agreed to
explore collaborative opportunities on next generation process technology nodes,
which will be ahead of published industry roadmaps.
RESULTS OF OPERATIONS
Our results of operations for the three and nine months ended September
30, 2001 were impacted by weakness in the overall economy, the cyclical
semiconductor industry downturn and the continued reduction in inventory in the
supply chain, particularly in the communications sector.
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.
21
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 including RAID host
bus adapters 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. The
proportion of revenues from ASIC design and related services compared to
semiconductor product sales varies among customers depending upon their
specific requirements. 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 RAID systems, subsystems and related software.
(See Note 11 of the Notes.)
Total revenues for the third quarter of 2001 decreased $330.9 million or
45% to $396.7 million from $727.6 million for the same period of 2000 on a
consolidated basis. Revenues for the Semiconductor segment decreased $267.0
million or 43% to $351.4 million for the third quarter of 2001 from $618.4
million for the same period of 2000. The decrease was primarily attributable to
decreased demand for products used in broadband access and networks, networking
infrastructure and storage infrastructure applications. Revenues for the SAN
Systems segment decreased $63.9 million or 59% to $45.3 million for the third
quarter of 2001 from $109.2 million for the same period of 2000 due to decreased
demand for all products sold in the SAN Systems segment. There were no
significant intersegment revenues during the periods presented.
Total revenues for the nine months ended September 30, 2001 decreased
$608.0 million or 31% to $1,379.1 million from $1,987.1 million for the same
period of 2000 on a consolidated basis. Revenues for the Semiconductor segment
decreased $475.9 million or 28% to $1220.2 million for the nine months ended
September 30, 2001 from $1,696.1 million for the same period of 2000. The
decrease was primarily attributable to decreased demand for products used in
broadband access and networks, networking infrastructure and storage
infrastructure applications. Revenues for the SAN Systems segment decreased
$132.1 million or 45% to $158.9 million for the nine months ended September 30,
2001 from $291.0 million for the same period of 2000 due to decreased demand for
all products sold in the SAN Systems segment. There were no significant
intersegment revenues during the periods presented.
We expect revenues to grow approximately 0% to 5% in the fourth quarter of
2001 as compared to the third quarter of 2001.
OPERATING COSTS AND EXPENSES: Key elements of the consolidated statements
of operations, expressed as a percentage of revenues, were as follows:
Three months ended September 30, Nine months ended September 30,
CONSOLIDATED: 2001 2000 2001 2000
-----------------------------------------------------------------------
Gross profit margin 15% 43% 25% 42%
Research and development 34% 14% 28% 14%
Selling, general and administrative 20% 11% 17% 11%
(Loss)/income from operations (99)% 5% (56)% 10%
22
Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:
Three months ended September 30, Nine months ended September 30,
SEMICONDUCTOR SEGMENT: 2001 2000 2001 2000
-----------------------------------------------------------------------
Gross profit margin 13% 44% 24% 43%
Research and development 37% 15% 29% 15%
Selling, general and administrative 18% 11% 15% 11%
(Loss)/income from operations (107)% 3% (60)% 10%
Three months ended September 30, Nine months ended September 30,
SAN SYSTEMS SEGMENT: 2001 2000 2001 2000
-----------------------------------------------------------------------
Gross profit margin 32% 38% 29% 38%
Research and development 15% 6% 14% 7%
Selling, general and administrative 39% 13% 32% 13%
(Loss)/income from operations (36)% 17% (29)% 13%
GROSS PROFIT MARGIN: We have advanced wafer manufacturing operations in
Oregon and Japan. We also acquire wafers from foundries in other locations.
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.
The gross profit margin percentage decreased to 15% in the third quarter
of 2001 from 43% in the same period of 2000 on a consolidated basis. The gross
profit margin percentage for the Semiconductor segment decreased to 13% from 44%
in the same period of 2000.
The gross profit margin percentage decreased to 25% during the nine months
ended September 30, 2001 from 42% in the same period of 2000 on a consolidated
basis. The gross profit margin percentage for the Semiconductor segment
decreased to 24% from 43% in the same period of 2000. The decrease for the
Semiconductor segment for the three and nine month periods ended September 30,
2001, as compared to the same periods of the prior year are primarily a result
of the following factors:
- Decreased revenue for higher margin products;
- Higher manufacturing variances and period costs as a percentage of
revenues;
- Additional excess inventory and related charges of $50 million for
the three months ended September 30, 2001 and $152 million for the
nine months ended September 30, 2001.
We recorded excess inventory and related charges of $50 million and $158
million for the three and nine month periods ended September 30, 2001. The
additional excess inventory and related charges during the three months ended
September 30, 2001 were primarily associated with underutilization charges
related to a temporary idling of our fabrication facilities. The decrease for
the nine months ended September 30, 2001 was due to the above coupled with the
closure of our Colorado Springs fabrication facility (See Note 3 of the
Notes) and a sudden and significant decrease in forecasted revenue and was
calculated in accordance with our policy, which is primarily based on inventory
levels in excess of 12-month judged demand for each specific product.
The gross profit margin percentage for the SAN Systems segment decreased
to 32% in the third quarter of 2001 from 38% in the same period of 2000. The
gross profit margin percentage for the SAN Systems segment decreased to 29% in
the nine months ended September 30, 2001 from 38% in the same period of 2000.
