<PAGE> 1
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 27, 1998
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, 1998 there were 141,263,154 shares of the registrant's Common
Stock, $.01 par value, outstanding.
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LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1998
INDEX
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - September 30, 1998 and
December 31, 1997 3
Consolidated Condensed Statements of Operations - Three-Month
and Nine-Month Periods Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows - Nine-Month
Periods Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 134,713 $ 104,571
Short-term investments 93,269 386,369
Accounts receivable, less allowance for doubtful
accounts of $3,152 and $2,597 284,002 210,141
Inventories 183,946 102,267
Other current assets 95,577 67,113
----------- -----------
Total current assets 791,507 870,461
----------- -----------
Property and equipment, net 1,411,543 1,123,909
Goodwill 263,035 20,852
Other assets 108,634 111,690
----------- -----------
Total assets $ 2,574,719 $ 2,126,912
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 205,154 $ 211,135
Accrued salaries, wages and benefits 59,788 38,422
Accrued restructuring costs 24,900 --
Other accrued liabilities 102,268 56,802
Income taxes payable 63,323 87,257
Current portion of long-term obligations and
short-term borrowings 152,911 44,615
----------- -----------
Total current liabilities 608,344 438,231
----------- -----------
Long-term obligations and deferred income taxes 599,709 117,511
Minority interest in subsidiaries 4,617 5,197
Commitments and contingencies -- --
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized -- --
Common stock; $.01 par value; 450,000 shares authorized;
140,538 and 140,161 shares outstanding 1,405 1,401
Additional paid-in capital 997,408 965,422
Retained earnings 391,273 611,622
Cumulative translation adjustment (28,037) (12,472)
----------- -----------
Total stockholders' equity 1,362,049 1,565,973
----------- -----------
Total liabilities and stockholders' equity $ 2,574,719 $ 2,126,912
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 390,365 $ 326,847 $ 1,045,316 $ 967,239
----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues 220,829 163,729 579,780 496,848
Research and development 77,733 57,746 206,421 166,198
Selling, general and administrative 59,055 49,036 153,397 143,368
Acquired in-process research and
development 224,800 2,850 224,800 2,850
Restructuring of operations and other
non-recurring charges 75,400 -- 75,400 --
Amortization of intangibles 5,826 1,156 8,598 3,188
----------- ----------- ----------- -----------
Total costs and expenses 663,643 274,517 1,248,396 812,452
----------- ----------- ----------- -----------
(Loss)/income from operations (273,278) 52,330 (203,080) 154,787
Interest expense (5,917) -- (5,917) (1,497)
Interest income and other expense (20,394) 9,295 (7,237) 25,407
----------- ----------- ----------- -----------
(Loss)/income before income taxes (299,589) 61,625 (216,234) 178,697
(Benefit)/provision for income taxes (16,763) 17,307 4,115 50,173
----------- ----------- ----------- -----------
Net (loss)/income $ (282,826) $ 44,318 $ (220,349) $ 128,524
=========== =========== =========== ===========
Net (loss)/income per share:
Basic $ (2.01) $ 0.31 $ (1.57) $ 0.93
=========== =========== =========== ===========
Diluted $ (2.01) $ 0.31 $ (1.57) $ 0.90
=========== =========== =========== ===========
Shares used in computing per share amounts:
Basic 140,827 141,827 140,523 137,873
=========== =========== =========== ===========
Dilutive 140,827 144,506 140,523 144,543
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net (loss)/ income $(220,349) $ 128,524
Adjustments:
Depreciation and amortization 139,841 122,240
Minority interest in net income of subsidiaries 221 566
Write-off of acquired in-process research and development 224,800 2,850
Non-cash restructuring and other non-recurring charges 75,400 --
Changes in:
Accounts receivable (16,349) (36,241)
Inventories (3,950) (12,339)
Other assets (5,452) (37,098)
Accounts payable (44,782) 96,536
Accrued and other liabilities (11,363) 54,996
--------- ---------
Net cash provided by operating activities 138,017 320,034
--------- ---------
Investing activities:
Purchases of debt and equity securities (301,782) (933,252)
Maturities and sales of debt and equity securities 594,546 996,775
Purchase of restricted equity securities (7,216) (6,681)
Purchases of property and equipment, net of retirements
and refinancings (230,201) (348,321)
Acquisition of stock from minority interest holders (599) --
Acquisition of Mint Technology, net of cash acquired -- (6,863)
Acquisition of Symbios, net of cash acquired (759,684) --
--------- ---------
Net cash used for investing activities (704,936) (298,342)
--------- ---------
Financing activities:
Proceeds from borrowings 694,682 34,193
Repayment of debt obligations (99,538) (67,260)
Issuance of common stock 12,480 15,254
Repurchase of common stock (5,661) (12,693)
--------- ---------
Net cash provided by (used for) financing activities 601,963 (30,506)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (4,902) (1,432)
--------- ---------
Increase (decrease) in cash and cash equivalents 30,142 (10,246)
Cash and cash equivalents at beginning of period 104,571 147,059
--------- ---------
Cash and cash equivalents at end of period $ 134,713 $ 136,813
========= =========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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LSI LOGIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring adjustments with
the exception of the in-process research and development charge
discussed in Note 2 and the restructuring charges as outlined in
Note 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, 1997 and the report on Form
8-K and 8-K/A which were filed with the Securities Exchange
Commission on August 21, 1998 and October 20, 1998, respectively.
On August 6, 1998, the Company completed the acquisition of all of
the outstanding capital stock of Symbios, Inc. ("Symbios") from
Hyundai Electronics America ("HEA"). HEA is a majority owned
subsidiary of Hyundai Electronics Industries Co.,Ltd. ("HEI"), a
Korean corporation. The transaction was accounted for as a
purchase and accordingly, the results of operations of Symbios and
estimated fair value of assets acquired and liabilities assumed
were included in the Company's consolidated condensed financial
statements as of August 6, 1998, the effective date of the
purchase through the end of the period. The acquisition of Symbios
is discussed further in Note 2. There are no significant
differences between the accounting policies of the Company and
Symbios.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the consolidated condensed financial statements and accompanying
notes. Actual results could differ from those estimates.
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, 1998 are not
necessarily indicative of the results to be expected for the full
year.
One customer represented 11% and 13% of the Company's consolidated
revenue during the third quarter and first nine months of 1998,
respectively.
This Current Report on Form 10-Q contains forward looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. In
particular, the assumptions set forth in Note 2 and the Management
Discussion and Analysis section of this Current Report on Form
10-Q regarding revenue growth, gross margin increases, cost
decreases and cost of capital which underlie the Company's
calculation of the in-process research and development expenses
contain forward-looking statements and are qualified by the
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risks associated with "Dependence on New Process Technologies and
Products," "Manufacturing Risks," "Capital Needs," "Fluctuations
in Operating Results," "Competition," "Currency Risks," "Customer
Concentration," "Cyclical Nature of the Semiconductor Business"
and "Acquisitions and Investment Alliances" and other risks
detailed in LSI Logic's Annual Report on Form 10-K for the year
ended December 31, 1997 and its Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998 and other
reports filed by LSI Logic with the Securities Exchange Commission
from time to time. Actual results could differ materially from
those projected in these forward-looking statements as a result of
the risks described above as well as other risk factors set forth
in LSI Logic's periodic reports both previously and hereafter
filed with the Securities Exchange Commission.
