<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 MARCH 28, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to ________
Commission File Number: 0-11674
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2712976
(State of Incorporation) (I.R.S. Employer
Identification Number)
1551 McCarthy Boulevard
Milpitas, California 95035
(Address of principal executive offices)
(408) 433-8000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 10, 1999 there were 143,050,044 shares of the registrant's Common
Stock, $.01 par value, outstanding.
<PAGE> 2
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED MARCH 28, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - March 31, 1999 and
December 31, 1998 3
Consolidated Condensed Statements of Operations - Three-Month
Periods Ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows - Three-Month
Periods Ended March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 183,141 $ 200,080
Short-term investments 99,216 81,220
Accounts receivable, less allowance for doubtful
accounts of $6,747 and $3,424 282,970 245,538
Inventories 171,850 178,107
Deferred tax assets 66,384 62,699
Prepaid expenses and other current assets 40,611 51,859
---------- ----------
Total current assets 844,172 819,503
---------- ----------
Property and equipment, net 1,310,920 1,480,113
Goodwill and other intangibles 321,563 332,779
Other assets 171,085 167,602
---------- ----------
Total assets $2,647,740 $2,799,997
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 178,779 $ 193,216
Accrued salaries, wages and benefits 54,887 47,350
Other accrued liabilities 94,958 108,049
Income taxes payable 31,691 57,989
Current portion of long-term obligations 40,624 186,240
---------- ----------
Total current liabilities 400,939 592,844
---------- ----------
Long-term obligations and deferred income taxes 815,780 691,780
Minority interest in subsidiaries 5,211 5,238
Commitments and contingencies -- --
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares
authorized -- --
Common stock; $.01 par value; 450,000 shares
authorized; 141,852 and 141,419 shares
outstanding 1,419 1,414
Additional paid-in capital 1,014,384 1,009,294
Retained earnings 393,088 479,990
Accumulated other comprehensive income 16,919 19,437
---------- ----------
Total stockholders' equity 1,425,810 1,510,135
---------- ----------
Total liabilities and stockholders' equity $2,647,740 $2,799,997
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE> 4
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 456,837 $ 324,850
--------- ---------
Costs and expenses:
Cost of revenues 297,066 183,106
Research and development 75,423 63,842
Selling, general and administrative 60,315 43,752
Restructuring of operations and other
non-recurring charges (2,533) --
Amortization of intangibles 11,207 1,386
--------- ---------
Total costs and expenses 441,478 292,086
--------- ---------
Income from operations 15,359 32,764
Interest expense (10,485) --
Interest income and other 1,628 7,846
--------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 6,502 40,610
Provision for income taxes 1,630 10,167
--------- ---------
Income before cumulative effect of
change in accounting principle 4,872 30,443
Cumulative effect of change in accounting
principle (91,774) --
--------- ---------
Net (loss)/income $ (86,902) $ 30,443
========= =========
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.03 $ 0.22
Cumulative effect of change in accounting
principle (0.64) --
--------- ---------
Net (loss)/income $ (0.61) $ 0.22
========= =========
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $ 0.03 $ 0.22
Cumulative effect of change in accounting
principle (0.63) --
--------- ---------
Net(loss)/income $ (0.60) $ 0.22
========= =========
Shares used in computing per share amounts:
Basic 141,674 140,242
========= =========
Diluted 144,151 141,590
========= =========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE> 5
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net (loss)/income $ (86,902) $ 30,443
Adjustments:
Depreciation and amortization 93,783 45,272
Minority interest in net income of subsidiaries 18 58
Write-off of unamortized preproduction costs 97,356 --
Non-cash restructuring and other non-recurring charges (2,533) --
Changes in:
Accounts receivable (37,924) (17,635)
Inventories 6,092 2,257
Prepaid expenses and other assets 9,719 (2,306)
Accounts payable (14,176) (9,108)
Accrued and other liabilities (29,342) (19,024)
--------- ---------
Net cash provided by operating activities 36,091 29,957
--------- ---------
Investing activities:
Purchases of debt and equity securities available-for-sale (82,616) (140,586)
Maturities and sales of debt and equity securities available-for-sale 64,620 197,995
Purchase of non-marketable equity securities -- (2,866)
Purchases of property and equipment, net of retirements (9,536) (60,758)
--------- ---------
Net cash used for investing activities (27,532) (6,215)
--------- ---------
Financing activities:
Proceeds from borrowings 345,000 --
Repayment of debt obligations (365,584) (48)
Debt issuance costs (9,488) --
Issuance of common stock, net 5,095 1,106
--------- ---------
Net cash (used for)/provided by financing activities (24,977) 1,058
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (521) (441)
--------- ---------
(Decrease)/increase in cash and cash equivalents (16,939) 24,359
Cash and cash equivalents at beginning of period 200,080 104,571
--------- ---------
Cash and cash equivalents at end of period $ 183,141 $ 128,930
========= =========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
<PAGE> 6
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 except as noted below for unamortized preproduction and
the reversal of a portion of the restructuring reserves as discussed 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/A for the year ended
December 31, 1998.
In April 1998, the Accounting Standards Executive Committee ("AcSEC") released
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities." The SOP 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 has expensed the
unamortized preproduction balance of $91.8 million associated with the Gresham
manufacturing facility, net of tax, on January 1, 1999 and has presented it as a
cumulative effect of a change in accounting principle in accordance with SOP No.
98-5.
For financial reporting purposes, the Company reports on a 13 or 14 week quarter
with a year ending December 31. For presentation purposes, the consolidated
condensed financial statements refer to the quarter's calendar month end for
convenience. The results of operations for the quarter ended March 31, 1999 are
not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated condensed
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the presentation of the first quarter of 1999.
The Company had no customers with revenues greater than or equal to 10% of total
consolidated revenues for the first quarter of 1999.