The decrease was primarily attributable to decreased revenue for higher margin
products and additional excess inventory and related charges of approximately $6
million recorded during the second quarter of 2001.
23
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
profit margin in future periods.
Changes in the relative strength of the yen may have a greater impact on
our gross profit margin than other foreign exchange fluctuations due to our
wafer fabrication operations in Japan. Although the yen weakened (the average
yen exchange rate for the third quarter of 2001 depreciated 12% from the same
period of 2000), the effect on gross profit 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 6 of the Notes.) Future changes in the
relative strength of the yen or mix of foreign currency denominated revenues and
costs could have a significant effect on our gross profit margin or operating
results.
RESEARCH AND DEVELOPMENT: Research and development ("R&D") expenses
increased $33.9 million or 33% to $135.6 million during the third quarter of
2001 as compared to $101.7 million during the same period of 2000 on a
consolidated basis. R&D expenses for the Semiconductor segment increased $33.8
million or 36% to $128.7 million in the third quarter of 2001 from $94.9 million
in the same period of 2000.
R&D expenses increased $113.1 million or 42% to $381.8 million during the
nine months ended September 30, 2001 as compared to $268.7 million during the
same period of 2000 on a consolidated basis. R&D expenses for the Semiconductor
segment increased $110.4 million or 44% to $359.2 million in the nine months
ended September 30, 2001 from $248.8 million in the same period of 2000. The
increase for the semiconductor segment for the three and nine month periods as
compared to the same periods of the prior year was primarily attributable to an
increase in expenditures related to continued R&D activities of the former
C-Cube and AMI RAID business included in our consolidated financial statements
as of May 11, 2001 and August 31, 2001 respectively, and continued development
of our already existing advanced sub-micron products and process technologies.
The R&D expenses were offset in part by the research and development
benefits associated with a technology transfer agreement entered into with
Silterra in Malaysia during 1999. (See Note 4 of the Notes.) A benefit of $2
million and $6 million was recorded during the three month periods ended
September 30, 2001 and 2000, respectively. A benefit of $14 million and $18
million was recorded during the nine month periods ended September 30, 2001 and
2000, respectively.
R&D expenses for the SAN Systems segment increased $0.1 million or 1% to
$6.9 million in the third quarter of 2001 from $6.8 million in the same period
of 2000. R&D expenses for the SAN Systems segment increased $2.7 million or 14%
to $22.6 million during the nine months ended September 30, 2001 from $19.9
million in the same period of 2000. The increase for the three and nine month
periods reflect higher compensation related expenses due to an increase in
average headcount during the periods presented in 2001 as compared to the prior
year.
As a percentage of revenues, R&D expenses increased to 34% in the third
quarter of 2001 from 14% in the same period of 2000 on a consolidated basis. R&D
expenses as a percentage of revenues for the Semiconductor segment increased to
37% in the third quarter of 2001 from 15% in the same period of 2000. R&D
expenses as a percentage of revenues for the SAN Systems segment increased to
15% in the third quarter of 2001 from 6% in the same period of 2000. The
increase in R&D expenses as a percentage of revenues for both segments are
primarily a result of lower revenues for the periods presented in 2001 as
compared to 2000 and the effects of R&D spending changes as discussed above.
24
As a percentage of revenues, R&D expenses increased to 28% during the nine
months ended September 30, 2001 from 14% in the same period of 2000 on a
consolidated basis. R&D expenses as a percentage of revenues for the
Semiconductor segment increased to 29% during the nine months ended September
30, 2001 from 15% in the same period of 2000. R&D expenses as a percentage of
revenues for the SAN Systems segment increased to 14% during the nine months
ended September 30, 2001 from 7% in the same period of 2000. The increase in R&D
expenses as a percentage of revenues for both segments are primarily a result of
lower revenues for the periods presented in 2001 as compared to 2000 and the
effects of R&D spending changes as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
("SG&A") expenses increased $1.0 million or 1% to $80.1 million during the third
quarter of 2001 as compared to $79.1 million in the same period of 2000 on a
consolidated basis. SG&A expenses for the Semiconductor segment decreased $2.7
million or 4% to $62.6 million in the third quarter of 2001 from $65.3 million
in the same period of 2000. SG&A expenses for the SAN Systems segment increased
$3.7 million or 27% to $17.5 million in the third quarter of 2001 from $13.8
million in the same period of 2000. The increase on a consolidated basis was
primarily attributable to the following factors:
- Continued SG&A expenses for the former C-Cube and AMI RAID business,
which are part of the Semiconductor segment and included in our
consolidated financial statements as of May 11, 2001 and August 31,
2001, respectively, and
- An increase in compensation related expenses for the SAN Systems
segment due to an increase in average headcount during the third
quarter of 2001.
The above increases were offset in part by the positive effects of cost
reduction programs in both segments in the third quarter of 2001.