Note 2- Acquisition of Symbios
As discussed in Note 1, the Company completed the acquisition of
all of the outstanding capital stock of Symbios from HEA on August
6, 1998. The transaction was completed pursuant to the Stock
Purchase Agreement, dated as of June 28, 1998, the First Amendment
to the Stock Purchase Agreement dated August 6, 1998, and the
Supplementary Liability Agreement dated August 6, 1998, each
agreement by and among the Company, HEA and HEI.
The Company paid approximately $767 million in cash for all of the
outstanding capital stock of Symbios which includes a $10 million
payment to HEA which was withheld pending resolution of
liabilities in accordance with the Supplementary Liability
Agreement dated August 6, 1998. This amount is ultimately payable
to HEA or to satisfy liabilities, if any, and was accordingly
reflected as a component of the total purchase price. The Company
additionally paid approximately $6 million in direct acquisition
costs. The purchase was financed using a combination of cash
reserves and a new credit facility bearing interest at adjustable
rates (see Note 4). In addition, the Company assumed all of the
options outstanding under Symbios' 1995 Stock Plan. The
Black-Scholes value of the options assumed of approximately $25
million was included as a component of the total purchase price,
resulting in a total purchase price of $798 million.
The total purchase price of $798 million was allocated to the
estimated fair value of assets acquired and liabilities assumed.
The estimate of fair value of the assets acquired is based on an
independent appraisal and management estimates. The purchase price
and the related allocation is subject to further refinement and
change over the next year.
The total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of property, plant and equipment $ 253,182
Fair value of other tangible net assets 72,483
In-process research and development 224,800
Current technology 199,600
Assembled workforce and trademarks 35,200
Excess of purchase price over net assets assumed 12,659
---------
$ 797,924
=========
</TABLE>
7
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Symbios Integration
-------------------
Management is in the final process of completing its integration
plans related to Symbios. The integration plans include initiatives
to combine the operations of Symbios and LSI Logic and consolidate
duplicative operations. Areas where management estimates may be
revised primarily relate to Symbios employee severance and
relocation costs and other exit costs. Adjustments to accrued
integration costs related to Symbios were recorded as an adjustment
to the fair value of net assets in the purchase price allocation.
Accrued integration charges include $4 million related to
involuntary employee separation and relocation benefits for
approximately 300 Symbios employees and $1.4 million in other exit
costs primarily relating to the closing of Symbios sales offices
and the termination of certain contractual relationships. The
accruals recorded related to the integration of Symbios are based
upon management's current estimate of integration costs and are in
accordance with Emerging Issue Task Force No. ("EITF") 95-3,
"Recognition of Liabilities in Connection with a Purchase Business
Combination."
In-Process Research and Development
-----------------------------------
The amount allocated to in-process research and development was
approximately $225 million. This was determined through valuation
techniques generally used by appraisers in the high-technology
industry and was immediately expensed in the period of acquisition
because technological feasibility had not been established and no
alternative use had been identified. This amount was expensed as a
non-recurring charge upon consummation of the acquisition. The
discussion below should be read with reference to the cautionary
language with respect to forward looking statements set out in
Note 1.
The value assigned to in-process research and development was
determined by identifying research projects in areas for which
technological feasibility has not been established. These include
semiconductor projects of $144 million, storage systems projects of
$59 million, and mixed signal process technology projects of $22
million. The value was determined by estimating the costs to
develop the in-process research and development into commercially
viable projects, estimating the resulting cash flows from such
projects and discounting the net cash flows back to their present
value.
The nature of the efforts to develop the in-process research and
development into commercially viable products principally relate to
the completion of design, verification, documentation, test program
development, prototyping, firmware development, hardware and
software integration, as well as customer system-level testing for
semiconductor, product concept, architecture, design and
development, module and unit test, system integration, product
release for storage, design rule definition, spice model
development, test chip fabrication, silicon to simulation
correlation and process qualification for mixed signal process
technology. The estimated costs expected to develop the in-process
research and development into commercially viable products are
approximately $90 million in aggregate -- $23 million in 1998 after
August 7, $44 million in 1999, $15 million in 2000, and $8 million
from 2001 through 2005.
The resulting net cash flows from such projects are based on LSI
Logic management's estimates of revenues, cost of sales, research
and development costs, selling, general and administrative costs,
and income taxes from such projects. These estimates are based on
the below mentioned assumptions.
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The estimated revenues are based on projected average compounded
annual revenue growth rates for semiconductor and storage products
that are in line with industry analysts' forecasts of growth in
substantially all of the markets in which the divisions compete.
Estimated total revenues from the in-process research and
development product areas are expected to peak in the year 2001 and
decline from 2002 - 2005 as other new products are expected to
enter the market. These projections are based on the Company's
estimates of market size and growth, expected trends in technology,
and the nature and expected timing of new product introductions by
the Company and its competitors. These estimates include projected
revenue related to LSI Logic integrating certain Symbios in-process
technology into ASIC designs with current LSI Logic customers.
These estimates also include projected incremental revenue to LSI
Logic's mixed signal business plan due to integrating Symbios'
advanced in-process mixed signal capabilities into LSI Logic's
in-process mixed signal technologies.
The Company intends to leverage the combined volumes of LSI Logic
and Symbios to achieve more favorable pricing from LSI Logic's
current test and assembly subcontractors, to leverage LSI Logic's
more advanced process technologies to achieve smaller die sizes and
to increase capacity utilization of the wafer fabrication factories
due to the combined volumes. As a result of these savings, the
estimated gross margin for the Company's newly acquired Colorado
semiconductor operations as a percentage of revenues is projected
to increase in 1999 with projected continued improvement until it
reaches LSI Logic historical gross margin levels.
The estimated selling, general and administrative costs are
expected to decrease from Symbios' historical cost structure. Cost
savings are expected to result from the replacement of Symbios'
third party sales distributors with LSI Logic's internal sales
force, closure of duplicate sales and engineering offices
worldwide, reductions in marketing staff and expenses for
overlapping product lines and marketing communications, and
significant reductions in administrative expenses.
Discounting the net cash flows back to their present value is based
on the weighted average cost of capital ("WACC"). The WACC
calculation produces the average required rate of return of an
investment from an operating enterprise, based on various required
rates of return from investments in various areas of that
enterprise. The WACC assumed for LSI Logic, as a corporate business
enterprise, is approximately 15%. The discount rate used in
discounting the net cash flows from in-process research and
development is 23%, which is 500 basis points higher than the
discount rate used in discounting the net cash flows from current
technology. This discount rate is higher than the WACC due to the
inherent uncertainties in the estimates described above including
the uncertainty surrounding the successful development of the
in-process research and development, the useful life of such
technology, the profitability levels of such technology and the
uncertainty of technological advances that are unknown at this
time.
If the projects discussed above are not successfully developed, the
sales and profitability of the combined company may be adversely
affected in future periods. Additionally, the value of other
intangible assets acquired may become impaired.
