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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-11674
LSI LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 433-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on February 12,
1999 as reported on the New York Stock Exchange, was approximately
$3,588,591,419. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 12, 1999, registrant had 141,684,452 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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 materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth below and
elsewhere in this Report. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below. Statements
made herein are as of the date of the filing of this Form 10-K with the
Securities and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update information
presented herein, except as may otherwise be required by law.
PART I
ITEM 1. BUSINESS
GENERAL
LSI Logic Corporation and its subsidiaries (collectively referred to as LSI
Logic or the Company and referred to as we, us and our) is a leader in the
design, development, manufacture and marketing of complex, high performance
integrated circuits and storage systems.
We operate predominately in the semiconductor industry segment. We offer
products and services for a variety of electronic systems applications. Our
products are marketed primarily to original equipment manufacturers ("OEMs") of
products targeted for the following applications:
- Networking;
- Telecommunications and wireless;
- Computers;
- Consumer products; and
- Storage.
In August 1998, we acquired Symbios, Inc., a producer and supplier of
semiconductors and high-end data storage systems. Through this acquisition, we
expanded our product offerings and systems-level capabilities and began
marketing established lines of high performance data storage management and
storage systems solutions. Although our storage systems business occupies a
separate industry segment, post-acquisition financial data attributable to that
segment did not meet the requirements for separate reporting of segment
financial information in accordance with Statement of Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information."
We use advanced process technology and design methodologies to design,
develop and manufacture highly complex integrated circuits. Our semiconductor
products primarily include application specific integrated circuits designed for
specific applications defined by the customer ("ASICs") and standard products
for applications selected by us ("ASSPs").
We have developed methods of designing integrated circuits based on a
library of building blocks of industry-standard electronic functions, interfaces
and protocols. Among these is our CoreWare(R) design methodology. Our advanced
submicron manufacturing process technologies allow our customers to combine one
or more CoreWare library elements with memory and their own proprietary logic to
integrate a highly complex, system-level solution on a single chip. (Our G10(R),
G11(TM) and G12(TM) submicron process technologies are more fully described in
the section on Manufacturing below.) We have developed and use complementary
metal oxide semiconductor ("CMOS") process technologies to manufacture our
integrated circuits.
The Company was incorporated in California on November 6, 1980, and was
reincorporated in Delaware on June 11, 1987. Our principal offices are located
at 1551 McCarthy Boulevard, Milpitas, California 95035,
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and our telephone number at that location is (408) 433-8000. Our home page on
the Internet is at www.lsilogic.com.
BUSINESS STRATEGY
Our objective is to continue to be an industry leader in the design and
manufacture of highly integrated, complex integrated circuits and other
electronic components and system-level products that provide our customers with
silicon-based system-level solutions. To achieve this objective, we incorporate
the following key elements into our business strategy:
- Emphasize CoreWare Methodology and System-on-a-Chip Capability. Our
CoreWare design methodology enables the integration of one or more
pre-designed circuit elements with customer-specified elements and memory
to create system capabilities on a single chip. For customers, this means
higher product complexity, greater differentiation and faster time to
market. We have used this design methodology to develop a line of
proprietary ASSPs that provide standard off-the-shelf solutions in
application areas including DVD, digital camera and digital video
broadcasting.
- Target Growth Markets and Selected Customers. We concentrate our
marketing and sales efforts on leading OEM customers in targeted growth
markets. Our focus on specific market applications allows us to build
relevant applications engineering expertise.
- Promote Highly Integrated Design and Manufacturing Technology. We use
proprietary and leading third-party electronic design automation ("EDA")
software design tools. Our design tool environment is highly integrated
with our manufacturing process requirements so that it will accurately
simulate product performance. This reduces design time and project cost.
We continually evaluate and, as appropriate, develop expertise with third
party EDA tools from leading and emerging suppliers of such products.
- Provide Flexibility in Design Engineering. We offer a broad range of
design and manufacturing support to our customers in implementing their
product specifications. A customer may use its own engineers to implement
a design, use our engineers on a "turn-key" basis to completely design
their ASICs, or collaborate with us in a combined engineering effort.
This allows customers substantial flexibility in how they proceed with an
ASIC design project.
- Maintain High-Quality and Cost-Effective Manufacturing. We operate our
own manufacturing facilities in order to control our deployment of
advanced wafer fabrication technology, our manufacturing costs and our
response to customer delivery requirements. We manage the availability of
internal manufacturing capacity predominantly to satisfy demand for our
products. We also use independent wafer foundry services when appropriate
and may seek to fill unused capacity in our own foundries by offering
such services to third parties. We perform substantially all of our
packaging, assembly and final test operations through subcontractors in
the Far East. Our production operations in the U.S. and Japan, as well as
all of our assembly and test subcontractors in the Far East, are ISO
certified, an important international measure for quality.
- Offer Worldwide Services. We market our products and services worldwide
through direct sales, marketing and field technical staff and through
independent sales representatives and distributors. We market our storage
system products to OEMs and to end users through value-added resellers.
Our extensive network of design centers allows us to provide customers
with highly experienced engineers to interact with customer engineering
management and system architects to develop designs for new products and
to provide continuing after-sale customer support.
- Develop and Drive Industry Standards to Achieve Market Advantage. We have
been a leader in developing and promoting important industry standard
architectures, functions, protocols and interfaces. We believe that this
strategy will enable us to quickly launch new standards-based products,
allowing us and our customers to achieve time-to-market and other
competitive advantages.
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PRODUCTS AND SERVICES
We design, manufacture, market and sell semiconductor products and storage
systems solutions.
In our semiconductor business, we primarily manufacture, market and sell
ASICs. ASICs are semiconductors that are designed for a unique,
customer-specified application. We also market and sell a variety of integrated
standard components called ASSPs that are designed by us for specific electronic
systems applications. Our ASSPs are sold to multiple customers, such as OEMs,
who offer system-level products using applications for which our ASSPs are
designed. Both our ASICs and ASSPs are manufactured using our proprietary
process technologies.
Our semiconductor products are increasingly based upon our cell-based
technology. This technology allows us to design products using predefined
circuit elements, called cells, that are standard building blocks of electronic
functions. These cells can be integrated into a product to implement a
customer's design specifications. Our emphasis on our newer cell-based product
lines reflects the market preference for developing advanced integrated circuit
products. Customers obtain greater flexibility in the design of system level
products using cell-based technology than is available in an array-based
methodology which limits the placement of circuits to a fixed grid. We also
continue to manufacture and sell gate-array products which were designed using
prior technologies.
Our CoreWare design methodology offers a comprehensive design approach for
creating a system on a chip efficiently, predictably and rapidly. Our CoreWare
libraries include predesigned implementations of industry standard electronic
functions, interfaces and protocols. Some of these are targeted for specific
types of products, and others can be used in a variety of product applications.
Examples of the cores which are targeted for specific applications are:
- Switched Ethernet/Fast Ethernet/Gigabit Ethernet for networking and
communications;
- Fibre Channel for storage applications;
- IEEE 1394 for storage and consumer product applications; and
- Audio/video encoders and decoders for consumer products.
Cores that can be used in product applications across a broad range of
product markets include:
- The MiniRISC(R) family of MIPS-based RISC (reduced instruction set
computing) processor cores;
- The GigaBlaze(R) SeriaLink(R) transceiver core;
- The ARM(R) CPU core;
- The OakDSPCore(R) digital signal processor core; and
- The HyperPHY high speed I/O (input/output) transceiver core.
Our acquisition of Symbios, Inc. resulted in a significant expansion of our
product lines designed for applications involving data storage and transmission
between a host computer and peripheral devices such as disk drives, scanners and
printers. We offer many industry standard I/O technologies, such as SCSI (small
computer system interface, pronounced "skuzzy"), Fibre Channel, PCI (peripheral
component interface), IEEE 1394, USB (universal serial bus) and I2O (intelligent
I/O) compliant software.
In addition to our integrated circuit products, we develop and market
high-performance data storage management and storage system solutions. These
products are targeted at key data storage applications, including:
- On-line transaction processing;
- Data warehousing;
- Internet servers;
- Electronic commerce;
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- Video delivery, editing and production; and
- Migration of mission critical applications off mainframe computers.
We offer a comprehensive array of storage products that can be integrated
on a component basis or aggregated into a complete storage solution. This broad
array of products includes the following:
- Host adapter boards ("HAB");
- Drive enclosures;
- Disk array controllers; and
- Complete Redundant Array of Independent Disks ("RAID") storage systems.
We also develop and market storage management software called
SYMplicity(TM) Storage Manager. To meet open computing standards, our storage
solutions products are designed to operate within the Windows NT, UNIX and
Novell operating systems environments.
In addition to the product offerings mentioned above, we continue to expand
our design services. The semiconductor design flow is an interactive process
involving participation by both us and our customer. We seek to engage customers
early in their new system product development process. We provide advice on
product design strategies to optimize product performance and suitability for
the targeted application. We also offer design engineering and consulting
services in the areas of system architecture and system level design simulation,
verification and synthesis used in the development of complex integrated
circuits. In offering a wide variety of design services, we allow the customer
to determine our level of participation in the design process.
We make various circuit elements from our library available to our
customers. These range from simple cells to larger and more complex elements and
silicon structures called macrocells, megacells and megafunctions. The most
complex of these cells are the cores that make up our CoreWare library.
Our software design tool environment supports and automatically performs
key elements of the design process from circuit concept to physical layout of
the circuit design. The design tool environment features a combination of
internally developed proprietary software and third party tools which are highly
integrated with our manufacturing process requirements. The design environment
includes expanded interface capabilities with a range of third party tools from
leading EDA vendors such as Cadence Design Systems, Inc., Mentor Graphics
Corporation, Synopsys, Inc., and Avant! Corporation, and features
hardware/software co-verification capability.
After completion of the ASIC engineering design effort, we produce and test
prototype circuits for shipment to the customer. We then begin volume production
of integrated circuits that have been developed through one or more of the
arrangements described above in accordance with the customer's quantity and
delivery requirements.
MARKETING AND CUSTOMERS
We primarily market our products and services to leading OEMs that develop
and manufacture products for the following applications:
- Networking. Our products are used in local area network ("LAN") and wide
area network ("WAN") equipment such as hubs, routers and switches.
Drawing from our CoreWare library, customers can use RISC processors,
digital signal processors ("DSPs"), HyperPHY high speed transceiver
cores, and Ethernet cores, including our GigaBlaze core capable of
transmission at more than one gigabit per second. We also offer
mixed-signal (digital and analog) integration and ASSPs such as the
ATMizer(R) family of products that supports segmentation and reassembly,
or SAR, functions on a single chip.
- Telecommunications and Wireless. We provide our telecommunications
customers with a blend of high performance, high integration and low
power solutions for Internet access, switching, digital
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WAN and residential broadband applications. Wireless customers benefit from
strong microprocessor and DSP core offerings, mixed-signal functions, industry
standard buffers and interfaces, and a range of ASSPs including our
Cablestream(TM) QAM receiver.
- Consumer. We target high-volume consumer product applications with
advanced digital technology and complete system solutions. Our products
have been designed into video games and digital set-top box systems for
satellite, cable and terrestrial TV reception. We also offer highly
integrated, cost-effective ASSP solutions for digital cameras and DVD
player and PC applications.
- Computer. We provide tools, libraries, semiconductor processes and
packaging products which enable our OEM customers to reliably develop
high performance, high complexity designs for leading edge computer
systems. For the office automation market, we provide a suite of MIPS(R)
and ARM embedded processors and industry standard bus interface cores
such as USB, IEEE 1394 and PCI.
- Storage Components. We design and manufacture semiconductor components
that facilitate data storage and transmission between a host computer and
peripheral devices such as disk drives, scanners and printers. We offer
many industry standard I/O technologies, such as SCSI, Fibre Channel,
PCI, IEEE 1394, USB and I2O compliant software.
- Storage Systems. We develop and market scaleable and integrated hardware
and software solutions for the enterprise market. To provide our OEM
customers with the flexibility to create differentiated products, we
offer a broad array of storage products that can be integrated on a
component basis or aggregated into a complete storage solution. This
broad array of products includes HABs, drive enclosures, disk array
controllers and complete RAID storage systems.
In each of the foregoing applications we seek to leverage our systems-level
ASIC strength to the benefit of acknowledged market leaders. We recognize that
this strategy may result in increased dependence on a limited number of
customers for a substantial portion of our revenues. It is possible that we will
not achieve significant sales volumes from one or more of the customers or
applications we have selected. This could result in lower revenues and higher
unit costs due to an underutilization of resources.
We market our semiconductor products and services primarily through our
network of direct sales and marketing and field engineering offices located in
North America, Europe, Japan and elsewhere in Pan-Asia. In 1998, we opened a
representative office in Beijing, China. We also use independent distributors
and sales representatives. Distributors typically offer customers engineering
support and purchase product from us for resale to their customers. Sales
representatives facilitate sales by us directly to customers and typically do
not carry inventory. International sales are subject to risks common to export
activities, including governmental regulations, tariff increases and other trade
barriers and currency fluctuations.
We sell our storage hardware and software solutions primarily to OEMs.
However, we also sell our RAID storage systems to resellers, system integrators
and distributors under the brand name MetaStor(R).
In 1998, Sony Corporation accounted for approximately 12% of our revenues.
No other customer accounted for greater than 10% of total revenue. Although we
do not currently foresee any reduction in volume of products ordered by Sony, a
significant decline in product orders could have a material adverse impact on
our operating results and financial condition.
MANUFACTURING
Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer volume production requirements. Manufacturing
begins with fabrication of custom diffused silicon wafers. Layers of metal
interconnects are deposited onto the wafer and patterned using customized photo
masks. Wafers are then tested, cut into die and sorted. The die that pass
initial tests are then sent to the assembly process where the fabricated
circuits are encapsulated into ceramic or plastic packages. The finished devices
undergo additional testing and quality assurance before shipment. Dedicated
computer systems are used in this comprehensive testing sequence. The test
programs use the basic functional test criteria from the design simulation. For
ASICs the functional test criteria are specified by the customer.
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We own and operate manufacturing facilities in the United States, Japan and
Hong Kong. We utilize various high performance CMOS process technologies in the
volume manufacture of our products. Our advanced manufacturing facilities
feature highly specialized chemical mechanical polishing equipment which
increase yields and allow for higher levels of chip customization. The
production operations are fully computer integrated to increase efficiency and
reduce costs.
Semiconductor process technologies are identified in terms of the size of
the channel length within the transistors, measured in millionths of a meter
called "microns." The measurement of the channel length is expressed in two
ways: effective electrical channel length and drawn gate length. The effective
channel length is smaller than the drawn gate length. In this Report, we use the
effective channel length to identify our process technologies.
Our advanced submicron manufacturing processes are capable of producing
products with an effective electrical channel length within each transistor as
small as 0.18 micron (G11 process technology) allowing for up to 24,000,000
usable gates on a single chip. Our G10 process technology is capable of
producing 0.25 micron products. During the first quarter of 1998, we announced
our next generation 0.13 micron G12 process technology, which is planned to be
ready for production in the fourth quarter of 1999. These advanced process
technologies allow for greater circuit density and increased functionality on a
single chip.
Substantially all of our wafers are fabricated in facilities in Tsukuba,
Japan, Colorado Springs, Colorado and our new factory in Gresham, Oregon. In the
Fall of 1998, we announced that the older of the two Tsukuba factories, which
produces the 0.38 micron products, will be closed in 1999 after eleven years of
service. This action was taken as part of a comprehensive restructuring and cost
reduction plan.
The new manufacturing facility in Gresham, Oregon, began volume production
in December 1998. Located on 325 acres outside of Portland, the facility is
equipped for advanced manufacturing operations and is designed to accommodate
our expansion requirements well into the foreseeable future. The Gresham plant
is equipped to produce eight-inch wafers hosting products manufactured to the
G10 and G11 processes.
The manufacturing of our HABs and other storage system products involves
the assembly and testing of components, including our semiconductors, which are
then integrated into final products. Our storage system products are assembled
and tested internally. We utilize subcontractors for the assembly and test of
our HABs.
Our fixed costs for manufacturing are high and are expected to remain high
because we must continually make significant capital expenditures and add new
advanced capacity in order to remain competitive. If demand for our products
does not absorb the additional capacity, the increase in fixed costs and
operating expenses related to increases in production capacity may result in a
material adverse impact on our operating results and financial condition.
Additional risk factors are set forth in the Risk Factors section below.
We have developed a high-density interconnect packaging technology, known
as Flip Chip, which essentially replaces the wires that connect the edge of the
die to a package with solder bumps spread over the entire external surface of
the die. This technology enables us to reach exceptional performance and lead
count levels in packages required for process technologies of 0.18 micron and
below. We also offer a mini ball grid array package that features a smaller
package size without sacrificing electrical and thermal performance. And we also
offer a wide array of ceramic and plastic wirebond packaging options.
Final assembly (i.e., encapsulation in a plastic or ceramic package) and
test operations are conducted by our Hong Kong affiliate through independent
subcontractors in the Philippines, Malaysia, Korea and Hong Kong. We perform
ceramic package assembly for our products at our Fremont, California facility.
Both manufacturing and sales of our products may be impacted by political
and economic conditions abroad. Protectionist trade legislation in either the
United States or foreign countries, such as a change in the current tariff
structures, export compliance laws or other trade policies, could adversely
affect our ability to manufacture or sell products in or into foreign markets.
The ongoing economic crisis in Asia could affect the viability of our assembly
and test subcontractors in that area. We cannot guarantee that current
arrangements
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with our component suppliers or assembly, testing and packaging subcontractors
will continue, and we do not maintain an extensive inventory of assembled
components. The failure to secure assembly and test capacity could affect our
sales and result in a material adverse impact on our operating results and
financial condition.
Although there has been no evidence of problems, it is still impossible to
predict the effects on Hong Kong business operations of the 1997 reversion of
Hong Kong to the Peoples' Republic of China ("PRC"). Our Hong Kong subsidiary
exercises primary control over our manufacturing and assembly and test
operations. If the PRC were to attempt to control or otherwise impose increased
governmental influence over business activities in Hong Kong, our operations
could be adversely affected. Additional risk factors are set forth in the Risk
Factors section below.
Development of advanced manufacturing technologies in the semiconductor
industry frequently requires that critical selections be made as to those
vendors from which essential equipment (including future enhancements) and
after-sales services and support will be purchased. Some of our equipment
selections require that we procure certain specific types of materials or
components specifically designed to our specifications. Therefore, when we
implement specific technology choices, we may become dependent upon certain
sole-source vendors. Accordingly, our capability to switch to other technologies
and vendors may be substantially restricted and may involve significant expense
and delay in our technology advancements and manufacturing capabilities.
The semiconductor equipment and materials industries also include a number
of vendors that are relatively small and have limited resources. Several of
these vendors provide equipment and or services to us. We do not have long-term
supply or service agreements with vendors of certain critical items, and
shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. Given the limited number of
suppliers of certain of the materials and components used in our products, if we
experience difficulty in obtaining essential materials in the future we cannot
assure you that alternative suppliers would be available to meet our needs, or
that if available, such suppliers would provide components in a timely manner or
on favorable terms. Should we experience such disruptions, our operations could
be materially affected, which could have a material adverse impact on our
operating results and financial condition. Our operations also depend upon a
continuing adequate supply of electricity, natural gas and water.
Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems which depend upon 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. Based on our assessment of the
Year 2000 issues, we believe that the operation of the computer integrated
manufacturing systems will not be adversely impacted by the Year 2000. However,
we cannot assure you that a significant disruption in the system resulting from
a Year 2000 related issue 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.
Additional risk factors are set forth in the Risk Factors section below.
BACKLOG
Generally, we do not have long-term volume purchase contracts with our
customers. Instead, customers place purchase orders that are subject to
acceptance by us. The timing of the performance of design services and the
placement of orders included in our backlog at any particular time are generally
within the control of the customer. For example, there could be a significant
time lag between engagement for design services and the delivery of a purchase
order for the product. Or a customer may from time to time revise delivery
quantities or delivery schedules to reflect changes in the customer's needs. For
these reasons, our backlog as of any particular date is not a meaningful
indicator of future sales.
COMPETITION
The semiconductor industry is intensely competitive and characterized by
constant technological change, rapid product obsolescence, evolving industry
standards, and price erosion. Many of our competitors are larger,
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diversified companies with substantially greater financial resources. Some of
these also are customers who have internal semiconductor design and
manufacturing capacity. We also compete with smaller and emerging companies
whose strategy is to sell products into specialized markets or to provide a
portion of the products and services which we offer.
Our major competitors include large domestic companies such as IBM
Corporation, Lucent Technologies, Inc., Motorola, Inc. and Texas Instruments,
Inc. We also face competition from large foreign corporations, including Toshiba
Corporation, NEC Corporation and SGS Thomson Microelectronics, S.A.
The principal competitive factors in the industry include:
- Design capabilities (including EDA programs, cell libraries and
engineering skills);
- Quality of the products and services delivered;
- Product functionality;
- Delivery time; and
- Price.
In addition, standard products and system level offerings compete on the
following factors:
- Quality of system integration;
- Existence and accessibility of differentiating features; and
- Quality and availability of supporting software.
We believe that we presently compete favorably with respect to these
factors. It is possible, however, that other custom design approaches or
competing system level products will be developed by others which could have a
material adverse impact on our competitive position.
We are increasingly emphasizing our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that are important to the
success of this strategy include:
- Selection, quantity and quality of our CoreWare library elements;
- Our ability to offer our customers systems level expertise; and
- Quality of software to support system-level integration.
Although there are other companies that offer similar types of products and
related services, we believe that we currently compete favorably with those
companies. However, competition in this area is increasing, and we cannot assure
you that our CoreWare methodology approach and product offerings will continue
to receive market acceptance.
We also compete in the storage systems market, which is characterized by
many of the same pressures found in the semiconductor industry. We believe that
important competitive factors in the storage systems market include the
following:
- Product performance and price;
- Support for new industry and customer standards;
- Scalability;
- Features and functionality; and
- Reliability, technical service and support.
Our failure to compete successfully with respect to any of these or other
factors could have a material adverse effect on our results of operations and
financial condition. Our storage system products compete primarily with products
from independent storage providers such as Adaptec, the CLARiiON business unit
of Data General Corporation, EMC Corporation, MTI Technologies, Inc., Mylex
Corporation and Network
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Appliance, Inc. In addition, many of our current customers in this market, as
well as certain potential customers, also have internal storage divisions which
produce products that compete directly or indirectly with our storage system
products. We cannot assure you that these customers, which include Hewlett
Packard Company, IBM Corporation, Compaq Computer Corporation, Dell Computer
Corporation, Sun Microsystems, Inc., and Unisys Corporation, will continue to
purchase storage products from us.
RESEARCH AND DEVELOPMENT
Our industry is characterized by rapid changes in products, design tools
and process technologies. We must continue to improve our existing products,
design tool environment and process technologies and to develop new ones in a
cost effective manner to meet changing customer requirements and emerging
industry standards. If we are not able to successfully introduce new products,
design tool environments and process technologies or to achieve volume
production of products at acceptable yields using new manufacturing processes,
there could be a material adverse impact on our operating results and financial
condition.
We operate research and development facilities in California, Colorado and
Kansas. The following table shows our expenditures on research and development
activities for each of the last three fiscal years (in thousands).
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YEAR AMOUNT PERCENT OF REVENUE
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1996............................... $184,452 15%
1997............................... $226,219 18%
1998............................... $286,041 19%
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Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs. As we continue our commitment to
technological leadership in our markets and realize the benefit of cost savings
from our restructuring programs in the third quarter of 1998, we anticipate our
research and development investment in the second half of 1999 to be
approximately 13% to 15% of revenues.
PATENTS, TRADEMARKS AND LICENSES
We own various United States and international patents and have additional
patent applications pending relating to certain of our products and
technologies. We also maintain trademarks on certain of our products and
services and claim copyright protection for certain proprietary software and
documentation. While patent and trademark protection for our intellectual
property is important, we believe our future success is primarily dependent upon
the technical competence and creative skills of our personnel.