SG&A expenses increased $12.2 million or 5% to $236.6 million during the
nine months ended September 30, 2001 as compared to $224.4 million in the same
period of 2000 on a consolidated basis. SG&A expenses for the Semiconductor
segment decreased $2.5 million or 1% to $185.5 million during the nine months
ended September 30, 2001 from $188.0 million in the same period of 2000. SG&A
expenses for the SAN Systems segment increased $14.7 million or 40% to $51.1
million during the nine months ended September 30, 2001 from $36.4 million in
the same period of 2000. The increase on a consolidated basis and by segment was
primarily attributable to the same factors noted above.
As a percentage of revenues, SG&A expenses increased to 20% in the third
quarter of 2001 from 11% in the same period of 2000 on a consolidated basis.
SG&A expenses as a percentage of revenues for the Semiconductor segment
increased to 18% in the third quarter of 2001 from 11% in the same period of
2000. SG&A expenses as a percentage of revenues for the SAN Systems segment
increased to 39% in the third quarter of 2001 from 13% in the same period of
2000. The increase in SG&A expenses as a percentage of revenues for both
segments are primarily a result of lower revenues for the periods presented in
2001 as compared to 2000 and the effects of SG&A spending changes as discussed
above.
As a percentage of revenues, SG&A expenses increased to 17% during the
nine months ended September 30, 2001 from 11% in the same period of 2000 on a
consolidated basis. SG&A expenses as a percentage of revenues for the
Semiconductor segment increased to 15% during the nine months ended September
30, 2001 from 11% in the same period of 2000. SG&A expenses as a percentage of
revenues for the SAN Systems segment increased to 32% during the nine months
ended September 30, 2001 from 13% in the same period of 2000. The increase in
SG&A expenses as a percentage of revenues for both segments are primarily a
result of lower revenues for the periods presented in 2001 as compared to 2000
and the effects of spending changes as discussed above.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT: In connection with the
acquisitions of the RAID business and C-Cube in 2001 (See Note 2 of the Notes),
we recorded a $96.6 million charge associated with acquired in-process
25
research and development ("IPR&D"). The amount of IPR&D was determined by
identifying research projects for which technological feasibility had not been
established and no alternative future uses existed as of the acquisition date.
RAID business:
On August 31, 2001, we entered into an Asset Purchase Agreement with
American Megatrends, Inc. ("AMI") Under the agreement, we acquired certain
tangible and intangible assets associated with AMI's Redundant Array of
Independent Disks, or RAID, business. The acquisition will enhance product
offerings and is included in the Semiconductor segment. The acquisition was
accounted for as a purchase and the results of operations and estimated fair
value of net liabilities acquired was included in our consolidated financial
statements as of August 31, 2001, the effective date of the purchase, through
the end of the period. We paid approximately $224 million in cash, which
included direct acquisition costs of $2.5 million for legal and accounting
fees. We issued and will issue approximately 0.8 million in restricted common
shares to certain RAID business employees retained as part of the purchase
transaction.
In connection with the purchase of RAID business, we recorded a $19.1
million charge to in-process research and development during the third quarter
of 2001. As of the acquisition date, there were several projects in-process. The
projects were for development of RAID technology applications.
The value of the projects identified to be in progress was determined by
estimating the future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value. The net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the projects. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages and growth estimates in the semiconductor
industry. Total revenues for the projects are expected to extend through 2005
and 2006 for the RAID projects. These projections were based on estimates of
market size and growth, expected trends in technology and the expected timing of
new product introductions by our competitors and us.
The discount rate used was 20% for the projects to account for the risks
associated with the inherent uncertainties surrounding the successful
development of the IPR&D, market acceptance of the technology, the useful life
of the technology, the profitability level of such technology and the
uncertainty of technological advances, which could impact the estimates
described above.
The percentage of completion for the project was determined based on
research and development expenses incurred as of August 31, 2001 for the
projects as a percentage of total research and development expenses to bring the
project to technological feasibility. Development of these projects started in
early 2000 and 2001.
As of August 31, 2001, we estimated the projects were approximately 12% to
62% complete for the RAID projects. As of the acquisition date, the cost to
complete these projects is estimated at $4.6 million and $2.4 million for 2001
and 2002, respectively.
C-Cube:
On March 26, 2001, we signed a definitive merger agreement ("Merger
Agreement") to acquire C-Cube Microsystems Inc. ("C-Cube") in a transaction to
be accounted for as a purchase. In accordance with the Merger Agreement, we
commenced an exchange offer whereby it would offer 0.79 of a share of common
stock for each outstanding share of C-Cube common stock. Under the terms of the
Merger Agreement, the exchange offer was followed by a merger in which we
acquired, at the same exchange ratio, the remaining shares of C-Cube common
stock not previously acquired in the exchange offer. Upon completion of the
merger, we assumed all options and warrants to purchase shares of C-Cube common
stock and converted them into options and warrants to purchase shares of our
common stock (See Note 2 of the Notes). We issued approximately 40.2 million
shares of its common stock, 10.6 million options and 0.8 million warrants in
exchange for the outstanding ordinary shares, options and
26
warrants of C-Cube, respectively. The acquisition is intended to enhance and
accelerate our DVD product offerings in the Semiconductor segment.
The total purchase price for C-Cube was $893.7 million, which includes
deferred compensation on unvested stock options and stock awards assumed as part
of the purchase. The acquisition was accounted for as a purchase. Accordingly,
the results of operations of C-Cube and estimated fair value of assets acquired
and liabilities assumed were included in our consolidated financial statements
as of May 11, 2001, the effective date of the purchase, through the end of the
period.