Useful lives of intangible assets
---------------------------------
The estimated weighted average useful life of the intangible assets
for current technology, assembled workforce, trademarks and
residual goodwill, created as a result of the acquisition, is
approximately eight years.
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Pro forma results
The following unaudited 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 Symbios been
a consolidated entity during the periods presented. The summary
combines the results of operations as if Symbios had been acquired
as of the beginning of the periods presented.
The summary includes the impact of certain adjustments such as
goodwill amortization, changes in depreciation, estimated changes
in interest income because of cash outlays associated with the
transaction and elimination of certain notes receivable assumed to
be repaid as of the beginning of the periods presented, changes in
interest expense because of the new debt entered into with the
purchase (see discussion in Note 4) and the repayment of certain
debt assumed to be repaid as of the beginning of the periods
presented. Additionally, restructuring charges of $75.4 million
discussed in Note 3 and in-process research and development of
$225 million discussed above have been excluded from the periods
presented due to their non-recurring nature.
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------------
1998 1997
------------------ -------------------
(Unaudited)
<S> <C> <C>
Revenue: $ 1,403,672 $ 1,425,275
Net income: $ 52,888 $ 109,118
Basic EPS $ .38 $ .79
Diluted EPS $ .37 $ .75
</TABLE>
Note 3 - Restructuring
The Company remains committed to efforts to improve profitability
and strengthen competitiveness. As a result of identifying
opportunities to streamline operations and maximize the
integration of Symbios into the Company's operation, the Company's
management, with the approval of the Board of Directors, committed
itself to a plan of action and recorded a $75.4 million
restructuring charge in the third quarter of 1998. The action
undertaken included a worldwide realignment of manufacturing
capacity, the consolidation of certain design centers and
administrative offices, and a streamlining of the Company's
overhead structure to reduce operating expenses. The restructuring
charge excludes any integration charges related to Symbios. As
discussed in Note 2, restructuring related to Symbios was accrued
as a liability assumed in the purchase in accordance with EITF
95-3.
Restructuring costs include $37.2 million primarily related to
fixed assets impaired as a result of the decision to close a
manufacturing facility in Tsukuba, Japan; $6.4 million for
terminations of leases and maintenance contracts primarily in the
U.S. and Europe; $13.1 million in surplus fixed asset and other
asset write-downs; and approximately $2.4 million in other exit
costs, which result primarily from the consolidation and closure
of certain design centers, sales and administrative offices
primarily in the U.S. and Europe. Work force reduction costs of
$16.3 million primarily include severance costs related to
involuntary termination programs for approximately 900
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employees and contractors from manufacturing in Japan, and
engineering, sales, marketing and finance personnel primarily
located in the U.S., Japan and Europe. The fair value of assets
determined to be impaired in accordance with the guidance in
Statement of Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" were the result of independent appraisals and
management estimates. Severance costs and other above noted exit
costs were determined in accordance with Emerging Issues Task
Force No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". The
restructuring actions, as outlined by the plan, are intended to be
executed to completion within the next 12 months. The reserve was
recorded as of September 30, 1998.
Note 4 - Debt
On August 5, 1998, the Company entered into a credit agreement by
and among the Company, LSI Logic Japan Semiconductor, Inc., a
wholly owned subsidiary of the Company ("LLJSI") and ABN AMRO Bank
N.V. ("ABN AMRO"). The credit agreement was restated and
superseded by the Amended and Restated Credit Agreement dated as
of September 22, 1998 by and among the Company, LLJSI, ABN AMRO
and thereafter syndicated to a group of lenders determined by ABN
AMRO. The credit agreement consists of two credit facilities: a
$575 million senior unsecured reducing revolving credit facility
("Revolver"), and a $150 million senior unsecured revolving credit
facility ("364 day Facility").
On August 5, 1998, the Company borrowed $150 million under the 364
day Facility and $485 million under the Revolver. The credit
facilities allow for borrowings at adjustable rates. Interest
payments are due quarterly. The 364 day Facility expires on August
3, 1999 at which time borrowings outstanding are payable in full.
The Revolver is for a term of four years with principal payments
due quarterly beginning on December 31, 1999. The Revolver
includes a term loan sub-facility in the amount of 8.6 billion yen
made available to LLJSI over the same term. The yen term loan
sub-facility is for a period of four years with no required
payments until it expires on August 4, 2002. Pursuant to the above
noted restated credit agreement, on August 30, 1998, LLJSI repaid
it's existing 11.4 billion yen ($79.2 million) credit facility and
borrowed 8.6 billion yen ($59.7 million) bearing interest at
adjustable rates. Borrowings outstanding under the 364 day
Facility and the Revolver including the yen sub-facility were
$694.7 million as of September 30, 1998.
The Company, in accordance with the new credit arrangement, must
comply with certain financial covenants related to profitability,
tangible net worth, working capital, senior and total debt
leverage and subordinated indebtedness. At September 30, 1998, the
Company was in compliance with these covenants.
In December 1996, the Company entered into a credit arrangement
with several banks for a $300 million revolving line of credit
expiring in December 1999. The Company canceled this agreement on
July 31, 1998.
Note 5 - Derivative financial instruments
The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the
Company is exposed to changes in foreign currency exchange rates
and interest rates. The Company utilizes various hedge
instruments, primarily forward contract, currency swap, interest
rate swap and currency option contracts, to manage its exposure
associated with firm intercompany and third-party transactions and
net asset and liability positions
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denominated in non-functional currencies. The Company does not
hold derivative financial instruments for speculative or trading
purposes.
On August 5, 1998, the Company recognized a loss of $1.5 million
from the decision to close interest rate swap contracts which
converted the interest associated with yen borrowings by LLJSI
from adjustable to fixed rates. The contracts were closed because
the underlying debt was repaid as discussed in Note 4. Current
period gains and losses associated with the interest rate swaps
are included in interest expense, or as other gains and losses at
such time as related borrowings are terminated. At September 30,
1998, there were no interest rate swap contracts outstanding,
however, the Company may enter into interest rate swaps in the
future.
The Company enters into forward contracts, currency swaps and
currency option contracts to hedge firm commitments, intercompany
transactions and third party exposures. The forward and currency
swap contracts hedging firm intercompany asset and liability
positions denominated in non-functional currencies expired on the
last day of the third quarter ended September 30, 1998 and year
ended December 31, 1997. Currency swap contracts outstanding
during the quarter are considered identifiable hedges and realized
and unrealized gains and losses are deferred until settlement of
the underlying commitments. They are recorded as other gains or
losses when a hedged transaction is no longer expected to occur.
Deferred foreign gains and losses were not material at September
30, 1998 and December 31, 1997. Foreign currency transaction gains
and losses included in interest income and other were immaterial
for the three and nine months ended September 30, 1998 and 1997,
respectively.
At September 30, 1998, total outstanding purchased currency option
contracts were $200 million. These contracts expire quarterly
through June 1999. These currency options were treated as hedges
of third-party yen revenue exposures. The realized and unrealized
gains and option premiums are deferred until the exposure
underlying the option is recorded. The deferred premiums on all
outstanding options were $7 million as of September 30, 1998 and
included in other current assets. The Company closed option
contracts not qualifying for hedge accounting treatment during the
third quarter of 1998 at a gain of $.7 million.