We also protect our trade secret and other proprietary information through
agreements with our customers, suppliers, employees and consultants and through
other security measures. We have also entered into certain cross-license
agreements that generally provide for the non-exclusive licensing of design and
product manufacturing rights and for cross-licensing of future improvements
developed by either party.
We continue to expand our portfolio of patents and trademarks. We offer a
staged incentive to engineers to identify, document and submit invention
disclosures. We have developed an internal review procedure to maintain a high
level of disclosure quality and to establish priorities and plans for filings
both in the United States and abroad. The review process is based solely on
engineering and management judgment, with no assurance that a specific filing
will issue, or if issued, will deliver any lasting value to us. We cannot assure
you that the rights granted under any patents will provide competitive
advantages to us or will be adequate to safeguard and maintain our proprietary
rights. Moreover, the laws of certain countries in which our products are or may
be manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States.
Please see Item 3, Legal Proceedings, additional risk factors set forth in
the Risk Factors section and Note 12 of the Notes, below.
10
<PAGE> 11
ENVIRONMENTAL REGULATION
Federal, state and local regulations, as well as those of other nations,
impose various environmental controls on the use and discharge of certain
chemicals and gases used in semiconductor processing. Our facilities have been
designed to comply with these regulations, and we believe that our activities
conform to present environmental regulations. However, increasing public
attention has been focused on the environmental impact of electronics and
semiconductor manufacturing operations. While to date we have not experienced
any materially adverse impact on our business from environmental regulations, we
cannot assure you that such regulations will not be amended so as to impose
expensive obligations on us in the future. In addition, violations of
environmental regulations or unpermitted discharges of hazardous substances
could result in the necessity for the following actions:
- Additional capital improvements to comply with such regulations or to
restrict discharges;
- Liability to our employees and/or third parties; and
- Business interruptions as a consequence of permit suspensions or
revocations or as a consequence of the granting of injunctions requested
by governmental agencies or private parties.
EMPLOYEES
At December 31, 1998, we and our subsidiaries had approximately 6,420
employees.
In connection with our restructuring and cost reduction plan announced in
October 1998 following the Symbios acquisition, we announced a workforce
reduction of 1200 jobs or approximately 17% of the workforce to be achieved by
October 1999. The reduction was primarily a result of the following actions:
- Closure of the manufacturing facility in Japan and the former Symbios
test and assembly facilities in Colorado;
- Consolidation of duplicative design centers and sales offices in the US
and Europe; and
- Closure of redundant administrative functions.
Our future success depends in large part on the continued service of our
key technical and management personnel and on our ability to continue to attract
and retain qualified employees, particularly those highly skilled design,
process and test engineers involved in the manufacture of existing products and
the development of new products and processes. Although we consider our employee
relations to be good, the competition for such personnel is intense, and the
loss of key employees or the inability to hire such employees when needed could
have a material adverse input on our business and financial condition.
11
<PAGE> 12
RISK FACTORS
The risks and uncertainties described below are not the only risks we face.
In addition to the following risk factors, we refer you to those risk factors
described elsewhere in this Form 10-K Report. Additional risks and uncertainties
not presently known to us or that we currently believe are immaterial could also
impair our business operations.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Form 10-K Report. These are statements that relate to our
expectations for future events and time periods. Generally, the words
"anticipate," "expect," "intend" and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties. Future events and circumstances could differ significantly from
those associated with the forward-looking statements.
WE DEPEND ON NEW PROCESS TECHNOLOGIES AND PRODUCTS TO MAINTAIN OUR
COMPETITIVE POSITION. The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product obsolescence and
evolving industry standards. We believe that our future success depends, in
part, on our ability to improve on existing technologies and to develop and
implement new ones in order to continue to reduce semiconductor chip size and
improve product performance and manufacturing yields. We must also be able to
adopt and implement emerging industry standards and to adapt products and
processes to technological changes. If we are not able to implement new process
technologies successfully or to achieve volume production of new products at
acceptable yields, our operating results and financial condition will be
adversely impacted.
In addition, we must continue to develop and introduce new products that
compete effectively on the basis of price and performance and that satisfy
customer requirements. We continue to emphasize engineering development and
acquisition of CoreWare building blocks, or cores, and integration of our
CoreWare libraries into our design capabilities. Our cores and ASSPs are
intended to be based upon industry standard functions, interfaces and protocols
so that they are useful in a wide variety of systems applications. Development
of new products and cores often requires long-term forecasting of market trends,
development and implementation of new or changing technologies and a substantial
capital commitment. We cannot assure you that ASSPs or cores that we select for
investment of our financial and engineering resources will be developed or
acquired in a timely manner or will enjoy market acceptance.
OUR MANUFACTURING FACILITIES ARE SUBJECT TO DISRUPTION DUE TO CAUSES BEYOND
OUR CONTROL. Operations at any of our primary manufacturing facilities or at any
of our assembly subcontractors, are subject to disruption for a variety of
reasons, including work stoppages, fire, earthquake, flooding or other natural
disasters, or Year 2000 related problems. Such disruption could cause delays in
shipments of products to our customers. We cannot assure you that alternate
production capacity would be available if a major disruption were to occur, or
that if it were available, it could be obtained on favorable terms. Such a
disruption could result in cancellation of orders or loss of customers. Such a
loss would result in a material adverse impact on our operating results and
financial condition.
WE DO NOT CONTROL THE TIMING OR VOLUME OF PRODUCTION ORDERS PLACED BY OUR
CUSTOMERS. We generally do not have long-term volume production contracts with
our customers. Whether and to what extent customers place orders for any
specific ASIC design or ASSPs and the quantities of products included in those
orders are factors beyond our control. Insufficient orders will result in
underutilization of our manufacturing facilities and would adversely impact our
operating results and financial condition.
THE RAMP-UP OF OUR NEW WAFER FABRICATION FACILITY COULD TAKE LONGER AND
COST MORE THAN ANTICIPATED. Our new wafer fabrication facility in Gresham,
Oregon, began production in December 1998. The Gresham facility is a
sophisticated, highly complex, state-of-the-art factory. Actual production rates
depend upon the reliable operation and effective integration of a variety of
hardware and software components. We cannot assure you that all of these
components will be fully functional or successfully integrated within the
currently projected ramping schedule or that the facility will achieve the
forecasted yield targets. Our inability to achieve and maintain acceptable
production capacity and yield levels could have a material adverse impact on our
operating results and financial condition.
12
<PAGE> 13
In addition, the amount of capital expenditures required to bring the
facility to full operating capacity could be greater than we currently
anticipate. Higher ramp-up costs will reduce margins and could have a material
adverse impact on our results of operations and financial condition.
WE MAY ENCOUNTER DIFFICULTIES IN OBTAINING MATERIALS FOR MANUFACTURING. We
use a wide range of raw materials in the production of our semiconductors, host
adapter boards and storage systems products, including silicon wafers,
processing chemicals, and electronic and mechanical components. We generally do
not have guaranteed supply arrangements with our suppliers and do not maintain
an extensive inventory of materials for manufacturing. Some of these materials
we purchase from a limited number of vendors, and some we purchase from a single
supplier. On occasion, we have experienced difficulty in securing an adequate
volume and quality of materials. We cannot assure you that if we have difficulty
in obtaining materials or components in the future alternative suppliers will be
available, or that available suppliers will provide materials and components in
a timely manner or on favorable terms. If we cannot obtain adequate materials
for manufacture of products, there could be a material impact on our operating
results and financial condition.
HIGH CAPITAL REQUIREMENTS AND HIGH FIXED COSTS CHARACTERIZE OUR BUSINESS,
AND WE FACE A RISK THAT REQUIRED CAPITAL MIGHT BE UNAVAILABLE WHEN WE NEED
IT. In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. We spent $329 million in
1998, net of retirements and refinancings, on investments in new facilities and
capital equipment (not including facilities and capital equipment acquired with
Symbios), and we expect to spend approximately $200 million during 1999. We
expect to continue to make significant investments in new facilities and capital
equipment. We believe that we will be able to meet our operating and capital
requirements and obligations for the foreseeable future using existing liquid
resources, funds generated from our operations and our ability to borrow funds.
We believe that our level of liquid resources is important, and we may seek
additional equity or debt financing from time to time. However, we cannot assure
you that additional financing will be available when needed or, if available,
will be on favorable terms. Moreover, any future equity or convertible debt
financing will decrease existing stockholders' percentage equity ownership and
may result in dilution, depending on the price at which the equity is sold or
the debt is converted. In addition, the high level of capital expenditures
required to remain competitive results in relatively high fixed costs. If demand
for our products does not absorb additional capacity, the fixed costs and
operating expenses related to increases in our production capacity could have a
material adverse impact on our operating results and financial condition.
THE PRICE OF OUR SECURITIES MAY BE AFFECTED BY FLUCTUATIONS IN OPERATING
RESULTS. Future operating results 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 our products;
- The availability and extent of utilization of manufacturing capacity;
- Erosion in the price of our products; and
- The timing of new product introductions, the ability to develop and
implement new technologies and other competitive factors.
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, and we predominantly sell custom products to customers
operating in a similar environment. Accordingly, changes in the conditions of
any of our customers may have a greater impact on our operating results and
financial condition than if we predominantly offered standard products that
could be sold to many purchasers. While we cannot predict what effect these
various factors may have on our financial results, their aggregate effect could
result in significant volatility in future performance. Our failure to meet the
performance expectations published by external sources could result in a sudden
and significant drop in the price of our stock and other securities,
particularly on a short-term basis.
13
<PAGE> 14
OUR MARKETS ARE HIGHLY COMPETITIVE. We compete in markets that are
intensely competitive, and which exhibit both rapid technological changes and
continued price erosion. Our competitors include many large domestic and foreign
companies that have substantially greater financial, technical and management
resources than us. Several major diversified electronics companies offer ASIC
products and/or other products that are competitive with our product lines.
Other competitors are smaller, specialized and emerging companies attempting to
sell products in particular markets that we also target. In addition, we face
competition from some companies whose strategy is to provide a portion of the
products and services that we offer. For example, these competitors may offer
semiconductor design services, may license design tools, and/or may provide
support for obtaining products at an independent foundry. Some of our large
customers, some of whom may have licensed elements of our process and product
technologies, may develop internal design and production operations to produce
their own ASICs, thereby displacing our products. Therefore, we cannot assure
you that we will be able to continue to compete effectively with our existing or
new competitors. Loss of competitive position could result in price reductions,
fewer customer orders, reduced revenues, reduced gross margins, and loss of
market share, any of which would affect our operating results and financial
condition.
To remain competitive, we continue to evaluate our worldwide manufacturing
operations, looking for additional cost savings and technological improvements.
If we are not able to implement successfully new process technologies and to
achieve volume production of new products at acceptable yields, our operating
results and financial condition may be affected.
Our future competitive performance depends on a number of factors,
including our ability to:
- Accurately identify emerging technological trends and demand for product
features and performance characteristics;
- Develop and maintain competitive products;
- Enhance our products by adding innovative features that differentiate our
products from those of our competitors;
- Bring products to market on a timely basis at competitive prices;
- Properly identify target markets;
- Respond effectively to new technological changes or new product
announcements by others;
- Reduce semiconductor chip size, increase device performance and improve
manufacturing yields;
- Adapt products and processes to technological changes; and
- Adopt and/or set emerging industry standards.
We cannot assure you that our design, development and introduction
schedules for new products or enhancements to our existing and future products
will be met. In addition, we cannot assure you that these products or
enhancements will achieve market acceptance, or that we will be able to sell
these products at prices that are favorable to us.
WE MUST MAKE SIGNIFICANT INVESTMENTS IN RESEARCH AND DEVELOPMENT. We must
continue to make significant investments in research and development in order to
continually enhance the performance and functionality of our products, to keep
pace with competitive products and to satisfy customer demands for improved
performance, features and functionality. Technical innovations are inherently
complex and require long development cycles and appropriate professional
staffing. We must complete development of such innovations before they are
obsolete, and make them sufficiently compelling to attract customers. Also, we
must incur substantial research and development costs before we confirm the
technical feasibility and commercial viability of a product. Therefore, we spend
substantial resources determining the feasibility of certain innovations that
may not lead to a product but may instead result in numerous dead ends and sunk
costs. We cannot assure you that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development.
14
<PAGE> 15
WE ARE EXPOSED TO RISK FROM CHANGES IN FOREIGN CURRENCY EXCHANGE RATES. We
have international subsidiaries that operate and sell our products globally.
Further, 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 in our Japanese manufacturing facilities. As a result,
we are exposed to changes in foreign currency exchange rates or weak economic
conditions in other the countries.
We also have debt obligations in Japan, which totaled approximately 8.68
billion yen (approximately US$74.6 million) at December 31, 1998. These
obligations expose us to exchange rate fluctuations for the period of time from
the start of the transaction until it is settled. In recent years, the yen has
fluctuated substantially against the U.S. dollar. We use forward exchange,
currency swap, interest swap and option contracts to manage our exposure to
currency fluctuations and changes in interest rates. There were no interest rate
swap, currency swap or forward exchange contracts outstanding as of December 31,
1998. We cannot assure you, however, that such hedging transactions will
eliminate exposure to currency rate fluctuations and changes in interest rates.
Notwithstanding our efforts to foresee and mitigate the effects of changes in
fiscal circumstances, fluctuations in currency exchange rates in the future
could affect our operations and/or cash flows. In addition, high inflation rates
in foreign countries could affect our future results.
WE DO BUSINESS IN EUROPE AND FACE RISKS RELATED TO THE EURO. A new European
currency was implemented in January 1999 to replace the separate currencies of
eleven western European countries. This is requiring changes in our operations
as we modify systems and commercial arrangements to deal with the new currency.
Modifications are necessary in operations such as payroll, benefits and pension
systems, contracts with suppliers and customers, and internal financial
reporting systems. Although a three-year transition period is expected during
which transactions may also be made in the old currencies, this is requiring
dual currency processes for our operations. We have identified issues involved
and are developing and implementing solutions. The cost of this effort is not
expected to have a material effect on our business or results of operations. We
cannot assure to you, however, that all problems will be foreseen and corrected
or that no material disruption of our business will occur.
CHANGES IN INTERNATIONAL TRADE AND ECONOMIC CONDITIONS COULD AFFECT OUR
BUSINESS. We have substantial business activities in Europe and the Pan-Asia
region. Both manufacturing and sales of our products may be adversely impacted
by changes in political and economic conditions abroad. A change in the current
tariff structures, export compliance laws or other trade policies, in either the
United States or foreign countries could adversely impact our ability to
manufacture or sell in foreign markets.
The economic crisis in Asia has affected business conditions and pricing in
the region. We subcontract test and assembly functions to subcontractors in
Asia. A significant reduction in the number or capacity of qualified
subcontractors or a substantial increase in pricing could cause longer lead
times, delays in the delivery of customer orders or increased costs. Such
conditions could have an adverse impact on our operating results. Additionally,
our customers sell products, especially consumer products, into the Pan-Asia
region. A significant decrease in sales to end-users and consumers in the area
could result in a decline in orders and have an impact on our operating results
and financial condition.
OUR MARKETING STRATEGY CREATES RISKS ASSOCIATED WITH CUSTOMER
CONCENTRATION. We expect that we will become increasingly dependent on a limited
number of customers for a substantial portion of our net revenues as a result of
our strategy to direct our marketing and selling efforts toward selected
customers. During 1998, Sony Corporation accounted for 12% of net revenues.
Our operating results and financial condition could be affected if:
- We do not win new product designs from major customers;
- Major customers cancel their business with us;
- Major customers make significant changes in scheduled deliveries; or
- Prices of products that we sell to these customers are decreased.
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<PAGE> 16
OUR BUSINESS AS A HIGH TECHNOLOGY COMPANY PRESENTS RISKS OF INTELLECTUAL
PROPERTY OBSOLESCENCE, INFRINGEMENT AND LITIGATION. Our success is dependent in
part on our technology and other proprietary rights, and we believe that there
is value in the protection afforded by our patents, patent applications and
trademarks. However, the semiconductor industry is characterized by rapidly
changing technology, and our future success depends primarily on the technical
competence and creative skills of our personnel, rather than on patent and
trademark protection.
As is typical in the semiconductor industry, from time to time we have
received communications from other parties asserting that they possess patent
rights, mask work rights, copyrights, trademark rights or other intellectual
property rights which cover certain of our products, processes, technologies or
information. We are evaluating several such assertions. We are considering
whether to seek licenses with respect to certain of these claims. Based on
industry practice, we believe that licenses or other rights, if necessary, could
be obtained on commercially reasonable terms for existing or future claims.
Nevertheless, we cannot assure you that licenses can be obtained, or if obtained
will be on acceptable terms or that litigation or other administrative
proceedings will not occur. Litigation of such claims or the inability to obtain
certain licenses or other rights or to obtain such licenses or rights on
favorable terms could have an impact on our operating results and financial
condition.
OUR MARKETS ARE SUBJECT TO CYCLICAL FLUCTUATIONS. We may experience
period-to-period fluctuations or a decline as a result of the following:
- Rapid technological change, rapid product obsolescence, and price erosion
in our products;
- Fluctuations in supply and demand in the semiconductor or storage markets
for our products;
- Maturing product cycles in our products or products produced by our
customers; and
- Fluctuations or declines in general economic conditions, which often
produce abrupt fluctuations or declines in our products or the products
or services offered by our suppliers and customers.
Significant industry-wide fluctuations or a downturn as a result of these
factors could affect our operating results and financial condition.
The semiconductor industry also has experienced periods of rapid expansion
of production capacity. Even if our customers' demand were not to decline, the
availability of additional excess production capacity in our industry creates
competitive pressure that can degrade pricing levels, which can also depress our
revenues. Also, during such periods, customers who benefit from shorter lead
times may delay some purchases into future periods, which could affect our
demand and revenues for the short term. We cannot assure you that we will not
experience such downturns or fluctuations in the future, which could affect our
operating results and financial condition.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS AND INVESTMENT ALLIANCES. We
intend to continue to make investments in companies, products and technologies,
either through acquisitions or investment alliances. Acquisitions and investment
activities often involve risks, including:
- We may experience difficulty in assimilating the acquired operations and
employees;
- We may be unable to retain the key employees of the acquired operation;
- The acquisition or investment may disrupt our ongoing business;
- We may not be able to incorporate successfully the acquired technology
and operations into our business and maintain uniform standards,
controls, policies and procedures; and
- We may lack the experience to enter into new markets, products or
technologies.
Some of these factors are beyond our control. Failure to manage growth
effectively and to integrate acquisitions would affect our operating results or
financial condition.
WE DEPEND ON KEY EMPLOYEES AND FACE COMPETITION IN HIRING AND RETAINING
QUALIFIED EMPLOYEES. Our employees are vital to our success, and our key
management, engineering and other employees are difficult to
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<PAGE> 17
replace. We generally do not have employment contracts with our key employees.
Further, we do not maintain key person life insurance on any of our employees.
The expansion of high technology companies in Silicon Valley and Colorado has
increased demand and competition for qualified personnel. We may not be able to
attract, assimilate or retain additional highly qualified employees in the
future. These factors could affect our business, financial condition and results
of operations.
WE FACE RISKS FROM THE YEAR 2000 ISSUE. 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.
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
resulting in the interruption of the business operations which they control.
This could adversely affect our ability to process orders, forecast production
requirements or issue invoices. A significant failure of the computer integrated
manufacturing systems, which monitor and control factory equipment, would
disrupt manufacturing operations and cause a delay in completion and shipping of
products. Moreover, if our critical suppliers' or customers' systems or products
fail because of a Year 2000 malfunction, it could impact our operating results.
Finally, our own products could malfunction as a result of a failure in date
recognition, giving rise to the possibility of warranty claims and litigation.
Based on currently available information, our management does not believe
that the Year 2000 issues discussed above, related to internal systems or
products sold to customers, will have a material 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. A significant disruption of
our financial management and control systems or a lengthy interruption in our
manufacturing operations caused by a Year 2000 related issue could result in a
material adverse impact on our operating results and financial condition. In
addition, it is possible that a supplier's failure to ensure Year 2000
capability or our customer's concerns about Year 2000 readiness of our products
would have a material adverse effect on our results of operations.
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<PAGE> 18
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our principal
facilities.
PRINCIPAL LOCATIONS
<TABLE>
<CAPTION>
NO. OF LEASED/ TOTAL
BUILDINGS LOCATION OWNED SQ. FT. USE
- --------- -------- ------- ------- ---
<C> <S> <C> <C> <C>
7 Milpitas, CA Leased 609,410 Executive Offices,
Administration, Engineering
1 Fremont, CA Leased 74,000 Manufacturing
1 Fremont, CA Owned 65,000 Manufacturing
2 Santa Clara, CA Leased 83,290 Research and Development
1 Fremont, CA Leased 39,246 Logistics
3 Gresham, OR Owned 532,400 Executive Offices, Engineering,
Manufacturing
1 Bracknell, United Kingdom Leased 70,000 Executive Offices, Design
Center, Sales
1 Tokyo, Japan Leased 24,263 Executive Offices, Design
Center, Sales
7 Tsukuba, Japan Owned 334,541 Executive Offices, Manufacturing
1 Etobicoke, Canada Leased 14,005 Design Center, Sales
1 Tsuen Wan, Hong Kong Owned 26,000 Manufacturing Control, Assembly
& Test
3 Colorado Springs, CO Owned 449,000 Executive Offices,
Manufacturing,
2 Fort Collins, CO Owned 270,000 Executive Offices,
Manufacturing,
1 Witchita, KS Owned 332,000 Executive Offices,
Manufacturing,
</TABLE>
In addition, we maintain leased regional office space for our field sales,
marketing and design center offices at locations in North America, Europe, Japan
and elsewhere in Pan-Asia. In addition, we maintain design centers at various
distributor locations.
Leased facilities described above are subject to operating leases which
expire in 1999 through 2022. (See Note 12 of Notes to Consolidated Financial
Statements.)
Although we have plans to acquire additional equipment, we believe that our
existing facilities and equipment are well maintained, in good operating
condition and are adequate to meet our current requirements.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1995, the remaining shares of our Canadian
subsidiary, LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were
previously owned by other parties were acquired by another one of our subsidiary
companies. At that time former shareholders of LSI Canada representing
approximately 800,000 shares or about 3% (which is now approximately 620,000
shares) of the previously outstanding shares, exercised dissent and appraisal
rights as provided by Canadian law. By so doing, these parties notified LSI
Canada of their disagreement with the per share value in Canadian dollars
($4.00) that was paid to the other former shareholders. In order to resolve this
matter, a petition was filed by LSI Canada in late 1995 in the Court of Queen's
Bench of Alberta, Judicial District of Calgary (the "Court") and has been
pending since that time. The trial of that case was to occur in late 1998. Prior
to the scheduled commencement of the trial, some of the parties who represent
approximately 410,000 shares retained a new attorney. Their new attorney is now
attempting to set aside the action based on the petition filed by LSI Canada and
commence a new action, which we understand will be based on a different legal
theory. Until their request is heard and resolved by the Court, a new trial date
for the pending matter is not expected to be set. They have also notified us
that they intend to bring a new action alleging that other conduct by LSI Logic
Corporation was oppressive of the rights of minority shareholders in LSI Canada,
for which they will seek
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<PAGE> 19
damages. While we cannot give any assurances regarding the resolution of these
matters, we believe that the final outcome will not have a material adverse
effect on our consolidated results of operations or financial condition. Also,
during 1998, a claim that was brought in 1994 by another former shareholder of
LSI Canada against LSI Logic Corporation in the Court of Chancery of the State
of Delaware in and for the New Castle County was dismissed. That dismissal was
upheld on appeal to the Delaware Supreme Court.