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. Actual results could differ significantly from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998 as well as
other periodic reports both previously and hereafter filed by the Company with
the Securities Exchange Commission. Statements made herein are as of the date of
the filing of this 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date. The Company expressly disclaims
any obligation to update information presented herein, except as may otherwise
be required by law.
Note 2 - Restructuring
Restructuring reserve reversals in 1999:
- ----------------------------------------
During the first quarter of 1999, the Company determined that $2.5 million of
the restructuring reserve established in the third quarter of 1998 would not be
utilized because of a change in management's estimate of the reserve
requirements in the U.S., Europe and Japan. Accordingly, the restructuring
reserve reversal was included in the determination of income from operations for
the three month period ended March 31, 1999. The Company expects that the
remaining reserve balance of $11.9 million will be fully utilized by the end of
the third quarter of 1999.
6
<PAGE> 7
Description of 1998 restructuring:
- ----------------------------------
As a result of identifying opportunities to streamline operations and maximize
the integration of Symbios Inc. ("Symbios") acquired on August 6, 1998 (see Note
3) into the Company's operations, the Company's management, with the approval of
the Board of Directors, committed itself to a restructuring plan 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 costs relating to Symbios. As
discussed in Note 3 to the Unaudited Consolidated Condensed Financial
Statements, integration costs relating to Symbios were accrued as a liability
assumed in the purchase in accordance with Emerging Issue Task Force ("EITF")
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
Restructuring costs include $37.2 million related primarily to fixed assets
impaired as a result of the decision to close a manufacturing facility in
Tsukuba, Japan by the third quarter of 1999; $4.7 million for termination of
leases and maintenance contracts primarily in the U.S. and Europe; $1.7 million
for non-cancelable purchase commitments primarily in Europe; $13.1 million in
fixed asset and other asset write-downs primarily in the U.S., Japan and Europe;
approximately $2.4 million in other exit costs, which result principally from
the consolidation and closure of certain design centers, sales facilities and
administrative offices primarily in the U.S. and Europe; and work force
reduction costs of $16.3 million.
Other exit costs include $0.9 million related to payments made for early lease
contract terminations and the write-down of surplus assets to their estimated
realizable value; $0.7 million for the write-off of excess licenses for closed
locations in Europe and $0.8 million of other exit costs associated with the
consolidation of design centers worldwide.
The workforce reduction costs primarily include severance costs related to
involuntary termination of employment for approximately 900 employees from
manufacturing in Japan, and engineering, sales, marketing and finance personnel
located in the U.S., Japan and Europe. The fair value of assets determined to be
impaired in accordance with the guidance for assets to be held and used in
Statement of Financial Accounting Standard ("SFAS") 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 EITF 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 by September 30,
1999, one year from the date the reserve was taken.
The following table sets forth the Company's 1998 restructuring reserves as of
December 31, 1998 and activity against the reserve for the three month period
ended March 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 RESERVE/
RESTRUCTURING TRANSLATION BALANCE TRANSLATION BALANCE
EXPENSE UTILIZED ADJUSTMENT 12/31/98 UTILIZED ADJUSTMENT 3/31/99
------------------ -------- ----------- -------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Write-down of manufacturing facility (d) .. $ 37,200 $(35,700) $ -- $ 1,500 $ -- $ (1,100) $ 400
Other fixed asset related charges(d) ...... 13,100 (13,100) -- -- -- -- --
Payments to employees for severance (b) ... 16,300 (4,700) -- 11,600 (6,140) (820) 4,640
Lease terminations and maintenance
contracts (c) .......................... 4,700 (100) -- 4,600 (550) (83) 3,967
Noncancelable purchase commitments (c) .... 1,700 (100) -- 1,600 (80) -- 1,520
Other exit costs (a,d) .................... 2,400 (1,200) -- 1,200 (326) (530) 344
Cumulative currency translation adjustment -- -- 1,512 1,512 -- (500) 1,012
-------- -------- -------- -------- -------- -------- --------
Total ........................... $ 75,400 $(54,900) $ 1,512 $ 22,012 $ (7,096) $ (3,033) $ 11,883
======== ======== ======== ======== ======== ======== ========
</TABLE>
(a) Amounts utilized represent non-cash charges.
(b) Amounts utilized represent cash payments related to the severance of
approximately 510 employees (220 in Q1 of 1999).
(c) Amounts utilized represent cash charges.
(d) Amounts utilized in 1998 reflect a write-down of fixed assets due to
impairment. The amounts were accounted for as a reduction of the assets and
did not result in a liability.
7
<PAGE> 8
Note 3 - Integration of Symbios
On August 6, 1998, the Company completed the acquisition of all of the
outstanding capital stock of 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 financial statements as of August 6, 1998, the effective date of
the purchase, through the end of the period. There are no significant
differences between the accounting policies of the Company and Symbios. The
allocation of the purchase price was disclosed in the Report on Form 10K/A
previously filed with the Securities and Exchange Commission.
The Company has taken certain actions to combine the Symbios operations with
those of LSI Logic and, in certain instances, to consolidate duplicative
operations. 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. The Company finalized the integration plan as of December 31, 1998.
Accrued integration charges included $4 million related to involuntary
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
Symbios integration related accruals were based upon management's current
estimate of integration costs and are in accordance with EITF No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."
The following table sets forth the Company's Symbios integration reserve as of
December 31, 1998 and activity against the reserve for the three month period
ended March 31, 1999:
<TABLE>
<CAPTION>
AUGUST 6, 1998 DECEMBER 31, MARCH 31,
INTEGRATION OF 1998 1999
SYMBIOS UTILIZED BALANCE UTILIZED BALANCE
-------------- -------- ------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Payments to employees for severance and relocation(a) .. $ 4,000 $(1,640) $ 2,360 $(1,190) $ 1,170
Other exit costs(a) .................................... 1,437 (435) 1,002 (22) 980
------- ------- ------- ------- -------
Total ........................................ $ 5,437 $(2,075) $ 3,362 $(1,212) $ 2,150
======= ======= ======= ======= =======
</TABLE>
(a) The amount utilized represents cash payments related to the severance
and relocation of approximately 132 employees.