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as
fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair
value of the instruments. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Upon adoption of SFAS 133, the Company will be required to adjust
hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to
be reported in net income or other comprehensive income, as
appropriate, and presented in a manner similar to the cumulative
effect of a change in accounting principle. While the Company
believes the adoption of this statement will not have a material
effect on the Company's results of operations as most derivative
instruments are closed on the last day of each fiscal quarter, the
impact of the adoption of SFAS 133 as of the effective date cannot
be reasonably estimated at this time.
Note 6 - Cash equivalents and short-term investments
Cash equivalents and short-term investments at September 30, 1998,
consisted primarily of U.S. and foreign corporate debt securities,
commercial paper, auction rate preferred stock, U.S. and
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foreign government and agency securities and time deposits. Cash
equivalents and short-term investments held at September 30, 1998
and at December 31, 1997 approximate fair market value and it is
the Company's intention to hold these investments for one year or
less. As of September 30, 1998, contractual maturities of
available-for-sale securities were $ 93.3 million maturing within
one year. The Company currently does not actively trade
securities. Realized gains and losses are based on book value of
specific securities sold and were not material during the quarters
ended September 30, 1998 and 1997.
Note 7 - Reconciliation of basic and diluted earnings per share
The following is a reconciliation of the numerators and
denominators of the basic and diluted per share computations as
required by Statement of Accounting Standards No. 128, "Earnings
Per Share ("EPS")."
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
---------------------------------- --------------------------------
Per-Share Per-Share
(Loss)* Shares** Amount Income* Shares** Amount
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders $(282,826) 140,827 $( 2.01) $44,318 141,827 $ 0.31
------- ------
Effect of Dilutive Securities
Common stock equivalents 2,679
Diluted EPS
Net income available to
common stockholders $(282,826) 140,827 $ (2.01) $44,318 144,506 $ 0.31
------- ------
</TABLE>
*Numerator **Denominator
Options to purchase approximately 13,008,994 and 2,418,138 which
were outstanding at September 30, 1998 and 1997 respectively, were
not included in the calculation because the exercise prices were
greater than the average market price of common shares in each
respective quarter. The exercise price ranges of these options
were $18.94 to $58.13 and $33.25 to $58.13 at September 30, 1998
and 1997, respectively. For the three months ended September 30,
1998, common equivalent shares of 1,454,000 were excluded from the
computation of diluted shares as a result of their antidilutive
effect on earnings per share.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---------------------------------- --------------------------------
Per-Share Per-Share
(Loss)* Shares** Amount Income* Shares** Amount
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders $(220,349) 140,523 $(1.57) $ 128,524 137,873 $ 0.93
------ ------
Effect of Dilutive Securities
Common stock equivalents 3,016
5-1/2% convertible subordinated
notes $ 1,279 3,654
Diluted EPS
Net income available to
common stockholders $(220,349) 140,523 $(1.57) $129,803 144,543 $ 0.90
------ ------
</TABLE>
*Numerator **Denominator
13
<PAGE> 14
Options to purchase approximately 11,241,908 and 637,039 which
were outstanding at September 30, 1998 and 1997 respectively, were
not included in the calculation because the exercise prices were
greater than the average market price of common shares in each
respective quarter. The exercise price ranges of these options
were $22.38 to $ 58.13 and $ 35.00 to $ 58.13 at September 30,
1998 and 1997, respectively. For the nine months ended September
30, 1998, common equivalent shares of 1,934,000 were excluded from
the computation of diluted shares as a result of their
antidilutive effect on earnings per share.
Note 8 - Balance sheet and cash flow information (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
Inventories:
<S> <C> <C>
Raw materials $ 46,350 $ 19,892
Work-in-process 73,046 58,621
Finished Goods 64,550 23,754
-------- --------
Total $183,946 $102,267
======== ========
</TABLE>
The September 30, 1998 inventory numbers are higher in part as a
result of the acquisition of Symbios on August 6, 1998. The
Symbios contribution to the numbers above is $76 million in total
inventories, or $22 million for raw materials, $31 million for
work-in-process and $23 million for finished goods inventories at
September 30, 1998.
During the nine month period ended September 30, 1998, the Company
capitalized $51.5 million related to the preproduction engineering
costs for its Gresham, Oregon manufacturing facility. The
unamortized preproduction balance at September 30, 1998 is $86
million. In April 1998, The Accounting Standards Executive
Committee ("AcSEC") released Statement of Position ("SOP") No.
98-5, "Reporting on the Costs of Start-up Activities." The new SOP
is effective for fiscal years beginning after December 15, 1998
and requires companies to expense all costs incurred or
unamortized in connection with start-up activities. Accordingly,
the Company will expense the unamortized preproduction balance as
of January 1, 1999 and present it as a cumulative effect of a
change in accounting principle in accordance with SOP 98-5.
The Company wrote-down to estimated fair values two long-term
equity investments during the third quarter. This included a $11.9
million write down of the Company's $20.2 million, 2.4% equity
investment in a non-public foundry company and a $2.5 million
write-down in the Company's equity investment in another
non-public technology company. The estimated fair values
established for the investments was determined by use of
management estimates. The decline in value of the investments is
not considered by management to be temporary.
14
<PAGE> 15
Note 9 - During the first nine months of 1998, the Company's Japanese sales
affiliate sold approximately $67.2 million of its accounts
receivables through non-recourse financing programs with two
Japanese banks. These receivables were discounted at short-term
Yen borrowing rates (averaging approximately 0.41%) and related
fees were not material.
Note 10 - Purchases of Minority Interest
During the third quarter of 1998, the Company acquired
approximately 107,880 shares of its Japanese affiliate from its
minority interest shareholders for approximately $.6 million. The
acquisition was accounted for as a purchase and the excess of
purchase price over the estimated fair value of the assets
acquired was allocated to goodwill and is being amortized over
eight years using the straight-line method. The Company owned
approximately 93% of the Japanese affiliate at September 30, 1998.
Note 11 - Comprehensive income
In January 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity
of a company during a period from transactions and other events
and circumstances excluding transactions resulting from
investments by owners and distributions to owners. The primary
difference between net income and comprehensive income, for the
Company, is due to foreign currency translation adjustments and
gains and losses on a long-term intercompany loan with the
Company's Japanese affiliate. Comprehensive income for the third
quarter and first nine months of 1998 and comparable periods in
the prior year is as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Comprehensive Income $(277,285) $ 54,757 $ (230,622) $ 139,713
========== =========== ============ ============
</TABLE>
Note 12 - Legal matters
A discussion of certain pending legal proceedings is included in
Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997. The information provided therein
remains unchanged except as noted in Item 1 of part II of this
Form 10Q. The Company continues to believe that the final outcome
of such matters discussed 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, particularly if viewed on a quarterly basis, for having
an adverse effect on the Company's financial position or its
results of operations.