We have learned that a lawsuit alleging patent infringement has been filed
in the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against
eighty-eight electronics industry companies, including us. Although we have
learned that we are one of the named defendants, we have not yet been served
with the complaint. We understand that the patents involved in this lawsuit
generally relate to semiconductor manufacturing and computer imaging, including
the use of bar coding for automatic identification of articles. While we cannot
make any assurances regarding the eventual resolution of this matter, we do not
believe it will have a material adverse effect on our consolidated results of
operations or financial conditions
We are a party to other litigation matters and claims which are normal in
the course of our operations, and while the results of such litigation and
claims cannot be predicted with certainty, we believe that the final outcome of
such matters will not have a materially adverse effect on our consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our stock trades on the New York Stock Exchange under the symbol "LSI." The
high and low sales prices for the stock for each full quarterly period within
the two most recent fiscal years as reported on the Exchange are:
STOCK PRICE RANGE
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter......................... $19.31 - 27.50 $25.88 - 38.25
Second Quarter........................ $20.75 - 29.38 $32.00 - 46.88
Third Quarter......................... $11.50 - 25.13 $28.38 - 36.75
Fourth Quarter........................ $10.50 - 20.50 $18.63 - 32.69
------------------- -------------------
Year.................................. $10.50 - 29.38 $18.63 - 46.88
=================== ===================
</TABLE>
At February 12, 1999, there were approximately 3,631 owners of record of
our common stock.
We have never paid cash dividends on our common stock. It is presently our
policy to reinvest our earnings internally, and we do not anticipate paying any
dividends to stockholders in the foreseeable future. In addition, pursuant to
the Amended and Restated Credit Agreement dated as of September 22, 1998, by and
among us, LSI Logic Japan Semiconductor, Inc., and ABN AMRO Bank N.V., we are
prohibited from declaring or paying dividends.
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<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31ST
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $1,490,701 $1,290,275 $1,238,694 $1,267,657 $ 901,830
---------- ---------- ---------- ---------- ----------
Costs and expenses
Cost of revenues............................. 867,278 675,153 695,002 665,673 520,150
Research and development..................... 286,041 226,219 184,452 123,892 98,978
Selling, general and administrative.......... 219,566 190,680 166,823 159,393 124,936
Acquired in-process research and
development................................ 145,500 2,850 -- -- --
Restructuring of operations and other
non-recurring charges...................... 75,400 -- -- -- --
Amortization of intangibles.................. 22,369 4,472 3,869 2,296 1,022
---------- ---------- ---------- ---------- ----------
Total costs and expenses.............. 1,616,154 1,099,374 1,050,146 951,254 745,086
---------- ---------- ---------- ---------- ----------
(Loss)/income from operations.................. (125,453) 190,901 188,548 316,403 156,744
Interest expense............................... (8,477) (1,497) (13,610) (16,349) (18,455)
Interest income and other...................... 10,282 34,759 30,177 34,889 17,880
---------- ---------- ---------- ---------- ----------
(Loss)/income before income taxes, minority
interest and cumulative effect of change in
accounting principle......................... (123,648) 224,163 205,115 334,943 156,169
Provision for income taxes..................... 7,916 62,748 57,432 93,781 43,679
---------- ---------- ---------- ---------- ----------
(Loss)/income before minority interest and
cumulative effect of change in accounting
principle.................................... (131,564) 161,415 147,683 241,162 112,490
Minority interest in net income of
subsidiaries................................. 68 727 499 3,042 3,747
---------- ---------- ---------- ---------- ----------
(Loss)/income before cumulative effect of
change in accounting principle............... (131,632) 160,688 147,184 238,120 108,743
Cumulative effect of change in accounting
principle.................................... -- (1,440) -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss)/income.............................. $ (131,632) $ 159,248 $ 147,184 $ 238,120 $ 108,743
========== ========== ========== ========== ==========
Basic earnings per share:
(Loss)/income before cumulative effect of
change in accounting principle............. $ (0.93) $ 1.16 $ 1.14 $ 1.92 $ 1.02
Cumulative effect of change in accounting
principle.................................. -- (0.01) -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss)/income............................ $ (0.93) $ 1.15 $ 1.14 $ 1.92 $ 1.02
========== ========== ========== ========== ==========
Diluted earnings per share:
(Loss)/income before cumulative effect of
change in accounting principle............. $ (0.93) $ 1.12 $ 1.07 $ 1.75 $ 0.93
Cumulative effect of change in accounting
principle.................................. -- (0.01) -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss)/ income........................... $ (0.93) $ 1.11 $ 1.07 $ 1.75 $ 0.93
========== ========== ========== ========== ==========
Year-end status:
Total assets................................. $2,799,997 $2,126,912 $1,952,714 $1,849,587 $1,270,374
Long-term debt............................... $ 555,654 $ 67,300 $ 258,274 $ 199,543 $ 262,730
Stockholders' equity......................... $1,510,135 $1,565,973 $1,316,219 $1,216,246 $ 544,906
---------- ---------- ---------- ---------- ----------
</TABLE>
The Company's fiscal years ended on December 31 in 1998 and 1997, and the
Sunday closest to December 31 in 1996, 1995 and 1994. For presentation purposes,
the Consolidated Financial Statements refer to December 31 as year end. The
Company reported a charge for restructuring of $75.4 million in the third
quarter of 1998 (See Note 3 of the Notes) and a charge for in-process technology
of $145.5 million related to the acquisition of Symbios on August 6, 1998. (See
Note 2 of the Notes.)
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<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
Revenues for LSI Logic increased 15.5% to $1.49 billion in 1998 from $1.29
billion in 1997. The increase is primarily attributable to revenues generated as
a result of our purchase of Symbios, Inc. ("Symbios") from Hyundai Electronics
America ("HEA") on August 6, 1998. We recorded a loss from operations of $125.5
million for 1998 compared to income from operations of $190.9 million in 1997.
The loss from operations in 1998 is primarily a result of a restructuring charge
of $75.4 million in the third quarter of 1998, a $145.5 million charge for
acquired in-process research and development and an additional $16.8 million of
goodwill amortization stemming from the acquisition of Symbios. The charges
stemming from restructuring actions, the in-process research and development and
goodwill amortization are discussed further below and in Notes 2 and 3 of Notes
to the Consolidated Financial Statements (referred to hereafter as "Notes"). The
net loss for the year ended December 31, 1998 was $131.6 million or $0.93 loss
per diluted share compared to net income for the same period in 1997 of $159.2
million or $1.11 income per diluted share.
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 the remainder of this
Annual Report on Form 10-K.
In 1998 and 1997, our fiscal year ended December 31. Fiscal years 1998 and
1996 were 52-week years, and fiscal year 1997 was a 53-week year. In 1996, the
fiscal year ended on the Sunday closest to December 31. For presentation
purposes, the consolidated financial statements and notes refer to December 31
as year end for all those years.
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 this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
REVENUE. In 1998, we adopted Statement of Accounting Standards ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information." We
concluded that we operate in two reportable segments: the Semiconductor segment
and the Storage Systems segment. In the Semiconductor segment, we design,
develop, manufacture and market 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. Our customers use these services in the design of increasingly
advanced integrated circuits characterized by higher levels of functionality and
performance. The proportion of revenues from ASIC design and related services
compared to semiconductor product sales varies among customers depending upon
their specific requirements. In the Storage Systems segment, we design,
manufacture, market and support high performance data storage management and
storage systems solutions, including host adapter boards ("HAB") and a complete
line of Redundant Array of
21
<PAGE> 22
Independent Disks ("RAID") storage systems, subsystems and related software. The
following table describes revenues from the Semiconductor and Storage Systems
segments as a percentage of total consolidated revenues:
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS: 1998 1997 1996
-------------------- ---- ---- ----
<S> <C> <C> <C>
Semiconductor............................................... 94% 100% 100%
Storage Systems............................................. 6% -- --
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
The Storage Systems segment was added in 1998 with the purchase of Symbios
(See Note 2 of the Notes), and therefore financial data are not available for
comparative purposes in prior years. In addition, the segment does not meet the
quantitative thresholds of a reportable segment as defined in SFAS No. 131, and
accordingly, separate financial information related to the segment has been
excluded for the fiscal year 1998.
Total revenues increased 15.5% to $1.49 billion in 1998 from $1.29 billion
in 1997. This increase is primarily a result of additional revenues from Symbios
after August 6, 1998, and increased demand for our component products used in
communications and networking applications. The increase was offset in part by
decreased demand for our component products used in computer product
applications and lower average selling prices when expressed in dollars for
component products used in computer and consumer product applications. Design
and service revenues remained relatively consistent as compared to 1997 at 5% of
total Semiconductor segment revenues. In 1997, all revenues were from the
Semiconductor segment. During 1998, one customer represented 12% of our
consolidated revenues.
Total revenues increased to $1.29 billion in 1997 from $1.24 billion in
1996. The increase in revenues during 1997 primarily reflected an increase in
demand for our component products used in consumer and communication
applications. The increase was offset in part by declines in demand for our
component products used in computer applications and by lower average selling
prices during 1997 as compared to 1996 when expressed in dollars. Design and
service revenues remained relatively consistent as compared to 1996 at 6% of
total revenues. One customer represented 22% in 1997 and 14% in 1996 of the
Company's consolidated revenues.
OPERATING COSTS AND EXPENSES. Key elements of the consolidated statements
of operations, expressed as a percentage of revenues, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Gross profit margin......................................... 42 % 48% 44%
Research and development expense............................ 19 % 18% 15%
Selling, general and administrative expense................. 15 % 15% 13%
(Loss)/income from operations............................... (8)% 15% 15%
</TABLE>
GROSS MARGIN. Gross margin percentage for 1998 decreased to 42% from 48% in
1997. The decrease reflects a combination of the following elements:
- Non-recurring inventory charges;
- Changes in product mix related to Symbios product additions from August
6, 1998;
- Lower average selling prices, including the impact from currency
fluctuations; and
- Increased cost of sales from commencing operations at our new fabrication
facility in Gresham, Oregon in December of 1998.
The gross margin percentage for 1997 increased to 48% of revenues, compared
with 44% in 1996. The increase was primarily related to increased manufacturing
yields largely attributable to the installation of chemical mechanical polishing
equipment during the fourth quarter of 1996 and to an improvement in capacity
utilization during 1997 as compared to 1996. The increase was partially offset
by lower average selling prices.
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<PAGE> 23
Our operating environment, combined with the resources required to operate
in the semiconductor industry, requires that we manage a variety of factors.
These factors include, among other things:
- Product mix;
- Factory capacity and utilization;
- Manufacturing yields;
- Availability of certain raw materials;
- Terms negotiated with third-party subcontractors; and
- Foreign currency fluctuations.
These and other factors could have a significant effect on our gross 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 weakened (the average yen
exchange rate for 1998 decreased 9.9% from 1997), the effect on gross margin and
net income was not significant because yen denominated sales offset a
substantial portion of yen denominated costs during those periods. Moreover, we
hedged a portion of our remaining yen exposure. (See Note 6 of the Notes.)
Future changes in the relative strength of the yen or mix of foreign denominated
revenues and costs could have a significant effect on gross margins or operating
results.
RESEARCH AND DEVELOPMENT. Total research and development ("R&D") increased
26.4% or $59.8 million to $286.0 million during 1998 as compared to 1997. The
increase is attributable to the following:
- Research and development expenditures for Symbios included in our
consolidated financial statements since August 6, 1998;
- Expenditures related to the continued development of advanced sub-micron
products and process technologies; and
- Upgrade from 6 inch to 8 inch wafer fabrication capability at our Santa
Clara, California research and development facility.
As a percentage of revenues, R&D expenses were 19% in 1998, 18% in 1997,
and 15% in 1996. Total R&D expenses increased from previous years' R&D spending
by $42 million to $226.2 million in 1997 and by $61 million to $184.5 million in
1996. The increase in 1997 as compared to 1996 was primarily attributed to
increased compensation and staffing levels and expansions of our product
development centers as we continued to develop higher technology sub-micron
products and the related manufacturing, packaging and design processes. As we
continue our commitment to technological leadership in our markets and realize
the benefit of cost savings from our restructuring programs in the third quarter
of 1998, we are targeting our research and development investment in the second
half of 1999 to be approximately 13% to 15% of revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A") increased $28.9 million during 1998 as compared to 1997. The
increase is primarily attributable to SG&A expenses from Symbios since August 6,
1998. SG&A expenses as a percentage of revenue were 15% in 1998 and 1997 and 13%
in 1996.
SG&A expenses increased $24 million in 1997 and $7 million in 1996 from
previous years' SG&A spending. The increases during 1997 and 1996 are primarily
attributable to increased information technology costs related to upgrading our
business systems and infrastructure. We are targeting SG&A expenses to decline
in 1999 to 13% of revenues as the benefit of cost savings are realized during
1999 from the restructuring programs established in the third quarter of 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT. We reduced our estimate of the amount
allocated to in-process research and development("IPR&D") by $79.3 million from
the $224.8 million amount previously reported in the third quarter of 1998 to
$145.5 million for the year ended December 31, 1998. Amortization of intangibles
increased by $4.3 million from $18.1 million to $22.4 million for the year ended
December 31, 1998. The basic
23
<PAGE> 24
loss per share and loss per share assuming dilution decreased from $1.47 to
$0.93 for the year ending December 31, 1998.
We allocated amounts to IPR&D and intangible assets in the third quarter of
1998 in a manner consistent with widely recognized appraisal practices and in
consultation with our independent accountants PricewaterhouseCoopers LLP at the
date of acquisition of Symbios. Subsequent to the acquisition, the SEC staff
expressed views that took issue with certain appraisal practices generally
employed in determining the fair value of the IPR&D that was the basis for our
measurement of our IPR&D charge. The charge of $224.8 million, as first we
reported, was based upon the work of an independent valuation firm that had
utilized the methodologies the SEC has since announced it does not consider
appropriate.
As a result of computing IPR&D using the SEC preferred methodology, we, in
consultation with our independent accountants, decided to revise the amount
originally allocated to IPR&D. We have revised earnings for 1998 and will amend
our Report on Form 10-Q and Report on Form 8-K/A previously filed with the SEC.
The revised quarterly results for the third and fourth quarters of 1998 are
included in this Report under Part II, Item 8 "Financial Statements and
Supplementary Data."
The value assigned to IPR&D was determined by identifying research projects
in areas for which technological feasibility had not been established. These
include semiconductor projects of $94.6 million and storage systems projects of
$50.9 million. The value was determined by estimating the expected cash flows
from the projects once commercially viable, discounting the net cash flows back
to their present value and then applying a percentage of completion to the
calculated value as defined below.
Net cash flows. The net cash flows from the identified projects are based
on our estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, and income taxes from those projects.
These estimates are based on the assumptions mentioned below. The research and
development costs included in the model reflect costs to sustain projects, but
exclude costs to bring in-process projects to technological feasibility.
The estimated revenues are based on management projections of each
in-process project for semiconductor and storage systems products, and the
aggregated business projections were compared and found to be in line with
industry analysts' forecasts of growth in substantially all of the relevant
markets. Estimated total revenues from the IPR&D product areas are expected to
peak in the year 2001 and decline from 2002 to 2005 as other new products are
expected to become available. These projections are based on our estimates of
market size and growth, expected trends in technology, and the nature and
expected timing of new product introductions by us and our competitors.
Projected gross margins approximate Symbios' recent historical performance
and are in line with industry margins in the semiconductor and storage systems
industry sectors. The estimated selling, general and administrative costs are
consistent with Symbios' historical cost structure which is in line with
industry averages at approximately 15% of revenues. Research and development
costs are consistent with Symbios' historical cost structure.
Royalty rate. The Company applied a royalty charge of 25% of operating
income for each in-process project to attribute value for dependency on
predecessor core technologies.
Discount rate. Discounting the net cash flows back to their present value
is based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 15% for semiconductors and 16% for storage systems. The
discount rate used in discounting the net cash flows from IPR&D is 20% for
semiconductor and 21% for storage systems, a 500 basis point increase from the
respective industry WACCs. This discount rate is higher than the industry WACC
due to inherent uncertainties surrounding the successful development of the
IPR&D, market acceptance of the technology, the useful life of such technology,
the profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above.
Percentage of completion. The percentage of completion for each project was
determined using milestones representing management's estimate of effort, value
added, and degree of difficulty of the portion of
24
<PAGE> 25
each project completed as of August 6, 1998, as compared to the remaining
research and development to be completed to bring each project to technical
feasibility. The development process is grouped into three phases with each
phase containing between one and five milestones. The three phases are:
- Researching the market requirements and the engineering architecture and
feasibility studies;
- Design and verification milestones; and
- Prototyping and testing the product (both internal and customer testing).
Each of these phases has been subdivided into milestones, and then the
status of each of the projects was evaluated as of August 6, 1998. The
percentage of completion varied by individual project ranging from 15% to 90%
for semiconductors and from 5% to 85% for storage systems.
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. Our management and advisers believe that the restated IPR&D charge of
$145.5 million is valued consistently with the SEC staff's current views
regarding valuation methodologies. There can be no assurances, however, that the
SEC staff will not take issue with any assumptions used in the Company's
valuation model and require the Company to further revise the amount allocated
to IPR&D.
In July 1997, we acquired all issued and outstanding shares of the common
stock of Mint Technology, Inc. ("Mint") for $9.5 million in cash and options to
purchase approximately 681,726 shares of common stock with an intrinsic value of
$11.3 million. The acquisition was accounted for as a purchase. (See Note 8 of
the Notes.) Approximately $2.9 million of the purchase price was allocated to
IPR&D and was expensed in the third quarter of 1997.
INTEREST EXPENSE. Interest expense increased to $8.5 million in 1998 from
$1.5 million in 1997. The increase is primarily attributable to interest expense
on the new debt facility with a bank which we entered into to fund the purchase
of Symbios. (See Notes 2 and 4 of the Notes.) It was offset in part by the
capitalization of interest as part of the construction at our new manufacturing
facility in Gresham, Oregon. Interest expense was $1.5 million in 1997 compared
to $13.6 million in 1996. The decrease resulted from the conversion of all of
our $144 million, 5 1/2% Convertible Subordinated Notes to common stock on March
24, 1997 (See Note 4 of the Notes) and the capitalization of interest as part of
the construction of the Gresham facility.
INTEREST INCOME AND OTHER. Interest income and other decreased $ 24.6
million to $10.2 million in 1998 from $34.8 million in 1997. The decrease is
primarily attributable to the combination of a reduction of $18 million in
interest income generated from our lower average balances of cash, cash
equivalents and short-term investments during 1998 and lower interest rates in
1998 as compared to 1997. The lower average balances of cash, cash equivalents
and short term investments resulted primarily from cash outlays associated with
the purchase of Symbios and purchases of property and equipment for the new
fabrication facility in Gresham, Oregon. Additionally, we charged to other
expense the following:
- $8.1 million of surplus fixed assets; and
- $14.3 million of our equity investment in two non-public technology
companies with impairment indicators considered to be other than
temporary. (See Note 1 of the Notes);
The decrease in interest income and other is offset in part by a $16.7
million gain on sale of a long-term investment in a non-public technology
company and a $3.1 million gain on the sale of a building owned by a European
affiliate.
Interest and other income increased $4.6 million in 1997 compared to 1996.
The increase was primarily attributable to a decrease in foreign exchange losses
from $6.9 million in 1996 to $1.6 million in 1997, which related primarily to a
reduced foreign exchange exposure at our European sales affiliate. In addition,
we received other income from insurance settlement proceeds, the disposal of
land owned by a European affiliate and other miscellaneous gains. These gains
were offset in part by losses on the final sale of equipment from the Company's
Milpitas wafer manufacturing facility. (See Note 7 of the Notes.)
25
<PAGE> 26
PROVISION FOR INCOME TAXES. In 1998, we recorded a provision for income
taxes with an effective tax rate of 6%. The tax rate in 1998 was impacted by the
write-offs relating to IPR&D 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%. The rates in 1997 and 1996
were 28%. The tax rate in the years presented was 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.
MINORITY INTEREST. There was a 91% decrease in minority interest in net
income of subsidiaries in 1998 attributable to the purchase of minority interest
shares of the Company's Japanese affiliate LSI Logic K.K. The changes in
minority interest in 1998 and 1997 were attributable to the composition of
earnings and losses among certain of our international affiliates for each of
the respective years. The changes in minority interest in 1996 was primarily
attributable to the purchase in that year of minority held shares of LSI Logic
Japan Semiconductor, Inc. ("JSI"), formerly known as Nihon Semiconductor, Inc.,
and LSI Logic Europe, Ltd. (formerly known as LSI Logic Europe, plc). (See Note
8 of the Notes.)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. On November 21, 1997,
the Emerging Issues Task Force ("EITF") issued EITF 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project that
Combines Business Process Re-engineering and Information Technology
Transformation." EITF 97-13 required that we expense, in the fourth quarter of
1997, all costs previously capitalized in connection with business process
re-engineering activities as defined by the statement. Accordingly, we recorded
a charge of $1.4 million, net of related tax of $0.6 million, during the fourth
quarter of 1997. (See Note 1 of the Notes.)
RESTRUCTURING. We remain committed to improving profitability and
strengthening competitiveness. 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 integration costs relating to
Symbios. As discussed in Note 2 of the Notes, such costs relating to Symbios
were accrued as a liability assumed in the purchase in accordance with EITF
95-3.
Restructuring costs include the following elements:
- $37.2 million related primarily to fixed assets impaired as a result of
the decision to close a manufacturing facility in Tsukuba, Japan;
- $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
- $16.3 million in work force reduction costs.
The workforce reduction costs primarily include severance costs related to
involuntary reduction of approximately 900 jobs from manufacturing in Japan, and
engineering, sales, marketing and finance personnel located primarily in the
U.S., Japan and Europe. The fair value of assets determined to be impaired in
accordance with the guidance on assets to be held and used in SFAS No. 121,
"Accounting for the
26
<PAGE> 27
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 exit costs noted above 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 completed by September 30, 1999, one year from the date
the reserve was taken.
The following table sets forth our 1998 restructuring reserves as of
September 30, 1998, and activity against the reserve for the three month period
ending December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,
RESTRUCTURING TRANSLATION 1998
EXPENSE UTILIZED ADJUSTMENT BALANCE
------------------ -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-down of manufacturing facility(a)...... $37,200 $(35,700) $ -- $ 1,500
Other fixed asset related charges(a)......... 13,100 (13,100) --
Payments to employees for severance(b)....... 16,300 (4,700) 11,600
Lease terminations and maintenance
contracts(c)............................... 4,700 (100) 4,600
Noncancelable purchase commitments (c)....... 1,700 (100) 1,600
Other exit costs............................. 2,400 2,400
Cumulative currency translation
adjustment(a).............................. 1,512 1,512
------- -------- ------ -------
Total.............................. $75,400 $(53,700) $1,512 $23,212
======= ======== ====== =======
</TABLE>
- ---------------
(a) Amounts utilized represent non-cash charges.
(b) Amounts utilized represent cash payments related to the severance of
approximately 290 employees.
(c) Amounts utilized represent cash charges.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
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;
- 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
27
<PAGE> 28
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 in
1998, there were no forward exchange, currency swap or interest rate swap
contracts outstanding as of December 31, 1998 and 1997. (See Note 6 of the
Notes.) 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.
YEAR 2000 DISCLOSURE
The following statement is a Year 2000 Readiness Disclosure under the Year
2000 Information and Readiness Disclosure Act of 1998.
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 the Company's 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 the Company's 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 approximately 85% complete. Based
on information currently available, we believe
28
<PAGE> 29
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 into 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 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 immaterial. 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 $8 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 $4 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
29
<PAGE> 30
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 the Company, 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.
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments decreased by $209.6
million in 1998 to $281.3 million from $490.9 million in 1997. The decrease is
primarily attributable to a combination of the following elements:
- Cash outlays associated with the purchase of Symbios;
- Purchase of property and equipment for our new Gresham facility;
- Decrease in cash provided by operating activities; and
- Cash used to repay debt obligations.
The decrease was offset in part by the gain on the sale of an investment in
a non-public technology company and proceeds received from employee stock
transactions.
Cash, cash equivalents and short-term investments decreased by $226.4
million in 1997 to $490.9 million from $717.3 million in 1996. The decrease was
primarily attributable to capital additions, increases in the repayment of debt
obligations (net of borrowings), and repurchases of our common stock. It was
offset in part by an increase in cash from operations and proceeds received from
employee stock transactions.