In connection with the purchase of C-Cube, we recorded a $77.5 million
charge to in-process research and development. As of the acquisition date, there
were various projects that were in-process. The majority of the projects
identified consist of Digital Video Disc Player ("DVD"), DVD Recorder ("DVD-R"),
Consumer Set-Top Box and Cable Modem.
The value of the projects identified to be in progress was determined by
estimating the future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value. The net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the projects. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages and growth estimates in the semiconductor
industry. Total revenues for the projects are expected to extend through 2005,
2006, 2004 and 2003 for DVD, DVD-R, Consumer Set-Top Box and Cable Modem,
respectively. These projections were based on estimates of market size and
growth, expected trends in technology and the expected timing of new product
introductions by our competitors and us.
The discount rate used was 27.5% for the projects to account for the risks
associated with the inherent uncertainties surrounding the successful
development of the IPR&D, market acceptance of the technology, the useful life
of the technology, the profitability level of such technology and the
uncertainty of technological advances, which could impact the estimates
described above.
The percentage of completion for the project was determined based on
research and development expenses incurred as of May 11, 2001 for the projects
as a percentage of total research and development expenses to bring the project
to technological feasibility. Development of these projects started in early
1999.
As of May 11, 2001, we estimated the projects were approximately 84%, 62%,
61% and 69% complete for DVD, DVD-R, Consumer Set-Top Box and Cable Modem,
respectively. As of the acquisition date, the cost to complete these projects is
estimated at $22.7 million and $9.1 million for 2001 and 2002, respectively.
RESTRUCTURING OF OPERATIONS AND OTHER NON-RECURRING ITEMS: We recorded
approximately $133 million and $192 million in restructuring and other
non-recurring charges for the three and nine months ended September 30, 2001,
respectively. Other non-recurring charges were approximately $8 million for the
nine months ended September 30, 2001.
Restructuring:
In September of 2001, we announced the consolidation of U.S. manufacturing
operations at Gresham, Oregon and the transfer of process research and
development from Santa Clara, California to Gresham, Oregon. We also announced
the closure of certain assembly activities in Fremont, California which will be
transferred offshore. During the three months ended September 30, 2001, we
recorded a restructuring charge of $77 million for fixed asset write-downs due
to impairment in the U.S. that will be disposed of, losses on operating leases
for equipment and facilities, severance for approximately 600 employees in the
US, Europe, Japan and Asia Pacific as well as other exit costs. We reclassified
$15 million from property, plant and equipment to other current assets to
reflect the intention to dispose of the assets within the next twelve months.
27
In April of 2001, we announced the closure of the Company's Colorado
Springs fabrication facility ("the facility") in August of 2001. In May of 2001,
we entered into a definitive agreement to sell the facility to a third party. As
part of the agreement, we agreed to purchase a minimum amount of production
wafers and die from the facility for a period of 18 months following the close
of the transaction. During the quarter ended June 30, 2001, we recorded an
impairment charge of $71 million relating to the facility of which approximately
$35 million was recorded in cost of sales and $36 million was recorded in
restructuring charges. The restructuring charges consisted of fixed asset
write-downs due to impairment, losses on operating leases for equipment,
severance for approximately 413 employees and other exit costs. On August 1,
2001, we announced the termination of the agreement to sell the facility. The
facility is currently scheduled to close in the fourth quarter of 2001. During
the three months ended September 30, 2001, we recorded an additional
restructuring charge of $55 million for fixed asset write-downs and other exit
costs associated with the planned closure of the facility. The additional asset
write-downs during the third quarter of 2001 were incurred to reflect the new
value of the facility's assets if sold on a piecemeal basis rather than sold as
a facility in continued use. In addition, equipment market values continued to
decline in the third quarter of 2001. We reclassified approximately $62 million
from property, plant and equipment to other current assets to reflect the
intention to dispose of the facility within the next twelve months.
We recorded approximately $16 million in additional restructuring charges
in the second quarter of 2001 primarily associated with the write-down of fixed
assets due to impairment in the U.S., Japan and Hong Kong that will be disposed
of and severance charges for approximately 240 employees in the U.S., Europe and
Asia Pacific. As a result of the continued decline in the equipment market
during the third quarter of 2001, we recorded an additional charge of $0.5
million during the third quarter of 2001 to reflect the fair value of the
equipment when sold.
The fair value of assets determined to be impaired was the result of
independent appraisals and the use of management estimates. Given that current
market conditions for the sale of older fabrication facilities and related
equipment may continue to deteriorate, there can be no assurance that the
company will realize its current net book value for the assets. We will reassess
the realizability of the carrying value of these assets at the end of each
quarter until the assets are sold or otherwise disposed of and additional
adjustments may be necessary.
As a result of the restructuring actions taken during the second quarter
of 2001, we expect to reduce cost of revenues and operating expenses by
$129.8 million during the remainder of 2001. As a result of the restructuring
actions taken during the third quarter of 2001, we expect to reduce cost of
revenues and operating expenses by $25 million during the remainder of 2001.
