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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, 1999
[ ] 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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<S> <C>
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
</TABLE>
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. [X]
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 March 15, 2000
as reported on the New York Stock Exchange, was approximately
$21,655,056,243.50. 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 March 15, 2000, registrant had 302,749,965 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts I,
II, III, and IV of this Form 10-K Report: (1) Proxy Statement for registrant's
2000 Annual Meeting of Stockholders, and (2) Registrant's 1999 Annual Report to
Stockholders.
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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 are focused on the three markets of
communications, network computing, and storage area network systems, that we
believe will continue to grow rapidly for the foreseeable future. Our integrated
circuits are used in a wide range of communication devices, including for
wireless, broadband, data networking, and set-top-box applications. We also
provide other types of integrated circuit products and board-level products for
network computing and high-performance storage controllers and systems for
storage area networks.
We operate in two segments -- the Semiconductor segment and the Storage
Area Network ("SAN") Systems segment, in which 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
applications in three major markets, which are:
- Communications;
- Network Computing; and
- Storage Area Network Systems.
In the Semiconductor segment, we use advanced process technology and design
methodologies to design, develop and manufacture highly complex integrated
circuits. These include both application specific integrated circuits, commonly
referred to as ASICs, and standard products. ASICs are designed for specific
applications defined by the customer; whereas standard products are for market
applications that we define.
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.
In the SAN Systems segment, our enterprise storage systems are designed,
manufactured, and sold by our wholly owned subsidiary -- LSI Logic Storage
Systems, Inc. Our high-performance, highly scalable open storage area network
systems and storage solutions are available through leading original equipment
manufacturers, or OEMs, and a worldwide network of resellers under the
MetaStor(R) brand name.
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
Semiconductor 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, our business
strategy includes the following key elements:
- Target Growth Markets and Selected Customers. We concentrate our sales
and marketing efforts on leading OEM customers in targeted growth
markets, led by the communications, networking, and storage area network
systems applications. Our engineering expertise is focused on developing
technologies that will meet the needs of leading-edge customers in order
to succeed in these market areas.
- 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. This results in higher
product complexity, greater differentiation, and faster time to market.
We also have used this design methodology to develop proprietary standard
products.
- Promote Highly Integrated Design and Manufacturing Technology. We use
proprietary and leading third-party electronic design automation, or 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 engage with customers for
our semiconductor products under various arrangements whereby the extent
of the engineering support we provide will be determined in accordance
with the customer's requirements. For example, a customer may primarily
use its own engineers for substantial development of its product design
and retain our support for silicon-specific engineering work. We also
enter into engineering design projects, including on a "turn-key" basis.
- 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 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 Asia. Our production operations in the U.S. and
Japan, and our assembly and test subcontractors in Asia are ISO-9002
certified, an important international measure for quality.
- Leverage Alliances with Key Partners. We are continually seeking to
establish relationships with key partners in a diverse range of
semiconductor and storage-system technologies to promote new products,
services, operating standards, and manufacturing capabilities and to
avail ourselves of cost efficiencies that may be obtained through
collaborative development.
- 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 standard-based products,
allowing our customers to achieve time-to-market and other competitive
advantages.
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- Operate Worldwide. We market our products and engage with our customers
on a worldwide basis through direct sales, marketing, and field technical
staff and through independent sales representatives and distributors. Our
network of design centers is located in major markets to allow 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.
SAN Systems Business Strategy
- Highly Leveraged Core Competencies. In the SAN systems market, we
leverage expertise used to develop our semiconductors, storage I/O
components, storage management software, and storage systems in the
development of scalable storage solutions. We aim to utilize the full
scope of our technical expertise to design and develop interoperable,
easy-to-manage, leading price/performance products.
- Modular Design Philosophy. Our flexible approach to storage system design
allows elements of a system to be configured and/or customized together
or separately to meet customer requirements. Benefits to our customers
include investment protection, reduced support costs, and a common
management interface and features. This allows customers to start with
pilot projects and later scale to full implementation.
- Complementary Channels of Distribution. We conduct sales of storage
systems through both direct and indirect channels to reach the largest
and fastest growing segments of the market. We sell on a direct basis to
OEM customers that are among the top ten sellers of storage products
worldwide. In addition, we are dedicated to providing proven and tested
SAN solutions in the open storage systems market through the reseller
channel. Resellers are the exclusive channel for the sale of
MetaStor-brand storage products.
- Flexible Business Models. Our strategy is to provide flexible,
customizable solutions with room for value-added components, software,
and services provided by the channel. Our modular product set allows OEMs
and resellers to devise a solution to best meet their needs and to
satisfy customers.
PRODUCTS AND SERVICES
Semiconductor Products
In our semiconductor business, we manufacture, market, and sell both ASICs
and standard products for electronic systems applications. ASICs are
semiconductors that are designed for a unique, customer-specified application.
Our standard products are sold to multiple customers offering system-level
products using applications for which our standard products are designed. Both
our ASICs and standard products are predominately manufactured using our
proprietary process technologies. We offer a wide range of products targeted for
the communications, network computing, and storage area network markets.
- Communications. For the burgeoning communications market, we offer a
broad array of products, including for wireless, data networking,
broadband, and set-top-box applications.
Wireless. Our product offerings feature a programmable single-chip code
division multiple access baseband processor for use in wireless handsets.
We are also working on future CDMA generation products leading to
third-generation wideband digital products. In addition, our customers
benefit from ASIC-design capabilities based on strong microprocessor and
digital signal processor core offerings, mixed-signal functions, and
industry-standard interfaces.
Data Networking. We offer Switched Ethernet, Fast Ethernet, and Gigabit
Ethernet standard products used in local area network and wide area
network equipment such as hubs, routers and switches. We develop ASICs
using MIPS-based reduced instruction set computing processors and
ARM(R)-based processors, digital signal processors, HyperPHY(TM)
high-speed I/O transceiver cores, and Ethernet MAC and PHY cores,
including our GigaBlaze(R) core for high-speed transmission. We also offer
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mixed-signal (digital and analog) integration and standard products such
as the ATMizer(R) family of products that supports segmentation and
reassembly functions on a single chip.
Broadband. We offer a blend of high-performance, high-integration and
low-power silicon solutions that are pivotal in development of Internet
infrastructure, including switches add-drop multiplexers, and computer
servers. We are also engaged in the development of new high-speed Internet
access technologies targeting cable modems, designated subscriber lines,
and fixed wireless mediums.
Set-Top-Box. Our processors, encoders, decoders, channel and source
products are designed into video games and digital set-top-box systems for
satellite, cable, and terrestrial TV reception and Internet connectivity.
We target high-volume consumer product applications with advanced digital
and mixed signal technology and complete system solutions. Furthermore, we
employ this technology to manufacture standard products incorporated in
home video games, digital cameras, and DVD players.
- Network Computing. Our product offerings in the field of network
computing include computer and storage components.
Computer. We provide tools, libraries, semiconductor processes and
packaging products which enable our OEM customers to reliably develop
high-performance designs for advanced computer systems. For the office
automation market, we provide a suite of MIPS cores and ARM processors, in
addition to industry-standard bus interface cores such as USB, IEEE 1394,
and PCI.
Storage Components. Our storage components make possible data storage and
transmission between a host computer and peripheral devices such as disk
drives, scanners, and printers. We offer industry leading I/O Standard
Products including product families in fibre channel, SCSI, and SCSI
expanders. We also provide complete solutions to our customers, including
integrated circuits for motherboard or adapter applications, host adapter
boards, and software. Our fibre channel offerings include the Merlin(TM)
family of high-performance fibre channel protocol controllers used in
high-performance ASIC designs.
In 1999, we delivered our 500th design using our proprietary cell-based
CoreWare design methodology to a high-volume customer, approximately five years
after introducing the design process that allows for system-on-a-chip solutions.
Our CoreWare design methodology offers a comprehensive design approach for
creating a system on a chip efficiently, predictably, and rapidly. Our CoreWare
libraries include high-level building blocks based on industry standard
electronic functions, interfaces, and protocols.
Our emphasis on cell-based product lines reflects the market preference for
use of this methodology to develop advanced integrated circuits. Customers
obtain greater flexibility in the design of system-level products using
cell-based technology than is available in an array-based methodology that
limits the placement of circuits to a fixed grid. Our CoreWare cells are
connected together electronically to form an entire system on a single chip.
These system-on-a-chip solutions can be used in ASICs or standard products
focused on the communications and network computing markets.
CoreWare cells that can be used in a diverse range of communications and
network computing applications include:
- the GigaBlaze serial core and SeriaLink(R) transceiver core;
- the HyperPHY(TM) high speed I/O (input/output) transceiver core;
- the ZSP4000 DSP core based on the ZSP DSP architecture;
- the ARM CPU (central processing unit) core;
- the OakDSPCore(R) digital signal processor core;
- the MiniRISC(R) family of MIPS-based RISC processor cores; and
- embedded FPGA core for high-volume programmable applications.
Customers for our ASIC products may utilize our engineering design
capabilities in a variety of ways. Typically, the ASIC design process involves
participation by both our engineers and the customer's engineers.
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We seek to engage with customers early in their new system product development
process and will accept large design assignments where we share substantial
risks and costs with the customer. We provide advice on the product design
strategies to optimize product performance and suitability for the targeted
application. In addition, our capabilities include support in the areas of
architecture and system-level design simulation, verification, and synthesis
used in the development of complex integrated circuits.
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 that 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 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.
SAN Systems Products
In the SAN Systems segment, we offer a broad line of storage systems
focused on the storage area network that span the entire enterprise, from
workgroup to data center. This includes controller modules, drive modules and
complete storage systems. Our storage subsystems can be integrated on a
component basis or aggregated into a complete storage solution, allowing OEMs
the flexibility to create differentiated products. This modularity in our
products also allows our indirect channel to customize solutions bundled with
value-added components, software, and services. Our storage systems are based on
highly scalable and available hardware and software solutions for the enterprise
market, including tested, real-world solutions for storage area networks.
- SAN Storage. MetaStor S-Class storage systems are designed for storage
area networks. These systems are an extension of the server-attached
storage family, combining fibre channel performance with our proprietary
Multi-Pathing Architecture. The product line emphasizes high availability
with redundant, dual-active controllers and efficient management with
SANtricity(TM) Storage Manager software.
- Server-Attached Storage. The MetaStor server-attached storage family
supports Windows(R) NT, Solaris(TM), and HP-UX platforms. These products
have scalable capacity up to 5.0 terabyte per cabinet allowing for
extended storage growth and redundant, hot-swappable components for high
availability.
- SANtricity Storage Manager Software. This storage management software
allows consolidation of storage through the SANshare(TM)
storage-partitioning feature. Additionally, the software provides a
single management interface and remote access capabilities. The software
features enhanced graphical user interface features, automatic device
discovery, and one-button configuration.
- Network-Attached Storage. The intelligent storage hub is a family of
network-attached storage solutions that enable transparent file sharing
between heterogeneous environments and are intended to reduce the cost of
ownership by consolidating storage and management functions. Features
include multi-protocol support, a high-performance file system, a backup
solution, and enterprise-level storage management.
- Storage Controller Modules. Our storage controller modules are designed
from the chip-level up and support both Ultra2 SCSI and fibre channel
interfaces. Using an architecture that incorporates our own ASICs enables
the controller to deliver superior performance. Combined with our drive
modules, each controller is able to have scalable capacity up to three
terabytes, and allow for either rack-mount or desk-side configurations.
Other features include redundant, dual-active controllers and automatic
fail-over for maximum data availability.
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- Storage Drive Modules. Our storage drive modules allow for increases in
storage capacity and performance as needs change. The drive modules
utilize our chip capabilities to monitor power, temperature, and fans,
and to relay information back to the controller. In addition, through the
integration of advanced technology from industry disk drive vendors, we
provide packaging intended to maximize capacity and minimize size.
To meet open computing standards, our storage systems are designed to
operate within the Windows NT, UNIX, and Solaris operating-system environments.
These products are targeted at key data storage applications, including:
- Internet servers;
- electronic commerce;
- data warehousing;
- on-line transaction processing;
- video delivery, editing and production; and
- migration of mission critical applications off mainframe computers.
In 1999, LSI Logic Storage Systems, Inc. announced its MetaStor Open SAN
Initiative, offering customers proven, multi-vendor SAN storage solutions, based
on the MetaStor S-Class family of fibre channel storage products. This
initiative offers a cooperative framework to promote customer choice,
flexibility, dependable support, and faster time-to-market of complete SAN
solutions.
We offer a toll-free 24 hour-a-day, 7 day-a-week technical support hotline
for customers worldwide using the MetaStor line of network- and server-attached
enterprise storage systems.
MARKETING AND DISTRIBUTION
Semiconductor Marketing and Distribution
Our semiconductor products and design services targeted for the
communications and network computing markets are primarily sold through our
network of direct sales and marketing and field engineering offices and sales
representatives located in North America, Europe, Japan, China, and elsewhere in
Asia. Our sites are interconnected by means of advanced computer networking
systems that allow for the continuous, uninterrupted exchange of information
that is vital for the proper execution of our sales and marketing activities.