Working capital decreased by $205.5 million to $226.7 million in 1998 from
$432.2 million in 1997. The decrease primarily reflects the combined effect of
the following elements:
- Lower cash balances resulting from the acquisition of Symbios;
- Higher accrued salaries, wages and benefits and other accrued
liabilities; and
- Higher current liabilities as a result of the short-term portion of the
new debt facility entered into to help fund the Symbios purchase. (See
Note 4 of the Notes.)
The decrease in working capital was offset in part by increased
inventories, accounts receivable, prepaids and other current assets related to
the addition of Symbios balances as of August 6, 1998, and by lower trade
accounts payable as compared to 1997.
30
<PAGE> 31
During 1998, the Company generated $229.2 million in cash and cash
equivalents from operating activities compared to $399.4 million in 1997. The
decrease in cash generated was primarily attributable to the following elements:
- Lower net income (before depreciation and amortization, the in-process
research and development charge, the non-cash restructuring charge, and
the gain on sale of stock investment); and
- Increases in prepaids and other assets and a decrease in accounts
payable.
The decrease was offset in part by a decrease in accounts receivable
(excluding the Symbios opening balance) and increases in accrued and other
liabilities.
The increase in prepaids and other assets is primarily an increase in the
premium paid on option contracts (See Note 6 of the Notes) and increases in
non-current deferred tax assets.
The decrease in accounts payable relates to the following elements:
- Timing of invoice receipt and payment in the fourth quarter of 1998 as
compared to the same period in 1997; and
- Fewer purchases of property and equipment in the second half of 1998 as
compared to 1997 as the new fabrication facility in Gresham, Oregon
neared completion.
The increase in accrued and other liabilities relates primarily to the
restructuring reserve established in the third quarter of 1998 (See Note 3 of
the Notes) and an increase in non-current deferred tax liabilities.
Cash and cash equivalents generated from operating activities in 1997 was
$399.4 million compared to $351.9 million in 1996. The increase was primarily
attributable to increases in accounts payable and net income before depreciation
and amortization, partially offset by increases in inventories, prepaids and
other assets and accounts receivable. Increased sales and manufacturing
activities in response to higher customer demand contributed to increases in
accounts receivable, accounts payable and inventories.
Cash and cash equivalents used in investing activities was $781.1 million
in 1998. The primary investing activities during 1998 included the following:
- Acquisition of Symbios (See Note 2 of the Notes);
- Purchase of property and equipment for the Gresham facility;
- Purchases and sales of debt and equity securities available-for-sale;
- Additional investments in non-marketable shares of other technology
companies; and
- Acquisition of stock from minority interest holders. (See Note 8 of the
Notes.)
Cash inflows from investing activities included the proceeds of the sale of
shares in a technology company during the fourth quarter of 1998.
Cash and cash equivalents used in investing activities were $345.9 million
during 1997 compared to $433.5 million in 1996. The primary investing activities
during 1997, other than short-term investment in available-for-sale debt and
equity securities, included purchases of property and equipment, the acquisition
of Mint and additional investment in non-marketable shares of other technology
companies.
We believe that maintaining technological leadership in the highly
competitive worldwide semiconductor industry requires substantial ongoing
investment in advanced manufacturing capacity. Capital additions were $329.1
million in 1998 and $513.3 million in 1997, net of retirements and refinancings.
The additions were primarily for property and equipment related to construction
of the new wafer fabrication facility in Gresham. Since the construction of the
initial phase of the new facility reached completion in the fourth quarter of
1998, we expect to maintain the level of capital expenditures below $200 million
in 1999.
Cash and cash equivalents provided by financing activities during 1998
totaled $640.1 million compared to $91.0 million used in financing activities in
1997. The increase in cash provided by financing activities in
31
<PAGE> 32
1998 relates primarily to $725 million in proceeds from the new debt facility
entered into to help fund the purchase of Symbios (See Note 4 of the Notes) and
$21 million in proceeds from the sale of common stock issued pursuant to our
employee stock purchase and stock option plans. The increase to cash from
financing activities was offset by the repayment of $100 million in borrowings
and the repurchase of shares of our common stock during 1998 for approximately
$6 million. (See Note 9 of the Notes.)
Cash and cash equivalents used in financing activities during 1997 amounted
to $91.0 million. This included repayment of debt obligations totaling $55
million (net of borrowings) and $60 million used to repurchase shares of our
common stock. This total was partially offset by proceeds received from employee
stock transactions of $24 million. (See Note 9 of the Notes.) In February 1997,
we called for redemption of our $144 million, 5 1/2% Convertible Subordinated
Notes. The holders of these instruments elected to convert them to common stock
at a conversion price of $12.25 per share. The conversion resulted in the
issuance of 11.7 million shares of common stock. (See Note 4 of the Notes.)
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. 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 has a term of four years, with the principal to be 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$74 million
translated at December 31, 1998) bearing interest at adjustable rates.
Borrowings outstanding under the 364 day Facility and the Revolver including the
yen sub-facility were $740 million as of December 31, 1998. JSI also had
borrowings outstanding of approximately 85 million yen (US$0.7 million) at
December 31, 1998.
In accordance with the new credit arrangement, we must comply with certain
financial covenants related to profitability, tangible net worth, liquidity,
senior debt leverage, debt service coverage and subordinated indebtedness. At
December 31, 1998, we were in compliance with these covenants.
In December 1996, we entered into a credit arrangement with several banks
for a $300 million revolving line of credit expiring in December 1999. We
canceled that agreement on July 31, 1998.
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 foreseeable
future. We can provide no assurance, however, 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 released
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up
Activities." SOP No. 98-5 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. We will expense the unamortized
preproduction balance of $91.8 million, net of tax as
32
<PAGE> 33
of January 1, 1999 and present it as a cumulative effect of a change in
accounting principle in accordance with SOP No. 98-5.
In 1998, we adopted 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 our net income and our comprehensive income is
due to foreign currency translation adjustments. We are showing comprehensive
income in the Statement of Stockholders' Equity.
In 1998, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and replaces the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of a
company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of our operations or financial position or
the segments we reported in 1998. (See Note 11 of the Notes.)
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 our results of operations as most derivative instruments are closed on
the last day of each fiscal quarter, the impact of the adoption of SFAS No. 133
as of the effective date cannot be reasonably estimated at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have foreign subsidiaries which operate and sell our products in various
global markets. As a result, our cash flow and earnings are exposed to
fluctuations in interest rates and foreign currency exchange rates. We attempt
to limit these exposures through operational strategies and financial market
instruments. We use various hedge instruments, primarily forward contracts with
maturities of six months or less, currency swaps and currency option contracts,
to manage our exposure associated with intercompany and third-party transactions
and with net asset and liability positions denominated in nonfunctional
currencies. We also use interest rate swap contracts to manage our interest rate
risk on yen denominated debt obligations. There were no forward exchange,
currency swap or interest rate swap contracts outstanding as of December 31,
1998. (See Note 6 of the Notes.) We did not purchase or hold derivative
financial instruments for trading purposes as of December 31, 1998.
INTEREST RATE SENSITIVITY. We are subject to interest rate risk on our
investment portfolio and outstanding debt.
A 45 basis-point move in interest rates (10% of our weighted-average
worldwide interest rate in 1998) affecting our floating-rate financial
instruments as of December 31, 1998, including both debt obligations and
investments, would have an insignificant effect on our pretax earnings. In 1997,
a 57 basis point move in interest rates affecting our interest sensitive
investments would have had an insignificant effect on our financial position,
results of operations and cash flows.
We manage interest rate risk on U.S. dollar and yen based debt obligations
by entering into interest rate swap contracts from time to time. There were no
interest rate swap contracts outstanding at December 31,
33
<PAGE> 34
1998. (See Note 6 of the Notes.) In the event that interest rate swaps are
entered into, any fluctuations in the underlying interest rate have an equal and
opposite effect on the debt obligations and the interest rate swaps hedging the
obligations.
FOREIGN CURRENCY EXCHANGE RISK. Based on our overall currency rate exposure
at December 31, 1998, including derivative financial instruments and
nonfunctional currency denominated receivables and payables, a near-term 10%
appreciation or depreciation of the U.S. dollar would have an insignificant
effect on our financial position, results of operations and cash flows over the
next fiscal year. In 1997, a near-term 10% appreciation or depreciation of the
U.S. dollar was also determined to have an insignificant effect.
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C>
Cash and cash equivalents................................... $ 200,080 $ 104,571
Short-term investments...................................... 81,220 386,369
Accounts receivable, less allowance for doubtful accounts
of $3,424 and $2,597...................................... 245,538 210,141
Inventories................................................. 178,107 102,267
Deferred tax assets......................................... 62,699 39,005
Prepaid expenses and other current assets................... 51,859 28,108
---------- ----------
Total current assets.............................. 819,503 870,461
---------- ----------
Property and equipment, net................................. 1,480,113 1,123,909
Goodwill and other intangibles.............................. 332,779 20,852
Other assets................................................ 167,602 111,690
---------- ----------
Total assets...................................... $2,799,997 $2,126,912
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 193,216 $ 211,135
Accrued salaries, wages and benefits........................ 47,350 38,422
Other accrued liabilities................................... 108,049 56,802
Income taxes payable........................................ 57,989 87,257
Current portion of long-term obligations.................... 186,240 44,615
---------- ----------
Total current liabilities......................... 592,844 438,231
---------- ----------
Long-term obligations and deferred income taxes............. 691,780 117,511
---------- ----------
Minority interest in subsidiaries........................... 5,238 5,197
---------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized... -- --
Common stock; $.01 par value; 450,000 shares authorized;
141,419 and 140,161 shares outstanding.................... 1,414 1,401
Additional paid-in capital.................................. 1,009,294 965,422
Retained earnings........................................... 479,990 611,622
Accumulated other comprehensive income/(loss)............... 19,437 (12,472)
---------- ----------
Total stockholders' equity........................ 1,510,135 1,565,973
---------- ----------
Total liabilities and stockholders' equity........ $2,799,997 $2,126,912
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................. $1,490,701 $1,290,275 $1,238,694
Costs and expenses:
Cost of revenues................................... 867,278 675,153 695,002
Research and development........................... 286,041 226,219 184,452
Selling, general and administrative................ 219,566 190,680 166,823
Acquired in-process research and development....... 145,500 2,850 --
Restructuring of operations and other non-recurring
charges......................................... 75,400 -- --
Amortization of intangibles........................ 22,369 4,472 3,869
---------- ---------- ----------
Total costs and expenses................... 1,616,154 1,099,374 1,050,146
---------- ---------- ----------
(Loss)/income from operations........................ (125,453) 190,901 188,548
Interest expense..................................... (8,477) (1,497) (13,610)
Interest income and other............................ 10,282 34,759 30,177
---------- ---------- ----------
(Loss)/income before income taxes, minority interest
and cumulative effect of change in accounting
principle.......................................... (123,648) 224,163 205,115
Provision for income taxes........................... 7,916 62,748 57,432
---------- ---------- ----------
(Loss)/income before minority interest and cumulative
effect of change in accounting principle........... (131,564) 161,415 147,683
Minority interest in net income of subsidiaries...... 68 727 499
---------- ---------- ----------
(Loss)/income before cumulative effect of change in
accounting principle............................... (131,632) 160,688 147,184
Cumulative effect of change in accounting
principle.......................................... -- (1,440) --
---------- ---------- ----------
Net (loss)/income.................................... $ (131,632) $ 159,248 $ 147,184
========== ========== ==========
Basic earnings per share:
(Loss)/income before cumulative effect of change in
accounting principle............................ $ (0.93) $ 1.16 $ 1.14
Cumulative effect of change in accounting
principle....................................... $ -- $ (0.01) $ --
---------- ---------- ----------
Net (loss)/ income................................. $ (0.93) $ 1.15 $ 1.14
========== ========== ==========
Diluted earnings per share:
(Loss)/income before cumulative effect of change in
accounting principle............................ $ (0.93) $ 1.12 $ 1.07
Cumulative effect of change in accounting
principle....................................... $ -- $ (0.01) $ --
---------- ---------- ----------
Net (loss)/income.................................. $ (0.93) $ 1.11 $ 1.07
========== ========== ==========
Shares used in computing per share amounts:
Basic.............................................. 140,799 138,576 128,899
========== ========== ==========
Dilutive........................................... 140,799 144,027 142,983
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) TOTAL
------- ------ ---------- --------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 129,303 $1,293 $ 853,538 $ 305,190 $ 56,225 $1,216,246
Net income..................... 147,184
Foreign currency translation
adjustments.................. (30,821)
Total comprehensive income..... 116,363
Purchases of common stock under
stock repurchase program..... (2,077) (21) (46,817) (46,838)
Issuance to employees under
stock option and purchase
plans........................ 1,780 18 19,680 19,698
Tax benefit of employee stock
transactions................. 10,750 10,750
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1996......................... 129,006 1,290 837,151 452,374 25,404 1,316,219
Net income..................... 159,248
Foreign currency translation
adjustments.................. (37,876)
Total comprehensive income..... 121,372
Purchase of common stock under
stock repurchase program..... (2,400) (24) (59,857) (59,881)
Issuance to employees under
stock option and purchase
plans........................ 1,820 18 24,054 24,072
Tax benefit of employee stock
transactions................. 11,200 11,200
Issuance of stock from
conversion of Convertible
Subordinated Notes, net of
deferred offering costs...... 11,735 117 141,591 141,708
Intrinsic value of options
issued in conjunction with
the acquisition of Mint
Technology, Inc.............. 11,283 11,283
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1997......................... 140,161 1,401 965,422 611,622 (12,472) 1,565,973
Net loss....................... (131,632)
Foreign currency translation
adjustments.................. 31,909
Total comprehensive loss....... (99,723)
Purchase of common stock under
stock repurchase program..... (445) (4) (5,657) (5,661)
Issuance to employees under
stock option and purchase
plans........................ 1,703 17 21,356 21,373
Tax benefit of employee stock
transactions................. 3,026 3,026
Intrinsic value of options
issued in conjunction with
the acquisition of Symbios,
Inc.......................... 25,147 25,147
------- ------ ---------- --------- -------- ----------
Balances at December 31,
1998......................... 141,419 $1,414 $1,009,294 $ 479,990 $ 19,437 $1,510,135
======= ====== ========== ========= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net (loss)/income.................................. $(131,632) $ 159,248 $ 147,184
Adjustments:
Depreciation and amortization.................... 225,205 166,396 147,465
Minority interest in net income of
subsidiaries.................................. 68 727 499
Write-off of acquired in-process research and
development................................... 145,500 2,850 --
Non-cash restructuring and other related
charges....................................... 75,400 -- --
Gain on sale of stock investments................ (16,671) -- --
Changes in:
Accounts receivable........................... 30,541 (32,014) 42,268
Inventories................................... 6,520 (16,714) 46,675
Current deferred tax assets................... (23,694) (20,131) 5,558
Prepaid expenses and other assets............. (36,013) (10,397) 2,936
Accounts payable.............................. (67,487) 111,310 (55,255)
Accrued and other liabilities................. 21,479 38,128 14,599
--------- ----------- -----------
Net cash provided by operating activities........ 229,216 399,403 351,929
--------- ----------- -----------
Investing activities:
Purchase of debt and equity securities
available-for-sale............................ (326,979) (1,134,838) (1,117,885)
Maturities and sales of debt and equity
securities available-for-sale................. 631,755 1,319,823 1,055,183
Purchase of non-marketable equity securities..... (9,216) (10,704) (6,252)
Purchases of property and equipment, net of
retirements................................... (329,092) (513,298) (361,776)
Acquisition of Symbios, net of cash acquired..... (763,683) -- --
Net proceeds from sale of stock investments...... 16,671 -- --
Acquisition of Mint Technology, Inc., net of cash
acquired...................................... -- (6,863) --
Acquisition of stock from minority interest
holders....................................... (599) -- (2,757)
--------- ----------- -----------
Net cash used in investing activities............ (781,143) (345,880) (433,487)
--------- ----------- -----------
Financing activities:
Proceeds from borrowings......................... 724,682 34,193 142,832
Repayment of debt obligations.................... (100,275) (89,362) (54,185)
Purchase of common stock under repurchase
program....................................... (5,661) (59,881) (46,838)
Issuance of common stock, net.................... 21,373 24,077 19,698
--------- ----------- -----------
Net cash provided by/(used in) financing
activities.................................... 640,119 (90,973) 61,507
--------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents...................................... 7,317 (5,038) (5,670)
--------- ----------- -----------
Increase/(decrease) in cash and cash equivalents... 95,509 (42,488) (25,721)
--------- ----------- -----------
Cash and cash equivalents at beginning of period... 104,571 147,059 172,780
--------- ----------- -----------
Cash and cash equivalents at end of period......... $ 200,080 $ 104,571 $ 147,059
--------- ----------- -----------
Supplemental non-cash disclosures:
Conversion of subordinated debentures to common
stock......................................... $ -- $ 141,708 $ --
--------- ----------- -----------
Tax benefit of employee stock transactions....... $ 3,026 $ 11,200 $ 10,750
--------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. LSI Logic Corporation designs, develops and
manufactures high-performance integrated circuits, including ASICs, ASSPs and
related products and services, which it markets primarily to original equipment
manufacturers in the electronic data processing, consumer electronics,
telecommunications and certain office automation industries worldwide. The
Company also markets and supports ASICs for peripheral and storage systems
connectivity, peripheral controller electronics, host adapter integrated
circuits and boards and a complete line of RAID storage systems, subsystems and
related software.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. Assets and liabilities of
certain foreign operations are translated to U.S. dollars at current rates of
exchange, and revenues and expenses are translated using weighted average rates.
Accounts denominated in foreign currencies have been remeasured into functional
currencies before translation into U.S. dollars. Foreign currency transaction
gains and losses are included as a component of interest income and other. Gains
and losses from foreign currency translation are included as a separate
component of comprehensive income.
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. The acquisition of Symbios is
discussed further in Note 2 of Notes to the Consolidated Financial Statements.
There are no significant differences between the accounting policies of the
Company and Symbios.
Minority interest in subsidiaries represents the minority stockholders'
proportionate share of the net assets and results of operations of the Company's
majority-owned subsidiaries. Sales of common stock of the Company's subsidiaries
and purchases of such shares may result in changes in the Company's
proportionate share of the subsidiaries' net assets. The Company reflects such
changes as an element of additional paid-in-capital.
During 1997, the Company changed its fiscal year from a 52-53 week year to
a year ending December 31. In 1996, the year ended on the Sunday closest to
December 31. For presentation purposes, the consolidated financial statements
and notes refer to December 31 as year end. Fiscal years 1998 and 1996 were
52-week years while fiscal year 1997 was a 53-week 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1998 presentation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. All highly liquid investments
purchased with an original maturity of ninety days or less are considered to be
cash equivalents and are classified as held-to-maturity. Marketable short-term
investments are accounted for as available-for-sale. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reassesses the classification at each reporting date. Investments in debt
and equity securities classified as held-to-maturity are reported at amortized
cost and securities available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of comprehensive income. Unrealized gains and losses at December 31,
1998 and 1997 were not significant. Realized gains and losses are based on the
book value of
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
specific securities at the time of sale. Realized gains and losses are included
in interest income and other and were not significant during 1998, 1997 and
1996.
CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS. Financial
instruments which potentially subject the Company to credit risk consist of cash
equivalents, short-term investments and accounts receivable. Cash equivalents
and short-term investments are maintained with high quality institutions, the
composition and maturities of which are regularly monitored by management. A
majority of the Company's trade receivables are derived from sales to large
multinational computer, communication and consumer electronics manufacturers,
with the remainder distributed across other industries. Amounts due from one of
the Company's customers accounted for 17% and 26% of trade receivables at
December 31, 1998 and 1997, respectively. During 1998 and 1997, the Company sold
throughout the year approximately $77 million and $177 million (discounted at
short-term yen borrowing rates, averaging 0.4% in 1998 and in 1997),
respectively, of its Japanese sales affiliate's accounts receivable through
financing programs with certain Japanese banks. Related transaction costs were
not significant. Concentrations of credit risk with respect to all other trade
receivables are considered to be limited due to the quantity of customers
comprising the Company's customer base and their dispersion across industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral as considered necessary.
Write-offs of uncollectible amounts have not been significant.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS. The estimated fair value
amounts have been determined by the Company, using available market information
and valuation methodologies considered to be appropriate. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a significant effect on the estimated fair value
amounts. The book value of the new debt at December 31, 1998 approximates fair
value as the debt is at adjustable rates, (See Note 4 to the Notes.) The
estimated fair value of financial instruments at December 31, 1997 was not
significantly different from the values presented in the consolidated balance
sheets.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis for raw materials and is computed on a
currently adjusted standard basis (which approximates first-in, first-out) for
work-in-process and finished goods.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost and
includes interest on funds borrowed. Depreciation and amortization are
calculated based on the straight-line method. Depreciation of equipment and
buildings, in general, is computed using the assets' estimated useful lives as
presented below:
<TABLE>
<S> <C>
Buildings and improvements........................... 20 - 40 years
Equipment............................................ 2 - 6 years
Furniture and fixtures............................... 3 - 6 years
</TABLE>
Amortization of leasehold improvements is computed using the shorter of the
remaining term of the Company's facility leases or the estimated useful lives of
the improvements. Depreciation for income tax purposes is computed using
accelerated methods.
PREPRODUCTION ENGINEERING COSTS. Incremental costs incurred in connection
with developing major production capabilities at new manufacturing plants,
including facility carrying costs and costs to qualify production processes, are
capitalized and amortized over the expected useful lives of the manufacturing
processes utilized in the plants, generally four years. Amortization commences
when the manufacturing plant is capable of volume production, which is generally
characterized by meeting certain reliability, defect density and service cycle
time criteria defined by management. In April of 1998, the Accounting Standards
Executive Committee of the AICPA released SOP No. 98-5, "Reporting on the Costs
of Start-up Activities." SOP No. 98-5 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
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unamortized preproduction balance of $92 million, net of tax on January 1, 1999
and present it as a cumulative effect of a change in accounting principle in
accordance with SOP No. 98-5. The preproduction costs are included in property
and equipment at December 31, 1998 and 1997. The Company recorded approximately
$2 million in amortization of preproduction costs in 1998 related to the new
fabrication facility in Gresham, Oregon.
SOFTWARE. The Company capitalizes substantially all external costs related
to the purchase and implementation of software projects used for business
operations and engineering design activities. Capitalized software costs
primarily include purchased software and external consulting fees. Capitalized
software projects are amortized over the estimated useful life of the project,
typically a two to five year period. The Company had $62 million and $47 million
of capitalized software costs, net of amortization, included in other assets at
December 31, 1998 and 1997, respectively. Software amortization totaling $17
million, $15 million and $16 million was included in the Company's results of
operations during 1998, 1997 and 1996, respectively.
On November 21, 1997, the Emerging Issues Task Force issued EITF No. 97-13,
"Accounting for costs incurred in connection with a consulting contract or an
internal project that combines business process re-engineering and information
technology transformation." EITF No. 97-13 required that the Company change its
accounting policy to expense, in the fourth quarter of 1997, all costs
previously capitalized in connection with business process re-engineering
activities as defined by the statement. The Company recorded a charge of $1.4
million, net of related tax of $0.6 million, during the fourth quarter of 1997.
The charge reduced basic and diluted earnings per share by one cent for the
quarter and year ended December 31, 1997.
OTHER ASSETS. Goodwill and other intangibles acquired in connection with
the acquisition of Symbios on August 6, 1998 (See Note 2 of Notes to the
Consolidated Financial Statements), the purchase of Mint Technology, Inc. in
1997 and the purchase of common stock from minority stockholders (See Note 8 of
Notes to the Consolidated Financial Statements) of approximately $369 million
and $35 million, and related accumulated amortization of $36 million and $14
million, are included in other assets at December 31, 1998 and 1997,
respectively. The acquisitions were accounted for as purchases, and the excess
of the purchase price over the fair value of assets acquired was allocated to
existing technology, workforce in place, trademarks and goodwill, which are
being amortized over a weighted average life of eight years. Goodwill and other
intangibles are evaluated for impairment based on the related estimated
undiscounted cash flows.
At December 31, 1998 and 1997, the Company had $8 million and $20 million
invested in restricted shares of Chartered Semiconductor Manufacturing Pte. Ltd.