28
The following table sets forth our restructuring reserves as of September
30, 2001:
Restructuring
(In thousands) Balance Balance Expense Balance
June 30, September 30, September 30, September 30,
2001 Utilized 2001 2001 Utilized 2001
- ---------------------------------------------------------------------------------------------------------------------------
Write-down of excess $ 1,407 $ -- $1,407 $100,782 $(96,263) $ 5,926
assets(a)
Lease terminations and
maintenance contracts (C) 14,253 (10,649) 3,604 12,659 -- 16,263
Other exit costs(C) 7,742 (7,702) 40 9,591 -- 9,631
Payments to employees for
severance(b) 4,084 (2,946) 1,138 9,498 (1,945) 8,691
--------------------------------------------------------------------------------------
Total $27,486 $(21,297) $6,189 $132,530 $(98,208) $40,511
======================================================================================
(a) Amounts utilized in 2001 reflect a write-down of fixed assets in
the U.S., Japan and Hong Kong due to impairment. The amounts were
accounted for as a reduction of the assets and did not result in a
liability. The $5.9 million balance as of September 30, 2001
relates to machinery and equipment decommissioning costs in the U.S.
(b) Amounts utilized represent cash payments related to the severance of
approximately 440 employees during the nine months ended September
30, 2001.
(c) Amounts utilized represent cash payments.
Other non-recurring:
We recorded approximately $8 million in other non-recurring charges in
the second quarter of 2001 associated with the write-down of intangible assets
due to impairment. The majority of the intangible assets were originally
acquired in the purchase of a division of NeoMagic in the second quarter of
2000.
During the first quarter of 2000, we recorded other non-recurring net
charges of $2.8 million. 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 performed by us at our
Fremont, California facility. The agreement provided for the sale
and transfer of certain test equipment and related peripherals for
total proceeds of approximately $10.7 million. We recorded a loss of
approximately $2.2 million associated with the agreement. (See Note
3 of the Notes.)
- In March 2000, we 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.
AMORTIZATION OF INTANGIBLES: Amortization of goodwill and other
intangibles increased $35.7 million or 163% to $57.7 million in the third
quarter of 2001 from $22.0 million in the same period of 2000. Amortization of
goodwill and other intangibles increased to $128.3 million during the nine
months ended September 30, 2001 from $47.6 million in the same period of 2000.
The increase was primarily related to additional amortization of goodwill
associated with the acquisitions of C-Cube and the RAID business in the second
and third quarters of 2001, respectively, and ParaVoice and Syntax in the fourth
quarter of 2000.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
FASB Statements Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business
Combinations" and "Goodwill and Other Intangible Assets." The statements were
effective for our purchase of the RAID business from AMI which closed on August
31, 2001. See Note 2 of the Notes for further discussion.
AMORTIZATION OF NON-CASH DEFERRED STOCK COMPENSATION: Amortization of
non-cash deferred stock compensation of $26.8 million and $75.9 million for the
three and nine month periods ended September 30, 2001,
29
respectively, is due to the amortization of non-cash deferred stock compensation
recorded in connection with the acquisitions of C-Cube and the RAID business
during the second and third quarters of 2001, respectively, (See Note 2 of the
Notes), Syntax in the fourth quarter of 2000 and DataPath in the third quarter
of 2000.
INTEREST EXPENSE: Interest expense decreased $0.2 million to $10.0 million
in the third quarter of 2001 from $10.2 million in the same period of 2000.
Interest expense decreased $1.6 million to $29.8 million during the nine months
ended September 30, 2001 from $31.4 million in the same period of 2000. The
decrease was primarily attributable to lower interest rates on outstanding debt
during the nine months ended September 30, 2001 as compared to the same period
in 2000.
INTEREST INCOME AND OTHER, NET: Interest income and other decreased $14.8
million to $3.9 million in the third quarter of 2001 from $18.7 million in the
same period of 2000. The decrease in interest income is attributable to a
decline in average cash balances during the quarter combined with lower interest
rates. The decrease in other income was primarily attributable to the write-down
of certain equity investments due to impairment, the write-off of debt issuance
costs associated with a master lease and security agreement and the time value
of purchased option contracts in the third quarter of 2001. (See Notes 5 and 6
of the Notes.)
Interest income and other decreased $20.7 million to $16.6 million during
the nine months ended September 30, 2001 from $37.3 million in the same period
of 2000. We recorded approximately $3 million higher interest income during the
nine months ended September 30, 2001 as compared to the same period in 2000 due
to higher average balances of interest-generating cash, cash equivalents and
short-term investments which was offset in part by lower interest rates during
the period. The increase in interest income and other was offset by the
write-down of equity investments due to impairment, the write-off of debt
issuance costs associated with a master lease and security agreement and the
time value of purchased option contracts. (See Notes 5 and 6 of the Notes.)
GAIN ON SALE OF EQUITY SECURITIES: We did not sell marketable equity
securities during the third quarter of 2001. During the first quarter of 2001,
we sold certain marketable equity securities for $7.9 million in the open
market, realizing a pre-tax gain of approximately $5.3 million. During the third
quarter of 2000, we sold certain marketable equity securities for $16.4 million
in the open market, realizing a pre-tax gain of approximately $15.3 million.
During the nine months ended September 30, 2000, we sold certain marketable
equity securities for $62.2 million in the open market, realizing a pre-tax gain
of approximately $58.0 million. In the first quarter of 2000, 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.