International sales are subject to risks common to export activities, including
governmental regulations, tariff increases, and other trade barriers and
currency fluctuations.
The highly competitive semiconductor industry is characterized by rapidly
changing technology, short product cycles, and emergent standards. Our marketing
strategy requires that we accurately forecast trends in the evolution of product
and technology development. We must then act upon this knowledge in a timely
manner to develop competitively priced products offering superior performance.
As part of this strategy, we are active in the formulation and adoption of
critical industry standards that influence the design specifications of our
products. Offering products with superior price and performance characteristics
is essential to satisfy the rapidly changing needs of our customers in the
dynamic communications and network computing markets.
We rely primarily on direct sales and marketing, but we also work with
independent distributors in North America, Europe, Japan and elsewhere in Asia.
Some of our distributors possess engineering capabilities and purchase both
ASICs and standard products from us for resale to their customers. Other
distributors, especially in Asia, focus solely on the sale of standard products.
Our agreements with distributors generally grant limited rights to return
inventory and obtain credits for price reductions applicable to products held in
inventory. We maintain appropriate reserves to account for these factors.
However, owing to the relatively small quantities of products held in inventory
by our distributors, we believe that these arrangements do not result in
material financial exposure for our company.
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SAN Systems Marketing and Distribution
SAN systems products are sold worldwide both on a direct basis to OEMs and
through indirect reseller channels to end-users. The MetaStor brand of scalable
SAN systems is exclusively marketed through a worldwide network of value-added
resellers, system integrators, and distributors. We closely manage these
relationships to meet the diverse needs of end-users. Our marketing efforts are
driven by an industry-wide trend toward the implementation of storage area
networks to maximize performance, availability, and efficiency.
Our direct sales force provides customized SAN systems solutions generally
to large, well-known manufacturers of computer equipment. Our product
development strategy focuses on implementing the latest storage technologies to
improve the performance of our hardware and software storage solutions. As a
pioneer in the development of redundant array of independent disks technology,
and as a member of the Fibre Channel Industry Association and Storage Networking
Industry Association, we are continually driving industry standards for fibre
channel and SAN solutions.
CUSTOMERS
We seek to leverage our expertise in the fields of communications, network
computing, and SAN systems by marketing our products and services to market
leaders. Our strategic-account focus is on larger, well-known companies that
produce high-volume products incorporating our semiconductors and storage system
products. 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 we have selected. While this could result in lower revenues and
higher unit costs owing to an under-utilization of our resources, we believe
this strategy provides us with the greatest opportunity to drive further growth
in sales and unit volumes.
We operate in a rigorous competitive environment and our continued success
requires that we consistently develop and manufacture products that meet the
needs of our customers. There is no assurance that we will achieve significant
sales revenues from one or more of our strategic customers. This could result in
lower revenues for our company.
In 1999, Sun Microsystems, Inc. accounted for greater than 10% of our
consolidated revenues. No other customer accounted for greater than 10% of
consolidated revenues.
MANUFACTURING
Semiconductor Manufacturing
Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer requirements for volume production.
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. 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. The customer specifies the functional test criteria for
ASICs.
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
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
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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(TM) process technology) allowing for up to 24,000,000
usable gates on a single chip. Our G10(R) process technology is capable of
producing 0.25 micron products. Our next generation 0.13 micron G12(TM) process
technology is planned for volume production in the third quarter of 2000. These
advanced process technologies allow for greater circuit density and increased
functionality on a single chip.
Substantially all of our wafers are fabricated in our factories in Gresham,
Oregon, Tsukuba, Japan, and Colorado Springs, Colorado. The factories in Gresham
and Tsukuba are ISO-9002 certified and the facility in Colorado Springs is
ISO-9001 certified -- important internationally recognized standards for
quality. In July 1999, the older of the two Tsukuba factories, which produced
0.38 micron products, was closed after eleven years of service. This action was
taken as part of a comprehensive restructuring and cost reduction plan commenced
in 1998.
Our newest manufacturing facility is located in Gresham, Oregon on 325
acres outside of Portland. This facility is equipped for advanced manufacturing
operations and is designed to accommodate our expansion requirements well into
the foreseeable future. The plant is equipped to produce eight-inch wafers
hosting products manufactured to the G10, G11, and G12 processes.
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 offer a wide range of packaging solutions for system-on-a-chip designs.
We have also developed a high-performance, 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. We also offer a wide array of ceramic and plastic wire-bond
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, South Korea, Taiwan, and Hong Kong.
We also utilize subcontractors in Thailand for the assembly and test of our host
adapter boards.
Both manufacturing and sales of our semiconductor 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. We cannot guarantee that current arrangements 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.
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
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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 supply us with equipment and/or services. 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 will be available to meet our needs. Such
disruptions could materially affect our operations, which could have a material
adverse impact on our operating results and financial condition.
The primary raw materials used in the manufacturing of semiconductors
include raw wafers and certain chemicals used in the processing of
semiconductors. The raw wafers are obtained primarily from suppliers in Japan,
whereas other material inputs are obtained on a local basis. Our operations also
depend upon a continuing adequate supply of electricity, natural gas and water.
These energy sources are available on a continuous basis and in adequate
quantities for current needs. An interruption in the supply of raw materials or
energy inputs for any reason would have an adverse effect on our manufacturing
operations.
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.
SAN Systems Manufacturing
The manufacturing of SAN systems products involves the assembly and testing
of components, including our semiconductors, which are then integrated into
final products. Our manufacturing facility in Wichita, Kansas, assembles and
tests high performance array controllers, rack-mount modules, and complete
storage systems.
ISO-9001 certification at our Kansas manufacturing facility has been
maintained since April 1992. Product quality is achieved through employee
training, automated testing, and sample auditing. Supply Line Management extends
quality through the component and subassembly supplier base with continuous
reporting and supplier/product qualification programs.
SAN systems product and manufacturing designs are highly modularized for
flexibility. Our manufacturing operation includes Configure to Order and
Assemble to Order capabilities. These processes have been implemented in an
effort to reduce requisite lead times for the delivery of product.
Our SAN systems manufacturing operations are based primarily on an
integrated Enterprise Resource Planning manufacturing application system
purchased from a third party. This ERP system is augmented with several of our
proprietary software tools that support the production process through automated
product configuration and automated electronic testing. Failure of these systems
would cause a disruption in the manufacturing process and could result in delays
of product shipments and/or customer billings.
Our manufacturing facility in Wichita, Kansas depends upon a continuous
supply of electricity from a single utility provider. Any natural or manmade
disruptions could materially affect our operating results and financial
condition.
BACKLOG
Semiconductor Backlog
In the Semiconductor segment, we generally do not have long-term volume
purchase contracts with our customers. Instead, customers place purchase orders
which are subject to acceptance by us. The timing of the design activities for
which we receive payment 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
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<PAGE> 11
lag between the commencement of design work and the delivery of a purchase order
for the units of a developed product. Also, customers may from time to time
revise delivery quantities or delivery schedules to reflect their changing
needs. For these reasons, our backlog as of any particular date is not a
meaningful indicator of future sales.
SAN Systems Backlog
In the SAN Systems segment, our large customers who are original equipment
manufacturers place orders that are subject to acceptance by us in accordance
with their requirements and our delivery lead time capabilities. In our reseller
channel, we typically receive requests for product to be delivered within two
weeks or less. Accordingly, our backlog as of any particular date is not a
meaningful indicator of future sales.
COMPETITION
Semiconductor Competitors
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, 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 that we offer.
Our major competitors include large domestic companies such as IBM
Corporation, Lucent Technologies, Inc., Motorola, Inc., Texas Instruments, Inc.,
and Conexant Systems, Inc. Other competitors in strategic markets include
Adaptec, Inc., QLogic Corporation, C-Cube Microsystems, Inc., and Broadcom
Corporation. In addition, the expansion of certain companies such as Intel
Corporation into markets in which we operate also presents competition for us.
We also face competition from certain large foreign corporations, including
Philips Electronics, N.V., STMicroelectronics, S.A., Toshiba Corporation, and
NEC Corporation.
The principal competitive factors in the industry include:
- design capabilities;
- differentiating product features;
- product performance characteristics;
- time to market;
- price;
- manufacturing processes; and
- utilization of emerging industry standards.
We believe that we presently compete favorably with respect to these
factors. It is possible, however, that other custom design solutions will be
developed by our competitors that could have a material adverse impact on our
competitive position. Our competitors may also decide from time-to-time to
aggressively lower prices of products that compete with us in order to sell
related products or achieve strategic goals. Strategic pricing by competitors
can place strong pricing pressure on our products in certain transactions,
resulting in lower selling prices and gross margins for those transactions.
The markets into which we sell our semiconductor products are subject to
severe price competition. We expect to continue to experience declines in the
selling prices of our semiconductor products over the life cycle of each
product. In order to offset or partially offset declines in the selling prices
of our products, we must continue to reduce the costs of products through
product design changes, manufacturing process changes, and yield improvements.
We do not believe that we can continually achieve cost reductions that fully
offset the
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<PAGE> 12
price declines of our products, and therefore gross margin percentages will
generally decline for existing products over their life cycles.
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 there is no
assurance that our CoreWare methodology approach and product offerings will
continue to receive market acceptance. Customers in our targeted markets
frequently require system-level solutions. Our ability to deliver complete
solutions may also require that we succeed in obtaining licenses to necessary
software and integrating this software with our semiconductors.
SAN Systems Competitors
The SAN systems market 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;
- interoperability with other network devices;
- features and functionality;
- availability;
- reliability, technical service, and support;
- quality of system integration;
- existence and accessibility of differentiating features; and
- quality and availability of supporting software.
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 SAN systems products compete primarily with products
from independent storage providers such as EMC Corporation, Hitachi Data Systems
Corporation, and MTI Technology Corporation. In addition, many of our current
and potential customers in this market have internal storage divisions that
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, Sun Microsystems, Inc., and Unisys
Corporation, will continue to purchase our storage systems.
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
in both the Semiconductor and the SAN Systems segments. In both segments, we
also maintain trademarks for certain of our products and services and claim
copyright protection for certain proprietary software and documentation.
Patents, trademarks, and other forms of protection for our intellectual property
are important, but we believe our future success principally depends upon the
technical competence and creative skills of our personnel.
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<PAGE> 13
In the Semiconductor segment, 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 entered
into certain cross-license agreements that generally provide for the
non-exclusive licensing of rights to design, manufacture, and sell products and,
in some cases, 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. There is no
assurance 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 U.S. legal system.
In the SAN Systems segment, we own a portfolio of patents and patent
applications concerning a variety of storage technologies. We also maintain
trademarks for certain of our products and services and claim copyright
protection for certain proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other proprietary
information through agreements and other security measures, and have implemented
internal procedures to identify patentable inventions and pursue protection in
selected derivatives.
Please see Item 3, Legal Proceedings; additional risk factors set forth in
the Risk Factors section; and Note 12 of the Notes, below for additional
information.
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 tools, 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).
<TABLE>
<CAPTION>
YEAR AMOUNT PERCENT OF REVENUE
---- -------- ------------------
<S> <C> <C>
1999.......................................... $297,554 14%
1998.......................................... $291,125 19%
1997.......................................... $229,735 17%
</TABLE>
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, we anticipate our research and
development investment in 2000 to be 16% of revenues.
ENVIRONMENTAL REGULATION
Federal, state and local regulations, in addition to 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 current 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
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<PAGE> 14
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 impermissible 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/or
- 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
As of December 31, 1999, we had approximately 6,300 employees.
Our future success depends upon 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. We currently have favorable employee relations,
but 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.
RISK FACTORS
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Prospectus and in the documents incorporated herein by
reference. 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, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements.
OUR PRODUCT AND PROCESS DEVELOPMENT ACTIVITIES OCCUR IN A HIGHLY
COMPETITIVE ENVIRONMENT. The Semiconductor and SAN Systems segments in which we
conduct business are characterized by rapid technological change, short product
cycles, and evolving industry standards. We believe 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 and integration of our CoreWare
libraries into our design capabilities. Our cores and standard products 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 cores or standard products 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.
WE OPERATE HIGHLY COMPLEX AND COSTLY MANUFACTURING FACILITIES. The
manufacture and introduction of our products is a complicated process. We
confront the following challenges in the manufacturing process that require us
to:
- maintain a competitive manufacturing cost structure;
- implement the latest process technologies required to manufacture new
products;
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<PAGE> 15
- exercise stringent quality control measures to ensure high yields;
- effectively manage the subcontractors engaged in the test and assembly of
products; and
- update equipment and facilities as required for leading edge production
capabilities.
We do not control the timing or size of orders for our products. We
generally do not have long-term volume production contracts with our customers.
There is a risk that we will be unable to meet sudden increases in demand beyond
our current manufacturing capacity, which may result in additional capital
expenditures and production costs. Meanwhile, order volumes below anticipated
levels may result in the under-utilization of our manufacturing facilities,
resulting in higher per unit costs, which could adversely impact our operating
results and financial condition.