The Company expects to complete the activities underlying the integration plan
by June 1999.
Note 4 - Debt
During March of 1999, the Company issued $345 million of 4 1/4% Convertible
Subordinated Notes (the "Convertible Notes") due in 2004. The Convertible Notes
are subordinated to all existing and future senior debt, are convertible 60 days
following issuance into shares of the Company's common stock at a conversion
price of $31.353 per share and are redeemable at the option of the Company, in
whole or in part, at any time on or after March 20, 2002. Each holder of the
Convertible Notes has the right to cause the Company to repurchase all of such
holder's Convertible Notes at 100% of their principal amount plus accrued
interest upon the occurrence of certain events and in certain circumstances.
Interest is payable semiannually. The Company paid approximately $9.5 million
for debt issuance costs related to the Convertible Notes. The debt issuance
costs are being amortized using the interest method. The net proceeds of the
Convertible Notes were used to repay borrowings under the Company's 364 day
facility and the Revolver as described below.
On August 5, 1998, the Company entered into a credit agreement with ABN AMRO
Bank N.V. ("ABN AMRO"). The credit agreement was restated and superseded by the
Amended and Restated Credit Agreement dated as of September 22, 1998 by and
among the Company, LSI Logic Japan Semiconductor, Inc., a wholly owned
subsidiary of the Company ("JSI"), ABN AMRO and thereafter syndicated to a group
of lenders determined by ABN AMRO and the Company. 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").
8
<PAGE> 9
On August 5, 1998, the Company borrowed $150 million under the 364 day Facility
and $485 million under the Revolver. On December 22, 1998, the Company borrowed
an additional $30 million under the Revolver. The credit facilities allow for
borrowings at adjustable rates of LIBOR/TIBOR with a 1.25% spread. 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 the principal reduced 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 JSI over the same term. The yen term loan
sub-facility is for a period of four years with no required payments until it
expires on August 5, 2002. Pursuant to the restated credit agreement, on August
30, 1998, JSI repaid its existing 11.4 billion yen (US$79.2 million) credit
facility and borrowed 8.6 billion yen (US$73.4 million at March 31, 1999)
bearing interest at adjustable rates. In March of 1999, the Company repaid the
full $150 million outstanding under the 364 day Facility and $185.5 million
outstanding under the Revolver primarily using the proceeds from the Convertible
Notes. Borrowings outstanding under the Revolver including the yen sub-facility
were $372.9 million as of March 31, 1999. As of March 31, 1999, the interest
rate for the Revolver and the yen sub-facility were 6.22% and 1.99%,
respectively. JSI also had borrowings outstanding of approximately 85 million
yen (US$0.7 million) at March 31, 1999. The Company paid approximately $3.8
million in debt issuance costs related to the credit facility.
In accordance with the terms of its existing credit agreement, the Company must
comply with certain financial covenants related to profitability, tangible net
worth, liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. As of March 31, 1999, the Company was in compliance with these
covenants.
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 denominated in non-functional currencies. The Company does
not hold derivative financial instruments for speculative or trading purposes.
As of March 31, 1999 and December 31, 1998, there were no interest rate swap or
currency swap contracts outstanding.
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 are held to hedge firm
intercompany asset and liability positions denominated in non-functional
currencies. The following table summarizes by major currency the forward
exchange contracts outstanding (in thousands) as of March 31, 1999. The buy
amounts represents the U.S. dollar equivalent of commitments to purchase foreign
currencies, and the sell amounts represent the U.S. dollar equivalent of
commitments to sell foreign currencies. Foreign currency amounts are translated
at rates current at March 31, 1999.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
Buy/(Sell):
Japanese Yen $ 18,960 $ --
U.S. Dollar (1,560) --
</TABLE>
These forward contracts 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 significant at March 31, 1999 and December 31, 1998. Foreign currency
transaction gains and losses included in interest income and other were
insignificant for the three months ended March 31, 1999 and 1998.
At March 31, 1999, total outstanding purchased currency option contracts were
$66.7 million. These contracts expire in June 1999. The 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
$3.0 million as of March 31, 1999 and included in other current assets.
9
<PAGE> 10
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Upon adoption of SFAS No. 133, the Company will
be required to adjust hedging instruments to fair value in the balance sheet,
and recognize the offsetting gain or loss as transition adjustments to be
reported in net income or other comprehensive income, as appropriate, and
presented in a manner similar to the cumulative effect of a change in accounting
principle. The impact of the adoption of SFAS No. 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 March 31, 1999, consisted
primarily of U.S. and foreign corporate debt securities, commercial paper,
auction rate preferred stock, U.S. and foreign government and agency securities,
overnight deposits and time deposits. Cash equivalents and short-term
investments held at March 31, 1999 and at December 31, 1998 approximate fair
market value and it is the Company's intention to hold these investments for one
year or less. As of March 31, 1999, contractual maturities of available-for-sale
securities were $99.2 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 significant during the quarters
ended March 31, 1999 and 1998.
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 SFAS No. 128, "Earnings
Per Share ("EPS")."
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income before cumulative effect of
change in accounting principle .......... $ 4,872 141,674 $ 0.03 $ 30,443 140,242 $ 0.22
-------- --------
Cumulative effect of change in
accounting principle .................... (91,774) 141,674 (0.64) -- -- --
--------
Net (loss)/ income available
to common stockholders .................. (86,902) 141,674 (0.61) 30,443 140,242 0.22
-------- --------
Effect of dilutive securities:
Stock options ........................... 2,477 1,348
Diluted EPS:
Net income before cumulative effect of
change in accounting principle .......... 4,872 144,151 0.03 30,443 141,590 0.22
-------- --------
Cumulative effect of change
in accounting principle ................. (91,774) 144,151 (0.63) -- -- --
--------
Net (loss)/income available
to common stockholders .................. $(86,902) 144,151 $ (0.60) $ 30,443 141,590 $ 0.22
-------- --------
</TABLE>
- ----------
*Numerator--+ Denominator
Options to purchase approximately 7,689,920 and 6,865,866 shares were
outstanding at March 31, 1999 and 1998, respectively, but 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 $25.00 to $41.88 and $25.31 to $58.13 at March 31, 1999 and
1998, respectively. For the three months ended March 31, 1999, common equivalent
shares of 1,264,797 and interest expense of
10
<PAGE> 11
$305,469, net of taxes associated with the Convertible Notes (see Note 4) were
excluded from the computation of diluted earnings per share as a result of their
antidilutive effect on earnings per share.