("CSM"), respectively. Transfer of the shares is restricted for five years or
until the listing of CSM stock upon a recognized stock exchange, whichever
occurs sooner. The Company also had $11 million in a number of other non-public
technology companies for both years ended December 31, 1998 and 1997. In the
third quarter of 1998, the Company wrote-down to estimated fair values two
long-term equity investments. This included a write-down of $11.9 million in its
investment in CSM and a $2.4 million write-down of its investment in a
technology company. The estimated fair values for these investments were based
on third party financings by CSM and management analysis of the two companies
financial statements. The decline in values was considered by management to be
other than temporary. In the fourth quarter of 1998, the Company recognized a
gain of $16.7 million on proceeds of $23.1 million related to the sale of one of
its investments in a technology Company. The carrying value of the investment
was approximately $6.4 million. All investments are recorded as long-term assets
at cost less adjustments made for other than temporary declines in value and the
Company believes that the fair value of the investments is equal to or greater
than their carrying values at December 31, 1998 and 1997.
REVENUE RECOGNITION. Revenue is primarily recognized upon shipment with the
exception of standard products sold to distributors. Revenue from standard
products sold to distributors is deferred until the distributor sells the
product to a third-party. Revenue from the licensing of the Company's design and
manufacturing technology is recognized when the significant contractual
obligations have been fulfilled. Royalty revenue is recognized upon the sale of
products subject to royalties. The Company uses the percentage-of-completion
method for recognizing revenues on fixed-fee design arrangements.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
One customer accounted for 12%, 22% and 14% of consolidated revenues in
1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company's policy is to grant options with
an exercise price equal to the quoted market price of the Company's stock on the
grant date. The Company provides additional pro forma disclosures as required
under SFAS No. 123, "Accounting for Stock-Based Compensation." (See Note 9 of
Notes to the Consolidated Financial Statements.)
INCOME PER SHARE Basic EPS is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS is computed using the
weighted-average number of common and dilutive potential common shares
outstanding during the period. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options. A reconciliation of the numerators
and denominators of the basic and diluted per share computations as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
--------- ------- --------- -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net (loss)/income before
cumulative effect of
change in accounting
principle................. $(131,632) 140,799 $(0.93) $160,688 138,576 $ 1.16 $147,184 128,899 $ 1.14
------ ------ ------
Cumulative effect of change
in accounting principle... -- -- (1,440) 138,576 (0.01) -- --
Net (loss)/ income available
to common stockholders.... (131,632) 140,799 (0.93) 159,248 138,576 1.15 147,184 128,899 1.14
------ ------ ------
Effect of dilutive
securities:
Stock options............. -- 2,701 2,349
5 1/2% Convertible
Subordinated Notes...... -- -- 1,279 2,750 6,166 11,735
Diluted EPS:
Net (loss)/income before
cumulative effect of
change in accounting
principle (adjusted for
assumed conversion of
debt)..................... (131,632) 140,799 (0.93) 161,967 144,027 1.12 153,350 142,983 1.07
------ ------ ------
Cumulative effect of change
in accounting principle... -- -- (1,440) 144,027 (0.01) -- --
------
Net (loss)/income available
to common stockholders.... $(131,632) 140,799 $(0.93) $160,527 144,027 $ 1.11 $153,350 142,983 $ 1.07
------ ------ ------
</TABLE>
- ---------------
* Numerator
+ Denominator
Options to purchase approximately 19,732,000, 3,156,000, and 2,160,000
shares were outstanding at December 31, 1998, 1997 and 1996, respectively, but
were not included in the computation because the exercise prices were greater
than the average market price of common shares in 1997 and 1996. In 1998, all
options were excluded from the calculation because of their antidilutive effect
on earnings per share. The exercise price ranges of these options were $1.98 to
$58.13, $32.00 to $58.13 and $30.50 to $58.13 at December 31, 1998, 1997 and
1996, respectively.
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SELF-INSURANCE. The Company retains certain exposures in its insurance plan
under self-insurance programs. Reserves for claims made and reserves for
estimated claims incurred but not yet reported are recorded as current
liabilities.
COMPREHENSIVE INCOME. In 1998, the Company adopted 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. Comprehensive income is being shown in the statement of
stockholders' equity.
SEGMENT REPORTING. In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of the Company's operations
or financial position or the segments reported in 1998. (See Note 11 of Notes to
the Consolidated Financial Statements.)
NOTE 2 -- ACQUISITION OF SYMBIOS
The Company completed the acquisition of all of the outstanding capital
stock of Symbios from HEA on August 6, 1998.
The Company paid approximately $767 million in cash for all of the
outstanding capital stock of Symbios. The Company additionally paid
approximately $6 million in direct acquisition costs and accrued an additional
$6 million as payable to HEA relating to the resolution of certain obligations
outlined in the Stock Purchase Agreement. The purchase was financed using a
combination of cash reserves and a new credit facility bearing interest at
adjustable rates. (See Note 4 of Notes to the Consolidated Financial
Statements.) In addition, the Company assumed all of the options outstanding
under Symbios' 1995 Stock Plan with a calculated Black-Scholes value of $25
million. The total purchase price of Symbios was $804 million.
The total purchase price of $804 million was allocated to the estimated
fair value of assets acquired and liabilities assumed 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 millions):
<TABLE>
<S> <C>
Fair value of property, plant and equipment................. $252
Fair value of other tangible net assets..................... 72
In-process research and development......................... 146
Current technology.......................................... 214
Assembled workforce and trademarks.......................... 37
Residual goodwill........................................... 83
----
$804
====
</TABLE>
SYMBIOS INTEGRATION. The Company has taken certain actions to combine the
Symbios operations with 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. Accrued integration charges include $4 million
related to involuntary separation and relocation benefits for approximately 300
Symbios positions 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 are based upon
management's current estimate of integration costs and are in
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with EITF No. 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
The following table sets forth the Company's 1998 integration activity from
August 6, 1998 to December 31, 1998:
<TABLE>
<CAPTION>
AUGUST 6, 1998 DECEMBER 31,
INTEGRATION OF 1998
SYMBIOS UTILIZED BALANCE
-------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Payments to employees for severance and relocation(a)... $4,000 $(1,640) $2,360
Other exit costs(a)..................................... 1,437 (435) 1,002
------ ------- ------
Total......................................... $5,437 $(2,075) $3,362
====== ======= ======
</TABLE>
- ---------------
(a) Amounts utilized represent cash charges.
The utilization of the Symbios integration reserve of $2.1 million during
the period August 6, 1998 to December 31, 1998 relates primarily to payments of
$1.6 million to 47 employees for severance and relocation and $0.4 million for
payments to third parties to terminate certain contractual relationships. No
significant adjustments were made to this reserve during the year.
IN-PROCESS RESEARCH AND DEVELOPMENT. The Company reduced its estimate of
the amount allocated to in-process research and development ("IPR&D") by $79.3
million from the $224.8 million amount previously reported in the third quarter
of 1998 to $145.5 million for the year ended December 31, 1998. Amortization of
intangibles increased by $4.3 million from $18.1 million to $22.4 million for
the year ended December 31, 1998. The basic loss per share and loss per share
assuming dilution decreased from $1.47 to $0.93 for the year ending December 31,
1998.
The amount allocated to IPR&D and intangible assets in the third quarter of
1998 was made in a manner consistent with widely recognized appraisal practices
and in consultation with our independent accountants PricewaterhouseCoopers at
the date of acquisition. Subsequent to the acquisition, the SEC staff expressed
views that took issue with certain appraisal practices generally employed in
determining the fair value of the in-process research and development that was
the basis for the Company's measurement of its in-process research and
development charge. The charge of $224.8 million, as first reported by the
Company, was based upon the work of an independent valuation firm that had
utilized the methodologies the SEC has since announced it does not consider
appropriate.
As a result of computing in-process research and development using the SEC
preferred methodology, the Company, in consultation with its independent
accountants, decided to revise the amount originally allocated to in-process
research and development. The Company will revise earnings for the third quarter
of 1998 and amend its Report on Form 10-Q and Report on Form 8-K/A previously
filed with the Securities Exchange Commission. The revised quarterly results for
the third and fourth quarter of 1998 are included in this Annual Report on Form
10K under Part II, Item 8 "Financial Statements and Supplementary Data."
The value assigned to in-process research and development was determined by
identifying research projects in areas for which technological feasibility had
not been established. These include semiconductor projects of $94.6 million and
storage systems projects of $50.9 million. The value was determined by
estimating the expected cash flows from the projects once commercially viable
and then discounting the net cash flows back to their present value and then
applying a percentage of completion.
The percentage of completion for each project was determined using
milestones representing management's estimate of effort, value added, and degree
of difficulty of the portion of each project completed as of August 6, 1998, as
compared to the remaining research and development to be completed to bring each
project to technical feasibility. The development process is grouped into three
phases with each phase containing between one and five milestones. The three
phases are: researching the market requirements and
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the engineering architecture and feasibility studies; the design and
verification milestones; and the third phase of prototyping and testing the
product (both internal to the Company and customer testing). Each of these
phases has been subdivided into milestones and then each of the projects was
evaluated as to its milestone status as of August 6, 1998. The percentage of
completion varied by individual project ranging from 15% to 90% for
semiconductors and from 5% to 85% for storage system.
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. Company management believes that the restated in-process research and
development charge of $145.5 million is valued consistently with the SEC staff's
current views regarding valuation methodologies. There can be no assurances,
however, that the SEC staff will not take issue with any assumptions used in the
Company's valuation model and require the Company to further revise the amount
allocated to in-process research and development.
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.
PRO FORMA RESULTS. The following pro forma summary is provided for
illustrative purposes only and is not necessarily indicative of the consolidated
results of operations for future periods or that actually would have been
realized had the Company and 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 of the Notes) 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 $145.5 million discussed above have been
excluded from the periods presented due to their non-recurring nature.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C> <C>
Revenue............................................. $1,849,057 $1,909,744
Net income.......................................... $ 74,710 $ 158,673
Basic EPS........................................... $ 0.53 $ 1.15
Diluted EPS......................................... $ 0.53 $ 1.09
</TABLE>
NOTE 3 -- RESTRUCTURING
The Company remains committed to improving profitability and strengthening
competitiveness. As a result of identifying opportunities to streamline
operations and maximize the integration of Symbios 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
2 of Notes to the Consolidated Financial Statements, integration costs relating
to Symbios was accrued as a liability assumed in the purchase in accordance with
EITF No. 95-3.
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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; $4.7 million for terminations 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 and administrative offices primarily in
the U.S. and Europe; and work force reduction costs of $16.3 million. 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 primarily 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 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. 94-13, "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 September 30, 1998 and activity against the reserve for the three month
period ending December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
RESTRUCTURING TRANSLATION BALANCE
EXPENSE UTILIZED ADJUSTMENT 12/31/98
------------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Write-down of manufacturing facility(a)... $37,200 $(35,700) $ $ 1,500
Other fixed asset related charges(a)...... 13,100 (13,100) --
Payments to employees for severance(b).... 16,300 (4,700) 11,600
Lease terminations and maintenance
contracts(c)............................ 4,700 (100) 4,600
Noncancelable purchase commitments (c).... 1,700 (100) 1,600
Other exit costs.......................... 2,400 2,400
Cumulative currency translation
adjustment(a)........................... 1,512 1,512
------- -------- ------ -------
Total........................... $75,400 $(53,700) $1,512 $23,212
======= ======== ====== =======
</TABLE>
- ---------------
(a) Amounts utilized represent non-cash charges.
(b) Amounts utilized represent cash payments related to the severance of
approximately 290 employees.
(c) Amounts utilized represent cash charges.
NOTE 4 -- DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to banks...................................... $739,774 $111,242
Capital lease obligations................................... 2,120 673
-------- --------
741,894 111,915
Current portion of long-term debt, capital lease obligations
and short-term borrowings................................. (186,240) (44,615)
-------- --------
Long-term debt and capital lease obligations................ $555,654 $ 67,300
======== ========
</TABLE>
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, JSI, ABN AMRO and thereafter
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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").
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. 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$74 million at December 31, 1998) bearing interest at
adjustable rates. Borrowings outstanding under the 364 day Facility and the
Revolver including the yen sub-facility were $740 million as of December 31,
1998. JSI also had borrowings outstanding of approximately 85 million yen
(US$0.7 million) at December 31, 1998. The Company paid approximately $3.8
million in debt issuance costs related to the new debt facility. This amount was
capitalized as an other asset and is being amortized over the life of the credit
facility.
The Company, in accordance with the new credit arrangement, must comply
with certain financial covenants related to profitability, tangible net worth,
liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. At December 31, 1998, the Company was in compliance with these
covenants.
In February 1997, the Company called for redemption of its $144 million,
5 1/2% Convertible Subordinated Notes ("Convertible Notes") which were
outstanding at December 31, 1996. The Convertible Notes were converted at a
price of $12.25 per share resulting in the issuance of 11,735,000 shares of
common stock. The redeemed value of the Convertible Notes of $142 million, net
of deferred offering costs, was recorded as part of stockholders' equity.
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.
Aggregate principal payments required on outstanding debt and capital lease
obligations are $186 million, $138 million, $103 million and $315 million for
1999, 2000, 2001 and 2002, respectively, and none thereafter.
The Company paid $9 million, $9 million and $17 million in interest during
1998, 1997 and 1996, respectively.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CASH AND INVESTMENTS
Cash and cash equivalents and short-term investments included the following
debt and equity securities at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents
Overnight deposits.......................................... $ 82,591 $ 30,724
Commercial paper............................................ 44,803 11,955
Corporate debt securities................................... -- 10,384
Time deposits............................................... -- 5,409
Other....................................................... -- 8,319
-------- --------
Total held-to-maturity............................ 127,394 66,791
Cash........................................................ 72,686 37,780
-------- --------
Total cash and cash equivalents................... $200,080 $104,571
======== ========
Short-term investments
Corporate debt securities................................... $ 34,545 $138,143
Time deposits............................................... 24,934 102,165
U.S. government and agency securities....................... 5,065 69,294
Commercial paper............................................ -- 44,735
Bank notes.................................................. 11,663 18,207
Auction rate preferred...................................... 5,013 13,825
-------- --------
Total available-for-sale.......................... $ 81,220 $386,369
======== ========
</TABLE>
Cash and cash equivalents and short-term investments held at December 31,
1998 and 1997 approximate fair market value. As of December 31, 1998,
contractual maturities of available-for-sale securities are within one year.
NOTE 6 -- 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.
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 JSI from adjustable to fixed rates. The
contracts were closed because the underlying debt was repaid as discussed in
Note 4 of Notes to the Consolidated Financial Statements. 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 December 31, 1998, there were no interest rate swap contracts
outstanding, however, the Company may enter into interest rate swaps in the
future. As of December 31, 1997, the Company had several interest rate swap
contracts outstanding which convert the interest associated with 14 billion yen
(US$109 million) of borrowings by the Company's Japanese manufacturing
subsidiary from adjustable to fixed rates (ranging from 1.75% to 2.46%). The
interest rate swaps covered payments to be made under term borrowings through
2001.
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
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the last day of the year ended December 31, 1998 and year ended December 31,
1997. 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 December 31, 1998 and 1997, respectively. Foreign
currency transaction gains and losses included in interest income and other were
insignificant for the year ended December 31, 1998 and 1997, respectively.
At December 31, 1998, total outstanding purchased currency option contracts
were $130 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 $5.5 million as of December 31, 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 $0.7
million.
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. While the Company believes the adoption of this statement will not
have a significant 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 No. 133 as of the effective date cannot be
reasonably estimated at this time.
NOTE 7 -- BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials............................................. $ 32,347 $ 19,892
Work-in-process........................................... 51,856 58,621
Finished goods............................................ 93,904 23,754
---------- ----------
$ 178,107 $ 102,267
========== ==========
Property and equipment:
Land...................................................... $ 50,278 $ 39,885
Buildings and improvements................................ 459,157 145,297
Equipment................................................. 1,338,325 856,745
Leasehold improvements.................................... 56,486 46,839
Preproduction engineering................................. 97,356 58,972
Furniture and fixtures.................................... 44,514 35,460
Construction in progress.................................. 210,426 557,350
---------- ----------
2,256,542 1,740,548
Accumulated depreciation and amortization................... (776,429) (616,639)
---------- ----------
$1,480,113 $1,123,909
========== ==========
</TABLE>
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company had $97 million and $34 million of unamortized preproduction
engineering costs at December 31, 1998 and 1997, respectively, associated with
the construction of a new manufacturing facility in Gresham, Oregon. This new
facility became operational as of December 1, 1998, at which time capitalized
preproduction began to be amortized over the expected useful life of the
manufacturing technology of approximately four years. In April 1998, the
Accounting Standards Executive Committee released SOP No. 98-5, "Reporting on
the Costs of Start-up Activities." SOP No. 98-5 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 of $92 million, net of tax on
January 1, 1999 and present it as a cumulative effect of a change in accounting
principle in accordance with SOP No. 98-5. The preproduction costs are included
in property and equipment at December 31, 1998 and 1997.
Accumulated amortization for preproduction engineering was $27 million and
$25 million at December 31, 1998 and 1997, respectively. Capitalized interest
included within property and equipment totaled $29 million and $17 million at
December 31, 1998 and 1997, respectively. Accumulated amortization of
capitalized interest was $9 million and $7 million at December 31, 1998 and
1997, respectively.
During 1997, the Company dispositioned assets held for sale with a carrying
amount of $15 million that were associated with the 1996 shutdown of the
Milpitas wafer manufacturing facility. In August 1997, approximately $5.6
million of the Milpitas equipment held for sale was transferred to another
facility within the Company as it was determined that the equipment could be
used to meet current capacity requirements.
NOTE 8 -- PURCHASES OF MINORITY INTEREST AND OTHER ACQUISITIONS
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 $0.6 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 December 31, 1998. There
were no minority interest purchases during 1997. As of December 31, 1997, the
Company owned 92% of the Japanese affiliate and 100% of the U.K. affiliate.
During 1996, the Company acquired 117,000 common shares of its Japanese
sales affiliate from its minority interest shareholders for approximately $0.7
million. In December 1996, the Company acquired the remaining minority shares
outstanding of its European sales affiliate, LSI Logic Europe, Ltd. (formerly
LSI Logic Europe, plc) for $2 million. These acquisitions were accounted for as
purchases and the excess of the purchase price over the fair value of the assets
acquired of $2 million was allocated to goodwill and is being amortized over
seven years. As of December 31, 1996, the Company owned approximately 92% of the
Japanese affiliate and 100% of the U.K. affiliate.
ACQUISITION OF MINT TECHNOLOGY. In July 1997, the Company acquired all
issued and outstanding shares of common stock of Mint Technology, Inc. ("Mint").
Mint provides engineering services on a contract basis to help customers ensure
timely and cost-effective completion of their design programs. Mint's consulting
services specialize in the architectural specification, implementation and test
of complex application-specific integrated circuits and field programmable gate
array based system designs. The acquisition was accounted for as a purchase. The
acquisition price consisted of $9.5 million in cash and options to purchase
approximately 681,726 shares of common stock with an intrinsic value of $11.3
million. The intrinsic value of the stock is being expensed over four years.
Approximately $2.9 million of the purchase price was allocated to in-process
research and development and was expensed in the third quarter of 1997. Total
goodwill recorded as part of the acquisition was $5.7 million and is being
amortized over four years. Pro forma results of operations have not been
presented as the amounts would not significantly differ from the Company's
historical results.
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- COMMON STOCK
The following summarizes all shares of common stock reserved for issuance
as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
(IN THOUSANDS)
<S> <C>
Issuable upon:
Exercise of stock options, including options available for
grant..................................................... 24,160
Purchase under Employee Stock Purchase Plan................. 542
------
24,702
======
</TABLE>
The Company's Board of Directors approved an action which authorizes
management to acquire up to 5 million and 4 million shares of its own stock in
the open market at current market prices in August 1997 and February 1996,
respectively. Accordingly, the Company repurchased 445,000 and 2.4 million
shares of its common stock from the open market for approximately $5.7 million
and $60 million in 1998 and 1997, respectively. The transactions were recorded
as reductions to common stock and additional paid-in capital. The authorization
for stock repurchases was rescinded by the Company's Board of Directors in
February of 1999.
STOCK OPTION PLANS. The Company's 1982 Incentive Stock Option Plan ("1982
Option Plan") is administered by the Board of Directors. Terms of the 1982
Option Plan required that the exercise price of options be no less than the fair
value at the date of grant and required that options be granted only to
employees or consultants of the Company. Generally, options granted vest in
annual increments of 25% per year commencing one year from the date of grant and
have a term of ten years. During 1992, the 1982 Option Plan expired by its
terms. Accordingly, no further options may be granted thereunder. Certain
options previously granted under the 1982 Option Plan remained outstanding at
December 31, 1998.
The 1991 Equity Incentive Plan, as amended July 30,1997, enables the
Company to grant stock options to its officers, employees or consultants. Stock
options may be granted with an exercise price no less than the fair value of the
stock on the date of grant. The term of each option is determined by the Board
of Directors and is generally ten years. Options generally vest in annual
increments of 25% per year commencing one year from the date of grant. A total
of 25 million shares have been reserved for issuance under this plan, including
7 million shares approved by the Company's Board of Directors and stockholders
in 1998.
In May 1995, the stockholders approved the 1995 Director Option Plan
("Director Plan"), which replaced the 1986 Directors' Stock Option Plan, and
reserved 500,000 shares for issuance thereunder. Terms of the Director Plan
provide for an initial option grant to new directors and subsequent automatic
option grants each year thereafter. The option grants generally have a ten year
term and vest in equal increments over four years. The exercise price of options
granted is the fair market value of the stock on the date of grant.
In connection with the acquisition of Symbios (See Note 2 of Notes to the
Consolidated Financial Statements), each outstanding stock option under Symbios'
Stock Option plan was converted to an option of the Company's common stock at a
ratio of 1.0094. As a result, outstanding options to purchase 2,073,593 shares
were assumed. No further options may be granted under the Symbios plan.
In connection with the acquisition of Mint (See Note 8 of Notes to the
Consolidated Financial Statements), each outstanding stock option under Mint's
Stock Option Plan ("Mint Plan") was converted to an option for the Company's
common stock at a ratio of 0.6286. As a result, outstanding options to purchase
681,726 shares were assumed. No further options may be granted under the Mint
Plan.
At December 31, 1998 shares available for grant under all stock option
plans were 4,428,000.
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's stock option share activity
and related weighted average exercise price within each category for each of the
years ended December 31, 1998, 1997 and 1996 (share amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1.......... 13,725 $24.36 10,812 $20.77 9,065 $20.26
Options assumed........................... 2,074 13.83 682 16.71
Options canceled.......................... (2,156) (26.51) (1,120) (26.66) (4,402) (34.46)
Options granted........................... 6,711 19.87 4,506 30.87 7,263 27.71
Options exercised......................... (622) (11.98) (1,155) (9.36) (1,114) (7.73)
------ ------ ------ ------ ------ ------
Options outstanding at December 31........ 19,732 $21.89 13,725 $24.36 10,812 $20.77
====== ====== ====== ====== ====== ======
Options exercisable at December 31........ 7,065 $20.38 4,249 $17.72 2,840 $11.29
====== ====== ====== ====== ====== ======
</TABLE>
On August 16, 1996 the Company canceled options to purchase 2,853,000
shares of common stock with exercise prices ranging from $32.13 to $58.13,
previously granted to employees, excluding certain executive officers, and
reissued all such options at an exercise price of $22.38, the fair market value
of the stock on August 16, 1996. The reissued options have a ten year term and
vest in equal increments over four years from the date of reissuance.