OUR MANUFACTURING FACILITIES ARE SUBJECT TO DISRUPTION FOR REASONS BEYOND
OUR CONTROL. Our newest wafer fabrication site located in Gresham, Oregon is a
highly complex, state-of-the-art facility. Anticipated production rates depend
upon the reliable operation and effective integration of a variety of hardware
and software components. There is no assurance that all of these components will
be fully functional or successfully integrated on time or that the facility will
achieve the forecasted yield targets. The capital expenditures required to bring
the facility to full operating capacity may be greater than we anticipate and
result in lower margins.
Operations at any of our primary manufacturing facilities, or at any of our
test and assembly subcontractors, may be disrupted for reasons beyond our
control, including work stoppages, fire, earthquake, floods, or other natural
disasters. Such an unexpected disruption could cause delays in shipments of
products to our customers and alternate sources for production may be
unavailable on acceptable terms. This could result in the cancellation of orders
or loss of customers.
WE CONFRONT RISKS FROM THE YEAR 2000 ISSUE. We use a significant number of
computer software programs and operating systems in our internal operations,
including financial, order management, and manufacturing systems. The inability
of computer software programs to accurately recognize and process date codes
designating the year 2000 and beyond could cause systems to yield inaccurate
results or create problems that interrupt our operations. We did not experience
any significant failure of computer systems during the critical transition from
the year 1999 to 2000. Based on tests conducted as part of our Year 2000
compliance program, we do not anticipate any material Year 2000 issues
associated with our operations hereinafter. However, potential failures in the
computer systems of our suppliers or customers could have an indirect, adverse
impact on our operations.
WE HAVE SIGNIFICANT CAPITAL REQUIREMENTS TO MAINTAIN AND GROW OUR
BUSINESS. In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. During 2000 we anticipate
that we will spend approximately $450 million on capital assets and that we will
be required to spend potentially larger amounts thereafter. We may seek
additional equity or debt financing from time to time and cannot be certain that
additional financing will be available on favorable terms. Moreover, any future
equity or convertible debt financing will decrease the percentage of equity
ownership of existing stockholders and may result in dilution, depending on the
price at which the equity is sold or the debt is converted. 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.
As of December 31, 1999, we have bank borrowings outstanding of
approximately $380 million. These include approximately $296 million in debt
related to the acquisition of Symbios, Inc. in 1998, in addition to 8.6 billion
yen (approximately US $84 million) used to finance capital expenditures related
to our manufacturing operations in Japan. The debt obligations related to Japan
expose us to exchange rate fluctuations for the period of time from the start of
the transaction until settlement. We use forward exchange contracts to manage
our exposure to currency fluctuations. There is no assurance that these hedging
transactions will eliminate exposure to currency rate fluctuations that could
affect our operations and/or cash flows.
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<PAGE> 16
WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES. We have
international subsidiaries and distributors that operate and sell our products
globally. Further, we purchase a substantial portion of our raw materials and
manufacturing equipment from foreign suppliers, and incur labor and other
operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries.
WE DO BUSINESS IN EUROPE AND FACE RISKS ASSOCIATED WITH THE EURO. A new
European currency was implemented in January 1999 to replace the separate
currencies of eleven western European countries. This has required changes in
our operations as we modified systems and commercial arrangements to deal with
the new currency. 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 will continue to address them, there can be no assurances that all problems
will be foreseen and controlled without any adverse impact on our operating
results or financial condition.
WE PROCURE PARTS AND RAW MATERIALS FROM LIMITED DOMESTIC AND FOREIGN
SOURCES. We use a wide range of parts and raw materials in the production of our
semiconductors, host adapter boards, and storage systems, including silicon
wafers, processing chemicals, and electronic and mechanical components. We do
not generally have guaranteed supply arrangements with our suppliers and do not
maintain an extensive inventory of parts and materials for manufacturing. We
purchase some of these parts and materials from a limited number of vendors and
some from a single supplier. On occasion, we have experienced difficulty in
securing an adequate volume and quality of parts and materials. There is no
assurance that, if we have difficulty in obtaining parts or materials in the
future, alternative suppliers will be available, or that these suppliers will
provide parts and materials in a timely manner or on favorable terms. As a
result, we may be adversely affected by delays in new and current product
shipments. If we cannot obtain adequate materials for manufacture of our
products, there could be a material adverse impact on our operating results and
financial condition.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS. We compete in markets that are
intensely competitive, and which exhibit both rapid technological change and
continual price erosion. Our competitors include many large domestic and foreign
companies that have substantially greater financial, technical, and management
resources. Several major diversified electronics companies offer ASIC products
and/or other standard products that are competitive with our product lines.
Other competitors are specialized, rapidly growing companies that sell products
into the same markets that we target. Some of our large customers may develop
internal design and production capabilities to manufacture their own products,
thereby displacing our products. There is no assurance that the price and
performance of our products will be superior relative to the products of our
competitors. As a result, we may experience a loss of competitive position that
could result in lower prices, fewer customer orders, reduced revenues, reduced
gross margins, and loss of market share. To remain competitive, we continually
evaluate our worldwide operations, looking for additional cost savings and
technological improvements.
Our future competitive performance depends on a number of factors,
including our ability to:
- properly identify target markets;
- 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;
- respond effectively to new technological changes or new product
announcements by others;
- adapt products and processes to technological changes; and
- adopt and/or set emerging industry standards.
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<PAGE> 17
We may not meet our design, development, and introduction schedules for new
products or enhancements to our existing and future products. In addition, our
products may not achieve market acceptance or sell at favorable prices.
WE CONCENTRATE OUR SALES EFFORTS ON A LIMITED NUMBER OF CUSTOMERS. We are
increasingly dependent on a limited number of customers for a substantial
portion of revenues as a result of our strategy to focus our marketing and
selling efforts on select, large-volume customers.
Our operating results and financial condition could be affected if:
- we do not win new product designs from major customers;
- major customers reduce or cancel their existing business with us;
- major customers make significant changes in scheduled deliveries; or
- there are declines in the prices of products that we sell to these
customers.
WE UTILIZE INDIRECT CHANNELS OF DISTRIBUTION OVER WHICH WE EXERCISE LIMITED
CONTROL. We derive a material percentage of product revenues from independent
reseller and distributor channels. Our financial results could be adversely
affected if our relationship with these resellers or distributors were to
deteriorate or if the financial condition of these resellers or distributors
were to decline. In addition, as our business grows, we may have an increased
reliance on indirect channels of distribution. There can be no assurance that we
will be successful in maintaining or expanding these indirect channels of
distribution. This could result in the loss of certain sales opportunities.
Furthermore, the partial reliance on indirect channels of distribution may
reduce our visibility with respect to future business, thereby making it more
difficult to accurately forecast orders.
OUR COMPANY OPERATIONS ARE AFFECTED BY CYCLICAL FLUCTUATIONS. The
Semiconductor and SAN Systems segments in which we compete are subject to
cyclical fluctuations in demand. As a result, we may experience periodic
declines in sales or the prices of our products as a result of the following:
- rapid technological change, product obsolescence, and price erosion in
our products;
- maturing product cycles in our products or products sold by our
customers;
- increases in worldwide manufacturing capacity for semiconductors,
resulting in declining prices; and
- changes in general economic conditions, which may cause declines in our
product markets or the markets of our suppliers and customers.
The semiconductor industry has experienced periods of rapid expansion of
production capacity. Even when the demand for our products remains constant, the
availability of additional excess production capacity in the industry creates
competitive pressure that can degrade pricing levels, which can reduce revenues.
Furthermore, customers who benefit from shorter lead times may defer some
purchases to future periods, which could affect our demand and revenues for the
short term. As a result, we may experience downturns or fluctuations in demand
in the future and experience adverse effects on our operating results and
financial condition.
WE ENGAGE IN ACQUISITIONS AND ALLIANCES GIVING RISE TO ECONOMIC AND
TECHNOLOGICAL RISKS. 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 the need
to:
- acquire timely access to needed capital for investments related to
acquisitions and alliances;
- conduct acquisitions that are timely relative to existing business
opportunities;
- successfully prevail over competing bidders for target acquisitions at an
acceptable price;
- invest in companies and technologies that contribute to the growth of our
business;
- retain the key employees of the acquired operation;
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<PAGE> 18
- incorporate acquired operations into our business and maintain uniform
standards, controls, and procedures; and
- develop the capabilities necessary to exploit newly acquired
technologies.
Some of these factors are beyond our control. Failure to manage growth
effectively and to integrate acquisitions could adversely affect our operating
results and financial condition.
THERE IS UNCERTAINTY ASSOCIATED WITH OUR RESEARCH AND DEVELOPMENT
INVESTMENTS. Our research and development activities are intended to maintain
and enhance our competitive position by utilizing the latest advances in the
design and manufacture of semiconductors and storage systems including
networking, communications, and storage technologies. Technical innovations are
inherently complex and require long development cycles and the commitment of
extensive engineering resources. We must incur substantial research and
development costs to confirm the technical feasibility and commercial viability
of a product that in the end may not be successful. If we are not able to
successfully and timely complete our research and development programs, we may
face competitive disadvantages. There is no assurance that we will recover the
development costs associated with such programs or that we will be able to
secure the financial resources necessary to fund future research and development
efforts.
THE PRICE OF OUR SECURITIES MAY BE AFFECTED BY A WIDE RANGE OF
FACTORS. Some of the factors that may cause volatility in the price of our
securities include:
- quarterly variations in results;
- business and product market cycles;
- fluctuations in customer requirements;
- the availability and utilization of manufacturing capacity;
- the timing of new product introductions; and
- the ability to develop and implement new technologies.
The price of our securities may also be affected by the estimates and
projections of the investment community, general economic and market conditions,
and the cost of operations in one or more of our product markets. While we
cannot predict the individual effect that these factors may have on the price or
our securities, these factors, either individually or in the aggregate, could
result in significant variations in price during any given period of time.
OUR GLOBAL OPERATIONS EXPOSE THE COMPANY TO NUMEROUS INTERNATIONAL BUSINESS
RISKS. We have substantial business activities in Asia and Europe. Both
manufacturing and sales of our products may be adversely impacted by changes in
political and economic conditions abroad. A change in the current tax laws,
tariff structures, export laws, regulatory requirements or trade policies in
either the United States or foreign countries could adversely impact our ability
to manufacture or sell our products in foreign markets. Moreover, a significant
decrease in sales by our customers to end users in either Asia or Europe could
result in a decline in orders.
We subcontract test and assembly functions to independent companies located
in Asia. A 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 products to customers, or increased costs.
THE HIGH TECHNOLOGY INDUSTRY IN WHICH WE OPERATE IS PRONE TO INTELLECTUAL
PROPERTY 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
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 high technology industry, from time to time we have
received communications from other parties asserting that certain of our
products, processes, technologies or information infringe upon their
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patent rights, copyrights, trademark rights or other intellectual property
rights. We regularly evaluate such assertions. In light of industry practice, we
believe with respect to existing or future claims that any licenses or other
rights that may be necessary can generally be obtained on commercially
reasonable terms. Nevertheless, there is no assurance that licenses will be
obtained on acceptable terms or that a claim will not result in litigation or
other administrative proceedings.
WE MUST ATTRACT AND RETAIN KEY EMPLOYEES IN A HIGHLY COMPETITIVE
ENVIRONMENT. Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We do not generally
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, Colorado, Oregon and elsewhere where we
operate our business has increased demand and competition for qualified
personnel. Our continued growth and future operating results will depend upon
our ability to attract, hire, and retain significant numbers of qualified
employees.
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>
6 Milpitas, CA Leased 514,595 Executive Offices,
Administration, Engineering
1 Fremont, CA Leased 74,000 Manufacturing
1 Fremont, CA Owned 65,000 Manufacturing
3 Santa Clara, CA Leased 100,290 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
2 Colorado Springs, CO Owned 402,930 Executive Offices,
Manufacturing
2 Fort Collins, CO Owned 270,000 Executive Offices,
Manufacturing
1 Wichita, 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 Asia. We also maintain design centers at various
distributor locations.
Leased facilities described above are subject to operating leases that
expire in 2001 through 2020. (See Note 12 of Notes to Consolidated Financial
Statements.)
We have plans to acquire additional equipment, but we believe that our
existing facilities and equipment are well maintained, in good operating
condition and are adequate to meet our current requirements.
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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.
Until their petition is heard and resolved by the Court, a new trial date for
the pending matter is not expected to be set. They have also initiated 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.
In February of 1999, 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. The case number is
CIV990377PHXRGS. The patents involved in this lawsuit are alleged to relate to
semiconductor manufacturing and computer imaging, including the use of bar
coding for automatic identification of articles. In September of 1999, the
Company filed an answer denying infringement, raising affirmative defenses and
asserting a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelson's patents. As of December 31, 1999,
discovery had not commenced and no trial date had been set. 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 litigation
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the
chart under "Stock Information" on the inside of the back cover of the Company's
1999 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
table under the heading of "Five-Year Consolidated Summary" on page 57 of the
Company's 1999 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by this Item is incorporated by reference to the
section of the same name on pages 9 through 25 of the Company's 1999 Annual
Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to the
section of the same name on pages 25 and 26 of the Company's 1999 Annual Report
to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
financial statements and notes thereto listed in Item 14(a)(1) hereof, which
appear on the pages referenced therein, and to the table under the heading
"Interim Financial Information (Unaudited)" on page 58 of the Company's 1999
Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE> 22
PART III
Certain information required by Part III is omitted from this Report in
that the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its Annual Meeting of Stockholders to be held May 4, 2000, and certain of
the information included therein is incorporated by reference herein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to "ELECTION OF DIRECTORS -- Nominees" in the
Company's Proxy Statement.