Note 8 - Balance sheet (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Inventories:
Raw materials $ 32,337 $ 32,347
Work-in-process 79,808 51,856
Finished Goods 59,705 93,904
-------- --------
Total $171,850 $178,107
======== ========
</TABLE>
The Company had $97.4 million of unamortized preproduction engineering costs at
December 31, 1998 associated with the construction of a new manufacturing
facility in Gresham, Oregon. In April 1998, the AcSEC released 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 has expensed the unamortized preproduction balance of
$91.8 million, net of tax, on January 1, 1999 and has presented it as a
cumulative effect of a change in accounting principle in accordance with SOP No.
98-5.
Note 9 - Comprehensive income
The primary difference between net income and comprehensive income, for the
Company, is due to foreign currency translation adjustments. Comprehensive
income for the current reporting and comparable period in the prior year is as
follows:
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Comprehensive (loss)/income $(88,564) $ 31,088
======== ========
</TABLE>
Note 10 - Segment reporting
The Company operates in two reportable segments: the Semiconductor segment and
the Storage Systems segment. In the Semiconductor segment, the Company designs,
develops, manufactures and markets integrated circuits, including
application-specific integrated circuits ("ASICs"), application-specific
standard products ("ASSPs") and related products and services. Semiconductor
design and service revenues include engineering design services, licensing of
LSI Logic's 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 Storage Systems segment, the
Company designs, manufactures, markets and supports high performance data
storage management and storage systems solutions and a complete line of
Redundant Array of Independent Disks ("RAID") storage systems, subsystems and
related software.
The following is a summary of operations by segment for the three month period
ended March 31, 1999.
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED
MARCH 31, 1999
------------------------------------------
Semiconductor Storage Systems TOTAL
------------- --------------- --------
<S> <C> <C> <C>
Revenue $389,327 $ 67,510 $456,837
Income from operations $ 8,879 $ 6,480 $ 15,359
</TABLE>
11
<PAGE> 12
The Storage Systems segment was added in August 1998 with the purchase of
Symbios, and therefore revenue and income from operations are not available for
the three months ended March 31, 1998. Intersegment revenues for the three month
period ended March 31, 1999 were not significant.
The following is a summary of total assets by segment for the periods ending
March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
(In thousands)
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
Assets by segment:
Semiconductor $2,527,835 $2,676,487
Storage Systems 119,905 123,510
---------- ----------
Total assets $2,647,740 $2,799,997
========== ==========
</TABLE>
The Storage Systems segment did not meet the requirement for a reportable
segment as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" as of December 31, 1998, however, for purposes of
comparability, total assets by segment as of December 31, 1998 were included in
the table.
Note 11- SEEQ Technology, Inc.
On February 22, 1999, LSI Logic and SEEQ Technology, Inc. ("SEEQ") announced an
agreement for the Company to acquire SEEQ in a transaction where SEEQ
shareholders will receive LSI Logic common stock based upon an exchange ratio of
0.1095 subject to certain adjustments. The transaction is expected to be
accounted for as a pooling of interests. LSI Logic anticipates completing the
acquisition in its second quarter ending June 30, 1999. The acquisition is
subject to customary closing conditions, including approval by SEEQ shareholders
and is subject to regulatory review.
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/A for the fiscal year ended December 31,
1998. The information provided therein remains unchanged. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
We believe that our future operating results will continue to be subject to
quarterly variations based upon a wide variety of factors. These factors
include, among others:
- Cyclical nature of both the semiconductor industry and the markets
addressed by our products;
- Availability and extent of utilization of manufacturing capacity;
- Price erosion;
- Competitive factors;
12
<PAGE> 13
- Timing of new product introductions;
- Changes in product mix;
- Fluctuations in manufacturing yields;
- Product obsolescence; 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 position 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 which operate and sell our products in
various global markets. We purchase a substantial portion of our raw materials
and equipment from foreign suppliers and incur labor and other operating costs
in foreign currencies, particularly at our Japanese manufacturing facilities. As
a result, we are exposed to international factors such as changes in foreign
currency exchange rates or weak economic conditions of the respective countries
in which we operate. We utilize forward exchange, currency swap, interest swap
and option contracts to manage our exposure associated with currency
fluctuations on intercompany transactions and certain foreign currency
denominated commitments. With the exception of purchased option contracts and
forward contracts, there were no currency swap or interest rate swap contracts
outstanding as of March 31, 1999 and December 31, 1998. (See Note 5 to the
Unaudited Consolidated Condensed Financial Statements.) Our corporate
headquarters and some of our manufacturing facilities are located near major
earthquake faults. As a result, in the event of a major earthquake, we could
suffer damages which could significantly and adversely affect our operating
results and financial condition.
There have been no significant changes in the market risk disclosures during the
first three months of 1999 as compared to the discussion in our 1998 Annual
Report on Form 10-K/A for the year ended December 31, 1998.
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 Management's Discussion and
Analysis included in our 1998 Annual Report on Form 10-K/A for the year ended
December 31, 1998.
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.
The extent to which our plans for future cost reductions are realized also may
impact our future financial performance. 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 1998 Annual Report on Form 10-K/A for the
year ended December 31, 1998.
YEAR 2000 DISCLOSURE
The following statement is a Year 2000 Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998.