Significant option groups outstanding at December 31, 1998 and related
weighted average exercise price and contractual life information is as follows
(share amounts in thousands):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE REMAINING
OPTIONS WITH EXERCISE ---------------- ---------------- ------------
PRICES RANGING FROM: SHARES PRICE SHARES PRICE LIFE (YEARS)
--------------------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
$1.98 to $10.00............................. 1,605 $ 6.04 1,372 $ 5.65 4.91
$10.01 to $20.00............................ 7,061 16.46 1,344 12.96 9.18
$20.01 to $30.00............................ 7,274 23.90 2,972 23.78 7.85
$30.01 to $40.00............................ 3,037 32.42 1,118 31.99 8.10
greater than $40.00......................... 755 44.58 259 47.79 6.94
------ ------ ----- ------
19,732 $21.89 7,065 $20.38
====== ====== ===== ======
</TABLE>
All options were granted at an exercise price equal to the market value of
the Company's common stock at the date of grant with the exception the options
assumed as part of the purchase of Symbios on August 6, 1998 and Mint in July of
1997. (See Notes 2 and 8 of Notes to the Consolidated Financial Statements.) The
weighted average estimated grant date fair value, as defined by SFAS No. 123,
for options granted during 1998, 1997 and 1996 was $10.48, $14.94 and $16.86 per
option, respectively. The estimated grant date fair value disclosed by the
Company is calculated using the Black-Scholes model. The Black-Scholes model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date fair value. The following weighted average
assumptions are included in the estimated grant date fair value calculations for
the Company's stock option awards:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 4.85 4.57 5.25
Risk-free interest rate..................................... 5.00% 5.99% 6.10%
Volatility.................................................. 57% 56% 55%
Dividend yield.............................................. 0% 0% 0%
</TABLE>
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK PURCHASE PLAN. Since 1983, the Company has offered an Employee Stock
Purchase Plan ("Employee Plan") under which rights are granted to purchase
shares of common stock at 85% of the lesser of the fair market value of such
shares at the beginning of a 24-month offering period or the end of each six-
month segment within such offering period. Sales under the Employee Plan in
1998, 1997 and 1996 were 1,081,000, 666,000 and 666,000 shares of common stock
at an average price of $13.83, $19.71 and $17.33 per share, respectively. During
1997, the Company's stockholders approved an amendment to the Company's Employee
Plan to increase the number of shares reserved for issuance by 500,000 shares.
Additionally in 1997, the stockholders approved an amendment to the Company's
Employee Plan to increase the number of shares of common stock reserved for
issuance pursuant to the Employee Plan on the first day of each fiscal year,
beginning fiscal 1998 by 1.15% of the shares of the Company's common stock
issued and outstanding on the last day of the immediately preceding fiscal year,
less the number of shares available for future option grants under the Employee
Plan on the last day of the preceding fiscal year. Shares available for future
purchase under the Employee Plan were 542,000 at December 31, 1998.
Compensation cost (included in pro forma net income and net income per
share amounts) for the grant date fair value of the purchase rights granted
under the Employee Plan was calculated using the Black-Scholes model. The
following weighted average assumptions are included in the estimated grant date
fair value calculations for rights to purchase stock under the Company's
Employee Plan:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 1.25 1.25 1.25
Risk-free interest rate..................................... 4.42% 5.82% 5.70%
Volatility.................................................. 59% 58% 54%
Dividend yield.............................................. 0% 0% 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS
No. 123, of rights to purchase stock under the Employee Plan granted in 1998,
1997 and 1996 were $5.94, $12.99 and $10.84 per share, respectively.
STOCK PURCHASE RIGHTS. In November 1988, the Company implemented a plan to
protect stockholders' rights in the event of a proposed takeover of the Company.
The plan was amended and restated in November 1998. Under the plan, each share
of the Company's outstanding common stock carries one Preferred Share Purchase
Right ("Right"). Each Right entitles the holder, under certain circumstances, to
purchase one-thousandth of a share of Preferred Stock of the Company or its
acquiror at a discounted price. The Rights are redeemable by the Company and
will expire in 2008.
PRO FORMA NET INCOME AND NET INCOME PER SHARE. Had the Company recorded
compensation costs based on the estimated grant date fair value, as defined by
SFAS No. 123, for awards granted under its stock option plans and stock purchase
plan, the Company's net income and earnings per share would have been adjusted
to the pro forma amounts below for the years ended December 31, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net (loss)/income
Basic........................................... $(185,500) $129,728 $128,069
Diluted......................................... $(185,500) $131,007 $132,508
Pro forma net (loss)/income per share
Basic........................................... $ (1.32) $ 0.94 $ 0.99
Diluted......................................... $ (1.32) $ 0.93 $ 0.94
</TABLE>
The pro forma effect on net income and net income per share for 1998, 1997
and 1996 is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- INCOME TAXES
The provision for taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal......................................... $ 11,106 $12,626 $29,111
State........................................... 2,560 4,172 6,969
Foreign......................................... 22,075 43,106 19,398
-------- ------- -------
Total...................................... 35,741 59,904 55,478
-------- ------- -------
DEFERRED LIABILITY (BENEFIT):
Federal......................................... (10,416) 7,164 (2,437)
State........................................... (2,085) 1,575 (6,635)
Foreign......................................... (15,324) (5,895) 11,026
-------- ------- -------
Total...................................... (27,825) 2,844 1,954
-------- ------- -------
TOTAL................................................ $ 7,916 $62,748 $57,432
======== ======= =======
</TABLE>
The domestic and foreign components of income before income taxes and
minority interest were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $ (31,000) $ 65,250 $ 82,882
Foreign........................................... (92,648) 158,913 122,233
--------- -------- --------
Income before income taxes and minority
interest........................................ $(123,648) $224,163 $205,115
========= ======== ========
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries aggregate to
approximately $283 million at December 31, 1998 and are indefinitely reinvested
in foreign operations or will be remitted substantially free of additional tax.
No material provision has been made for taxes that might be payable upon
remittance of such earnings, nor is it practicable to determine the amount of
this liability.
The deferred tax assets valuation allowance at December 31, 1998 is
attributed to U.S. federal, state and foreign deferred tax assets which result
primarily from restructuring and other one-time charges and the Company's
acquisition of Symbios, Inc. and are deductible for tax purposes over a long
period of time. Management believes that the realization of such deferred tax
assets was not fully assured at December 31, 1998. Significant components of the
Company's deferred tax assets and liabilities as of December 31, were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $ 8,873 $ 656
Tax credit carryovers..................................... 2,380 2,380
Future deductions for purchased intangible assets......... 45,239 --
Future deductions for reserves and other.................. 89,483 45,745
-------- --------
Total deferred tax assets......................... 145,975 48,781
Valuation allowance......................................... (22,409) --
-------- --------
Net deferred tax assets..................................... 123,566 48,781
Deferred tax liabilities -- depreciation and amortization... (84,619) (37,659)
-------- --------
Total net deferred tax assets............................... $ 38,947 $ 11,122
======== ========
</TABLE>
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Differences between the Company's effective tax rate and the federal
statutory rate were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate............ $(43,276) (35)% $ 78,457 35% $ 71,790 35%
State taxes, net of federal
benefit......................... 2,049 2% 3,937 2% 6,517 3%
Difference between U.S. and
foreign tax rates............... 21,970 17% (22,453) (10)% (12,358) (6)%
Nondeductible expenses............ 6,200 5% 2,847 1% 4,693 2%
Foreign tax credits............... (420) -- (1,195) (1)% (11,260) (5)%
Research and development tax
credit.......................... (2) -- (4,500) (2)% (4,243) (2)%
Future benefit of deferred tax
assets not recognized........... 22,409 18% -- -- (3,400) (2)%
Other............................. (1,014) (1)% 5,655 3% 5,693 3%
-------- --- -------- --- -------- --
Effective tax rate................ $ 7,916 6% $ 62,748 28% $ 57,432 28%
======== === ======== === ======== ==
</TABLE>
The Company paid $30 million, $31 million and $53 million for income taxes
in 1998, 1997 and 1996, respectively.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1991, 1992, 1993 and 1994. The Company received a notice of
proposed tax deficiency for the years 1991 and 1992 and filed an appeal with the
IRS on March 26, 1997 in response to that IRS notice. Management believes the
ultimate outcome of the IRS audits will not have a material adverse impact on
the Company's financial position or results of operations.
NOTE 11 -- SEGMENT REPORTING AND FOREIGN OPERATIONS
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company concluded that it 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 ASICs, 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,
including HABs and a complete line of RAID storage systems, subsystems and
related software. The Storage Systems segment did not meet the requirements for
a reportable segment as defined in SFAS No. 131.
The Company's significant operations outside the United States include
manufacturing facilities, design centers and sales offices in Japan and Europe.
Long-lived assets consist of net property and equipment, goodwill,
capitalized software and other intangibles, and other long-term assets excluding
long-term deferred tax assets.
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of operations by entities located within the
indicated geographic areas for 1998, 1997 and 1996. United States revenues
include export sales.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
United States................................ $ 931,067 $ 617,352 $ 661,829
Japan........................................ 261,705 366,508 264,316
Europe....................................... 218,015 240,249 212,410
Other foreign countries...................... 79,914 66,166 100,139
---------- ---------- ----------
Total................................ $1,490,701 $1,290,275 $1,238,694
---------- ---------- ----------
LONG-LIVED ASSETS:
United States................................ $1,583,161 $ 842,125 $ 386,289
Japan........................................ 301,423 332,073 440,847
Europe....................................... 24,286 23,454 13,935
Other foreign countries...................... 44,966 57,159 60,589
---------- ---------- ----------
Total................................ $1,953,836 $1,254,811 $ 901,660
========== ========== ==========
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company leases the majority of its facilities and certain equipment
under non-cancelable operating leases which expire in 1999 through 2022. The
facilities lease agreements typically provide for base rental rates which are
increased at various times during the terms of the leases and for renewal
options at the fair market rental value.
In June 1995, the Company, through its Japanese subsidiary, entered into a
master lease agreement and a master purchase agreement with a group of leasing
companies ("Lessor") for up to 15 billion yen (US$129 million). Each Lease
Supplement pursuant to the transaction will have a lease term of one year with
four consecutive annual renewal options. The Company may, at the end of any
lease term, return or purchase at a stated amount all the equipment. Upon return
of the equipment, the Company must pay the Lessor a terminal adjustment amount.
The Lessor also has entered into a remarketing agreement with a third party to
remarket and sell any equipment returned pursuant to which the third party is
obligated to reimburse the Company a guaranteed residual value. The lease line
was fully utilized as of December 31, 1998. There were no significant gains or
losses from these leasing transactions. Minimum rental payments under these
operating leases, including option periods, are $23 million for 1999 and $16
million for 2000. The terminal adjustment, which the Company would be required
to pay upon cancellation of all leases and return of the equipment, would be as
follows: 1999 -- $42 million; 2000 -- $22 million; 2001 -- $2 million.
Future minimum payments under other lease agreements are as follows:
1999 -- $28 million; 2000 -- $23 million; 2001 -- $19 million; 2002 -- $14
million; 2003 -- $8 million: 2004 and thereafter -- $21 million. Total rental
expense, including month-to-month rentals, was $58 million, $58 million and $62
million in 1998, 1997 and 1996, respectively.
During the third quarter of 1995, the remaining shares of our Canadian
subsidiary, LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were
previously owned by other parties were acquired by another one of our subsidiary
companies. At that time former shareholders of LSI Canada representing
approximately 800,000 shares or about 3% (which is now approximately 620,000
shares) of the previously outstanding shares, exercised dissent an appraisal
rights as provided by Canadian law. By so doing, these parties notified LSI
Canada of their disagreement with the per share value in Canadian dollars
($4.00) that was paid to the other former shareholders. In order to resolve this
matter, a petition was filed by LSI Canada in late 1995 in the Court of Queen's
Bench of Alberta, Judicial District of Calgary (the "Court") and has been
pending since that time. The trial of that case was to occur in late 1998. Prior
to the scheduled
56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
commencement of the trial, some of the parties who represent approximately
410,000 shares retained a new attorney. Their new attorney is now attempting to
set aside the action based on the petition filed by LSI Canada and commence a
new action, which we understand will be based on a different legal theory. Until
their request is heard and resolved by the Court, a new trial date for the
pending matter is not expected to be set. They have also notified us that they
intend to bring a new action alleging that other conduct by LSI Logic
Corporation was oppressive of the rights of minority shareholders in LSI Canada,
for which they will seek damages. While we cannot give any assurances regarding
the resolution of these matters, we believe that the final outcome will not have
a material adverse effect on our consolidated results of operations or financial
condition. Also, during 1998, a claim that was brought in 1994 by another former
shareholder of LSI Canada against LSI Logic Corporation in the Court of Chancery
of the State of Delaware in and for the New Castle County was dismissed. That
dismissal was upheld on appeal to the Delaware Supreme Court.
We have learned that a lawsuit alleging patent infringement has been filed
in the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against
eighty-eight electronics industry companies, including us. Although we have
learned that we are one of the named defendants, we have not yet been served
with the complaint. We understand that the patents involved in this lawsuit
generally relate to semiconductor manufacturing and computer imaging, including
the use of bar coding for automatic identification of articles. While we cannot
make any assurance regarding the eventual resolution of this matter, we do not
believe it will have a material adverse effect on our consolidated results of
operations or financial condition.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such
litigations and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a significantly adverse
effect on the Company's consolidated financial position or results of
operations.
NOTE 13 -- SUBSEQUENT EVENTS
On February 22, 1999, LSI Logic and SEEQ Technology, Inc. announced an
agreement for the Company to acquire SEEQ Technology in a transaction where SEEQ
shareholders will receive LSI Logic common stock based on 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 Technology
shareholders and is subject to regulatory review.
57
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of LSI Logic Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
LSI Logic Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 22, 1999
58
<PAGE> 59
SUPPLEMENTARY FINANCIAL DATA
INTERIM FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- --------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenues....................................... $324,850 $330,101 $ 390,365 $445,385
Gross profit................................... 141,744 154,256 169,631 157,792
Net income/(loss).............................. 30,443 32,034 (205,122) 11,013
Basic net income/(loss) per share:............. $ 0.22 $ 0.23 $ (1.46) $ 0.08
Diluted net income/(loss) per share:........... $ 0.22 $ 0.23 $ (1.46) $ 0.08
YEAR ENDED DECEMBER 31, 1997
Revenues....................................... $308,388 $332,004 $ 326,847 $323,036
Gross profit................................... 144,268 163,005 163,118 144,731
Income before cumulative effect of change in
accounting principle......................... 38,407 45,799 44,318 32,164
Cumulative effect of change in accounting
principle.................................... -- -- -- (1,440)
Net income..................................... 38,407 45,799 44,318 30,724
Basic earnings per share:
Income before cumulative effect of change in
accounting principle...................... 0.30 0.32 0.31 0.23
Cumulative effect of change in accounting
principle................................. -- -- -- (.01)
Net income................................... 0.30 0.32 0.31 0.22
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle...................... 0.28 0.32 0.31 0.23
Cumulative effect of change in accounting
principle................................. -- -- -- (.01)
Net income................................... $ 0.28 $ 0.32 $ 0.31 $ 0.22
</TABLE>
The Company reported a charge for restructuring of $75.4 million in the
third quarter of 1998 (See Note 3 of the Notes) and a charge for in-process
technology of $145.5 million related to the acquisition of Symbios on August 6,
1998. (See Note 2 to the Notes.)
59
<PAGE> 60
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The members of our Board of Directors, who are elected annually by a vote
of the stockholders, are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
<S> <C> <C> <C>
Wilfred J. Corrigan.................. 61 Chairman of the Board of Directors and 1981
Chief Executive Officer of LSI Logic Corporation
T.Z. Chu............................. 64 Retired President of Hoefer Pharmacia Biotech, 1992
Inc.
Malcolm R. Currie.................... 72 Chief Executive Officer, Currie Technologies, 1992
Inc.;
Chairman Emeritus, Hughes Aircraft, Inc.
James H. Keyes....................... 58 Chairman and Chief Executive Officer of Johnson 1983
Controls, Inc.
R. Douglas Norby..................... 63 Executive Vice President and Chief Financial 1993
Officer of
the Company
</TABLE>
There are no family relationships between or among any directors or
executive officers of the Company.
Mr. Corrigan, a founder of the Company, has served as Chief Executive
Officer and a director of the Company since our organization in January 1981.
Mr. Corrigan also serves on the boards of directors of several privately held
corporations.
Mr. Chu served as President of Hoefer Pharmacia Biotech, Inc., a
biotechnology company, from March 1995 until his retirement in February 1997.
From August 1993 until March 1995, Mr. Chu served as President and Chief
Executive Officer of Hoefer Scientific Instruments, a manufacturer of scientific
instruments. From January 1992 until August 1993, Mr. Chu acted as a consultant
to Hambrecht & Quist, an investment banking firm and to Thermo Instrument
Systems, Inc., a manufacturer of analytical instruments.
Mr. Currie serves as Chief Executive Officer of Currie Technologies, Inc.,
a manufacturer of electric propulsion systems for bicycles. Mr. Currie served as
Chairman and Chief Executive Officer of Hughes Aircraft Company from March 1988
until his retirement in July 1992. He presently serves on the boards of
directors of Unocal Corporation, Investment Company of America, SM&A Corp., and
Regal One Corp., and as Chairman of the Board of Trustees of the University of
Southern California.
Mr. Keyes has served as Chairman and Chief Executive Officer of Johnson
Controls, Inc. since January 1993. Johnson Controls, Inc. is a global leader in
automotive systems and facility management and control. Mr. Keyes also serves on
the boards of directors of Pitney Bowes, Inc. and the Chicago Federal Reserve
Board.
Mr. Norby has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996. From September 1993 until November
1996, Mr. Norby served as Senior Vice President and Chief Financial Officer of
Mentor Graphics Corporation, an EDA company. From July 1992 until September
1993, Mr. Norby served as President and Chief Executive Officer of Pharmetrix
Corporation, a health care company located in Menlo Park, California. Mr. Norby
serves on the board of directors of Corvas International, Inc.
60
<PAGE> 61
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:
<TABLE>
<CAPTION>
EMPLOYED
NAME AGE POSITION SINCE
---- --- -------- --------
<S> <C> <C> <C>
Wilfred J. Corrigan.................. 61 Chairman and Chief Executive Officer 1981
Elias J. Antoun...................... 42 Executive Vice President, Consumer Products 1991
John P. Daane........................ 35 Executive Vice President, Communications, 1985
Computer
and ASIC Products
John D'Errico........................ 55 Executive Vice President, LSI Storage Products 1984
and Colorado Operations
Thomas Georgens...................... 39 Senior Vice President & General Manager, 1998
Storage Systems, Inc.
W. Richard Marz...................... 55 Executive Vice President, Geographic Markets 1995
R. Douglas Norby..................... 63 Executive Vice President and Chief Financial 1996
Officer
David E. Sanders..................... 51 Vice President, General Counsel and Secretary 1986
Lewis C. Wallbridge.................. 55 Vice President, Human Resources 1984
Joseph M. Zelayeta................... 52 Executive Vice President, Worldwide Operations 1981
</TABLE>
Mr. Corrigan, Mr. Sanders and Mr. Wallbridge have been associated with the
Company in their present position for more than the past five years.
Elias J. Antoun was named Executive Vice President, Consumer Products in
March 1998. Mr. Antoun joined the Company in 1991, and has served in senior
management and executive positions including General Manager of Finance and,
more recently, President of LSI Logic K.K.
John P. Daane was named Executive Vice President, Communications, Computer
and ASIC Products, in October 1997. Mr. Daane joined us in 1985, and has served
in senior management and executive positions since 1992, including, most
recently, Vice President and General Manager of the Communication Products
Division.
John D'Errico was named Executive Vice President, Storage Components and
Colorado Operations in August 1998. Mr. D'Errico joined us in 1984 and has held
various senior management and executive positions at our manufacturing
facilities in the U.S. and Japan. Most recently, Mr. D'Errico served as Vice
President and General Manager, Pan-Asia.
Thomas Georgens was named Senior Vice President and General Manager,
Storage Systems, Inc., in August 1998, upon the acquisition of Symbios, Inc. Mr.
Georgens joined Symbios in 1996, where he served as Vice President and General
Manager of Storage Systems. Before joining Symbios, Mr. Georgens was employed by
EMC Corporation, where he served as Director of Engineering Operations for the
Systems Group and later as Director of Internet Marketing.
W. Richard Marz joined the Company in September 1995 as Senior Vice
President, North American Marketing and Sales, and was named Executive Vice
President, Geographic Markets in May 1996. Before joining us, Mr. Marz was a
long-time senior sales and marketing executive at Advanced Micro Devices, Inc.,
a semiconductor manufacturer.
R. Douglas Norby has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996. From September 1993 until November
1996, Mr. Norby served as Senior Vice President and Chief Financial Officer of
Mentor Graphics Corporation, an EDA company. From July 1992 until September
1993, Mr. Norby served as President and Chief Executive Officer of Pharmetrix
Corporation, a health care company located in Menlo Park, California. Mr. Norby
has been a member of the Board of Directors of the Company since 1993, and he
currently also serves on the board of directors of Corvas International, Inc., a
biopharmaceutical company.
61
<PAGE> 62
Joseph M. Zelayeta was named Executive Vice President, Worldwide Operations
in September 1997. Employed with the Company since 1981, Mr. Zelayeta has held
management and executive positions in research and development and manufacturing
operations since 1986.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers, directors, and persons who own more than ten percent of a registered
class of our equity securities to file reports of security ownership and changes
in such ownership with the SEC and the New York Stock Exchange. Executive
officers, directors and greater than ten percent stockholders are required by
SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us and
written representations received from those reporting persons recognized by us
as being subject to filing requirements, we believe that with the exception of
one report on Form 5, all required Section 16(a) reports were timely filed
during 1998. A report on Form 5 was not timely filed in connection with Mr.
Corrigan's transfer in 1994 of beneficial 50,000 shares of the Company's stock
to the Corrigan Walla Foundation, a Charitable Trust. The Form 5 was filed with
the SEC on February 11, 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table shows, as to (i) the Chief Executive Officer, and (ii)
each of the four other most highly compensated executive officers whose salary
plus bonus exceeded $100,000 in 1998 (the "Named Executive Officers"),
information concerning all reportable compensation awarded to, earned by or paid
to each for services to us in all capacities during the fiscal year ended
December 31, 1998, as well as such compensation for each such individual for our
previous two fiscal years (if such person was an executive officer during any
part of such previous fiscal year).
TABLE 11-1
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------------------------------
ANNUAL COMPENSATION OTHER ANNUAL ALL OTHER
--------------------------- COMPENSATION COMPENSATION
------------ OPTIONS/ ------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) SARS(#)(2) ($)(3)
--------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Wilfred J. Corrigan................................. 1998 $744,238 $375,000 $ 9,600 500,000 $ 9,450
Chairman and Chief Executive Officer 1997 $704,231 $375,000 $ 8,800 300,000 $ 19,911
1996 $685,577 $ -0- $10,400 -0- $ 13,807
John P. Daane(4).................................... 1998 $329,238 $150,000 $ 8,400 200,000 $ 727
Executive Vice President, Communications, Computer 1997 $230,000 $200,000 $ 7,033 100,000 $ 4,884
and ASIC Products
W. Richard Marz..................................... 1998 $350,967 $ 85,000 $ 9,710 35,000 $ 5,815
Executive Vice President, Geographic Markets 1997 $337,308 $100,000 $ 7,700 20,000 $ 10,567
1996 $332,077 $ 30,000 $ 9,100 175,000 $ 7,562
R. Douglas Norby.................................... 1998 $334,623 $110,000 $12,300 75,000 $ 9,450
Executive Vice President and Chief Financial 1997 $314,615 $150,000 $11,600 30,000 $187,530
Officer......................................... 1996 $ 45,000 $ -0- $ 2,100 307,500 $ 25,318
Joseph M. Zelayeta(5)............................... 1998 $360,968 $130,000 $ 8,400 35,000 $ 3,722
Executive Vice President, Worldwide Operations 1997 $304,423 $170,000 $ 6,900 70,000 $ 19,785
</TABLE>
- ---------------
(1) Includes amounts paid for car allowance and, in the case of Messrs. Marz and
Norby, tax preparation.
(2) We have not granted any stock appreciation rights.
62
<PAGE> 63
(3) "All Other Compensation" is itemized as follows:
- In 1998, Mr. Corrigan received $9,450 for group life insurance. In 1997,
Mr. Corrigan received $13,611 for profit sharing and $6,300 for group
term life insurance. In 1996, Mr. Corrigan received $7,265 for profit
sharing and $6,542 for group term life insurance.