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............... 62 Chairman and Chief Executive Officer 1981
John P. Daane..................... 36 Executive Vice President, Communications Products 1985
Group
John D'Errico..................... 56 Executive Vice President, LSI Storage Products and 1984
Colorado Operations
Thomas Georgens................... 40 Senior Vice President & General Manager, SAN 1998
Systems
W. Richard Marz................... 56 Executive Vice President, Geographic Markets 1995
R. Douglas Norby.................. 64 Executive Vice President and Chief Financial 1996
Officer
David E. Sanders.................. 52 Vice President, General Counsel and Secretary 1986
Lewis C. Wallbridge............... 56 Vice President, Human Resources 1984
Joseph M. Zelayeta................ 53 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.
John P. Daane was named Executive Vice President Communications Products
Group in January 2000, having served as Executive Vice President,
Communications, Computer and ASIC Products since October 1997. Mr. Daane joined
us in 1985, and has served in senior management and executive positions since
1992.
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, SAN
Systems, 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
22
<PAGE> 23
Directors of the Company since 1993, and he currently also serves on the board
of directors of Corvas International, Inc., a biopharmaceutical company.
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.
The information concerning Section 16(a) reporting is incorporated by
reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's 2000 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"Executive Compensation" in the Company's 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"Executive Compensation" in the Company's 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
"Executive Compensation" in the Company's 2000 Proxy Statement.
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 incorporated by
reference to the Company's 1999 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE IN
THE ANNUAL
REPORT
----------
<S> <C>
Consolidated Balance Sheets -- As of December 31, 1998 and
1999...................................................... 27
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1999, 1998 and 1997.................... 28
Consolidated Statements of Stockholders' Equity -- For the
Three Years Ended December 31, 1999, 1998 and 1997........ 29
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1999, 1998 and 1997.................... 30
Notes to Consolidated Financial Statements.................. 31 - 55
Report of Independent Accountants........................... 56
</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 year 1997 was a 53-week year and fiscal
years 1998 and 1999 were 52-week years.
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.
23
<PAGE> 24
3. EXHIBITS:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997. Incorporated
by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
2.2 Stock Purchase Agreement dated as of June 28, 1998, by and
among the Registrant, HEA and HEI. Incorporated by reference
to exhibits filed with the Registrant's Registration
Statement on Form 8-K/A filed October 20, 1998.
2.3 First Amendment to Stock Purchase Agreement dated as of
August 6, 1998, by and among the Registrant, HEA and HEI.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form 8-K/A filed
October 20, 1998.
3.1 Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to exhibits filed with
the Registrant's Registration Statement on Form S-8 (No.
333-57563) filed June 24, 1998.
3.2 By-laws of Registrant. Said document is included as an
Exhibit to this Annual Report on Form 10-K for the year
ended December 31, 1999.
3.3 Certificate of Amendment of By-laws of LSI Logic Corporation
dated November 20, 1998. Incorporated by reference to
exhibits filed with the Registrant's Form 8-K filed on
December 8, 1998.
4.11 Amended and Restated Preferred Shares Rights Agreement dated
as of November 20, 1998, between LSI Logic Corporation and
BankBoston N.A. Incorporated by reference to exhibits filed
with the Registrant's Form 8-A12G/A filed on December 8,
1998.
4.2 Indenture dated March 15, 1999 between LSI Logic Corporation
and State Street Bank and Trust Company of California, N.A.,
Trustee, covering $345,000,000 principal amount of 4 1/4
Convertible Subordinated Notes due 2004. Incorporated by
reference to exhibits filed with the Registrant's Form S-3
(No. 333-80611), filed on June 14, 1999.
4.3 Indenture dated February 15, 2000 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, Trustee. Incorporated by reference to exhibits
filed with the Registrant's Form 8-K filed on February 24,
2000.
10.1 Registrant's 1982 Incentive Stock Option Plan, as amended,
and forms of Stock Option Agreement. Incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.*
10.2 Lease Agreement dated November 22, 1983 for 48580 Kato Road,
Fremont, California between the Registrant and Bankamerica
Realty Investors. Incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1983.
10.3 Registrant's 1986 Directors' Stock Option Plan and forms of
Stock Option Agreements. Incorporated by reference to
exhibits filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1986.*
10.4 Form of Indemnification Agreement entered and to be entered
into between Registrant and our officers, directors and
certain key employees. Incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1987.*
10.5 Amended and Restated LSI Logic Corporation 1991 Equity
Incentive Plan. Incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Form S-8
(No. 333-81437) filed June 24, 1999.*
10.6 Lease Agreement dated February 28, 1991 for 765 Sycamore
Drive, Milpitas, California between the Registrant and the
Prudential Insurance Company of America. Incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.7 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. Incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.8 1995 Director Option Plan. Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.*
10.9 LSI Logic Corporation International Employee Stock Purchase Plan. Incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-74627) filed on
March 18, 1999.*
10.10 Amended and Restated Credit Agreement, dated as of September 22, 1998, by and among Registrant,
LLJS, ABN AMRO Bank and Lenders. Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-K/A filed October 20, 1998.
10.11 Amendment No. 2 to Amended and Restated Credit Agreement, dated November 12, 1999, by and among
Registrant, LLJS, ABN AMRO Bank and Lenders. Said document is included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31, 1999.
10.12 Amendment No. 3 to Amended and Restated Credit Agreement, dated February 15, 2000, by and among
Registrant, LLJS, ABN AMRO Bank and Lenders. Said document is included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31, 1999.
10.13 Form of LSI Logic Corporation Change of Control Severance Agreement between LSI Logic Corporation
and each of its Executive Officers. Incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.*
10.14 LSI Logic Corporation Change of Control Agreement entered into on November 20, 1998, by and between
LSI Logic Corporation and Wilfred J. Corrigan. Incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.*
10.15 Agreement and Plan of Reorganization and Merger dated February 21, 1999, among the Registrant,
Stealth Acquisition Corporation and SEEQ Technology Inc. Incorporated by reference to Exhibit 99.1
filed with the Registrant's Current Report on Form 8-K as of February 23, 1999.
10.16 Technology Transfer Agreement between LSI Logic Corporation and Wafer Technology (Malaysia) Sdn.
Bhd. Dated September 8, 1999. Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (subject to confidential
treatment pursuant to Rule 24b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934).
10.17 Mint Technology, Inc. Amended 1996 Stock Option Plan. Incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Form S-8 (No. 333-34285) filed August 25, 1997.
10.18 Registrant's Amended and Restated Employee Stock Purchase Plan. Incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-81433) filed June
24, 1999.
10.19 Symbios Logic, Inc. 1995 Stock Plan. Incorporated by reference to exhibits filed with the
Registrant's Form S-8 (No. 333-62159) filed on August 25, 1998.
10.20 LSI Logic Corporation 1999 Nonstatutory Stock Option Plan. Incorporated by reference to exhibits
filed with the Registrant's Form S-8 (No. 333-90951) filed on November 15, 1999.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
.2110 SEEQ Technology, Inc. Amended and Restated 1982 Stock Option Plan. Incorporated by
reference to exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on
June 24, 1999.
<C> <S>
10.22 SEEQ Technology, Inc. 1989 Non-Employee Director Stock Option Plan. Incorporated by
reference to exhibits filed with the Registrant's Form S-8 (No. 333-81435) filed on
June 24, 1999.
13.1 Annual Report to Stockholders for the year ended December 31, 1999 (to be deemed
filed only to the extent required by the instructions for Reports on Form 10-K).
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see page 27)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Denotes management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
During the fourth quarter ended December 31, 1999, and up to the date of
filing of this 10-K, we filed the following Current Reports on Form 8-K:
On October 25, 1999, pursuant to Item 5 to report information set
forth in the Registrant's press release dated October 21, 1999.
On January 26, 2000, pursuant to Item 5 to report information set
forth in the Registrant's press release dated January 25, 2000.
On February 15, 2000, pursuant to Item 7 to file the Underwriting
Agreement dated February 14, 2000 between LSI Logic Corporation and J.P.
Morgan Securities, Inc., and related documents.
On February 24, 2000, pursuant to Item 7 to file the Subordinated
Indenture and Supplemental Indenture, both dated February 15, 2000, between
LSI Logic Corporation and State Street Bank of California, N.A., as
trustee.
(c) EXHIBITS.
See Item 14(a)(3), above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2), above.
TRADEMARK ACKNOWLEDGMENTS
The LSI Logic logo design, ATMizer, CoreWare, G10, GigaBlaze, HyperPHY,
MetaStor, MiniRISC, and SeriaLink are registered trademarks of LSI Logic
Corporation; Cablestream, G11, G12, SANtricity, and SANshare are 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.
26
<PAGE> 27
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 17, 2000
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
--------- ----- ----
<S> <C> <C>
/s/ WILFRED J. CORRIGAN Chairman of the Board and Chief March 17, 2000
- ------------------------------------- Executive Officer (Principal
(Wilfred J. Corrigan) Executive Officer)
/s/ R. DOUGLAS NORBY Executive Vice President and Chief March 17, 2000
- ------------------------------------- Financial Officer (Principal
(R. Douglas Norby) Financial Officer and Principal
Accounting Officer)
/s/ T.Z. CHU Director March 17, 2000
- -------------------------------------
(T.Z. Chu)
/s/ MALCOLM R. CURRIE Director March 17, 2000
- -------------------------------------
(Malcolm R. Currie)
/s/ JAMES H. KEYES Director March 17, 2000
- -------------------------------------
(James H. Keyes)
/s/ MATTHEW O'ROURKE Director March 17, 2000
- -------------------------------------
(Matthew O'Rourke)
</TABLE>
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997. Incorporated
by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
2.2 Stock Purchase Agreement dated as of June 28, 1998, by and
among the Registrant, HEA and HEI. Incorporated by reference
to exhibits filed with the Registrant's Registration
Statement on Form 8-K/A filed October 20, 1998.
2.3 First Amendment to Stock Purchase Agreement dated as of
August 6, 1998, by and among the Registrant, HEA and HEI.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form 8-K/A filed
October 20, 1998.
3.1 Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to exhibits filed with
the Registrant's Registration Statement on Form S-8 (No.
333-57563) filed June 24, 1998.
3.2 By-laws of Registrant. Said document is included as an
Exhibit to this Annual Report on Form 10-K for the year
ended December 31, 1999.
3.3 Certificate of Amendment of By-laws of LSI Logic Corporation
dated November 20, 1998. Incorporated by reference to
exhibits filed with the Registrant's Form 8-K filed on
December 8, 1998.
4.1 Amended and Restated Preferred Shares Rights Agreement dated
as of November 20, 1998, between LSI Logic Corporation and
BankBoston N.A. Incorporated by reference to exhibits filed
with the Registrant's Form 8-A12G/A filed on December 8,
1998.
4.2 Indenture dated March 15, 1999 between LSI Logic Corporation
and State Street Bank and Trust Company of California, N.A.,
Trustee, covering $345,000,000 principal amount of 4 1/4
Convertible Subordinated Notes due 2004. Incorporated by
reference to exhibits filed with the Registrant's Form S-3
(No. 333-80611), filed on June 14, 1999.
4.3 Indenture dated February 15, 2000 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, Trustee. Incorporated by reference to exhibits
filed with the Registrant's Form 8-K filed on February 24,
2000.
4.5 Registrant's Employee Stock Purchase Plan, as amended.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8 (No.
333-34285) filed August 25, 1997.
4.6 Symbios Logic, Inc. 1995 Stock Plan. Incorporated by
reference to exhibits filed with the Registrant's Form S-8
(No. 333-62159) filed on August 25, 1998.
10.1 Registrant's 1982 Incentive Stock Option Plan, as amended,
and forms of Stock Option Agreement.* Incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
10.2 Lease Agreement dated November 22, 1983 for 48580 Kato Road,
Fremont, California between the Registrant and Bankamerica
Realty Investors. Incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1983.
10.3 Registrant's 1986 Directors' Stock Option Plan and forms of
Stock Option Agreements. Incorporated by reference to
exhibits filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1986.*
10.4 Form of Indemnification Agreement entered and to be entered
into between Registrant and our officers, directors and
certain key employees. Incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1987.*
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.5 Amended and Restated LSI Logic Corporation 1991 Equity
Incentive Plan. Incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Form S-8
(No. 333-57563) filed June 24, 1998*
10.6 Lease Agreement dated February 28, 1991 for 765 Sycamore
Drive, Milpitas, California between the Registrant and the
Prudential Insurance Company of America. Incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
10.7 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. Incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.8 1995 Director Option Plan. Incorporated by reference to
exhibits filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.*
10.9 LSI Logic Corporation International Employee Stock Purchase
Plan. 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.*
10.10 Amended and Restated Credit Agreement, dated as of September
22, 1998, by and among Registrant, LLJS, ABN AMRO Bank and
Lenders. Incorporated by reference to exhibits filed with
the Registrant's Registration Statement on Form 8-K/A filed
October 20, 1998.