13
<PAGE> 14
As with many other companies, the Year 2000 computer issue presents risks for
us. We use a significant number of computer software programs and operating
systems in our internal operations, including applications used in our
financial, product development, order management and manufacturing systems.
There are areas in which the Year 2000 computer issue could negatively impact us
and our business. If internal systems do not properly recognize and process date
information for years into and beyond the turn of the century, there could be an
adverse impact on our operations. Moreover, if critical suppliers' or customers'
systems or products fail because of a Year 2000 malfunction, there could be an
adverse impact on our operating results. Finally, our products could malfunction
as a result of a failure in date recognition. A Year 2000 problem could arise if
our 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 they could fail to recognize the year
2000 as a leap year. The inability of computer software programs to accurately
recognize, interpret and process date codes designating the year 2000 and beyond
could cause systems to yield inaccurate results or encounter operating problems,
including interruption of the business operations such systems control.
We are engaged in a comprehensive program to assess our Year 2000 risk exposure
and to plan and implement remedial and corrective action where necessary. We
have reviewed all of our major internal systems, including human resources,
financial, engineering and manufacturing systems, to assess Year 2000 readiness
and to identify critical systems that require correction or remediation.
Assessment of our design engineering systems and products was completed in the
first quarter of 1999. Based on the results of this assessment, it is
anticipated that remediation of critical systems will be completed and tested by
the end of the third quarter 1999. We believe that our existing HR, financial
and business software systems are Year 2000 ready. We cannot assure you,
however, that integration and testing of new, corrected or updated programs or
systems with which they interface will not result in necessary corrective action
to one or more critical systems. A significant disruption of our financial or
business systems would adversely impact our ability to process orders, manage
production and issue and pay invoices. Our inability to perform these functions
for a long period of time could result in a material impact on our results of
operations and financial condition.
Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems which depend on a mix of our proprietary software and
systems and software purchased from third parties. Failure of these systems
would cause a disruption in the manufacturing process and could result in a
delay in completion and shipment of products. Our assessment of the Year 2000
readiness of our manufacturing systems is complete. Based on information
currently available, we believe that our systems will not be materially impacted
by Year 2000 issues. However, we cannot assure you that a significant disruption
in systems resulting from a Year 2000 problem will not occur. If the computer
integration system fails for this or any other reason, there could be a material
adverse impact on our operating results and financial condition.
We are 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 to us. Comprehensive inquiries have been sent and responses
are being monitored, with appropriate follow-up where required. This analysis
will continue well through 1999, with corrective action taken commensurate with
the criticality of affected products and services.
Our assessment program also has encompassed our own product offerings. Our ASICs
are custom-designed chips which implement the customer's functional or
engineering specifications. As designer and manufacturer of the physical
implementation of a customer's design in silicon, we generally do not have
specific 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. Our
ASSP and storage systems products, on the other hand, do implement chip and
system functionality designed by us. They include graphics processing,
audio/video signal decoding, data transmission, I/O control and data storage
whose functionality generally is not date dependent. We have completed our
assessment of the Year 2000 readiness of these products, and there is no
information to indicate that Year 2000 issues will have a material impact on
sales or functionality of our standard product offerings. Customers are seeking
assurances of our Year 2000 readiness with increasing frequency, and we are
endeavoring promptly and completely to address their concerns. However, we have
no control over a customer's Year 2000 readiness. Customers who believe that the
products they purchase from us may not be Year 2000 compliant may seek
alternative sources of supply. A significant decline in new orders or increase
in cancellations of existing backlog could have a material adverse impact on our
results of operations or financial condition.
We are at work on the development of various types of contingency plans to
address potential problems with critical internal systems and third party
interactions. Our contingency plans include procedures for dealing with a major
disruption of internal business systems, plans for long term factory shutdown
and identification of alternative vendors of critical materials in the event of
Year 2000
14
<PAGE> 15
related disruption in supply. Contingency planning will continue through at
least 1999, and will depend heavily on the results of the remediation and
testing of critical systems. The potential ramifications of a Year 2000 type
failure are potentially far-reaching and largely unknown. We cannot assure you
that a contingency plan in effect at the time of a system failure will
adequately address the immediate or long term effects of a failure, or that such
a failure would not have a material adverse impact on our operations or
financial results in spite of prudent planning.
Our costs to date related to the Year 2000 issue consist primarily of
reallocation of internal resources to evaluate and assess systems and products
as described above and to plan our remediation and testing efforts. We have not
maintained detailed accounting records, but based on our review of department
budgets and staff allocations, we believe these costs to be insignificant. We
currently estimate that the total cost of ongoing assessment, remediation,
testing and planning directly related to Year 2000 issues will amount to
approximately $14 million. Of this, approximately $7 million is expected to
consist of expenses attributed to redeployment of labor resources and overhead,
$2 million for the cost of software and external consulting fees and $5 million
for additional capital expenditures. The capital expenditures represent the
early replacement of information technology equipment and software to obtain the
full benefits of Year 2000 protections versus the normal technical obsolescence
replacement cycle. The estimate is based on the current assessment of the
projects and is subject to change as the projects progress. We cannot assure you
that remediation and testing will not identify issues which require additional
expenditure of material amounts which could result in an adverse impact on
financial results in future reporting periods.
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 our financial condition or
overall trends in results of operations. However, we are uncertain to what
extent we may be affected by such matters. In addition, we cannot assure you
that the failure to ensure Year 2000 capability by a supplier not considered
critical or another third party would not have a material adverse effect on us.
ADOPTION OF THE EURO
In 1998, we established a task force to address the issues raised by the
implementation of the European single currency (the "Euro"). Our primary focus
has been the changes needed to address a mix of Euro and local denomination
transactions during the transition period from January 1, 1999 through January
1, 2002.
As of January 1, 1999, we began transacting business in Euros. We implemented a
new bank account structure throughout Europe to accommodate customers and
vendors and to improve liquidity management in Europe.