Certain additional claims and litigation against the Company have
also arisen in the normal course of business. The Company believes
that it is unlikely that the outcome of these claims and lawsuits
will have a materially adverse effect on the Company's
consolidated financial position or results of operations.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company believes that its future operating results are and will continue to
be subject to quarterly variations based upon a wide variety of factors,
including the cyclical nature of both the semiconductor industry and the markets
addressed by the Company's products, the availability and extent of utilization
of manufacturing capacity, fluctuations in manufacturing yields, price erosion,
competitive factors, the timing of new product introductions, changes in product
mix, product obsolescence and the ability to develop and implement new
technologies. The Company's 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 the Company does business. As a
participant in the semiconductor industry, the Company operates in a
technologically advanced, rapidly changing and highly competitive environment.
The Company predominantly sells custom products to customers operating in a
similar environment. Accordingly, changes in the circumstances of the Company's
customers may have a greater impact on the Company than if the Company
predominantly offered standard products that could be sold to many purchasers.
While the Company cannot predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price. To the extent the Company's performance may not satisfy expectations
published by external sources, public reaction could result in a sudden and
significantly adverse impact on the market price of the Company's securities,
particularly on a short-term basis.
The Company currently has international subsidiaries which operate and sell the
Company's products in various global markets. The Company purchases a
substantial portion of its raw materials and equipment from foreign suppliers,
and incurs labor and other operating costs, particularly at its Japanese
manufacturing facility, in foreign currencies. As a result, the Company is
exposed to international factors such as changes in foreign currency exchange
rates or economic conditions of the respective countries in which the Company
operates. The Company utilizes various instruments, primarily forward exchange,
currency swap and currency option contracts to manage its exposure associated
with currency fluctuations on intercompany, certain foreign currency denominated
commitments and anticipated third party sales (see Note 5 to the Unaudited
Consolidated Condensed Financial Statements). Despite its hedging activities,
the Company continues to be exposed to the risks associated with fluctuation of
foreign currency exchange rates, particularly the Japanese yen. There can be no
assurance that such fluctuation will not cause a material adverse effect on the
Company's financial position or results of operations.
The Company's corporate headquarters and some of its manufacturing facilities
are located near major earthquake faults. As a result, in the event of a major
earthquake the Company could suffer damages which could materially and adversely
affect the operating results and financial condition of the Company.
There have been no significant changes in the market risk disclosures during the
first nine months of 1998 as compared to the discussion in the Company's 1997
Annual Report on Form 10-K for the year ended December 31, 1997.
While management believes that the discussion and analysis in this report is
adequate for a fair presentation of the information, management recommends that
this discussion and analysis be read in conjunction with Management's Discussion
and Analysis included in the Company's 1997 Annual Report on Form 10-K for the
year ended December 31, 1997, and its Quarterly reports of Form 10Q for the
quarters ending March 31, and
16
<PAGE> 17
June 30, 1998, and the Current Reports on Form 8-K filed on August 21, 1998 and
the Amendment filed on Form 8-K/A on October 20, 1998 with the Securities
Exchange Commission.
Statements in this discussion and analysis contain forward looking information
and involve known and unknown risks and uncertainties, which may cause the
Company's actual results in future periods to be materially different from any
future performance suggested herein. In addition to the factors discussed above,
such factors may include, but may not necessarily be limited to fluctuations in
customer demand, both in timing and volumes, and fluctuations in currency
exchange rates. Also, the Company's ability to have available an appropriate
amount of production capacity in a timely manner can significantly impact the
Company's financial performance. The timing of new technology and product
introductions and the risk of early obsolescence are also important factors.
Further, the Company operates in an industry sector where the market value of
it's securities is highly volatile and may be influenced by economic and other
factors beyond the Company's control. (See additional discussion contained in
"Risk Factors", set forth in Part 1 of the Company's report on Form 10-K for the
year ended December 31, 1997.
Year 2000 Disclosure
As with many other companies, the Year 2000 computer issue presents risks for
the Company. There may be areas in which the Year 2000 computer issue could
negatively impact the Company and its business. If internal systems do not
properly recognize and process date information for years into and beyond 1999,
there could be an adverse impact on the Company's operations. Moreover, if
critical suppliers' or customers systems or products fail because of a Year 2000
malfunction, there could be an adverse impact on the Company's operating
results. Finally, the Company's products could malfunction as a result of a
failure in date recognition. A Year 2000 problem could arise if the Company's
systems were to fail to properly recognize and process date information for
several reasons: they could fail to properly recognize years that begin with the
digits "20" instead of "19"; they could attribute specially assigned meanings to
certain date code digits, such as "99"; or it could fail to recognize the year
2000 as a leap year.
The Company is engaged in a comprehensive program to assess its Year 2000 risk
exposure and to plan and implement remedial and corrective action where
necessary. The Company is reviewing all of its major internal systems, including
human resources, financial, engineering and manufacturing systems, to assess
Year 2000 readiness and to identify any critical systems that require correction
or remediation. Full assessment is planned for completion by the end of December
1998, and based on current knowledge it is anticipated that remediation of
critical systems will be completed and tested by mid-1999. This effort includes
facilities and systems acquired by the Company in August 1998. There can be no
assurances, however, that new information discovered during the assessment
process will not result in a delay in completion of necessary corrective action
to one or more critical systems.
The Company is also working with critical suppliers of products and services to
assess their Year 2000 readiness with respect both to their operations and the
products and services they supply. Comprehensive inquiries have been sent and
responses are being monitored, with appropriate follow-up where required. This
analysis will continue well into 1999, with corrective action taken commensurate
with the criticality of affected products and services.
The Company's assessment program also encompasses its own product offerings. The
Company designs, manufactures and sells both application specific integrated
circuits ("ASIC") and application specific standard products ("ASSP"). ASICs are
custom-designed chips which implement the customer's functional or engineering
specifications, and the Company generally does not have knowledge of the role of
the customer's ASIC within the complete system for which it is intended. Whether
the chip will operate correctly depends on the system function and the software
design and integration, which will be determined independently by the customer
or other third party suppliers. The Company's ASSP products, on the other hand,
do implement chip
17
<PAGE> 18
and system functionality designed by the Company. They include graphics
processing, audio/video signal decoding, transmission signal reception, and data
transmission, whose functionality by and large is not date dependent. The
Company is in the process of assessing the Year 2000 readiness of its portfolio
of ASSP products, but in view of the functionalities implemented in these
designs, the Company has no information to indicate that Year 2000 issues will
have a material impact on sales or functionality of ASSPs.
The Company has commenced work on the development of various types of
contingency plans to address potential problems with internal systems and third
party interactions. Contingency planning will continue through at least 1999,
and will depend heavily on the results of the assessment and remediation efforts
described above. The potential ramifications of a Year 2000 type failure are
potentially far-reaching and largely unknown. There can be no assurances that a
contingency plan in effect at the time of a system failure will adequately
address the immediate or long term effects of the failure, or that such a
failure would not have a material adverse impact on the Company's operations or
financial results in spite of prudent planning.
The costs incurred to date related to these programs are not material. The
Company currently expects the total cost of assessment, remediation and
planning, including incremental spending and redeployed resources, will not be
material. However, there can be no assurance that the information discovered
during the Year 2000 readiness assessment currently underway will not cause an
adverse impact on financial results in future reporting periods. This estimate
does not include potential costs related to customer or other claims or the cost
of internal software or hardware replaced in the normal course of business. In
some cases, the installation schedule of new software and hardware in the normal
course of business in being accelerated to also afford a solution to potential
Year 2000 issues. The estimate is based on the current assessment of the
projects and is subject to change as the projects progress.