- In 1998, Mr. Daane received $727 for group life insurance. In 1997, Mr.
Daane received $4,128 for profit sharing and $756 for group term life
insurance.
- In 1998, Mr. Marz received $5,815 for group life insurance. In 1997, Mr.
Marz received $6,535 for profit sharing and $4,032 for group life
insurance. In 1996, Mr. Marz received $3,375 for profit sharing and
$4,187 for group term life insurance.
- In 1998, Mr. Norby received $9,450 for group life insurance. In 1997, Mr.
Norby received $6,077 for profit sharing, $9,828 for group term life
insurance and $171,625 for relocation compensation. In 1996, Mr. Norby
received $23,750 for directors' fees.
- In 1998, Mr. Zelayeta received $3,722 for group life insurance. In 1997,
Mr. Zelayeta received $5,619 for profit sharing, $4,032 for group term
life insurance and $10,134 for relocation.
(4) Mr. Daane was named an executive officer of the Company in October 1997.
(5) Mr. Zelayeta was named an executive officer of the Company in September
1997.
STOCK OPTION GRANTS AND EXERCISES
The following tables set forth information with respect to the stock
options granted to the Named Executive Officers under our stock option plans and
the options exercised by such Named Executive Officers during the fiscal year
ended December 31, 1998 and the options held by the Named Executive Officers at
December 31, 1998.
The Option Grants Table sets forth hypothetical gains or "option spreads"
for the options at the end of their respective ten-year terms, as calculated in
accordance with the rules of the Securities and Exchange Commission. Each gain
is based on an arbitrarily assumed annualized rate of compound appreciation of
the market price of 5% and 10% from the date the option was granted to the end
of the option term and does not represent our projection of future stock price
performance. Actual gains, if any, on option exercises are dependent on the
future performance of our common stock and overall market conditions.
TABLE 11-2
OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF AT ASSUMED ANNUAL RATES OF
UNDERLYING TOTAL STOCK PRICE APPRECIATION
OPTIONS OPTIONS/SARS EXERCISE OR FOR OPTION TERM
GRANTED IN GRANTED TO BASE PRICE EXPIRATION ---------------------------
NAME FISCAL YEAR(2) EMPLOYEES ($/SHARE) DATE 5% 10%
---- -------------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Wilfred J. Corrigan.............. 500,000 7.48 $17.06 11/20/2008 $5,365,257 $13,596,615
John P. Daane.................... 50,000 0.75 $26.00 2/11/2008 $ 817,563 $ 2,071,865
150,000 2.24 $18.94 8/14/2008 $1,786,454 $ 4,527,225
W. Richard Marz.................. 35,000 0.52 $18.94 8/14/2008 $ 416,839 $ 1,056,352
R. Douglas Norby................. 75,000 1.12 $18.94 8/14/2008 $ 893,227 $ 2,263,612
Joseph M. Zelayeta............... 35,000 0.52 $18.94 8/14/2008 $ 416,839 $ 1,056,352
</TABLE>
- ---------------
(1) We have not granted any stock appreciation rights.
(2) All options shown in the table were granted under the 1991 Incentive Plan.
The material terms of the options are: (a) The exercise price of the options
is the fair market value of the common stock as of the date of grant; (b)
The options vest cumulatively in equal 25% increments on each of the first
four anniversaries of the date of grant; (c) To the extent unexercised, the
options lapse after ten years;
63
<PAGE> 64
(d) The options are non-transferable and are only exercisable during the
period of employment of the optionee (or within three months following
termination of employment), subject to limited exceptions in the cases of
certain terminations, death or permanent disability of the optionee.
TABLE 11-3
AGGREGATED OPTION(1) EXERCISES IN LAST FISCAL YEAR
AND YEAR-END VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE(1) OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS HELD OPTIONS HELD AT
SHARES AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wilfred J. Corrigan................. -0- $ -0- 1,250,000 1,075,000 $1,328,125 $-0-
John P. Daane....................... -0- $ -0- 127,000 345,000 $ 31,750 $-0-
W. Richard Marz..................... -0- $ -0- 186,250 168,750 $ -0- $-0-
R. Douglas Norby.................... 30,000 $520,688 178,750 253,750 $ -0- $-0-
Joseph M. Zelayeta.................. -0- $ -0- 211,500 137,500 $1,353,500 $-0-
</TABLE>
- ---------------
(1) Value of unexercised options is based on the difference between the fair
market value of Company's Common Stock of $16.125 per share as of December
31, 1998 (the last day of the last completed fiscal year) and the exercise
price of the unexercised in-the-money options.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY
The Compensation Committee (the "Committee") of the Board of Directors
establishes the overall executive compensation strategies of the Company and
approves compensation elements of the Chief Executive Officer and other
executive officers. The Committee periodically reviews its approach to executive
compensation.
The Committee is comprised of all of the outside, non-employee members of
the Board of Directors (three), none of whom has interlocking relationships as
defined by the Securities and Exchange Commission. The Committee has available
to us such external compensation advice and data as the Committee deems
necessary and appropriate to obtain.
The compensation philosophy of the Committee is to provide a comprehensive
compensation package for each executive officer that is well suited to support
accomplishment of our business strategies, objectives and initiatives. For
incentive-based compensation, the Committee considers the desirability of
structuring such compensation arrangements so as to qualify for deductibility by
us under Section 162(m) of the Internal Revenue Code. As the Committee applies
this compensation philosophy in determining appropriate executive compensation
levels and other compensation factors, the Committee reaches its decision with a
view towards our overall financial performance.
EXECUTIVE OFFICER COMPENSATION
The Committee's approach is based upon a belief that a substantial portion
of aggregate annual compensation for executive officers should be contingent
upon our performance and an individual's contribution to our success. In
addition, the Committee strives to align the interest of our executive officers
with the long-term interests of stockholders through stock option grants that
can result in ownership of our common stock. The Committee endeavors to
structure each executive officer's overall compensation package to be consistent
with this approach and to enable us to attract, retain and reward individuals
who contribute to our success.
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<PAGE> 65
Our compensation program for executive officers is based on the following
guidelines:
- Establishment of salary levels and participation in generally available
employee benefit programs based on competitive compensation package
practices.
- Utilization of a performance-based, cash incentive plan.
- Inclusion of equity opportunities that create long-term incentives based
upon increases in stockholder return.
We had a cash incentive plan during 1998 that provided for bonus awards to
be made to the executive officers (other than the CEO) and other members of
senior management, subject to an aggregate budget for all awards under the plan.
The plan established a minimum level of operating income to be achieved by the
Company for the year (1998) before any awards would be made. The plan also
allowed upward adjustments in awards to be made if the minimum operating income
target was exceeded. In addition, the plan provides for the CEO to determine
individual bonus award amounts pursuant to his judgment of each participant's
relative personal contributions to our performance, subject to the approval of
the Committee of awards to executive officers. Our operating income for 1998
exceeded the threshold target established under the plan for payments under the
plan. Accordingly, awards were made to individual executive officers consistent
with the plan's provisions regarding the Company's performance and the personal
contributions of each executive officer. The total of all payments under the
plan were within the budget approved previously by the Committee.
During 1998, the Committee approved a budget for increases in base salary
levels of executive officers, which reflected the compensation guidelines
described previously in this report. Increases in base salary amounts for
individual executive officers were then made pursuant to the CEO's judgment and
discretion in satisfying our compensation philosophy set forth above. The
aggregate of such adjustments was within the budget that had been approved by
the Committee. The general level of compensation of our executive officers is in
the median of ranges of compensation information sources against which we make
competitive comparisons.
We maintain a set of guidelines for use in making recommendations to the
Committee on individual grants to executive officers of options to purchase
common stock of the Company. Stock Option grants were made to the executive
officers by reference to the guidelines. These guidelines are developed by
reference to external published surveys and other information that are believed
to fairly reflect the competitive environment in which we operate and which are
consistent with the compensation principles set forth above.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Corrigan has been CEO of the Company since its founding in 1981. His
base salary prior to the beginning of fiscal 1998 was $715,000. During 1998, the
Committee considered information regarding competitive compensation practices
and levels for chief executive officers, the above-described compensation
approach to executive officers and an assessment by this Committee of Mr.
Corrigan's contribution to the Company's performance. Based on such factors, the
Committee increased Mr. Corrigan's base salary to $755,000. The base salary
established by the Committee falls in the median of the range of such
information used for competitive comparisons.
The Committee awarded Mr. Corrigan a cash bonus in the amount of $375,000,
in respect to the Company's performance during 1998, and Mr. Corrigan's
contributions as CEO. The Committee based its evaluation of Mr. Corrigan's
performance for purposes of determining the amount of this award pursuant to the
operating income objectives that were established in accordance with the terms
of the performance-based bonus compensation plan for the CEO.
Mr. Corrigan was granted options to purchase 500,000 shares of the
Company's Common Stock during 1998. The Committee determined this portion of Mr.
Corrigan's total compensation after consideration of the compensation principles
set forth above. Also, the Committee considered external published survey data
and other information sources that it believes fairly reflect competitive equity
incentive practices for chief
65
<PAGE> 66
executive officers of publicly traded companies against which the Company's
practices for the CEO should be compared.
The Committee believes Mr. Corrigan has managed the Company well, and has
achieved distinguished results, including in terms of revenue, gross margin,
operating income, net income growth and successful execution of strategic
transactions.
MEMBERS OF THE COMPENSATION COMMITTEE
James H. Keyes
T.Z. Chu
Malcolm R. Currie
February 19, 1999
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no members of the Compensation Committee who were officers or
employees of us or any of our subsidiaries during the fiscal year, formerly
officers of us, or had any relationship otherwise requiring disclosure
hereunder.
66
<PAGE> 67
PERFORMANCE GRAPH
The stock price performance shown on the graph following is not necessarily
indicative of future price performance.
<TABLE>
<CAPTION>
STANDARD & POOR'S 500
LSI LOGIC CORPORATION INDEX HAMBRECHT & QUIST
--------------------- --------------------- -----------------
<S> <C> <C> <C>
1993 100 100 100
1994 254.33 101.32 120.12
1995 412.6 139.4 179.61
1996 337.01 171.4 223.23
1997 247.24 228.59 261.72
1998 203.15 293.91 407.08
</TABLE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG LSI LOGIC CORPORATION*, S&P 500 INDEX
AND HAMBRECHT & QUIST TECHNOLOGY INDEX
67
<PAGE> 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of February 12, 1999 (the most recent practicable date) by all
directors, each of the named executive officers set forth in the Summary
Compensation Table (the "Named Executive Officers") and by all directors and
current executive officers as a group:
<TABLE>
<CAPTION>
NUMBER APPROXIMATE
OF SHARES PERCENTAGE
NAME OWNED OWNED
---- --------- -----------
<S> <C> <C>
Wilfred J. Corrigan(1)..................................... 6,989,952 4.93%
T.Z. Chu(2)................................................ 65,700 *
Malcolm R. Currie(3)....................................... 141,950 *
James H. Keyes(4).......................................... 76,250 *
R. Douglas Norby(5)........................................ 219,092 *
John P. Daane(6)........................................... 156,624 *
W. Richard Marz(7)......................................... 208,790 *
Joseph M. Zelayeta(8)...................................... 237,000 *
All current directors and executive officers as a group (13
persons)(9).............................................. 8,465,281 5.97%
</TABLE>
- ---------------
* Less than 1%
(1) Includes 1,600,000 shares, options for which are presently exercisable or
will become exercisable within 60 days of February 12, 1999.
(2) Includes 26,250 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(3) Includes 28,750 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(4) Includes 28,750 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(5) Includes 180,625 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(6) Includes 149,500 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(7) Includes 205,000 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(8) Includes 221,500 shares, options for which are presently exercisable or will
become exercisable within 60 days of February 12, 1999.
(9) Includes 2,775,301 shares, options for which are presently exercisable or
will become exercisable within 60 days of February 12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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<PAGE> 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of LSI
Logic Corporation and Report of Independent Accountants are included as part of
this Report.
<TABLE>
<CAPTION>
PAGE IN
THIS REPORT
ON FORM
10-K
-----------
<S> <C>
Consolidated Balance Sheets -- As of December 31, 1998 and
1997...................................................... 35
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1998................................... 36
Consolidated Statements of Stockholders' Equity -- For the
Three Years Ended December 31, 1998....................... 37
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1998................................... 38
Notes to Consolidated Financial Statements.................. 39 - 57
Report of Independent Accountants........................... 58
</TABLE>
Effective beginning 1990, we changed our fiscal year end from December 31
to the 52 or 53 week period which ends on the Sunday closest to December 31.
Beginning in 1997, we reverted to a straight December 31 fiscal year end. For
presentation purposes, the consolidated financial statements, notes and
financial statement schedules for fiscal years 1990 through 1996 refer to
December 31 as the year end. Fiscal years 1998 and 1996 were 52 week years;
fiscal year 1997 was a 53 week year.
2. FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. EXHIBITS:
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997.(1)
2.2 Stock Purchase Agreement dated as of June 28, 1998, by and
among the Registrant, HEA and HEI.(2)
2.3 First Amendment to Stock Purchase Agreement dated as of
August 6, 1998, by and among the Registrant, HEA and HEI.(2)
3.1 Amended and Restated Certificate of Incorporation of
Registrant.(3)
3.2 By-laws of Registrant.(4)
3.3 Certificate of Amendment of Bylaws of LSI Logic Corporation
dated November 20, 1998.(5)
4.4 Mint Technology, Inc. Amended 1996 Stock Option Plan.(6)
4.5 Registrant's Employee Stock Purchase Plan, as amended.(6)
4.6 Symbios Logic, Inc. 1995 Stock Plan.(7)
4.7 Amended and Restated Preferred Shares Rights Agreement dated
as of November 20, 1998, between LSI Logic Corporation and
BankBoston N.A.(8)
10.2 Registrant's 1982 Incentive Stock Option Plan, as amended,
and forms of Stock Option Agreement.(9)*
10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road,
Fremont, California between the Registrant and Bankamerica
Realty Investors.(10)
10.24 Registrant's 1986 Directors' Stock Option Plan and forms of
Stock Option Agreements.(11)*
</TABLE>
69
<PAGE> 70
<TABLE>
<S> <C>
10.29 Form of Indemnification Agreement entered and to be entered
into between Registrant and our officers, directors and
certain key employees.(12)*
10.35 Amended and Restated LSI Logic Corporation 1991 Equity
Incentive Plan.(3)*
10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore
Drive, Milpitas, California between the Registrant and the
Prudential Insurance Company of America.(12)
10.37 Stock Purchase Agreement dated as of January 20, 1995;
Promissory Note dated January 26, 1995; Note Purchase
Agreement dated as of January 26, 1995 in connection with
our purchase of the minority interest in one of our Japanese
subsidiaries.(13)
10.38 1995 Director Option Plan.(14)*
10.40 LSI Logic Corporation International Employee Stock Purchase
Plan.(15)*
10.42 Amended and Restated Credit Agreement, dated as of September
22, 1998, by and among Registrant, LLJS, ABN AMRO Bank and
Lenders.(2)
10.43 Form of LSI Logic Corporation Change of Control Severance
Agreement to be entered into by and among LSI Logic
Corporation and each of its Executive Officers.
10.44 LSI Logic Corporation Change of Control Agreement entered
into on November 20, 1998, by and between LSI Logic
Corporation and Wilfred J. Corrigan.
10.45 Agreement and Plan of Reorganization and Merger dated
February 21, 1999, among the Registrant, Stealth Acquisition
Corporation and SEEQ Technology Incorporated.(16)
11.1 Statement Re: Computation of Earnings Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-K/A filed October 20, 1998.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-57563) filed June 24, 1998.
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1988.
(5) Incorporated by reference to exhibits filed with the Registrant's Form 8-K
filed on December 8, 1998.
(6) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-34285) filed August 25, 1997.
(7) Incorporated by reference to exhibits filed with the Registrant's Form S-8
(No. 333-62159) filed on August 25, 1998.
(8) Incorporated by reference to exhibits filed with the Registrant's Form
8-A12G/A filed on December 8, 1998.
(9) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1983.
(11) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1986.
(12) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
70
<PAGE> 71
(13) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(14) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(15) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-12887) which became effective
September 27, 1996.
(16) Incorporated by reference to Exhibit 99.1 filed with the Registrant's
Current Report on Form 8-K as of February 23, 1999.
* Denotes management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
During the fourth quarter ended December 31, 1998, we filed the following
Current Reports on Form 8-K:
On October 20, 1998, 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 Exchange Commission on August 21, 1998,
reporting the acquisition by Registrant from Hyundai Electronics America, a
California corporation ("HEA"), of all of the outstanding capital stock of
Symbios, Inc. ("Symbios"), a Delaware corporation and the wholly-owned
subsidiary of HEA. The financial statements of the business acquired were filed
with the Report.
On December 8, 1998, pursuant to Item 5 to report certain amendments to the
Company's by-laws which were approved by the Board of Directors on November 20,
1998.
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.
(c) EXHIBITS.
See Item 14(a)(3), above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2), above.
TRADEMARK ACKNOWLEDGMENTS
LSI Logic logo design, G10, The System on a Chip Company, ATMizer,
CoreWare, SeriaLink, MiniRISC, GigaBlaze and MetaStor are registered trademarks
of LSI Logic Corporation; G11, G12, Cablestream, SYMplicity and trademarks of
LSI Logic Corporation.
ARM is a registered Trademark of Advanced RISC Machines Limited, used under
license. OakDSPCore is a registered trademark of DSP Group, Inc., used under
license. All other brand and product names appearing in this report are the
trademarks of their respective companies.
71
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ WILFRED J. CORRIGAN
------------------------------------
Wilfred J. Corrigan
Chairman and Chief Executive Officer
Dated: March 5, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilfred J. Corrigan and David E. Sanders, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILFRED J. CORRIGAN Chairman of the Board and Chief Executive March 5, 1999
- ------------------------------------------ Officer (Principal Executive Officer)
(Wilfred J. Corrigan)
/s/ R. DOUGLAS NORBY Executive Vice President and Chief March 5, 1999
- ------------------------------------------ Financial Officer (Principal Financial
(R. Douglas Norby) Officer and Principal Accounting Officer);
/s/ T.Z. CHU Director March 5, 1999
- ------------------------------------------
(T.Z. Chu)
/s/ MALCOLM R. CURRIE Director March 5, 1999
- ------------------------------------------
(Malcolm R. Currie)
/s/ JAMES H. KEYES Director March 5, 1999
- ------------------------------------------
(James H. Keyes)
</TABLE>
72
<PAGE> 73
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997.(1)
2.2 Stock Purchase Agreement dated as of June 28, 1998, by and
among the Registrant, HEA and HEI.(2)
2.3 First Amendment to Stock Purchase Agreement dated as of
August 6, 1998, by and among the Registrant, HEA and HEI.(2)
3.1 Amended and Restated Certificate of Incorporation of
Registrant.(3)
3.2 By-laws of Registrant.(4)
3.3 Certificate of Amendment of Bylaws of LSI Logic Corporation
dated November 20, 1998.(5)
4.4 Mint Technology, Inc. Amended 1996 Stock Option Plan.(6)
4.5 Registrant's Employee Stock Purchase Plan, as amended.(6)
4.6 Symbios Logic, Inc. 1995 Stock Plan.(7)
4.7 Amended and Restated Preferred Shares Rights Agreement dated
as of November 20, 1998, between LSI Logic Corporation and
BankBoston N.A.(8)
10.2 Registrant's 1982 Incentive Stock Option Plan, as amended,
and forms of Stock Option Agreement.(9)*
10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road,
Fremont, California between the Registrant and Bankamerica
Realty Investors.(10)
10.24 Registrant's 1986 Directors' Stock Option Plan and forms of
Stock Option Agreements.(11)*
10.29 Form of Indemnification Agreement entered and to be entered
into between Registrant and our officers, directors and
certain key employees.(12)*
10.35 Amended and Restated LSI Logic Corporation 1991 Equity
Incentive Plan.(3)*
10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore
Drive, Milpitas, California between the Registrant and the
Prudential Insurance Company of America.(12)
10.37 Stock Purchase Agreement dated as of January 20, 1995;
Promissory Note dated January 26, 1995; Note Purchase
Agreement dated as of January 26, 1995 in connection with
our purchase of the minority interest in one of our Japanese
subsidiaries.(13)
10.38 1995 Director Option Plan.(14)*
10.40 LSI Logic Corporation International Employee Stock Purchase
Plan.(15)*
10.42 Amended and Restated Credit Agreement, dated as of September
22, 1998, by and among Registrant, LLJS, ABN AMRO Bank and
Lenders.(2)
10.43 Form of LSI Logic Corporation Change of Control Severance
Agreement to be entered into by and among LSI Logic
Corporation and each of its Executive Officers.
10.44 LSI Logic Corporation Change of Control Agreement entered
into on November 20, 1998, by and between LSI Logic
Corporation and Wilfred J. Corrigan.
10.45 Agreement and Plan of Reorganization and Merger dated
February 21, 1999, among the Registrant, Stealth Acquisition
Corporation and SEEQ Technology Incorporated.(16)
11.1 Statement Re: Computation of Earnings Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-K/A filed October 20, 1998.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-57563) filed June 24, 1998.
<PAGE> 74
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1988.
(5) Incorporated by reference to exhibits filed with the Registrant's Form 8-K
filed on December 8, 1998.
(6) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-34285) filed August 25, 1997.
(7) Incorporated by reference to exhibits filed with the Registrant's Form S-8
(No. 333-62159) filed on August 25, 1998.
(8) Incorporated by reference to exhibits filed with the Registrant's Form
8-A12G/A filed on December 8, 1998.
(9) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1983.
(11) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1986.
(12) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
(13) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(14) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(15) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-12887) which became effective
September 27, 1996.
(16) Incorporated by reference to Exhibit 99.1 filed with the Registrant's
Current Report on Form 8-K as of February 23, 1999.
* Denotes management contract or compensatory plan or arrangement.
<PAGE> 75
CORPORATE INFORMATION
HEADQUARTERS ADDRESS
LSI Logic Corporation
1551 McCarthy Blvd
Milpitas CA 95035
REGISTRAR & TRANSFER AGENT
EquiServe
Boston EquiServe Division
Stockholder Services
150 Royall Street
Canton MA 02021
1.800.730.6001
www.equiserve.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
10 Almaden Blvd
San Jose CA 95113
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto CA 94304
FINANCIAL LITERATURE
Publications of interest to current and potential investors, including
copies of the Company's current 10-K filed with the Securities and Exchange
Commission, are available without charge by calling 1.800.574.4286. Outside the
U.S. and Canada, phone 408.433.7700 or call 32.11.300351 within Europe for
multilingual operators. Financial information is also available over the World
Wide Web at http://www.lsilogic.com.
STOCKHOLDER INQUIRIES
To notify LSI Logic of address changes, lost certificates or transfers of
stock, stockholders of record should contact the Company's Registrar and
Transfer Agent, EquiServe, Boston EquiServe Division. Stockholders of record who
receive more than one copy of this annual report can contact EquiServe to
arrange to have their accounts consolidated. Stockholders who own LSI Logic
stock through a brokerage can contact their broker to request consolidation of
their accounts.
INQUIRIES CONCERNING THE COMPANY
Questions regarding LSI Logic's operations, historical performance or
recent results may be directed to:
LSI Logic Corporation
Investor Relations Department
1551 McCarthy Blvd
Milpitas CA 95035
408.954.4710
(C)1999, LSI Logic Corporation. Printed in U.S.A.
<PAGE> 76
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Wilfred J. Corrigan
Chairman
Chief Executive Officer
R. Douglas Norby
Executive Vice President
Chief Financial Officer
T.Z. Chu
Retired President
Hoefer Pharmacia Biotech, Inc.
Dr. Malcolm R. Currie
President
Chief Executive Officer
Currie Technologies, Inc.
James H. Keyes
Chairman
Chief Executive Officer
Johnson Controls, Inc.