We do not presently expect that the introduction and use of the Euro will
materially affect our foreign exchange and hedging activities or our use of
derivative instruments. We do not believe that the introduction of the Euro will
result in any significant increase in costs to us, and all costs associated with
the introduction of the Euro will be expensed in accordance with our policy. We
do not expect that the transition to the Euro will result in any competitive
pricing or will adversely impact any of our internal computer systems. While we
will continue to evaluate the impact of the Euro introduction over time, based
on currently available information, we do not believe that the introduction of
the Euro currency will have a significant adverse impact on our financial
condition or overall trends in results of operations.
RESULTS OF OPERATIONS
Where more than one material factors caused changes in results, we have
quantified such material factors throughout the MD&A where practicable.
Revenues for the first quarter of 1999 increased $131.9 million or 40.6% to
$456.8 million compared to $324.9 million during the same period of 1998. The
increase was primarily a result of additional revenues from the acquisition of
Symbios in the third quarter of 1998 (see Notes 3 to the Unaudited Consolidated
Condensed Financial Statements). The increase is also attributable to increased
demand for products used in communications and networking applications. The
increase was offset in part by the decreased demand and lower average selling
prices for our component products used in computer and consumer product
applications.
There were no customers with revenues greater than or equal to 10% of the total
consolidated revenues for the three months ended March 31, 1999.
15
<PAGE> 16
Key elements of the consolidated statements of operations, expressed as a
percentage of revenues, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
Gross margin 35.0% 43.6%
Research and development expenses 16.5% 19.7%
Selling, general and administrative expenses 13.2% 13.5%
Income from operations 3.4% 10.1%
</TABLE>
The gross margin percentage decreased to 35.0% during the first quarter of 1999
from 43.6% in the same period in 1998. The decrease reflects a combination of
the following elements:
- Non-recurring inventory charges of $10.4 million;
- Changes in product mix primarily related to Symbios product additions
from August 6, 1998;
- Lower average selling prices, including the impact from currency
fluctuations; and
- Increased cost of revenues from commencing operations at our new
fabrication facility in Gresham, Oregon in December of 1998.
Our operating environment, combined with the resources required to operate in
the semiconductor industry, requires that we manage a variety of factors. These
factors include, among other things:
- Product mix;
- Factory capacity and utilization;
- Manufacturing yields;
- Availability of certain raw materials;
- Terms negotiated with third-party subcontractors; and
- Foreign currency fluctuations.
These and other factors could have a significant effect on our gross margin in
future periods.
Changes in the relative strength of the yen may have a greater impact on gross
margin than other foreign exchange fluctuations due to our large wafer
fabrication operations in Japan. Although the yen strengthened (the average yen
exchange rate for the first quarter of 1999 increased 8.0% from the same period
in 1998), the effect on gross margin and net income was not significant because
yen denominated sales offset a substantial portion of yen denominated costs
during the period. Moreover, we hedged a portion of our remaining yen exposure.
(See Note 5 to the Unaudited Consolidated Condensed Financial Statements.)
Future changes in the relative strength of the yen or mix of foreign denominated
revenues and costs could have a significant effect on gross margins or operating
results.
Research and development ("R&D") expenses increased $11.6 million or 18.1% to
$75.4 million, during the first quarter of 1999 compared to $63.8 million during
the same period of 1998. The increase in R&D expenses is primarily attributable
to the following:
- Expenditures for research and development activities which are a
continuation of research and development activities of the Symbios
business included in our unaudited consolidated financial statements in
the first quarter of 1999;
- Expenditures related to the continued development of advanced sub-micron
products and process technologies
As a percentage of revenues, R&D expenses decreased to 16.5% in the first
quarter of 1999, compared to 19.7% during the same period of 1998. The decrease
is primarily due to the effects of our restructuring programs in the third
quarter of 1998 (see Note 2 to the Unaudited Consolidated Condensed Financial
Statements). As we continue our commitment to technological leadership in our
markets and realize the further benefit of cost savings from our restructuring
efforts, we are targeting our R&D investment in the second half of 1999 to be
approximately 12% to 15% of revenues.
16
<PAGE> 17
Selling, general and administrative ("SG&A") expenses increased $16.5 million or
37.9% to $60.3 million in the first quarter of 1999 compared to $43.8 million
during the same period in 1998. The increase is primarily attributable to the
inclusion of current expenses in the first quarter of 1999 relating to the
former Symbios business. As a percentage of revenues, SG&A expenses declined
slightly to 13.2% in the first quarter of 1999 from 13.5% during the same period
in 1998. We expect that SG&A expenses as a percentage of revenues will decline
to 12% of revenues in 1999 as the benefit of cost savings are realized from the
restructuring programs established in the third quarter of 1998.
During the first quarter of 1999, we determined that $2.5 million of the
restructuring reserve established in the third quarter of 1998 would not be
utilized because of a change in management's estimate of the reserve
requirements in the U.S., Europe and Japan. Accordingly, we included the
restructuring reserve reversal in the determination of income from operations
for the three month period ended March 31, 1999. We expect that the remaining
reserve balance of $11.9 million will be fully utilized by the third quarter of
1999.
In the third quarter of 1998, as a result of identifying opportunities to
streamline operations and maximize the integration of Symbios into our
operations, our 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 the
following elements:
- Worldwide realignment of manufacturing capacity;
- Consolidation of certain design centers, sales facilities and
administrative offices; and
- Streamlining of our overhead structure to reduce operating expenses.
The restructuring charge excludes any restructuring related to Symbios. As
discussed in Note 3 to the Unaudited Consolidated Condensed Financial
Statements, such costs relating to Symbios were accrued as a liability assumed
in the purchase in accordance with EITF No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." For a description of the
restructuring costs recorded in the third quarter of 1998, refer to Note 2 to
the Unaudited Consolidated Condensed Financial Statements.
As a result of the execution of the restructuring plan announced in the third
quarter of 1998, we recognized reduced employee expenses in 1998 and the first
quarter of 1999. We expect to realize further savings throughout 1999.