10.11 Amendment No. 2 to Amended and Restated Credit Agreement,
dated November 12, 1999, by and among Registrant, LLJS, ABN
AMRO Bank and Lenders. Said document is included as an
Exhibit to this Annual Report on Form 10-K for the year
ended December 31, 1999.
10.12 Amendment No. 3 to Amended and Restated Credit Agreement,
dated February 15, 2000, by and among Registrant, LLJS, ABN
AMRO Bank and Lenders. Said document is included as an
Exhibit to this Annual Report on Form 10-K for the year
ended December 31, 1999.
10.13 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. Incorporated
by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.*
10.14 LSI Logic Corporation Change of Control Agreement entered
into on November 20, 1998, by and between LSI Logic
Corporation and Wilfred J. Corrigan. Incorporated by
reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.*
10.15 Agreement and Plan of Reorganization and Merger dated
February 21, 1999, among the Registrant, Stealth Acquisition
Corporation and SEEQ Technology Incorporated. Incorporated
by reference to Exhibit 99.1 filed with the Registrant's
Current Report on Form 8-K as of February 23, 1999.
10.16 Technology Transfer Agreement between LSI Logic Corporation
and Wafer Technology (Malaysia) Sdn. Bhd. Dated September 8,
1999. Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 (subject to confidential treatment
pursuant to Rule 24b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934).
10.17 Mint Technology, Inc. Amended 1996 Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8 (No.
333-34285) filed August 25, 1997.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.18 Registrant's Amended and Restated Employee Stock Purchase
Plan. Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8 (No.
333-81433) filed June 24, 1999.
10.19 Symbios Logic, Inc. 1995 Stock Plan. Incorporated by
reference to exhibits filed with the Registrant's Form S-8
(No. 333-62159) filed on August 25, 1998.
10.20 LSI Logic Corporation 1999 Nonstatutory Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant's Form S-8 (No. 333-90951) filed on November 15,
1999.
10.21 SEEQ Technology, Inc. Amended and Restated 1982 Stock Option
Plan. Incorporated by reference to exhibits filed with the
Registrant's Form S-8 (No. 333-81435) filed on June 24,
1999.
10.22 SEEQ Technology, Inc. 1989 Non-Employee Director Stock
Option Plan. Incorporated by reference to exhibits filed
with the Registrant's Form S-8 (No. 333-81435) filed on June
24, 1999.
13.1 Annual Report to Stockholders for the year ended December
31, 1999 (to be deemed filed only to the extent required by
the instructions for Reports on Form 10-K).
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see page 27)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Denotes management contract or compensatory plan or arrangement.
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Exhibit 3.2
BY-LAWS
OF
LSI LOGIC CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place or
places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the State
of Delaware, designated by the board of directors. In the absence of any such
designation, stockholders' meetings shall be held at the registered office of
the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at a
time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time only by the
board of directors, by the chairman of the board, by the president or by the
chief executive officer.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The secretary, upon receiving the request, shall cause notice to be
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5, and that a meeting will be held at the time requested by
the person or persons who called the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. Nothing contained in
this second paragraph of Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be sent
or otherwise given in accordance with Section 2.5 of these by-laws not less than
ten (10) nor more than sixty (60) days before the date of the meeting to
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each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and entitled to
vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other announcement at the meeting, until a quorum is present or represented. At
such adjourned meeting at which a quorum is present or represented, any business
may be transacted that might have been transacted at the meeting as originally
noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these by-laws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
The Chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these by-laws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.9, or as may
be otherwise provided in the certificate of incorporation, each stockholder
shall be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes greater than the number of
votes which such stockholder normally is entitled to cast) if the candidates'
names have been properly placed in nomination (in accordance with these by-laws)
prior to commencement of the voting and the stockholder requesting cumulative
voting has given notice prior to commencement of the voting of the stockholder's
intention to cumulate votes. If cumulative voting is properly requested, each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.
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2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
by-laws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these by-laws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
(a) Actions other than Written Consent. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or the allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion, or exchange of stock, or other lawful
purpose (other than the expression of consent to corporate action in writing
without a meeting) the directors may fix, in advance, a record date, which, in
the case of a meeting of stockholders, shall not be more than 60 days nor less
than 10 days before the date of such meeting. If no record date is fixed, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and the record date for determining stockholders for any other purpose pursuant
to this Section 2.12(a) shall be at the close of business on the day on which
the board of directors adopts the resolution relating thereto. A determination
of stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the board of directors may fix a new record date for the adjourned meeting.
(b) Action by Written Consent. In order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the board of directors to fix a record
date. The board of directors may, at any time within ten (10) days after the
date on which such a request is received, adopt a resolution fixing the record
date (unless a record date has previously been fixed by the first sentence of
this Section 2.12(b)). If no record date has been fixed by the board of
directors pursuant to the first sentence of this Section 2.12(b) or otherwise
within ten (10) days of the date on which such a request is received, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in Delaware, its principal
place of business, or to any officer or agent of the corporation having custody
of the book in which proceedings of meetings of stockholders are recorded.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the board of directors and prior
action by the board of directors is required by applicable law, the record date
for determining stockholders entitled
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<PAGE> 4
to consent to corporate action in writing without a meeting shall be at the
close of business on the date on which the Board of Directors adopts the
resolution taking such prior action.
In the event of the delivery, in the manner provided by this Section
2.12(b), to the corporation of the requisite written consent or consents to take
corporate action and/or any related revocation or revocations, the corporation
may engage independent inspectors of elections for the purpose of performing
promptly a ministerial review of the validity of the consents and revocations.
For the purpose of permitting the inspectors to perform such review, in the
event such inspectors are appointed, no action by written consent without a
meeting shall be effective until such date as such appointed independent
inspectors certify to the corporation that the consents delivered to the
corporation in accordance herewith represent at least the minimum number of
votes that would be necessary to take the corporate action. Nothing contained in
this Section 2.12(b) shall in any way be construed to suggest or imply that the
board of directors or any stockholder shall not be entitled to contest the
validity of any consent or revocation thereof, whether before or after any
certification by any independent inspectors, or to take any other action
(including, without limitation, the commencement, prosecution or defense of any
litigation with respect thereto, and the seeking of injunctive relief in such
litigation).
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated written consent received in accordance with this Section
2.12(b), a written consent or consents signed by a sufficient number of holders
to take such action are delivered to the corporation in the manner prescribed
herein.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to express
consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
2.15 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment. If
no inspector of election is so appointed, the chairman of the meeting may, and
on the request of any stockholder or a stockholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more stockholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.
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Such inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all stockholders.
2.16 NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors and the proposal
of business to be considered by the stockholders may be made at any meeting of
stockholders only (a) pursuant to the corporation's notice of meeting, (b) by or
at the direction of the board of directors or (c) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in these bylaws, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 2.16.
For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
however, that in the event that less than 65 days notice of the meeting is given
to stockholders, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the public
announcement of an adjournment of a stockholders meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder
(or any successor thereto) (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a reasonably detailed description of the business desired to
be brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, and (ii) the class and number of shares of the corporation which are
owned beneficially and of record by such stockholder and such beneficial owner.
Notwithstanding any provision herein to the contrary, no business shall be
conducted at a stockholders meeting except in accordance with the procedures set
forth in this Section 2.16.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and any
limitations in the certificate of incorporation or these by-laws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The board of directors shall consist of six (6) persons until changed by a
proper amendment of this Section 3.2.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these by-laws, directors shall be elected
at each annual meeting of stockholders to hold office until the next annual
meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these by-laws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Election of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the attention of the
secretary of the corporation. When one or more directors so resigns and the
resignation is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
by-laws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these by-laws, or may
apply to the Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board ( as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as
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aforesaid, which election shall be governed by the provisions of Section 211 of
the General Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular and
special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by the board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may be
called at any time by the chairman of the board, the president, the chief
executive officer, any vice president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized number
of directors shall constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum is not present at any meeting of the board of directors, then the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
by-laws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need to specified in
any written waiver of notice unless so required by the certificate of
incorporation or these by-laws.
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3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
by-laws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or otherwise
assist any officer or other employee of the corporation or of its subsidiary.
including any officer or employee who is a director of the corporation or its
subsidiary, whenever, in the judgment of the directors, such loan, guaranty or
assistance may reasonably be expected to benefit the corporation. The loan,
guaranty or other assistance may be with or without interest and may be
unsecured, or secured in such manner as the board of directors shall approve,
including, without limitation, a pledge of shares of stock of the corporation.
Nothing in this section contained shall be deemed to deny, limit or restrict the
powers of guaranty or warranty of the corporation at common law or under any
statute.
3.13 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation or
by these by-laws, any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors; provided, however, that, so long as
shareholders of the corporation are entitled to cumulative voting, if less than
the entire board is to be removed, no director may be removed without cause if
the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire board of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the by-laws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the
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stockholders a dissolution of the corporation or a revocation of a dissolution,
or (v) amend the by-laws of the corporation; and, unless the board resolution
establishing the committee, the by-laws or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the same to
the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken in
accordance with, the provisions of Article III of these by-laws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those by-laws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
by-laws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a chief
financial officer. The corporation may also have, at the discretion of the board
of directors, a chairman of the board, chief executive officer, one or more vice
presidents, one or more assistant secretaries, one or more assistant treasurers,
and any such officers as may be appointed in accordance with the provisions of
Section 5.3 of these by-laws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be appointed in
accordance with the provisions of Section 5.3 or 5.5 of these by-laws, shall be
appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president or chief executive
officer to appoint, such other officers and agents as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these by-laws or as
the board of directors may from time to time determine. Executive officers of
the corporation shall only be those officers expressly designated as such by the
board of directors.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of employment,
any officer may be removed, either with or without cause, by an affirmative vote
of the majority of the board of directors at any regular or special meeting of
the board or, except in the case of an officer chosen by the board of directors,
by any officer upon whom such power of removal may be conferred by the board of
directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified
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in that notice, the acceptance of the resignation shall not be necessary to make
it effective. Any resignation is without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party.
5.5 VACANCIES IN OFFICE
Any vacancy occurring in any office of the corporation shall be filled by the
board of directors if such officer was appointed by the board of directors, or
by such other person as appointed by the board of directors to fill such
vacancy.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if present,
preside at meetings of the board of directors and exercise and perform such
other powers and duties as may from time to time be assigned to him by the board
of directors or as may be prescribed by these by-laws. If there is no president,
or chief executive officer then the chairman of the board shall also be the
chief executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these by-laws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer of the corporation shall, subject to the control of the board
of directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the chief executive officer of a
corporation and shall have such other powers and duties as may be prescribed by
the board of directors or these by-laws.
5.8 PRESIDENT
Subject to such powers as may be given by these by-laws or the board of
directors to the chairman of the board or the chief executive officer, if there
be such officers, the president shall have general supervision, direction and
control of the business and other officers of the corporation. He shall have the
general powers and duties of management usually vested in the president of the
corporation, and such other powers and duties as may be prescribed by the board
of directors or these by-laws.
5.9 VICE PRESIDENTS
In the absence or disability of the president and chief executive officer, the
vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president and chief executive officer. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these by-laws, the president, chief
executive officer or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive office
of the corporation or such other place as the board of directors may direct, a
book of minutes of all meetings and actions of directors, committees of
directors, and stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at stockholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation at the office of the corporation's transfer
agent or registrar, as determined by resolution of the board of directors, a
share register, or a duplicate share register, showing the names of all
stockholders and their addresses, the number and classes of shares held by each,
the number and date of certificates evidencing such shares, and the number and
date of cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these by-laws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these by-laws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president, chief executive and directors, whenever they request it, an account
of all his transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or the by-laws.
5.12 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, chief executive officer, any vice
president, the treasurer, the secretary or assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president, or the chief executive officer or a vice president, is authorized to
vote, represent, and exercise on behalf of this corporation all rights incident
to any and all shares of any other corporation or corporations standing in the
name of this corporation. The authority granted herein may be exercised either
by such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the corporation, or that such
director or officer is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise (collectively "Agent"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with the respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with the respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was lawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its
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favor by reason of the fact that he is or was a Agent (as defined in Section
6.1) against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
6.3 SUCCESSFUL DEFENSE
To the extent that an agent of the corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the Agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 6.1 and 6.2. Such determination shall be made (1) by the Board of
Directors or an executive committee by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) or if
such quorum is not obtainable or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or proceeding
shall be paid by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted pursuant to
the other subsections of this section shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was an Agent of the corporation, or is or was
serving at the request of the corporation, as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.8 THE CORPORATION
For purposes of this Article VI, references to "the corporation" shall include,
in addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors and officers, so that any person who is or was a
director or Agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under and subject to the provisions
of this Article VI (including, without limitation the provisions of Section 6.4)
with respect to the
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resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee, or agent of the corporation which imposes duties
on, or involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article VI.