EXECUTIVE OFFICERS
Wilfred J. Corrigan
Chairman
Chief Executive Officer
Elias J. Antoun
Executive Vice President
Consumer Products
John P. Daane
Executive Vice President Communications,
Computer and ASIC Products
John J. D'Errico
Executive Vice President
Storage Components and
Colorado Operations
Thomas Georgens
Senior Vice President & General Manager
Storage Systems, Inc.
W. Richard Marz
Executive Vice President
Geographic Markets
R. Douglas Norby
Executive Vice President
Chief Financial Officer
David E. Sanders
Vice President
General Counsel & Secretary
Lewis C. Wallbridge
Vice President
Human Resources
Joseph M. Zelayeta
Executive Vice President
Worldwide Operations
VICE PRESIDENTS
Maniam B. Alagaratnam
Package Development
Norman L. Armour
General Manager
Gresham Operations
Danny Biran
Strategic Marketing
Thomas Daniel
ASIC Technology
Simon P. Dolan
Consumer Products Marketing
W. Hugh Durdan
General Manager
Computer Products Division
Daniel L. Ellsworth
Memory and Mixed Signal Technology
Bruce L. Entin
Worldwide Customer Marketing
Geographic Markets
Donald J. Esses
U.S. Manufacturing
Darrell L. Jones
Colorado Operations
Dan King
Quality & Reliability
Charles E. Laughlin
General Manager
LSI Logic Japan Semiconductor, Inc.
Theodore Leno
Assembly and Test Operations
<PAGE> 77
Bryon Look
Corporate Development & Strategic Planning
Diana L. Matley
Investor Relations
R. Gregory Miller
Corporate Controller
Marlon R. Murzello
MIPS Engineering
Willsie H. Nelson
Worldwide Logistics
King F. Pang
Digital Video Engineering
Jordan S. Plofsky
General Manager
Networking Products Division
Ranko L. Scepanovic
Advanced Development Labs
Richard D. Schinella
Wafer Process R&D and Santa Clara Operations
Giuseppe Staffaroni
General Manager
Telecommunications and Wireless Division
Chiaki Terada
President
LSI Logic K.K.
Frank Tornaghi
North America Sales
Lam H. Truong
Information Technology &
Chief Information Officer
Daniel M. Weed
Worldwide Engineering Services
Jeff Wolf
General Manager
Pan Asia
Bill Wuertz
General Manager
Storage Components Division
<PAGE> 1
EXHIBIT 10.43
LSI LOGIC CORPORATION
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into effective as of November 20, 1998 (the "Effective Date"), by and
between [Name of Executive Officer] ("Employee") and LSI Logic Corporation a
Delaware corporation (the "Company"). Certain capitalized terms used in this
Agreement are defined in Section 1 below.
RECITALS
A. It is expected that the Company from time to time will consider the
possibility of a Change of Control. The Board of Directors of the Company (the
"Board") recognizes that such consideration can be a distraction to the Employee
and can cause the Employee to consider alternative employment opportunities.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to maximize the value of the Company upon a Change of Control for
the benefit of its shareholders.
C. In order to provide the Employee with enhanced financial security and
sufficient encouragement to remain with the Company notwithstanding the
possibility of a Change of Control, the Board believes that it is imperative to
provide the Employee with certain severance benefits upon the Employee's
termination of employment following a Change of Control.
AGREEMENT
In consideration of the mutual covenants herein contained and the continued
employment of Employee by the Company, the parties agree as follows:
1. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty taken
by the Employee in connection with his responsibilities as an employee with
the intention or reasonable expectation that such may result in substantial
personal enrichment of the Employee, (ii) Employee's conviction of a felony
which the Board reasonably believes has had or will have a material
detrimental effect on the Company's reputation or business, (iii) a willful
act by the Employee which constitutes misconduct and is injurious to the
Company, or (iv) continued willful violations by the Employee of the
Employee's obligations to the Company after there has been delivered to the
Employee a written demand for performance from the Company which describes
the basis for the Company's belief that the Employee has not substantially
performed his duties.
(b) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) the consummation of the Company of a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation;
(ii) the approval by the shareholders of the Company of a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets; or
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(iii) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly
or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding
voting securities.
(c) Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, a significant reduction of
the Employee's duties, position or responsibilities relative to the
Employee's duties, position or responsibilities in effect immediately prior
to such reduction, or the removal of the Employee from such position,
duties and responsibilities, unless the Employee is provided with
comparable duties, position and responsibilities; provided, however, that a
reduction in duties, position or responsibilities solely by virtue of the
Company being acquired and made part of a larger entity (as, for example,
when the Chief Financial Officer of the Company remains as such following a
Change of Control but is not made the Chief Financial Officer of the
acquiring corporation) shall not constitute an "Involuntary Termination;"
(ii) without the Employee's express written consent, a substantial
reduction, without good business reasons, of the facilities and perquisites
(including office space and location) available to the Employee immediately
prior to such reduction; (iii) a reduction by the Company of the Employee's
base salary as in effect immediately prior to such reduction; (iv) a
material reduction by the Company in the kind or level of employee benefits
to which the Employee is entitled immediately prior to such reduction with
the result that the Employee's overall benefits package is significantly
reduced; (v) without the Employee's express written consent, the relocation
of the Employee to a facility or a location more than thirty-five (35)
miles from his current location; (vi) any purported termination of the
Employee by the Company which is not effected for Cause or for which the
grounds relied upon are not valid; or (vii) the failure of the Company to
obtain the assumption of this Agreement by any successors contemplated in
Section 5 below.
(d) Termination Date. "Termination Date" shall mean the effective date
of any notice of termination delivered by one party to the other hereunder.
2. Term of Agreement. This Agreement shall terminate upon the date that is
five (5) years following the Effective Date, unless within such term a Change of
Control has occurred, in which case this Agreement shall terminate upon the date
that all obligations of the parties hereto under this Agreement have been
satisfied.
3. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as otherwise also may
be established under the Company's then existing employee benefit plans or
policies at the time of termination.
4. Severance Benefits.
(a) Termination Following A Change of Control.
(i) Involuntary Termination.
(A) Option Acceleration. If the Employee's employment with the
Company terminates as a result of an Involuntary Termination at any
time within twelve (12) months after a Change of Control, then as to
the unvested portion of each option to purchase shares of the
Company's equity securities that was granted to the Employee by the
Company at least six (6) months prior to the Change of Control (the
"Options"), the vesting and exercisability of each of the Options
shall be automatically accelerated and shall be fully vested and
exercisable as at the date of Involuntary Termination.
(B) Severance Benefits. If the Employee's employment with the
Company terminates as a result of an Involuntary Termination at any
time within twelve (12) months after a Change of Control, the
Employee, within seven (7) days of such Involuntary Termination,
shall be paid a lump sum that shall be equal to the sum of: (i)
twenty-four (24) months of the Employee's
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base salary (as in effect immediately prior to the Change of
Control), plus (ii) 200% of the Employee's target bonus for the year
in which the Change of Control occurs. In addition, the Company shall
provide the Employee with (x) health, dental and vision coverage
benefits during the period of twenty-four (24) months following the
date of Involuntary Termination, provided, however, that the Employee
elects continuation coverage pursuant to the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), within the
time period prescribed pursuant to COBRA and (y) life insurance
benefits during the period of eighteen (18) months following the date
of Involuntary Termination, at the same level as each of such
benefits were in effect for the Employee on the day immediately
preceding the day of the Employee's termination of employment.
(ii) Other Termination. If the Employee's employment with the
Company terminates other than as a result of an Involuntary Termination
at any time within twelve (12) months after a Change of Control, then
the Employee shall not be entitled to receive severance or other
benefits hereunder, but may be eligible for those benefits (if any) as
may then be established under the Company's then existing severance and
benefits plans and policies at the Termination Date.
(b) Accrued Wages and Vacation; Expenses. Without regard to the reason
for, or the timing of, Employee's termination of employment: (i) the
Company shall pay the Employee any unpaid base salary due for periods prior
to the Termination Date; (ii) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and
(iii) following submission of proper expense reports by the Employee, the
Company shall reimburse the Employee for all expenses reasonably and
necessarily incurred by the Employee in connection with the business of the
Company prior to the Termination Date. These payments shall be made
promptly upon termination and within the period of time mandated by law.
5. Successors.
(a) Company's Successors. Any successor to the Company (whether direct
or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and/or assets shall assume the Company's obligations under this
Agreement and agree expressly to perform the Company's obligations under
this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
include any successor to the Company's business and/or assets which
executes and delivers the assumption agreement described in this subsection
(a) or which becomes bound by the terms of this Agreement by operation of
law.
(b) Employee's Successors. Without the written consent of the Company,
Employee shall not assign or transfer this Agreement or any right or
obligation under this Agreement to any other person or entity.
Notwithstanding the foregoing, the terms of this Agreement and all rights
of Employee hereunder shall inure to the benefit of, and be enforceable by,
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
6. Limitation on Payments.
(a) In the event that the severance and other benefits provided for in
this Agreement or otherwise payable to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section
6 would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's severance benefits under Section 4 shall be payable
either (i) in full, or (ii) as to such lesser amount which would result in
no portion of such severance benefits being subject to excise tax under
Section 4999 of the Code, whichever of the foregoing amounts, taking into
account the applicable federal, state and local income taxes and the excise
tax imposed by Section 4999, results in the receipt by the Employee on an
after-tax basis, of the greatest amount of severance benefits under this
Agreement, notwithstanding that all or some portion of such severance
benefits may be taxable under Section 4999 of the Code.
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(b) If a reduction in the payments and benefits that would otherwise
be paid or provided to the Employee under the terms of this Agreement is
necessary to comply with the provisions of Section 6(a), the Employee shall
be entitled to select which payments or benefits will be reduced and the
manner and method of any such reduction of such payments or benefits
(including but not limited to the number of options that would vest under
Sections 4(a)(i)(A)) subject to reasonable limitations (including, for
example, express provisions under the Company's benefit plans) (so long as
the requirements of Section 6(a) are met). Within thirty (30) days after
the amount of any required reduction in payments and benefits is finally
determined in accordance with the provisions of Section 6(c), the Employee
shall notify the Company in writing regarding which payments or benefits
are to be reduced. If no notification is given by the Employee, the Company
will determine which amounts to reduce. If, as a result of any reduction
required by Section 6(a), amounts previously paid to the Employee exceed
the amount to which the Employee is entitled, the Employee will promptly
return the excess amount to the Company.
(c) Unless the Company and the Employee otherwise agree in writing,
any determination required under this Section 6 shall be made in writing by
the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required
by this Section 6, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999
of the Code. The Company and the Employee shall furnish to the Accountants
such information and documents as the Accountants may reasonably request in
order to make a determination under this Section. The Company shall bear
all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 6.
7. Notices.
(a) General. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
(b) Notice of Termination. Any termination by the Company for Cause or
by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other
party hereto given in accordance with this Section. Such notice shall
indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the Termination Date (which shall be not more than 30 days after
the giving of such notice). The failure by the Employee to include in the
notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder
or preclude the Employee from asserting such fact or circumstance in
enforcing his rights hereunder.
8. Arbitration.
(a) Any dispute or controversy arising out of, relating to, or in
connection with this Agreement, or the interpretation, validity,
construction, performance, breach, or termination thereof, shall be settled
by binding arbitration to be held in Santa Clara County, California, in
accordance with the National Rules for the Resolution of Employment
Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. The
arbitration proceedings shall be governed by federal arbitration law and by
the Rules, without reference to state arbitration law. Employee hereby
consents to the personal
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jurisdiction of the state and federal courts located in California for any
action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the parties are participants.
(c) The Company and Employee shall each pay one-half of the costs and
expenses of such arbitration, and each shall separately pay its counsel
fees and expenses.
(d) Employee understands that nothing in this Section modifies
Employee's at-will employment status. Either Employee or the Company can
terminate the employment relationship at any time, with or without cause.
(e) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT
OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE
INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION
THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO
A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL
ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED
TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH
OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR
INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT
OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION
IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990,
THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING
ACT, AND LABOR CODE SECTION 201, et seq;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor
shall any such payment be reduced by any earnings that the Employee may
receive from any other source.
(b) Waiver. No provision of this Agreement may be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) Integration. This Agreement and the stock option agreements
representing the Options represent the entire agreement and understanding
between the parties as to the subject matter herein and supersede all prior
or contemporaneous agreements, whether written or oral.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal substantive
laws, but not the conflicts of law rules, of the State of California.
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(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(f) Employment Taxes. All payments made pursuant to this Agreement
shall be subject to withholding of applicable income and employment taxes.
(g) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
EMPLOYEE
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LSI LOGIC CORPORATION
By:
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Title:
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EXHIBIT 10.44
LSI LOGIC CORPORATION
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered into
effective as of November 20, 1998 (the "Effective Date"), by and between WILFRED
J. CORRIGAN (the "Employee") and LSI Logic Corporation a Delaware corporation
(the "Company"). Certain capitalized terms used in this Agreement are defined in
Section 1 below.
RECITALS
A. It is expected that the Company from time to time will consider the
possibility of a Change of Control. The Board of Directors of the Company (the
"Board") recognizes that such consideration can be a distraction to the Employee
and can cause the Employee to consider alternative employment opportunities.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to maximize the value of the Company upon a Change of Control for
the benefit of its shareholders.
C. In order to provide the Employee with enhanced financial security and
sufficient encouragement to remain with the Company notwithstanding the
possibility of a Change of Control, the Board believes that it is imperative to
provide the Employee with certain benefits upon a Change of Control.
AGREEMENT
In consideration of the mutual covenants herein contained and the continued
employment of Employee by the Company, the parties agree as follows:
1. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) the consummation of the Company of a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation;
(ii) the approval by the shareholders of the Company of a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets; or
(iii) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly
or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding
voting securities.
(b) Termination Date. "Termination Date" shall mean the effective date
of any notice of termination of employment delivered by one party to the
other hereunder.
2. Term of Agreement. This Agreement shall terminate upon the date that is
five (5) years following the Effective Date unless within such term a Change of
Control has occurred, in which case this Agreement
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shall terminate upon the date that all obligations of the parties hereto under
this Agreement have been satisfied.
3. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
established under the Company's then existing employee benefit plans or policies
at the time of termination.
4. Benefits.
(a) Change of Control.
(i) Option Acceleration. Upon a Change of Control, then, as to the
unvested portion of each option to purchase shares of the Company"s
equity securities that was granted to the Employee by the Company at
least six (6) months prior to the Change of Control (the "Options"), the
vesting and exercisability of each of the Options shall be automatically
accelerated and shall be fully vested and exercisable as at the date of
Change of Control.
(ii) Other Benefits. Upon a Change of Control, the Employee, within
seven (7) days thereof, shall be paid a lump sum that shall be equal to
the sum of: (i) thirty-six (36) months of the Employee's base salary (as
in effect immediately prior to the Change of Control), plus (ii) 300% of
the Employee's target bonus for the year in which the Change of Control
occurs. In addition, the Company shall provide the Employee with (x)
health, dental and vision coverage benefits during the period of
twenty-four (24) months following the date of Termination, provided,
however, that the Employee elects continuation coverage pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), within the time period prescribed pursuant to COBRA and (y)
life insurance benefits during the period of eighteen (18) months
following the date of Involuntary Termination, at the same level as each
of such benefits were in effect for the Employee on the day immediately
preceding the day of the Employee's termination of employment.
(b) Accrued Wages and Vacation; Expenses. In addition: (i) the Company
shall pay the Employee any unpaid base salary due for periods prior to the
Termination Date; (ii) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and
(iii) following submission of proper expense reports by the Employee, the
Company shall reimburse the Employee for all expenses reasonably and
necessarily incurred by the Employee in connection with the business of the
Company prior to the Termination Date. These payments shall be made
promptly upon termination and within the period of time mandated by law.
5. Successors.
(a) Company's Successors. Any successor to the Company (whether direct
or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and/or assets shall assume the Company's obligations under this
Agreement and agree expressly to perform the Company's obligations under
this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term "Company" shall
include any successor to the Company's business and/or assets which
executes and delivers the assumption agreement described in this subsection
(a) or which becomes bound by the terms of this Agreement by operation of
law.
(b) Employee's Successors. Without the written consent of the Company,
Employee shall not assign or transfer this Agreement or any right or
obligation under this Agreement to any other person or entity.
Notwithstanding the foregoing, the terms of this Agreement and all rights
of Employee hereunder shall inure to the benefit of, and be enforceable by,
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
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6. Limitation on Payments.
(a) In the event that the benefits provided for in this Agreement or
otherwise payable to the Employee (i) constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) but for this Section 6 would be subject to
the excise tax imposed by Section 4999 of the Code, then the Employee's
benefits under Section 4 shall be payable either (i) in full, or (ii) as to
such lesser amount which would result in no portion of such benefits being
subject to excise tax under Section 4999 of the Code, whichever of the
foregoing amounts, taking into account the applicable federal, state and
local income taxes and the excise tax imposed by Section 4999, results in
the receipt by the Employee on an after-tax basis, of the greatest amount
of benefits under this Agreement, notwithstanding that all or some portion
of such benefits may be taxable under Section 4999 of the Code.
(b) If a reduction in the payments and benefits that would otherwise
be paid or provided to the Employee under the terms of this Agreement is
necessary to comply with the provisions of Section 6(a), the Employee shall
be entitled to select which payments or benefits will be reduced and the
manner and method of any such reduction of such payments or benefits
(including but not limited to the number of options that would vest under
Sections 4(a)(i)(A)) subject to reasonable limitations (including, for
example, express provisions under the Company's benefit plans) (so long as
the requirements of Section 6(a) are met). Within thirty (30) days after
the amount of any required reduction in payments and benefits is finally
determined in accordance with the provisions of Section 6(c), the Employee
shall notify the Company in writing regarding which payments or benefits
are to be reduced. If no notification is given by the Employee, the Company
will determine which amounts to reduce. If, as a result of any reduction
required by Section 6(a), amounts previously paid to the Employee exceed
the amount to which the Employee is entitled, the Employee will promptly
return the excess amount to the Company.
(c) Unless the Company and the Employee otherwise agree in writing,
any determination required under this Section 6 shall be made in writing by
the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required
by this Section 6, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999
of the Code. The Company and the Employee shall furnish to the Accountants
such information and documents as the Accountants may reasonably request in
order to make a determination under this Section. The Company shall bear
all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 6.
7. Notices.
General. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
8. Arbitration.
(a) Any dispute or controversy arising out of, relating to, or in
connection with this Agreement, or the interpretation, validity, construction,
performance, breach, or termination thereof, shall be settled by binding
arbitration to be held in Santa Clara County, California, in accordance with the
National Rules for the Resolution of Employment Disputes then in effect of the
American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
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(b) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. The arbitration
proceedings shall be governed by federal arbitration law and by the Rules,
without reference to state arbitration law. Employee hereby consents to the
personal jurisdiction of the state and federal courts located in California for
any action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the parties are participants.
(c) The Company and Employee shall each pay one-half of the costs and
expenses of such arbitration, and each shall separately pay its counsel fees and
expenses.
(d) Employee understands that nothing in this Section modifies Employee's
at-will employment status. Either Employee or the Company can terminate the
employment relationship at any time, with or without cause.
(e) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF,
RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING
ARBITRATION, CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND
RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE
EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING
CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF
CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH
AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR
PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE
FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT,
AND LABOR CODE SECTION 201, et seq;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS
RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement, nor shall any such payment
be reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement may be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) Integration. This Agreement and the stock option agreements
representing the Options represent the entire agreement and understanding
between the parties as to the subject matter herein and supersede all prior or
contemporaneous agreements, whether written or oral.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal substantive
laws, but not the conflicts of law rules, of the State of California.
-4-
<PAGE> 5
(e) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(f) Employment Taxes. All payments made pursuant to this Agreement shall be
subject to withholding of applicable income and employment taxes.
(g) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
<TABLE>
<S> <C>
EMPLOYEE LSI LOGIC CORPORATION
</TABLE>
<TABLE>
<S> <C>
/s/ By: /s/
- ----------------------------------------------------- -------------------------------------------------
(Wilfred J. Corrigan)
Title:
</TABLE>
-5-
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
(AS OF FEBRUARY 12, 1999)
Mint Technology, Inc.
LSI Logic Export Sales Corp.
LSI Logic Asia, Inc.
LSI Logic Leasing Company
LSI Logic (fsi), Inc.
LSI Logic Storage Systems, Inc. (a subsidiary of LSI Logic (fsi), Inc.)
Symbios International, Inc. (Cayman) (a subsidiary of LSI Logic (fsi),
Inc.)
Symbios Logic France S.A.R.L. (a subsidiary of LSI Logic (fsi), Inc.)
Symbios Singapore Pte. Ltd. (a subsidiary of LSI Logic (fsi), Inc.)
Symbios Logic Europe GmbH (a subsidiary of LSI Logic (fsi), Inc.)
LSI Logic Netherlands B.V.
LSI Logic International Services, Inc. (a subsidiary of LSI Logic
Netherlands B.V.)
LSI Logic Japan Semiconductor, Inc. (a subsidiary of LSI Logic Netherlands
B.V.)
LSI Logic K.K. (a subsidiary of LSI Logic Netherlands B.V.)
LSI Logic Corp. of Korea (a subsidiary of LSI Logic Netherlands B.V.)
LSI Logic Corp. of Canada, Inc. (a subsidiary of LSI Logic Netherlands
B.V.)
LSI Logic Singapore, Ltd. (a subsidiary of LSI Logic Netherlands B.V.)
LSI Logic Europe, Ltd. (a subsidiary of LSI Logic Netherlands B.V.)
LSI Logic GmbH (a subsidiary of LSI Logic Europe, Ltd.)
LSI Logic S.A. (France) (a subsidiary of LSI Logic Europe, Ltd.)
LSI Logic S.P.A. (Italy) (a subsidiary of LSI Logic Europe, Ltd.)
LSI Logic A.B. (Sweden) (a subsidiary of LSI Logic Europe, Ltd.)
LSI Logic S.A. (Spain) (a subsidiary of LSI Logic Europe, Ltd.)
LSI Logic Ltd. (U.K.) (a subsidiary of LSI Logic Europe, Ltd.) (Inactive)
Headland Technology Ltd. (U.K.) (a subsidiary of LSI Logic Europe, Ltd.)
(Inactive)
LSI Logic Export, Ltd. (a subsidiary of LSI Logic Europe, Ltd.) (Inactive)
LSI Logic Israel, Ltd. (a subsidiary of LSI Logic Export, Ltd.)
LSI Logic Netherlands Antilles B.V. (a subsidiary of LSI Logic Netherlands
B.V.)
LSI Logic HK Holdings (Cayman) (a subsidiary of LSI Logic Netherlands
Antilles B.V.)
LSI Logic Hong Kong, Ltd. (a subsidiary of LSI Logic Netherlands Antilles
B.V.)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 2-86474, No. 2-91907, No. 2-98732, No. 33-6188, No.
33-6203, No. 33-13265, No. 33-17720, No. 33-30385, No. 33-30386, No. 33-36249,
No. 33-41999, No. 33-42000, No. 33-53054, No. 33-66548, No. 33-66546, No.
33-55631, No. 33-55633, No. 33-55697, No. 33-59981, No. 33-59987, No. 333-12887,
No. 333-34285, No. 333-57563, No. 333-62159) of LSI Logic Corporation of our
report dated February 22, 1999, appearing on page 58 of this Annual Report on
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 200,080
<SECURITIES> 81,220
<RECEIVABLES> 248,962
<ALLOWANCES> 3,424
<INVENTORY> 178,107
<CURRENT-ASSETS> 819,503
<PP&E> 2,256,542
<DEPRECIATION> 776,429
<TOTAL-ASSETS> 2,799,997
<CURRENT-LIABILITIES> 592,844
<BONDS> 0
0
0
<COMMON> 1,414
<OTHER-SE> 1,508,721
<TOTAL-LIABILITY-AND-EQUITY> 2,799,997
<SALES> 1,490,701
<TOTAL-REVENUES> 1,490,701
<CGS> 867,278
<TOTAL-COSTS> 867,278
<OTHER-EXPENSES> 748,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,477
<INCOME-PRETAX> (123,648)
<INCOME-TAX> 7,916
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (131,642)
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