Depreciation expense savings were realized in 1998 and we expect to realize
further savings in the remainder of 1999. We realized savings in the first
quarter of 1999 related to the reduction in the number of engineering design
centers, sales facilities and administrative offices worldwide. We expect to
realize additional savings in the second quarter of 1999. These savings will
include reduced lease and maintenance contract expenses. As of March 31, 1999,
the remaining cash requirements will be related primarily to severance payouts.
Cash requirements for severance payments are expected to be spread evenly over
the second and third quarter of 1999. The resources for such payments will come
from cash on hand at the time the severance payouts are distributed.
Amortization expenses of goodwill and intangibles increased $9.8 million to
$11.2 million in the first quarter of 1999 compared to $1.4 million during the
same period in 1998. The increase is primarily attributable to amortization of
goodwill and other intangibles associated with the acquisition of Symbios in the
third quarter of 1998.
Interest expense increased $10.5 million for the three month period ended March
31, 1999 as compared to the same period in the prior year. The increase is
attributable to interest expense on the bank debt facility, which we entered
into during the third quarter of 1998 to fund the purchase of Symbios and the
new Convertible Notes issued in March of 1999. (See Note 4 to the Unaudited
Consolidated Condensed Financial Statements.) Additionally in the first quarter
of 1999, we did not capitalize interest associated with the construction of the
new fabrication facility as operations which commenced in December of 1998.
Interest income and other decreased $6.2 million to $1.6 million in the first
quarter of 1999, as compared to $7.8 million during the same period in 1998. The
decrease is primarily the result of a reduction of $3.6 million in interest
income generated from lower average balances of cash, cash equivalents and
short-term investments during the first quarter of 1999 as compared to the same
period in the prior year. The lower average balances of cash, cash equivalents
and short term investments resulted primarily from cash outlays associated with
the purchase of Symbios in the third quarter of 1998 and debt repayments, net of
borrowings, during the first quarter of 1999.
17
<PAGE> 18
We recorded a provision for income taxes for the first three months of 1999 and
1998 with an effective rate of 25%. Our effective tax rate is lower than the
U.S. statutory rate primarily due to earnings of our foreign subsidiaries taxed
at lower rates and the utilization of prior loss carryovers and other tax
credits.
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments increased by $1.1 million
during the first three months of 1999 to $282.4 million from $281.3 million at
the end of 1998. The increase is primarily due to cash generated from operations
partially offset by purchases of property and equipment.
Working capital increased by $216.5 million to $443.2 million at March 31, 1999
from $226.7 million at December 31, 1998. The increase in working capital is
primarily a result of the following elements:
- Lower current liabilities as a result of repayment of the short-term
portion of the debt facility; and
- Higher accounts receivable and lower accounts payable and accrued
liabilities.
The increase in working capital was offset in part by lower inventories,
prepaids and other current assets and higher accrued salaries, wages and
benefits as compared to the comparable period in 1998.
During the first three months of 1999, we generated $36.1 million of cash and
cash equivalents from operating activities compared to $30.0 million during the
same period in 1998. The increase in cash and cash equivalents provided from
operations is primarily attributable to:
- Higher net income (before depreciation and amortization, write-off of
unamortized preproduction costs and non-cash restructuring charges); and
- Decreases in inventories, prepaids and other assets.
The increase is offset in part by an increase in accounts receivable, and a
decrease in accounts payable, accrued and other liabilities. The increase in
accounts receivable and a decrease in inventories are due to large shipments
made at the end of the first quarter of 1999 as compared to the same period in
1998. The decrease in prepaids and other assets is primarily attributable to
$19.2 million of amortization of intangibles partially offset by $9.5 million of
the capitalized debt issuance costs. The decrease in accounts payable is as a
result of timing of invoice receipt and payment and fewer purchases of property
and equipment during the first three months of 1999 as compared to the same
period in 1998 as the construction of the Gresham facility reached completion.
The decrease in accrued and other liabilities is primarily due to lower income
taxes payable.
Cash and cash equivalents used in investing activities during the first three
months of 1999 were $27.5 million compared to $6.2 million during the same
period in 1998. The primary investing activities during the first quarter of
1999 included the following:
- Purchases and sales of debt and equity securities available-for-sale;
and
- Purchases of property and equipment.
The increase in cash used in investing activities during the first three months
of 1999 as compared to the same period in 1998 is primarily attributable to an
increase in purchases of debt and equity securities available-for-sale, net of
maturities and sales, offset in part by a decrease in purchases of property and
equipment. 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 $9.5
million and $60.8 million during the first three months of 1999 and 1998,
respectively. The decrease in additions from 1998 was primarily attributable to
reduced purchases of property and equipment related to construction of the new
wafer fabrication facility in Gresham, Oregon. We expect to maintain the level
of capital expenditure below $200 million in 1999.
Cash and cash equivalents used for financing activities during the first three
months of 1999 totaled $25.0 million, compared to $1.1 million provided by
financing activities in the same period of 1998. The increase in cash used
during the first quarter of 1999 is primarily attributable to repayment of the
credit facility, net of proceeds from the issuance of the new 41/4% Convertible
Subordinated Notes (see Note 4 to the Unaudited Consolidated Condensed Financial
Statements.) The increase in cash used is offset in part by proceeds from sales
of common stock issued pursuant to our employee stock option plans.
18
<PAGE> 19
During March of 1999, we issued $345 million of 4 1/4% Convertible Subordinated
Notes (the "Convertible Notes") due in 2004. The Convertible Notes are
subordinated to all existing and future senior debt, are convertible 60 days
following issuance into shares of our common stock at a conversion price of
$31.353 per share and are redeemable at our option, in whole or in part, at any
time on or after March 20, 2002. Each holder of the Convertible Notes has the
right to cause us to repurchase all of such holder's Convertible Notes at 100%
of their principal amount plus accrued interest upon the occurrence of certain
events and in certain circumstances. Interest is payable semiannually. We paid
approximately $9.5 million for debt issuance costs related to the Convertible
Notes. The debt issuance costs are being amortized using the interest method. We
used the net proceeds from the Convertible Notes to repay debt obligations as
outlined below.