6.10 INDEMNITY FUND
Upon resolution passed by the Board, the corporation may establish a trust or
other designated account, grant a security interest or use other means
(including, without limitation, a letter of credit), to ensure the payment of
certain of its obligations arising under this Article VI and/or agreements which
may be entered into between the corporation and its officers and directors from
time to time.
6.11 INDEMNIFICATION OF OTHER PERSONS
The provisions of this Article VI shall not be deemed to preclude the
indemnification of any person who is not an Agent (as defined in Section 6.1),
but whom the corporation has the power or obligation to indemnify under the
provisions of the General Corporation Law of the State of Delaware or otherwise.
The corporation may, in its sole discretion, indemnify an employee, trustee or
other agent as permitted by the General Corporation Law of the State of
Delaware. The corporation shall indemnify an employee, trustee or other agent
where required by law.
6.12 SAVING CLAUSE
If this Article or any portion thereof shall be invalidated on any ground by any
court of competent jurisdiction, then the corporation shall nevertheless
indemnify each Agent against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement with respect to any action, suit,
proceeding or investigation, whether civil, criminal or administrative, and
whether internal or external, including a grand jury proceeding and an action or
suit brought by or in the right of the corporation, to the full extent permitted
by any applicable portion of this Article that shall not have been invalidated,
or by any other applicable law.
6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such place
or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath
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shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock ledger, a
list of its stockholders, and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the corporation
to permit the director to inspect any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with reference
to the inspection, or award such other and further relief as the Court may be
deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any special
meeting of the stockholders when called for by vote of the stockholders, a full
and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these by-laws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided that
the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
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8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or more
than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be
issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware, shall
govern the construction of these by-laws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in (i)
the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the board of
directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal, which may be altered at pleasure,
and may use the same by causing it or a facsimile thereof, to be impressed or
affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
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8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement with
any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends and to vote
as such owner, shall be entitled to hold liable for calls and assessments the
person registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of another person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
The by-laws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
by-laws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal by-laws.
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Exhibit 10.11
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Amendment"), dated as of
November 12, 1999, is entered into by and among:
(1) LSI LOGIC CORPORATION, a Delaware corporation ("LSI");
(2) LSI LOGIC JAPAN SEMICONDUCTOR, INC., a Japanese corporation
("LLJS");
(3) Each of the financial institutions which are listed in
Schedule I of the Credit Agreement referred to in Recital A below, as such
schedule has been amended by Assignment Agreements effective as of October 6,
1998 and October 12, 1998 (collectively, "Lenders"); and
(4) ABN AMRO BANK N.V., as agent for Lenders (in such capacity,
"Agent").
RECITALS
A. LSI and LLJS (collectively, "Borrowers"), Lenders and Agent are
parties to an Amended and Restated Credit Agreement, dated as of September 22,
1998, as amended by Amendment No. 1 to Credit Agreement, dated as of March 4,
1999 (collectively, the "Credit Agreement").
B. At the time the Credit Agreement was executed, it was expected that
the aggregate credit facilities available under the Credit Agreement would not
be reduced below $300,000,000, but as a result of the commitment reduction upon
the issuance of subordinated indebtedness, the aggregate credit facilities will
be reduced below $300,000,000 by the scheduled commitment reductions if the
Credit Agreement is not amended.
C. Lenders and Agent are willing to amend the Credit Agreement to
maintain the aggregate credit facilities at $300,000,000 upon the terms and
subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrowers, Lenders and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. Unless otherwise defined herein, all
capitalized terms used herein shall have the respective meanings given to those
terms in the Credit Agreement. The rules of construction set forth in Section I
of the Credit Agreement shall, to the extent not inconsistent with the terms of
this Amendment, apply to this Amendment and are hereby incorporated by
reference.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Paragraphs 3 and 4 below,
the Credit Agreement is hereby amended as follows:
(a) The definition of "Scheduled Reduction Date" in Paragraph
1.01 is amended to read in its entirety as follows:
"Scheduled Reduction Date" means each of December 31,
1999, March 31, 2000 and June 30, 2000.
(b) Clause (i) of Subparagraph 2.03(b) is amended to add a
semi-colon and the following proviso at the end of the sentence:
provided, that LSI's obligation under this provision to reduce
the Total U.S. Revolving Commitment shall not exceed the amount
necessary to reduce the Total U.S. Revolving Commitment to
$240,521,474.50, after taking into account any mandatory
reduction pursuant to clause (ii) of this
1
<PAGE> 2
Subparagraph 2.03(b) and any voluntary reduction pursuant to
Subparagraph 2.03(c).
(c) Clause (ii) of Subparagraph 2.03(b) is amended by
substituting the following proviso for the proviso at the end of this
clause:
provided, that with respect to the Net Proceeds from "synthetic"
leases or Indebtedness for borrowed money, LSI's obligation
under this provision to reduce the Total U.S. Revolving
Commitment shall not exceed the amount necessary to reduce the
Total U.S. Revolving Commitment to $240,521,474.50, after taking
into account any mandatory reduction pursuant to clause (i) of
this Subparagraph 2.03(b) and any voluntary reduction pursuant
to Subparagraph 2.03(c).
(d) Clause (iii) of Subparagraph 2.05(c) is amended by
substituting the following proviso for the proviso at the end of this
clause:
provided, that with respect to the Net Proceeds from "synthetic"
leases or Indebtedness for borrowed money, LSI's obligation
under this provision to prepay such U.S. Loans shall not exceed
the amount necessary to reduce the aggregate outstanding
principal amount of the U.S. Loans to $240,521,474.50, after
taking into account any optional prepayment pursuant to
Subparagraph 2.05(b).
3. REPRESENTATIONS AND WARRANTIES. Borrowers hereby represent and
warrant to Agent and Lenders that the following are true and correct on the date
of this Amendment and will be true and correct on the Effective Date (as defined
below):
(a) The representations and warranties of Borrowers and their
Subsidiaries set forth in Paragraph 4.01 of the Credit Agreement and in
the other Credit Documents are true and correct in all material respects
(except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Credit Documents are in full force and effect.
4. EFFECTIVE DATE. The amendments effected by Paragraph 2 above shall
become effective on the date this Amendment is duly executed by Borrowers, all
Lenders and Agent (the "Effective Date").
5. EFFECT OF THIS AMENDMENT. On and after the Effective Date, each
reference in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall mean the Credit Agreement as amended hereby. Except as
specifically amended above, (a) the Credit Agreement and the other Credit
Documents shall remain in full force and effect and are hereby ratified and
confirmed and (b) the execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of Lenders or Agent, nor constitute a waiver of any
provision of the Credit Agreement or any other Credit Document.
2
<PAGE> 3
6. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any number
of identical counterparts, any set of which signed by all the parties
hereto shall be deemed to constitute a complete, executed original for
all purposes.
(b) Headings. Headings in this Amendment are for convenience of
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
IN WITNESS WHEREOF, Borrowers, Agent and all Lenders have caused this
Amendment to be executed as of the day and year first above written.
BORROWERS: LSI LOGIC CORPORATION
By:_________________________________
Name:____________________________
Title:___________________________
LSI LOGIC JAPAN SEMICONDUCTOR, INC.
By:_________________________________
Name:____________________________
Title:___________________________
AGENT: ABN AMRO BANK N.V.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
LENDERS: ABN AMRO BANK N.V.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANCA DI ROMA
By:_________________________________
Name:____________________________
Title:___________________________
<PAGE> 5
BANK OF AMERICA, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANKBOSTON, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANK ONE, NA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
THE BANK OF NOVA SCOTIA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
2
<PAGE> 6
BANQUE NATIONALE DE PARIS
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
CHIAO TUNG BANK CO., LTD.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
CREDIT LYONNAIS,
LOS ANGELES BRANCH
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
DAI-ICHI KANGYO BANK, LIMITED
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
FIRST SECURITY BANK, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
3
<PAGE> 7
By:_________________________________
Name:____________________________
Title:___________________________
FLEET NATIONAL BANK
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
KEYBANK NATIONAL ASSOCIATION
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
MELLON BANK
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
4
<PAGE> 8
SANWA BANK CALIFORNIA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
SOCIETE GENERALE
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
U.S. BANK NATIONAL ASSOCIATION
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
5
<PAGE> 1
Exhibit 10.12
AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment"), dated as of
February 15, 2000, is entered into by and among:
(1) LSI LOGIC CORPORATION, a Delaware corporation ("LSI");
(2) LSI LOGIC JAPAN SEMICONDUCTOR, INC., a Japanese corporation
("LLJS");
(3) Each of the financial institutions which are listed in
Schedule I of the Credit Agreement referred to in Recital A below, as such
schedule has been amended by Assignment Agreements (collectively, "Lenders");
and
(4) ABN AMRO BANK N.V., as agent for Lenders (in such capacity,
"Agent").
RECITALS
A. LSI and LLJS (collectively, "Borrowers"), Lenders and Agent are
parties to an Amended and Restated Credit Agreement, dated as of September 22,
1998, as amended by Amendment No. 1 to Credit Agreement, dated as of March 4,
1999, and Amendment No. 2 to Credit Agreement, dated as of November 12, 1999
(collectively, the "Credit Agreement").
B. LSI has requested Lenders and Agent to amend the Credit Agreement to
permit the issuance of additional Subordinated Debt, a portion of Net Proceeds
of which will be applied to prepay the Loans in accordance with Subparagraphs
2.05(b) and (c) of the Credit Agreement and to reduce the Total U.S. Revolving
Commitment to $240,000,000 in accordance with Subparagraph 2.03(b) of the Credit
Agreement.
C. Lenders and Agent are willing to amend the Credit Agreement upon the
terms and subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrowers, Lenders and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. Unless otherwise defined herein, all
capitalized terms used herein shall have the respective meanings given to those
terms in the Credit Agreement. The rules of construction set forth in Section I
of the Credit Agreement shall, to the extent not inconsistent with the terms of
this Amendment, apply to this Amendment and are hereby incorporated by
reference.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Paragraphs 3 and 4 below,
the Credit Agreement is hereby amended as follows:
(a) Clause (i) of Subparagraph 2.03(b) and clause (ii) of
Subparagraph 2.03(b) are amended to reduce the Total U.S. Revolving
Commitment set forth in the provisos to such clauses from
$240,521,474.50 to $240,000,000.
(b) Clause (iii) of Subparagraph 2.05(c) is amended to reduce
the principal amount of the U.S. Loans set forth in the proviso to such
clause from $240,521,474.50 to $240,000,000.
(c) Subparagraph 5.03(e) is amended to increase the maximum
amount of Subordinated Debt from $750,000,000 to $920,000,000.
1
<PAGE> 2
3. REPRESENTATIONS AND WARRANTIES. Borrowers hereby represent and
warrant to Agent and Lenders that the following are true and correct on the date
of this Amendment and will be true and correct on the Effective Date (as defined
below):
(a) The representations and warranties of Borrowers and their
Subsidiaries set forth in Paragraph 4.01 of the Credit Agreement and in
the other Credit Documents are true and correct in all material respects
(except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Credit Documents are in full force and effect.
4. EFFECTIVE DATE. The amendments effected by Paragraph 2 above shall
become effective on the date this Amendment is duly executed by Borrowers,
Required Lenders and Agent (the "Effective Date").
5. EFFECT OF THIS AMENDMENT. On and after the Effective Date, each
reference in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall mean the Credit Agreement as amended hereby. Except as
specifically amended above, (a) the Credit Agreement and the other Credit
Documents shall remain in full force and effect and are hereby ratified and
confirmed and (b) the execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of Lenders or Agent, nor constitute a waiver of any
provision of the Credit Agreement or any other Credit Document.
6. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any number
of identical counterparts, any set of which signed by all the parties
hereto shall be deemed to constitute a complete, executed original for
all purposes.
(b) Headings. Headings in this Amendment are for convenience of
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
2
<PAGE> 3
IN WITNESS WHEREOF, Borrowers, Agent and all Lenders have caused this
Amendment to be executed as of the day and year first above written. BORROWERS:
LSI LOGIC CORPORATION
By:_________________________________
Name:____________________________
Title:___________________________
LSI LOGIC JAPAN SEMICONDUCTOR, INC.
By:_________________________________
Name:____________________________
Title:___________________________
AGENT: ABN AMRO BANK N.V.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
LENDERS: ABN AMRO BANK N.V.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANCA DI ROMA
By:_________________________________
Name:____________________________
Title:___________________________
3
<PAGE> 4
BANK OF AMERICA, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANKBOSTON, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BANK ONE, NA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
THE BANK OF NOVA SCOTIA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
4
<PAGE> 5
BANQUE NATIONALE DE PARIS
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
CHIAO TUNG BANK CO., LTD.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
CREDIT LYONNAIS,
LOS ANGELES BRANCH
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
DAI-ICHI KANGYO BANK, LIMITED
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
FIRST SECURITY BANK, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
5
<PAGE> 6
By:_________________________________
Name:____________________________
Title:___________________________
FLEET NATIONAL BANK
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
KEYBANK NATIONAL ASSOCIATION
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
MELLON BANK
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
6
<PAGE> 7
SANWA BANK CALIFORNIA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
SOCIETE GENERALE
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
UNION BANK OF CALIFORNIA, N.A.