PROVISION FOR INCOME TAXES: During the three months ended September 30,
2001, we did not record any income tax provision or benefit representing an
effective tax rate of 0%. During the nine months ended September 30, 2001, we
recorded an income tax benefit of $39.2 million, which represents an effective
tax rate of 5%. This rate differs from the U.S. statutory rate primarily due to
losses of our foreign subsidiaries, which are benefited at lower rates, and
items related to acquisitions, which are non-deductible for tax purposes. For
the three and nine months ended September 30, 2000, an income tax provision was
recorded at an effective rate of 71% and 37%, respectively. These rates differ
from the U.S. statutory rate primarily due to merger and restructuring charges,
the recognition of taxable gains offset in part by earnings of our foreign
subsidiaries taxed at lower rates and the utilization of tax credits.
30
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments decreased $358.6 million
or 31.6% to $744.7 million as of September 30, 2001 from $1,133.2 million as of
December 31, 2000.
WORKING CAPITAL: Working capital decreased $648.8 million or 44.9% to
$796.5 million as of September 30, 2001 from $1,445.3 million as of December 31,
2000. The decrease was primarily a result of the following factors:
- Lower short-term investments due to higher maturities and sales of
securities available-for-sale and reclassification of certain
marketable equity securities into long-term assets during the nine
months ended September 30, 2001 as compared to the same period of 2000;
- Lower accounts receivable due to decreased revenue and improved
collections during the third quarter of 2001 as compared to the fourth
quarter of 2000;
- Higher accrued salaries, wages and benefits; and
- Higher other accrued liabilities resulting primarily from restructuring
related accruals.
The decrease in working capital was offset in part by higher cash and cash
equivalents primarily due to the C-Cube acquisition in 2001 (See Note 2 of the
Notes), higher inventories due to decreased revenue during the third quarter of
2001 as compared to the fourth quarter of 2000, higher prepaid expenses and
other current assets due to a reclassification from fixed assets to current
assets held for sale, lower accounts payable that reflect lower purchases during
the third quarter of 2001 as compared to the fourth quarter of 2000 and lower
income taxes payable due to the timing of tax payments and the tax benefit
recorded during 2001.
CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES: During the
nine month period ended September 30, 2001, we generated $95.5 million of cash
and cash equivalents from operating activities compared to $343.1 million
generated during the same period in 2000. The decrease in cash and cash
equivalents provided by operating activities was primarily attributable to a net
loss for the nine month period ended September 30, 2001, compared to net income
for the same period of 2000, an increase in inventory and prepaid expenses and
other current assets and a decrease in accounts payable and income tax payable.
The increase in inventories reflects lower than expected sales during the nine
months ended September 30, 2001 that was partly offset by a write-down of
certain inventory. (See Note 7 of the Notes.) The increase in prepaid expenses
and other current assets was primarily attributable to a reclassification of
assets held for sale from property, plant and equipment to other current assets
(See Note 3 of the Notes) during the period. The decrease in accounts payable
reflects lower purchases during the nine months ended September 30, 2001 as
compared to the same period of 2000 and the timing of invoice receipt and
payments. The decrease in income tax payable is due to the tax benefit recorded
during 2001.
CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES: Cash and cash
equivalents used in investing activities was $161.8 million during the nine
months ended September 30, 2001, compared to $437.3 million during the same
period of 2000. The decrease was primarily related to higher sales and
maturities of debt and equity securities available-for-sale and others, net of
purchases during the nine month period ended September 30, 2001 compared to the
same period of 2000.
The decrease was offset in part by higher capital expenditures, an
increase in non-current assets and deposits from our participation as a lender
in certain lease transactions (See Note 12 of the Notes), a net increase in cash
and cash equivalents paid for the acquisition of companies, and lower proceeds
from the sale of marketable equity securities during the nine month period ended
September 30, 2001 compared to the same period of 2000.
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 $151.4
million during the nine month period ended September 30, 2001 and $120.2 million
during the same period
31
of 2000. In order to maintain our position as a technological market leader, we
expect the level of capital expenditures to be approximately $400 million in
2001.
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES: Cash and cash
equivalents provided by financing activities during the nine month period ended
September 30, 2001 was $253.0 million compared to $168.7 million in the same
period of 2000. During the nine month period ended September 30, 2001, we
generated cash proceeds of $55.1 million from our employee stock option and
purchase plans, which were offset in part by the repayment of debt obligations
and payment of debt issuance costs. During the nine month period ended September
30, 2000, we generated cash proceeds of $123.6 million from the issuance of the
2000 Convertible Notes, net of repayment of the Revolver, and $60.3 million from
our employee stock option and purchase plans, net of purchases of common stock
under the stock repurchase program, which was offset in part by the debt
issuance costs associated with the 2000 Convertible Notes. (See Note 8 of the
Notes.)