On August 5, 1998, LSI Logic Corporation, JSI and ABN AMRO entered into a credit
agreement. The credit agreement was restated and superseded by the Amended and
Restated Credit Agreement dated as of September 22, 1998 and thereafter
syndicated to a group of lenders determined by ABN AMRO and LSI Logic. 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, we borrowed $150 million under the 364 day Facility and $485
million under the Revolver. On December 22, 1998, we borrowed an additional $30
million under the Revolver. The credit facilities allow for borrowings at
adjustable rates of LIBOR/TIBOR with a 1.25% spread. 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 the principal reduced 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 JSI over the same term. The yen term loan sub-facility is for a
period of four years with no required payments until it expires on August 5,
2002. Pursuant to the restated credit agreement, on August 30, 1998, JSI repaid
it's existing 11.4 billion yen (US$79.2 million) credit facility and borrowed
8.6 billion yen (US$73.4 million at March 31, 1999) bearing interest at
adjustable rates. In March of 1999, we repaid the $150 million outstanding under
the 364 day Facility and $185.5 million outstanding under the Revolver primarily
using proceeds from the Convertible Notes. Borrowings outstanding under the
Revolver including the yen sub-facility were $372.9 million as of March 31,
1999. As of March 31, 1999, the interest rate for the Revolver and the yen
sub-facility were 6.22% and 1.99%, respectively. JSI also had borrowings
outstanding of approximately 85 million yen (US$0.7 million) at March 31, 1999.
The Company paid approximately $3.8 million in debt issuance costs related to
the credit facility.
In accordance with the existing credit agreement, we must comply with certain
financial covenants related to profitability, tangible net worth, liquidity,
senior debt leverage, debt service coverage and subordinated indebtedness. As of
March 31, 1999, we were in compliance with these covenants.
We believe that our level of financial resources is an important competitive
factor in our industry. Accordingly, we may, from time to time, seek additional
equity or debt financing. 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 next twelve months. However, we can
provide 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 June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Upon adoption of SFAS No. 133, we will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle.
While we believe the adoption of this statement will not have a significant
effect on out results of operations, the impact of the adoption of SFAS No. 133
as of the effective date cannot be reasonably estimated at this time.
19
<PAGE> 20
PART II
Item 1 Legal Proceedings
Reference is made to Item 3, Legal Proceedings, of the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1998 for a discussion of
certain pending legal proceedings. The information provided at such reference
regarding those matters remains unchanged. The Company continues to believe that
the final outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations. No assurance
can be given, however, that these matters will be resolved without the Company
becoming obligated to make payments or to pay other costs to the opposing
parties, with the potential for having an adverse effect on the Company's
financial position or its results of operations.
Item 5 Other Information.
Stockholder Proposals
Proposals of stockholders intended to be presented at the Company's 2000 annual
meeting of stockholders must be received at the Company's principal executive
offices not later than November 19, 1999 in order to be included in the
Company's proxy statement and form of proxy relating to the 2000 annual meeting.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedules
(b) Reports on Form 8-K
On February 23, 1999, pursuant to Item 5 to report the Agreement and Plan of
Reorganization and Merger dated February 21, 1999, between the Registrant and
SEEQ Technology Incorporated.
On March 5, 1999, pursuant to Item 5 to report technical corrections to the
Agreement and Plan of Reorganization and Merger dated February 21, 1999 between
the Registrant and SEEQ Technology Incorporated.
On March 15, 1999, pusuant to Item 5 to report information set forth in the
Registrant's press release dated March 9, 1999.
On March 23, 1999, pursuant to Item 5 to report an Amendment to Credit Agreement
dated as of March 4, 1999, by and among Registrant, LLJSI, ABN AMRO and Lenders
(as defined therein).
On March 31, 1999, pursuant to Item 2 to report an amendment to financial
statements, exhibits or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on August 21, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LSI LOGIC CORPORATION
(Registrant)
Date: May 12, 1999 By /s/ R. Douglas Norby
---------------------------------
R. Douglas Norby
Executive Vice President Finance &
Chief Financial Officer
21
<PAGE> 22
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 183,141
<SECURITIES> 99,216
<RECEIVABLES> 289,717
<ALLOWANCES> 6,747
<INVENTORY> 171,850
<CURRENT-ASSETS> 844,172
<PP&E> 2,160,938
<DEPRECIATION> 850,018
<TOTAL-ASSETS> 2,647,740
<CURRENT-LIABILITIES> 400,939
<BONDS> 0
0
0
<COMMON> 1,419
<OTHER-SE> 1,424,391
<TOTAL-LIABILITY-AND-EQUITY> 2,647,740
<SALES> 456,837
<TOTAL-REVENUES> 456,837
<CGS> 297,066
<TOTAL-COSTS> 297,066
<OTHER-EXPENSES> 144,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,485)
<INCOME-PRETAX> 6,502
<INCOME-TAX> 1,630
<INCOME-CONTINUING> 4,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (91,774)
<NET-INCOME> (86,902)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.60)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 128,930
<SECURITIES> 328,828
<RECEIVABLES> 230,584
<ALLOWANCES> 2,325
<INVENTORY> 100,390
<CURRENT-ASSETS> 851,456
<PP&E> 1,792,520
<DEPRECIATION> 648,701
<TOTAL-ASSETS> 2,132,221
<CURRENT-LIABILITIES> 410,564
<BONDS> 0
0
0
<COMMON> 1,403
<OTHER-SE> 1,597,097
<TOTAL-LIABILITY-AND-EQUITY> 2,132,221
<SALES> 324,850
<TOTAL-REVENUES> 324,850
<CGS> 183,106
<TOTAL-COSTS> 183,106
<OTHER-EXPENSES> 108,980
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 40,610
<INCOME-TAX> 10,167
<INCOME-CONTINUING> 30,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,443
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