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
U.S. BANK NATIONAL ASSOCIATION
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
7
<PAGE> 1
EXHIBIT 13.1
[.comm LOGO]
LSI LOGIC CORPORATION - 1999 ANNUAL REPORT
<PAGE> 2
Financial Data
Annual Revenues
(in millions)
[Chart]
0 5 47 138 173 226 313 440 600 701 745 652 749 924
81 82 83 84 85 86 87 88 89 90 91 92 93 94
1,289 1,272 1,323 1,517 2,089
95 96 97 98 99
1999 REVENUE EXCEEDS $2 BILLION
Revenue Profile
[Pie Charts]
COMMUNICATIONS GROWING 60% IN 2000
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C>
O COMMUNICATIONS 39% 48%
O NETWORK COMPUTING 34% 35%
O SAN SYSTEMS 13% 13%
O OTHER 14% 4%
</TABLE>
CONTENTS
9 Management's discussion and analysis of financial condition and results of
operations
27 Consolidated financial statements
31 Notes to consolidated financial statements
56 Report of independent accountants
57 Five year consolidated summary
58 Interim financial information (unaudited)
59 Corporate information
60 Corporate directory
Stock information
<PAGE> 3
[Chart]
463 501 540 585
Q1 Q2 Q3 Q4
REVENUES RISE
($ in millions)
[Chart]
35 37 40 41
Q1 Q2 Q3 Q4
GROSS MARGIN EXPANDS
(% of revenues)
[Chart]
30 28 26 24
Q1 Q2 Q3 Q4
OPERATING EXPENSES - TREND DOWN
(% of revenues)
[Chart]
.04 .10 .17 .23
Q1 Q2 Q3 Q4
and EBG** ACCELERATES ($)
[Chart]
1,517 2,089
98 99
REVENUES GROW
38%
($ in millions)
[Chart]
94 174
98 99
EARNINGS** UP 84%
($ in millions)
[Chart]
292 661
98 99
CASH and SHORT TERM INVESTMENTS MORE THAN DOUBLE
($ in millions)
[Chart]
1,524 1,856
98 99
TOTAL SHAREHOLDERS' EQUITY CLIMBS 22%
($ in millions)
* Operating expenses excluding special items and goodwill amortization.
** Earnings Before Goodwill -- excludes special items and goodwill amortization.
See page 59 for an explanation of items excluded from EBG.
1999 AT A GLANCE
o LSI Logic stock price gains 319%
o 4th best performing S&P 500 stock.
o 11th best performing NYSE stock.
o Industry research firm Dataquest ranked LSI Logic merchant marketshare leader
in both ASIC (application-specific integrated circuit) and Standard Cell
markets.
o LSI Logic listed among top 50 companies worldwide receiving most U.S.
patents.
o Fortune magazine ranked LSI Logic 4th among semiconductor manufacturers in
their annual ranking of the Most Admired Companies in America (Feb. 21, 2000
edition).
<PAGE> 4
Communications -
LSI Logic makes the chips that make communications possible.
Throughout its journey, every communciation -- from voice over a cell phone, to
an e-mail message or an online transaction -- touches semiconductors in the
routers, switching equipment and devices used to access the Internet. LSI Logic
makes the chips that make communications possible.
LSI Logic is a leading designer and manufacturer of advanced semiconductors for
communications applications including broadband, data networking, wireless base
stations and cell phones, and digital set-top boxes. The company targets these
fast-growing markets with a broad portfolio of products for SONET/SDH and DWDM
optical systems, LAN switches, CDMA cell phones and high-performance DSP
technologies for DSL and voice over IP (Internet protocol) applications.
In addition, the company provides chips and boards for network computing, and
supplies storage area network (SAN) systems for the enterprise.
LSI Logic is headquartered in Milpitas, CA 95035. The company's stock is traded
on the New York Stock Exchange under the symbol LSI.
<PAGE> 5
[Photo of Wilfred J. Corrigan Chairman and CEO]
The global communications market, sparked by the expansion of the Internet,
was the key growth driver for LSI Logic in 1999 as the company reported record
revenues of $2.09 billion.
It took 14 years for LSI Logic to exceed $1 billion in revenues, and only
four years to surpass the $2 billion milestone.
LSI Logic revenues grew 38 percent in 1999, more than twice the rate of
growth of the worldwide semiconductor industry. Net income increased 85 percent
to $174 million or 56 cents per diluted share before goodwill amortization and
other special items (EBG). Net income grew more than twice as fast as revenues
in 1999.
Capitalizing on Communications
Communications, which includes wireless, data networking, broadband and
set-top box applications, is LSI Logic's fastest growing sector. Revenues from
communications are expected to increase approximately 60 percent this year to
about one-half of the company's total revenues, compared to 39 percent in 1999.
The rapid growth of the worldwide communications industry is driven by
three key developments: the widespread acceptance of the Internet; the rapid
expansion of cell phone usage and the convergence of data, voice and video.
In 1999, LSI Logic took several steps to enhance its position in the global
communications market.
LSI Logic completed the purchase of SEEQ Technology, Inc., a company
focused on Ethernet physical layer devices. The acquisition expanded LSI Logic's
switch and physical layer integrated circuit offerings for customers competing
in the Internet-driven networking space.
LSI Logic also acquired ZSP Corporation in 1999, a leading-edge company
developing high-performance digital signal processor products for the wireless,
data modem and voice over Internet Protocol (VolP) markets.
The company unveiled an "open architecture" ZSP/DSP strategy, providing LSI
Logic customers a welcome alternative to proprietary digital signal processor
products. Boardcom was the first to license our ZSP digital signal processor and
several leading companies are expected to follow suit, validating our open DSP
strategy.
LSI Logic is also providing its ZSP digital signal processor architecture
and software development tools as a complete suite of solutions to customers
participating
<PAGE> 6
in communications markets, ranging from the low-power wireless handsets to
high-end applications, such as voice-over-digital networks.
The company also establishes a $50 million venture fund to make strategic
investments in emerging communications technologies and promising start-ups.
REBUILDING THE GLOBAL COMMUNICATIONS NETWORK
The rapidly growing worldwide communications market is creating a new
generation of infrastructure builders and is transforming many of the
traditional telecom equipment companies. Today, we are experiencing the
rebuilding of the global communications structure that took nearly a century to
put into place. China, India and other developing nations represent lucrative
markets for next generation communications technologies.
The worldwide demand for increased bandwidth is growing exponentially as
data, voice and soon video are placing huge incremental demands on existing
communications networks.
Cell phone usage is literally skyrocketing, placing even more demand on
the communications infrastructure.
NETWORK COMPUTING-STORAGE AREA NETWORK SYSTEMS
The LSI Logic growth story extends beyond the global communications
market. LSI Logic's Network Computing sector accounted for 35 percent of the
company's revenues last year.
In the Network Computing space, LSI Logic offers a broad array of analog
and digital intellectual property cores and standard products to customers
developing the backbone of the Internet infrastructure as well as access
devices to the Internet. Servers, desktop computers, printers, copiers and
multi-function peripherals are among the products that are interconnected and
networked on the Internet.
The company's Storage Area Network (SAN) Systems business, accounted for 13
percent of LSI Logic's revenues in 1999. The SAN is a new methodology for
connecting and sharing storage among multiple servers. LSI Logic plays a major
role in the SAN paradigm.
<PAGE> 7
Our SAN Systems offerings include high availability storage solutions and
storage system management software. LSI Logic provides these products directly
to OEMs (original equipment manufacturers) or as standard products under the
MetaStor(R) brand for the data warehousing, electronic commerce and Internet
service markets.
Both of these Internet-driven markets, Network Computing and SAN Systems,
are expected to grow approximately 35 percent this year.
Investing in the Future
1999 was broadly interpreted as a recovery year for the global
semiconductor industry. The Semiconductor Industry Association is now
forecasting 20 percent growth years for both 2000 and 2001. LSI Logic is poised
to respond to the challenges of a rapidly growing marketplace and to grow
market share.
LSI Logic brings to its three high-growth, high-volume markets --
Communications, Network Computing and Storage Area Network Systems -- a
complete portfolio of competitive advantages. These strengths include: world
class manufacturing, engineering expertise, intellectual property and a
demonstrated track record.
LSI Logic prepared for the industry upturn by investing in new world
class manufacturing in Gresham, Oregon. This state-of-the-art wafer fabrication
facility ramped production very smoothly in 1999. As a result, LSI Logic will
have ample 0.18-micron capacity to meet the expected increase in customer
demand at a time when such capacity is in short supply.
LSI Logic maintains a worldwide manufacturing strategy with fabrication
facilities in Oregon, Colorado, California and Japan,, augmented by strategic
foundry relationships. The company also operates a SAN Systems manufacturing
facility in Wichita, Kansas.
The LSI Logic manufacturing growth story is not limited to Gresham,
Oregon. The company increased the capacity at its Colorado Springs fab by
approximately 50 percent in 1999, and completed a technology licensing
manufacturing relationship with Silterra of Malaysia, valued at $120 million to
LSI Logic.
<PAGE> 8
ACHIEVING 1999 GOALS
LSI Logic accomplished the goals it set out to achieve in 1999. During
each quarter, we:
o Grew revenue.
o Improved gross margin.
o Increased net income.
o Lowered operating expenses.
o We also doubled cash and short-term investments during 1999.
For our shareholders, LSI Logic common stock grew by 319 percent in 1999.
LSI Logic was the 11th best performing NYSE stock and the 4th best on the
Standard and Poor's 500.
We also announced a two-for-one stock split in early 2000.
We are optimistic about the future of LSI Logic. We are offering the right
products at the right time in the right markets.
On behalf of everyone at LSI Logic, I want to thank all our shareholders,
customers, partners, suppliers and dedicated employees for their support. We
have a full complement of competitive advantages and we are clearly focused on
the global communications revolution. We have every reason to be confident
about our future.
/s/ WILFRED J. CORRIGAN
- --------------------------
Wilfred J. Corrigan
Chairman and Chief Executive Officer
<PAGE> 9
1999 MILESTONES
- - Communications
- - Network Computing
- - Storage Area Network Systems
FIRST QUARTER
- - Delivered a single-chip CDMA (Code Division Multiple Access) IS-95B
baseband processor for wireless devices such as cellular phones.
- - Announced a new generation tuner and channel receiver chip set for digital
satellite set-top box manufacturers. This two-chip set provides the
essential functionality to support a range of advanced set-top box
applications including video entertainment, internet data delivery and
wireless communications.
- - Introduced ATMizer(R) II+, an enhanced version of the second-generation ATM
standard product optimized for high-speed ATM WAN and LAN applications.
- - Siemens selected LSI Logic to provided ASIC chips for their EWSD switches
(Digital Electronic Switching System/Elektronisches Waehlsystem).
- - Sony announced LSI Logic will provide the key I/O Processor for their
second-generation PlayStation video game console/DVD player/Internet access
device.
- - Acer Group selected LSI Logic's Integra(R) architecture for a set-top box
developed for SKYPerfect, the digital direct broadcast satellite (DBS)
system in Japan.
- - Announced the PCI-Ultra2 wide SCSI host adapter solution developed for
desktop, workstation and server systems.
SECOND QUARTER
- - Acquired SEEQ Technology, Inc., a leading semiconductor designer of data
communications products for the networking market.
- - Cabletron Systems, Inc. selected LSI Logic's GigaBlaze(R) core for its
SmartSwitch 9500 Family.
- - Acquired ZSP Corporation, a leading-edge company developing high
performance DSP products for customers competing in high-growth
communications markets.
- - Introduced new high-performance Fibre Channel solutions to meet customer
requirements for faster speeds, increasing bandwidth and shrinking product
cycles in the Storage Area Network (SAN) market.
Announced a technology licensing and manufacturing agreement with Silterra
(Malaysia) Sdn. Bhd. valued at $120 million to LSI Logic.
Delivered the 500th CoreWare(R) design, a highly integrated disk
controller on a chip for Quantum Corp.
- - Announced availability of the SC2000 Source Decoder, a new class of device
that will power next-generation, convergence ready set-top box
entertainment appliances.
- - Introduced a combination DVD, super video compact disk (SVCD), video
compact disk (VCD) player reference kit for China market.
<PAGE> 10
THIRD QUARTER
- - Unveiled the ZSP(TM) family of high performance digital signal processor
(DSP) cores. The ZSP architecture is available to customers either as a
core or a standard product. The architecture is also available for
licensing.
Announced the addition of an embedded FPGA core into LSI Logic's
CoreWare(R) library.
- - Introduced an ARM7TDMI(TM) cored-based silicon development platform to
reduce ASIC development cycle times.
Dataquest ranked LSI Logic 1999 market share leader in both merchant ASIC
and Standard Cell markets.
FOURTH QUARTER
- - Brocade Communications Systems, Inc. certified LSI Logic's MetaStor(R)
division as a Fabric Integrator partner. This certification covers
multi-vendor SAN storage solutions based on the MetaStor S-Class family of
Fibre Channel storage products.