On October 30, 2001, we issued $450 million of 4% Convertible Subordinated
Notes (the "2001 Convertible Notes") due in 2006. We granted the initial
purchaser an option to purchase an additional $67.5 million aggregate principal
amount of the 2001 Convertible Notes within 30 days of issuance date. The 2001
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at any time following issuance into shares of our common stock at a
conversion price of $26.339 per share and are redeemable at our option, in whole
or in part, at any time on or after November 6, 2004. Each holder of the 2001
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 $13.5 million for debt issuance
costs related to the 2001 Convertible Notes. The debt issuance costs are being
amortized using the interest method. The net proceeds from the 2001 Convertible
Notes were used to repay bank debt outstanding with a balance of approximately
$200 million as of September 30, 2001 as described below.
On September 28, 2001, we entered into a Credit Agreement with Bank of
America, N.A. and Banc of America Securities LLC that provides for borrowings up
to $200 million through September 26, 2002. We borrowed $200 million under the
Credit Agreement as of September 30, 2001, with an interest rate based on LIBOR.
The obligation was secured by inventory and accounts receivable. The Credit
Agreement required that we maintain a minimum tangible net worth and minimum
cash reserves. At September 30, 2001, we were in compliance with all financial
covenants. In October 2001, the borrowings outstanding under the Credit
Agreement were repaid in full with the proceeds of the 2001 Convertible Notes
and the Credit Agreement was terminated.
On March 14, 2001, the Second Amended and Restated Credit Agreement was
amended to reduce the total revolving commitment by $165 million from $240
million to $75 million. On the effective date of this reduction, the revolving
commitment of each lender was reduced accordingly. The Second Amended and
Restated Credit Agreement was terminated in August of 2001.
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 July 2001, the Financial Accounting Standards Board ("FASB") issued
FASB Statements Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business
Combinations" and "Goodwill and Other Intangible Assets." SFAS 141 replaces APB
16 and eliminates pooling-of-interests accounting prospectively. It also
provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 142,
32
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS 141 and SFAS 142 are effective
for all business combinations completed after September 30, 2001. Upon adoption
of SFAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under SFAS
141 will be reclassified to goodwill. Companies are required to adopt SFAS 142
for fiscal years beginning after December 15, 2001, but early adoption is
permitted. The Company will adopt SFAS 142 on January 1, 2002, the beginning of
fiscal 2002. In connection with the adoption of SFAS 142, the Company will be
required to perform a transitional goodwill impairment assessment. The Company
has not yet determined the impact these standards will have on its results of
operations and financial position.
In August 2001, the FASB issued Statement No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations," which is effective for fiscal
years beginning after June 15, 2002. SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Statement
applies to all entities. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. The Company does not expect the adoption of
SFAS 143 will have a significant impact on its financial position and results
of operations.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed. SFAS 144 will be effective for fiscal years
beginning after December 15, 2001. The Company does not expect that its
adoption on January 1, 2002 will have a material effect on its financial
statements.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the market risk disclosures
during the nine month period ended September 30, 2001 as compared to the
discussion in Part II of our Annual Report on Form 10-K for the year ended
December 31, 2000.
34
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, 2000 for a discussion
of certain pending legal proceedings. In addition, the Company is a party to
other litigation matters and claims that are normal in the course of its
operations. The information provided at such reference regarding those matters
remains substantially unchanged except as set forth herein.
Regarding the pending litigation initiated by the Lemelson Medical,
Education & Research Foundation, Limited Partnership against certain electronics
industry companies, including LSI, that was described in the Company's prior
reports, the court has completed its review of motion papers filed in connection
with Cypress Semiconductor's and plaintiff's cross-motions for summary judgment
with respect to the 4,390,586 patent and granted a motion for oral arguments to
be held in mid-December. These activities are ongoing and, as of yet, no trial
date has been set.
The information in Item 3 pertaining to the proceedings that are pending
in the Court of Queen's Bench of Alberta, Judicial District of Calgary (the
"Court") between the Company, its Canadian subsidiary ("LSI Canada") and certain
former shareholders of LSI Canada is updated as follows. Following a hearing
held in March 2001, the Court dismissed the motion of the former shareholders
that challenged the propriety of the fair value proceedings initiated by LSI
Canada and the jurisdiction of the Court to adjudicate the matter. In addition,
the Court ruled that the portions of the application of the former shareholders
to initiate a claim based upon allegations that actions of LSI Logic Corporation
and certain named (former) directors and a (former) officer of LSI Canada were
oppressive of the rights of minority shareholders in LSI Canada are struck and
the balance are stayed. The Court also directed the litigants to recommence
preparation for trial in the fair value proceeding and advised the litigants of
the Court's intention to schedule a date for trial of that matter as soon as
practicable. While we cannot give any assurances regarding the resolution of
these matters, we believe that the final outcome will not have a material
adverse effect on our consolidated results of operations or financial condition.
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.
U.S. Philips Corporation, a subsidiary of Royal Philips Electronics of
Netherlands, in a business wire dated October 17, 2001, stated that it had filed
suits in the U.S. District Court in New York against eight companies, including
the Company, for allegedly infringing and inducing others to infringe on Philips
U.S. Patent Number 4,689,740. This patent is directed to devices and methods
used with the Inter-Integrated Circuit Bus. To date, the Company has not been
served with a complaint by U.S. Philips Corporation, and as of such date, it has
no additional information with respect to this suit.