Based on currently available information, management does not believe that the
Year 2000 issues discussed above related to internal systems or products sold to
customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
RESULTS OF OPERATIONS
The results of operations for the three and nine month periods presented include
the effect of the acquisition of Symbios from the date of acquisition, August 6,
1998 which is discussed in Note 2 to the Unaudited Consolidated Condensed
Financial Statements contained herein.
Revenues for the third quarter of 1998 increased $63.5 million or 19.4% as
compared to the third quarter of 1997. The increase was primarily attributable
to revenues of $89.4 million generated from Symbios included as of August 6,
1998 in the third quarter results. Excluding the effect of Symbios, revenues
decreased $25.9 million or 7.9% for the three month period ended September 30,
1998. The decrease was attributable to lower average selling prices for products
for consumer, computer and communications applications as well as the
unfavorable effect of foreign exchange, most notably for the Company's products
in consumer applications. Revenues for the first nine months of 1998 increased
$78.1 million or 8.1% compared to the same period in 1997. The increase included
revenues of $89.4 million related to Symbios included as of August 6, 1998.
Excluding the effect of Symbios, revenues for the nine month period decreased
$11.3 million or 1.2%. The decrease is primarily attributable to lower revenues
for computer and consumer product applications and overall lower average selling
prices as well as the unfavorable effect of foreign exchange, offset in part by
increased demand for the Company's products for communications applications.
18
<PAGE> 19
One customer represented 11% and 13% of the Company's consolidated revenues
during the third quarter and first nine months of 1998.
Key elements of the statements of operations, expressed as a percentage of
revenues, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Gross margin 43.4% 49.9% 44.5% 48.6%
Research and development expenses 19.9% 17.7% 19.7% 17.2%
Selling, general and administrative expenses 15.1% 15.0% 14.7% 14.8%
Income (Loss) from operations (70.0%) 16.0% (19.4%) 16.0%
</TABLE>
Key elements of the statements of operations, excluding Symbios, expressed as a
percentage of revenues, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Gross margin 45.6% 49.9% 45.3% 48.6%
Research and development expenses 21.4% 17.7% 20.2% 17.2%
Selling, general and administrative expenses 16.1% 15.0% 14.9% 14.8%
Income (Loss) from operations (18.9)% 16.0% 1.4% 16.0%
</TABLE>
Gross margin as a percentage of revenues decreased to 43.4% and 44.5% during the
third quarter and first nine months of 1998, respectively, from 49.9% and 48.6%
in the same periods in 1997. Excluding the effect of Symbios, gross margins
decreased to 45.6% and 45.3% during the third quarter and first nine months of
1998, respectively, from 49.9% and 48.6% in the same periods in 1997. The
decrease was primarily related to the combination of non-recurring inventory
charges taken during the third quarter and first nine months of 1998 and lower
average selling prices to a large customer offset partially by improved capacity
utilization. Although the average yen exchange rate for the third quarter and
the first nine months of 1998 weakened by approximately 21.1% and 13.3%,
respectively, from the same periods in 1997, the effect on gross margin and net
income was not material due to the Company's yen denominated sales offsetting a
substantial portion of its yen denominated costs and the Company's hedging of a
portion of its remaining yen exposures during these periods. However, there can
be no assurance that future changes in the relative strength of the yen, or the
mix of foreign denominated revenues and expenses, will not have a material
effect on gross margin or operating results.
The Company's operating environment, combined with the resources required to
operate in the semiconductor industry, requires managing a wide variety of
factors such as factory and capacity utilization, manufacturing yields, product
mix, availability of certain raw materials, terms negotiated with third-party
subcontractors and foreign currency exchange rate fluctuations. Factors
including the purchase and related integration of Symbios and the restructuring
activities discussed in Notes 2 and 3 to the Unaudited Consolidated Condensed
Financial Statements combined with the impact of bringing the new fabrication
facility in Gresham, Oregon on line, is expected to reduce gross margins in the
next two quarters as compared to the first three quarters of 1998.
19
<PAGE> 20
The Company is currently constructing a new manufacturing facility in Gresham,
Oregon. This new facility is expected to become operational during the fourth
quarter of 1998 to accommodate anticipated future capacity requirements based on
growth and on shutdown of the manufacturing facility in Japan. If demand does
not absorb the Company's available capacity at a sufficient rate, or if
achieved, such demand is not sustained, the Company's gross margin and operating
results could be negatively impacted in future periods.
Research and development ("R&D") expenses increased $20.0 million, and $40.2
million to $77.7 million and $206.4 million , respectively, during the third
quarter and first nine months of 1998 compared to $ 57.7 million and $ 166.2
million during the same periods of 1997. Of the total increase for the third
quarter of 1998, $13.3 million related to the inclusion of Symbios R&D expenses
as of August 6, 1998. Excluding the effect of Symbios, R&D expenses increased
$6.7 and $26.9 million or 11.6% and 16.2% for the three and nine month periods
ended September 30, 1998. The increase in R&D expenses is primarily attributable
to the Company's continued development of advanced sub-micron products and the
upgrade from 6 to 8 inch wafer fabrication capability at the Company's Santa
Clara research and development facility in California. As a percentage of
revenues, R&D expenses increased to 19.9% and 19.7% in the third quarter and
first nine months of 1998, respectively, compared to 17.7% and 17.2%, during the
same periods in 1997. Excluding the effects of Symbios, R&D expense as a
percentage of revenues was 21.4% and 20.2% for the three and nine month periods
ended September 30, 1998. As the Company continues its commitment to
technological leadership in the high performance semiconductor market, it
anticipates continuing to invest in R&D at the rate of 19% to 21% of revenues
during the remainder of 1998.
Selling, general and administrative ("SG&A") expenses increased $10 million to
$59.1 million and $153.4 million, respectively, in the third quarter and first
nine months of 1998 compared to $49 million and $143.4 million during the same
periods in 1997. The increase is primarily attributable to the inclusion of
$10.7 million in expenses relating to Symbios as of August 6, 1998. Excluding
the effect of Symbios, SG&A expenses remained essentially flat for the three and
nine month periods ending September 30, 1998 as compared to the same periods in
1997. As a percentage of revenues, SG&A expenses increased to 15.1% in the third
quarter of 1998, and decreased to 14.7% in the first nine months of 1998,
compared to 15.0% and 14.8%, respectively, during the same periods in 1997.
Excluding the effects of Symbios, SG&A expenses were 16.1% and 14.9% for the
three and nine month periods ending September 30, 1998. The Company expects that
SG&A expenses as a percentage of revenues will decline as a result of the
restructuring actions discussed in Note 3 to the Unaudited Consolidated
Condensed Financial Statements.
The Company recorded a non-recurring charge of $225 million related to the
purchase of Symbios on August 6, 1998. This was determined through valuation
techniques generally used by appraisers in the high-technology industry and was
immediately expensed in the period of acquisition because technological
feasibility had not been established and no alternative use had been identified.
The charge is discussed in more detail in Note 2 to the Unaudited Consolidated
Condensed Financial Statements contained herein.
The Company remains committed to efforts to improve profitability and strengthen
competitiveness. As a result of identifying opportunities to streamline
operations and maximize the integration of Symbios into the Company's operation,
the Company's management, with the approval of the Board of Directors, committed
itself to a plan of action and recorded a $75.4 million restructuring charge in
the third quarter of 1998. The action undertaken included a worldwide
realignment of manufacturing capacity, the consolidation of certain design
centers and administrative offices, and a streamlining of the Company's overhead
structure to reduce operating expenses. The restructuring charge excludes any
restructuring related to Symbios. As discussed in Note 2, restructuring related
to Symbios was accrued as a liability assumed in the purchase in accordance with
EITF 95-3.
20
<PAGE> 21
Restructuring costs include $37.2 million primarily related to fixed assets
impaired as a result of the decision to close a manufacturing facility in
Tsukuba, Japan, $6.4 million for terminations of leases and maintenance
contracts primarily in the U.S. and Europe, $13.1 million in fixed asset and
other asset write-downs, and approximately $2.4 million in other exit costs,
which result primarily from the consolidation and closure of certain design
centers, sales and administrative offices primarily in the U.S. and Europe. Work
force reduction costs of $16.3 million primarily include severance costs related
to involuntary termination programs for approximately 900 employees from
manufacturing in Japan, and engineering, sales, marketing and finance personnel
primarily located in the U.S. Japan and Europe. The fair value of assets
determined to be impaired in accordance with the guidance in Statement of
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" were the result of independent
appraisals and use of management estimates. Severance costs and other above
noted exit costs were determined in accordance with Emerging Issues Task Force
No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity". The restructuring actions, as outlined by the
plan, are intended to be executed to completion within the next 12 months.
Interest expense increased $5.9 million and $4.4 million for the three and nine
month periods ended September 30, 1998 as compared to the same period in the
prior year. The results are relatively the same excluding Symbios. The increase
for the three and nine month periods ended September 1998 is primarily
attributable to interest on the new credit facility entered into during the
third quarter of 1998 as discussed in Note 4 to the Unaudited Condensed
Consolidated Financial Statements, offset in part by interest capitalized as
part of the construction at the Company's new manufacturing facility in Gresham,
Oregon.
Interest income and other expense decreased $29.7 million and $32.6 million for
the three and nine month periods ended September 30, 1998 to a net expense of
$20.4 million and $7.2 million, respectively, as compared to the same periods in
1997. The decrease is primarily a result of the combination of a $14.4 million
write-down of the Company's equity investment in two non-public technology
companies with impairment indicators not considered to be temporary (see Note 8
to the Unaudited Consolidated Condensed Financial Statements), a $1.5 million
loss from the decision to close the interest rate swap at LLJSI (see Note 5 to
the Unaudited Condensed Consolidated Financial Statements), a $1.8 million
write-down of capitalized software and a $8.1 million write-down of fixed assets
to be disposed of along with a reduction of interest income generated from the
Company's lower average balances of cash and cash equivalents and short-term
investments during the third quarter and the first nine months of 1998 resulting
from cash outlays for the acquisition of Symbios as compared to same periods in
the prior year. The decrease in interest income and other during the first nine
months of 1998 is attributable to the items noted above offset in part by gains
from the sale of a building owned by a European affiliate in the second quarter
of 1998.
The Company recorded a (benefit)/provision for income taxes for the first three
and nine months of 1998 with an effective rate of (5.6)% and 1.9%, respectively
compared to a provision for income taxes of 28% for the three and nine months
ended September 30, 1997. The rate change is due to write-offs relating to
in-process research and development and restructuring charges during the third
quarter of 1998 which are not currently deductible for tax purposes. Excluding
these charges, the effective tax rate would have been 25%, consistent with the
rate in the first half of 1998.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash, cash equivalents and short-term investments decreased $263
million during the first nine months of 1998 to $228 million from $491 million
at the end of 1997. The decrease is primarily due to cash used to acquire
Symbios in the third quarter of 1998, purchases of property and equipment and
higher amounts of cash used in the Company's operations. Working capital
decreased $249 million to $183 million at September 30, 1998 from $432 million
at December 31, 1997. The decrease in working capital is primarily a result of
cash reserves used to acquire Symbios and higher current liabilities as a result
of the short-term
21
<PAGE> 22
portion of the new debt facility entered into to by the Company to purchase
Symbios (see Note 4 to the Unaudited Consolidated Condensed Financial
Statements).
During the first nine months of 1998, the Company generated approximately $138
million of cash and cash equivalents from its operating activities compared with
$320 million during the same period in 1997. The decrease in cash and cash
equivalents provided from operations during the first nine months of 1998 as
compared to the same period a year ago is primarily attributable to decreases in
net income before depreciation and amortization, the in-process research and
development write-off and the non-cash restructuring charge, coupled with
decreases in accounts payable and accrued and other liabilities and lower
increases in accounts receivable, inventories and other assets as compared to
the same period in the previous year. The decrease in accounts payable reflects
a combination of factors primarily related to the timing of invoice receipt and
payment compared to the previous period and lower capital expenditures in the
first nine months of 1998 relative to the same period in the prior year for the
Company's manufacturing facility in Gresham, Oregon as it approaches completion.
This decrease in accounts payable is offset in part by the inclusion of Symbios
liabilities in the financial statements at September 30, 1998 (see Note 2 to the
Unaudited Consolidated Financial Statements). The decrease in accrued and other
liabilities is primarily attributable to lower income tax accruals resulting
primarily from lower taxable income and a lower effective income tax rate during
the first three quarters of 1998 as compared to the same period in 1997 offset
in part by the inclusion of Symbios in the financial statements at September 30,
1998 (see Note 2 to the Unaudited Consolidated Condensed Financial Statements)
which were not included for the same period in 1997.
Cash and cash equivalents used for investing activities during the first nine
months of 1998 were $705 million compared to $298 million during the same
period in 1997. The primary investing activities during the first nine months of
1998, other than short-term investments in available for sale debt and equity
securities, included the purchase of Symbios, purchases of property and
equipment and additional investments in non-marketable shares of other
technology companies. The increase in cash used for investing activities from
the first nine months of 1998 as compared to the same period in 1997 is
primarily attributable to an increase from the purchase of Symbios, offset in
part by a decrease in purchases of property and equipment, net of retirements
and refinancings. The Company believes that maintaining technological leadership
in the highly competitive worldwide semiconductor industry requires substantial
ongoing investment in advanced manufacturing capacity. Capital additions were
$230 million and $348 million, net of retirements and refinancings, during the
first nine months of 1998 and 1997, respectively. The additions were primarily
for costs related to the new eight-inch wafer manufacturing facility in Gresham,
Oregon. The Company expects to spend approximately $25 million to bring the
Gresham facility to operational status during the fourth quarter of 1998.
Cash and cash equivalents provided by financing activities during the first nine
months of 1998 totaled approximately $602 million, compared to $31 million of
cash used in the same period of 1997. The primary financing activities during
the first nine months of 1998 are attributable to the new debt facility entered
into to fund the purchase of Symbios (see Note 4 to the Unaudited Condensed
Consolidated Financial Statements), net of debt repayments and the repurchase of
445,000 shares of common stock during the third quarter for approximately $6
million, offset in part by the issuance of common stock associated with the
employee stock purchase plan and employee stock option exercises. In the first
nine months of 1997, the primary activities from financing activities included
repayments of debt obligations offset in part by the issuance of common stock
associated with the employee stock purchase plan, employee stock option
exercises and the Company's repurchase of 400,000 shares of common stock for
approximately $13 million during the third quarter of 1997.