In addition, the Company is a party to other litigation matters and
claims, which are normal in the course of its operations. 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 2002
annual meeting of stockholders must be received at the Company's principle
executive offices not later than November 26, 2001 in order to be included in
the Company's proxy statement and form of proxy relating to the 2002 annual
meeting.
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.24 First Amendment to Amended and Restated Participation Agreement by and
among LSI Logic, ABN Amro Bank N.V., Keybank National Association, FBTC
Leasing Corp., as Lessor, ABN Amro Bank N.V., as agent for Lessors and
Participants, dated as of August 2, 2001.
10.25 Second Amendment to Amended and Restated Participation Agreement by and
among LSI Logic, ABN Amro Bank N.V., Keybank National Association, FBTC
Leasing Corp., as Lessor, ABN Amro Bank N.V., as agent for Lessors and
Participants, dated as of August 17, 2001.
10.26 Third Amendment to Participation Agreement and Omnibus Amendment by and
among LSI Logic, Banc of America Leasing & Capital LLC, as Lessor,
Fleet National Bank, as Lessor Agent and as Agent and Participants,
dated as of September 28, 2001.
10.27 Participation Agreement by and among LSI Logic, First Security Bank,
N.A. as Certificate Trustee, First Security Trust Company of Nevada, as
Agent and Participants, dated as of April 20, 2001.
10.28 First Amendment to Participation Agreement by and among LSI Logic,
Wells Fargo Bank Northwest, N.A. (f/k/a First Security Bank, N.A.), as
Certificate Trustee, First Security Trust Company of Nevada, as Agent
and Participants, dated as of August 2, 2001.
10.29 Second Amendment to Participation Agreement by and among LSI Logic,
Wells Fargo Bank Northwest, N.A. (f/k/a First Security Bank, N.A.), as
Certificate Trustee, Wells Fargo Bank Nevada, National Association
(f/k/a First Security Trust Company of Nevada), as Agent and
Participants, dated as of August 17, 2001.
10.30 Third Amendment to Participation Agreement and Omnibus Amendment by and
among LSI Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First Security
Bank, N.A.), as Certificate Trustee, Wells Fargo Bank Nevada, National
Association (f/k/a First Security Trust Company of Nevada), as Agent
and Participants, dated as of September 28, 2001.
(b) Reports on Form 8-K
On April 4, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated March 26, 2001.
On April 25, 2001, pursuant to Item 5 to report information set forth
in the Registrant's press release dated April 24, 2001.
On May 21, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated May 11, 2001.
On June 5, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated May 29, 2001.
On June 15, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated June 11, 2001.
On June 18, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated June 11, 2001.
36
On June 26, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated June 18, 2001.
On July 20, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated May 11, 2001.
On July 20, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated June 11, 2001.
On July 30, 2001, pursuant to Item 5 to report information set forth in
the Registrant's press release dated July 26, 2001.
On August 6, 2001, pursuant to Item 5 to report information set forth
in the Registrant's press release dated August 1, 2001.
On October 25, 2001, pursuant to Item 5 to report information set forth
in the Registrant's press release dated October 23, 2001.
37
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: November 13, 2001 By /s/ Bryon Look
-------------------------
Bryon Look
Executive Vice President &
Chief Financial Officer
38
INDEX TO EXHIBITS
10.24 First Amendment to Amended and Restated Participation Agreement by and
among LSI Logic, ABN Amro Bank N.V., Keybank National Association, FBTC
Leasing Corp., as Lessor, ABN Amro Bank N.V., as agent for Lessors and
Participants, dated as of August 2, 2001.
10.25 Second Amendment to Amended and Restated Participation Agreement by and
among LSI Logic, ABN Amro Bank N.V., Keybank National Association, FBTC
Leasing Corp., as Lessor, ABN Amro Bank N.V., as agent for Lessors and
Participants, dated as of August 17, 2001.
10.26 Third Amendment to Participation Agreement and Omnibus Amendment by and
among LSI Logic, Banc of America Leasing & Capital LLC, as Lessor,
Fleet National Bank, as Lessor Agent and as Agent and Participants,
dated as of September 28, 2001.
10.27 Participation Agreement by and among LSI Logic, First Security Bank,
N.A. as Certificate Trustee, First Security Trust Company of Nevada, as
Agent and Participants, dated as of April 20, 2001.
10.28 First Amendment to Participation Agreement by and among LSI Logic,
Wells Fargo Bank Northwest, N.A. (f/k/a First Security Bank, N.A.), as
Certificate Trustee, First Security Trust Company of Nevada, as Agent
and Participants, dated as of August 2, 2001.
10.29 Second Amendment to Participation Agreement by and among LSI Logic,
Wells Fargo Bank Northwest, N.A. (f/k/a First Security Bank, N.A.), as
Certificate Trustee, Wells Fargo Bank Nevada, National Association
(f/k/a First Security Trust Company of Nevada), as Agent and
Participants, dated as of August 17, 2001.
10.30 Third Amendment to Participation Agreement and Omnibus Amendment by and
among LSI Logic, Wells Fargo Bank Northwest, N.A. (f/k/a First Security
Bank, N.A.), as Certificate Trustee, Wells Fargo Bank Nevada, National
Association (f/k/a First Security Trust Company of Nevada), as Agent
and Participants, dated as of September 28, 2001.
39