On August 5, 1998, the Company entered into a credit agreement by and among the
Company, LSI Logic Japan Semiconductor, Inc., a wholly owned subsidiary of the
Company ("LLJSI") and ABN AMRO Bank N.V. ("ABN AMRO"). The credit agreement was
restated and superseded by the Amended and Restated Credit Agreement dated as of
September 22, 1998 by and among the Company, LLJSI, ABN AMRO and thereafter
syndicated to a group of lenders determined by ABN AMRO. The credit agreement
consists of two credit facilities: a $575 million senior unsecured reducing
revolving credit facility ("Revolver"), and a $150 million senior unsecured
revolving credit facility ("364 day Facility").
22
<PAGE> 23
On August 5, 1998, the Company borrowed $150 million under the 364 day Facility
and $485 million under the Revolver. The credit facilities allow for borrowings
at adjustable rates. Interest payments are due quarterly. The 364 day Facility
expires on August 3, 1999 at which time borrowings outstanding are payable in
full. The Revolver is for a term of four years with principal payments due
quarterly beginning on December 31, 1999. The Revolver includes a term loan
sub-facility in the amount of 8.6 billion yen made available to LLJSI over the
same term. The yen term loan sub-facility is for a period of four years with no
required payments until it expires on August 4, 2002. Pursuant to the above
noted restated credit agreement, on August 30, 1998, LLJSI repaid it's existing
11.4 billion yen ($79.2 million) credit facility and borrowed 8.6 billion yen
($59.7 million) bearing interest at adjustable rates. Borrowings outstanding
under the 364 day Facility and the Revolver including the yen sub-facility were
$694.7 million as of September 30, 1998.
The Company, in accordance with the new credit arrangement, must comply with
certain financial covenants related to profitability, tangible net worth,
working capital, senior and total debt leverage and subordinated indebtedness.
At September 30, 1998, the Company was in compliance with these covenants.
In December 1996, the Company entered into a credit arrangement with several
banks for a $300 million revolving line of credit expiring in December 1999. The
Company canceled this agreement on July 31, 1998.
The Company believes that its existing liquid resources and funds generated from
operations combined with funds from such financing and its ability to borrow
funds will be adequate to meet its operating and capital requirements and
obligations through the foreseeable future. There can be no assurance that such
additional financing will be available when needed or, if available, will be on
favorable terms. Any future equity financing will decrease existing
stockholders' equity percentage ownership and may, depending on the price at
which the equity is sold, result in dilution.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee ("AcSEC") released
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities". The new SOP is effective for fiscal years beginning after December
15, 1998 and requires companies to expense all costs incurred or unamortized in
connection with start-up activities. The Company will expense the unamortized
preproduction balance as of January 1, 1999 and present it as a cumulative
effect of a change in accounting principle in accordance with SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair value, cash flow
and foreign currency hedges, and establishes respective accounting standards for
reporting changes in the fair value of the instruments. The statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Upon adoption of SFAS 133, the Company will be required to adjust hedging
instruments to fair value in the balance sheet, and recognize the offsetting
gain or loss as transition adjustments to be reported in net income or other
comprehensive income, as appropriate, and presented in a manner similar to the
cumulative effect of a change in accounting principle. While the Company
believes the adoption of this statement will not have a material effect on the
Company's results of operations as most derivative instruments are closed on the
last day of each fiscal quarter, the impact of the adoption of SFAS 133 as of
the effective date cannot be reasonably estimated at this time.
23
<PAGE> 24
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, 1997 for a discussion of certain pending
legal proceedings. The information provided at such
reference regarding those matters remains unchanged, except
that the Delaware Supreme Court affirmed the dismissal of
the case granted in January 1998 by the Court of Chancery.
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.
Stockholder Proposals
Proposals of stockholders intended to be presented at the
Company's 1999 annual meeting of stockholders must be
received at the Company's principal executive offices not
later than November 26, 1998 in order to be included in the
Company's proxy statement and form of proxy relating to the
1999 annual meeting.
Pursuant to new amendments to Rule 14a-4(c) of the
Securities Exchange Act of 1934, as amended, if a
stockholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company
of such proposal on or prior to February 7, 1999, then
management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when
the proposal is raised at the annual meeting, even though
there is no discussion of the proposal in the 1999 proxy
statement.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedules
(b) Reports on Form 8-K
Pursuant to a Current Report on Form 8-K filed on
July 2, 1998 the Registrant reported the agreement to
acquire all of the outstanding capital stock of
Symbios, Inc.
Pursuant to a Current Report on Form 8-K filed on
August 21, 1998 the Registrant reported the
completion of the acquisition of all of the
outstanding capital stock of Symbios, Inc.
Pursuant to Amendment No. 1 to the Form 8-K filed on
August 21, 1998, filed on a Form 8-K/A on October 20,
1998 the Registrant filed pro forma financial
statements reflecting the acquisition of all of the
outstanding stock of Symbios, Inc.
24
<PAGE> 25
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 11, 1998 By /s/ R. Douglas Norby
--------------------------------------
R. Douglas Norby
Executive Vice President Finance &
Chief Financial Officer
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 134,713
<SECURITIES> 93,269
<RECEIVABLES> 287,154
<ALLOWANCES> 3,152
<INVENTORY> 183,946
<CURRENT-ASSETS> 791,507
<PP&E> 2,110,296
<DEPRECIATION> 698,753
<TOTAL-ASSETS> 2,574,719
<CURRENT-LIABILITIES> 608,344
<BONDS> 0
0
0
<COMMON> 1,405
<OTHER-SE> 1,362,049
<TOTAL-LIABILITY-AND-EQUITY> 2,574,719
<SALES> 1,045,316
<TOTAL-REVENUES> 1,045,316
<CGS> 579,780
<TOTAL-COSTS> 579,780
<OTHER-EXPENSES> 668,616
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,917)
<INCOME-PRETAX> (216,234)
<INCOME-TAX> 4,115
<INCOME-CONTINUING> (220,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (220,349)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 136,813
<SECURITIES> 507,732
<RECEIVABLES> 221,824
<ALLOWANCES> 3,749
<INVENTORY> 100,894
<CURRENT-ASSETS> 1,041,608
<PP&E> 1,634,099
<DEPRECIATION> 610,049
<TOTAL-ASSETS> 2,184,536
<CURRENT-LIABILITIES> 462,218
<BONDS> 0
0
0
<COMMON> 1,417
<OTHER-SE> 1,581,926
<TOTAL-LIABILITY-AND-EQUITY> 2,184,536
<SALES> 967,239
<TOTAL-REVENUES> 967,239
<CGS> 496,848
<TOTAL-COSTS> 496,848
<OTHER-EXPENSES> 315,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 178,697
<INCOME-TAX> 50,173
<INCOME-CONTINUING> 128,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,524
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.90
</TABLE>