Announced a wide-ranging technology agreement with Hitachi, Ltd. that calls
for joint development and exchange of 0.10-micron device architectures,
copper and low K interconnect, advanced lithography, direct write E-beam
and technical cooperation on embedded DRAM.
- - Announced the availability of a next-generation single-chip demodulator
that will improve digital terrestrial TV (DTT) coverage and performance in
set-top box and digital TV applications.
- - Rambus Inc. named LSI Logic first company to achieve Gold ASIC Support
Partnership status for its Direct Rambus ASIC cell.
Licensed organic laminate flip chip package technology to ChipPAC Inc. LSI
Logic's organic laminate flip chip technology offers ChipPAC customers a
high pin count and high-performance package solution.
- - Introduced an upgraded PCI-to-Ultra2 SCSI host adapter board (HAB) that
provides users with increased memory addressing capability and improved
signal integrity. The new HAB complies with Microsoft Corporation's PC99
certification requirements.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On January 25, 2000, we announced a two-for-one common stock split, which was
declared by the Board of Directors as a 100% stock dividend payable to
stockholders of record on February 4, 2000 as one new share of common stock for
each share held on that date. The newly issued common stock shares were
distributed on February 16, 2000. In the following discussion and analysis,
stockholders' equity has been restated to give retroactive recognition to the
two-for-one common stock split announced on January 25, 2000 for all periods
presented by reclassifying the par value of the newly issued shares arising from
the split from additional paid-in capital to common stock. In addition, all
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of our common stock have been restated.
On June 22, 1999, we combined with SEEQ Technology, Inc. ("SEEQ") in a
transaction accounted for as a pooling of interests. All financial information
has been restated retroactively to reflect the combined operations of LSI Logic
Corporation and SEEQ as if the combination had occurred at the beginning of the
earliest period presented. (See Note 2 of the Notes to the Consolidated
Financial Statements referred to hereafter as "Notes.") Prior to the
combination, SEEQ's fiscal year-end was the last Sunday in September of each
year whereas we operate on a year ending December 31. SEEQ's financial
information has been recast to conform to our year-end.
Revenues increased 38% to $2.1 billion in 1999 from $1.5 billion in 1998. The
increase was primarily the result of our business strategy of providing
solutions for our high-volume customers, particularly customers competing in
such high-growth markets as communications, network computing, storage area
network ("SAN") systems which included revenues from the acquisition of Symbios,
Inc. ("Symbios") on August 6, 1998. (See Note 2 and 11 of the Notes.) We are
continually exploring strategic acquisitions that build upon our existing
library of intellectual property and increase our leadership position in the
markets where we operate. The acquisition of SEEQ, a leading semiconductor
designer of data communications devices for the Internet-driven networking
market, immediately enhanced our product offerings for customers competing in
network computing. (See Note 2 of the Notes.) During 1999, we also acquired ZSP
Corporation ("ZSP"), a leading-edge developer of high-performance digital signal
processor products for customers competing in the communications market. (See
Note 2 of the Notes.)
Gross margin declined to 38% in 1999 from 42% in 1998 primarily due to increased
costs from commencing operations at our fabrication facility in Gresham, Oregon
in December of 1998. Operating expenses decreased 21% to $604 million in 1999
from $761 million in 1998. The decrease was primarily a result of a $146 million
charge for acquired in-process research and development in connection with the
acquisition of Symbios from Hyundai Electronics America and a restructuring
charge of $75 million in the third quarter of 1998. The acquired in-process
research and development and the charge stemming from restructuring actions are
discussed further below and in Notes 2 and 4 of the Notes. For the years ended
December 31, 1999 and 1998, gains on sale of equity securities were $48 million
and $17 million, respectively. For the year ended December 31, 1999, we recorded
net income of $67 million or $0.23 income per diluted share compared to a net
loss for the same period in 1998 of $139 million or a $0.49 loss per diluted
share. Net income in 1999 would have been $92 million or $ 0.28 per share higher
on a diluted basis but for the cumulative effect of the change in accounting
principle recorded in the first quarter of 1999. (See Note 1 of the Notes.)
Cash and short-term investments grew 127% to $661 million as of December 31,
1999, from $292 million as of December 31, 1998 primarily due to increased cash
flows from our continuing operations. Our strategic cash position and greater
cash flows provide us with the capital to make strategic acquisitions and to
continue investing in key technologies.
<PAGE> 12
In 1999, 1998 and 1997, our fiscal year ended December 31. Fiscal years 1999 and
1998 were 52-week years, and fiscal year 1997 was a 53-week year.
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 our Annual
Report on Form 10-K for the year ended December 31, 1999.
Statements in this discussion and analysis include forward looking information
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
These statements involve known and unknown risks and uncertainties. Our actual
results in future periods may be significantly different from any future
performance suggested in this report. Risks and uncertainties that may affect
our results may include, among others:
- - Fluctuations in the timing and volumes of customer demand;
- - Currency exchange rates;
- - Availability and utilization of our manufacturing capacity;
- - Timing and success of new product introductions; and
- - Unexpected obsolescence of existing products.
We operate in an industry sector where security values are highly volatile and
may be influenced by economic and other factors beyond our control. See
additional discussion contained in "Risk Factors" set forth in Part I of our
Annual Report on Form 10-K for the year ended December 31, 1999.
Where more than one significant factor contributed to changes in results from
year to year, we have quantified material factors throughout the MD&A where
practicable.
RESULTS OF OPERATIONS
REVENUE We operate in two reportable segments: the Semiconductor segment and the
SAN Systems segment. In the Semiconductor segment, we design, develop,
manufacture and market integrated circuits, including application-specific
integrated circuits, (commonly known in the industry as ASICs),
application-specific standard products and related products and services.
Semiconductor design and service revenues include engineering design services,
licensing of our advanced design tools software, and technology transfer and
support services. Our customers use these services in the design of increasingly
advanced integrated circuits characterized by higher levels of functionality and
performance. The proportion of revenues from ASIC design and related services
compared to semiconductor product sales varies among customers depending upon
their specific requirements. In the SAN Systems segment, we design, manufacture,
market and support high-performance data storage management and storage systems
solutions and a complete line of Redundant Array of Independent Disk ("RAID")
systems, subsystems and related software. The SAN Systems segment was added in
August 1998 with the purchase of Symbios. (See Notes 2 and 11 of the Notes.)
For the year ended December 31, 1998, the SAN Systems segment did not meet the
requirements for a reportable segment as defined in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." However, for purposes of comparability, we
have included operating results by segment for that year below.
Total revenues increased 38% to $2.1 billion in 1999 from $1.5 billion in 1998.
Revenues for the Semiconductor segment increased 27% to $1.8 billion in 1999
from $1.4 billion in 1998. Significant factors which contributed to this revenue
growth included increased demand for products used in communications
applications and additional revenues from the acquisition of Symbios on August
6, 1998 (see Notes 2 and 11 of the Notes), which included increased demand for
products used in network computing applications. We expect demand for products
used in communications and network computing applications to remain strong
during this next year based on expected growth of Internet infrastructure and
wireless communications applications. Revenues for the SAN Systems segment
increased 200% to $279 million in 1999 from $93 million in 1998. The increase
was primarily attributable to
<PAGE> 13
recording a full year of revenue from the acquisition of Symbios in August of
1998. The demand for products used in the SAN Systems segment also increased
significantly after the acquisition due to rapid growth of the Internet.
Total revenues increased 15% to $1.5 billion in 1998 from $1.3 billion in 1997.
Significant factors contributing to this increase included additional revenues
from Symbios after August 6, 1998, and increased demand for products used in
certain communications and network computing applications. The increase was
offset in part by decreased demand for products used in computer product
applications and lower average selling prices when expressed in dollars for
products used in computer and consumer product applications. In 1997, all
revenues were from the Semiconductor segment.
One customer represented 11% of our total consolidated revenues for the year
ended December 31, 1999, and another customer represented 12% and 22% of our
total consolidated revenues for the years ended December 31, 1998 and 1997,
respectively. In the Semiconductor segment, one customer represented 10%, 13%
and 22% of the total Semiconductor revenues for the years ended December 31,
1999, 1998 and 1997, respectively. In the SAN Systems segment, there were three
customers with revenues representing 29%, 27% and 14% of total SAN Systems
revenues for the year ended December 31, 1999. During 1998, there were three
customers with revenues representing 17%, 15% and 14% of SAN Systems revenues.
Operating costs and expenses Key elements of the consolidated statements of
operations, expressed as a percentage of revenues, were as follows:
<TABLE>
<CAPTION>
CONSOLIDATED: 1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Gross profit margin 38% 42% 48%
Research and development 14% 19% 17%
Selling, general and administrative 12% 15% 15%
Income/(loss) from operations 9% (8)% 15%
</TABLE>
Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:
<TABLE>
<CAPTION>
SEMICONDUCTOR SEGMENT: 1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Gross profit margin 39% 42% 48%
Research and development 15% 20% 17%
Selling, general and administrative 12% 15% 15%
Income/(loss) from operations 10% (6)% 15%
SAN SYSTEMS SEGMENT: 1999 1998 1997
-------- -------- ---------
Gross profit margin 33% 32% --
Research and development 9% 9% --
Selling, general and administrative 11% 13% --
Income/(loss) from operations 9% (48)% --
</TABLE>
GROSS MARGIN We have advanced wafer manufacturing operations in Oregon,
Colorado, California and Japan. This allows us to maintain our ability to
provide products to customers with minimal disruption in the manufacturing
process due to economic and geographic risks associated with each geographic
location. During 1999, we entered into a technology transfer agreement with
Wafer Technology (Malaysia) Sdn. Bhd. ("Silterra") under which we grant licenses
to Silterra with respect to certain of our wafer fabrication technologies and
provide associated manufacturing training and related services. In exchange, we
receive cash and equity consideration valued at $120 million over three years
during which transfers and the performance of our obligations are scheduled to
occur. (See Note 3 of the Notes.) During 1999, we provided engineering training
in accordance with the agreement. The engineering training was valued at $2
million and was recorded as a credit to cost of revenues. We will provide an
<PAGE> 14
additional $6 million of engineering training over the contract term of three
years, which also will be recorded as a credit to cost of revenues.
The gross margin percentage for 1999 decreased to 38% from 42% in 1998 on a
consolidated basis. The gross margin percentage for the Semiconductor segment
was 39% in 1999 compared to 42% in 1998. The decrease primarily reflected a
combination of the following factors:
- - Increased cost of revenues from commencing operations at our fabrication
facility in Gresham, Oregon in December of 1998;
- - Lower average selling prices of products used in certain semiconductor
product applications, including the impact from currency fluctuations;
and
- - Changes in product mix primarily related to Symbios product additions
from August 6, 1998.
Our focus on communications is anticipated to contribute to improvement of our
gross margin for the Semiconductor segment in the foreseeable future as many of
the products we offer for communications and network computing applications are
expected to have higher margins. Increased production capacity utilization at
the manufacturing facility in Gresham, Oregon should also contribute to
improvement of our gross margin.
The gross margin percentage for the SAN Systems segment was 33% in 1999 compared
to 32% in 1998.
The gross margin percentage for 1998 decreased to 42% from 48% in 1997. The
decrease primarily reflected a combination of the following factors:
- - Increased cost of revenues from commencing operations at our fabrication
facility in Gresham, Oregon in December of 1998, including $12 million
in lower of cost or market charges;
- - Lower average selling prices, including the impact from currency
fluctuations;
- - Non-recurring inventory charges of approximately $8 million; and
- - Changes in product mix related to Symbios product additions from August
6, 1998.
Our operating environment, combined with the resources required to operate in
the semiconductor industry, requires that we manage a variety of factors. These
factors include, among other things:
- - Product mix;
- - Factory capacity and utilization;
- - Manufacturing yields;
- - Availability of certain raw materials;
- - Terms negotiated with third-party subcontractors; and
- - Foreign currency fluctuations.
These and other factors could have a significant effect on our gross margin in
future periods. We are targeting our overall gross margin percentage to increase
to 48% by the end of 2000.
Changes in the relative strength of the yen may have a greater impact on our
gross margin than other foreign exchange fluctuations due to our wafer
fabrication operations in Japan. Although the yen strengthened (the average yen
exchange rate for 1999 appreciated 14% from 1998), the effect on gross margin
and net income was not significant because yen-denominated sales offset a
substantial portion of yen-denominated costs during the period. Moreover, we
hedged a portion of our remaining yen exposure. (See Note 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 our gross margin or
operating results.
RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses increased 2%
to $298 million during 1999 as compared to $291 million in 1998. R&D expenses
for the Semiconductor segment decreased 4% to $272 million in 1999 from $283
million in 1998. The decrease was primarily attributable to a $15 million
research and development benefit associated with a technology transfer agreement
entered into with Silterra in Malaysia during the year. (See Note 3 of the
Notes.) We will receive an additional $50 million from Silterra over the
contract term of three years as consideration for technology to be transferred.
The benefit will be recorded to research and
<PAGE> 15
development. The decrease in R&D during 1999 resulting from the agreement with
Silterra was offset in part by expenditures related to the following:
- - A continuation of R&D activities of the former Symbios business 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
- - Increased compensation costs during 1999.
R&D expenses for the SAN Systems segment increased 212% to $26 million in 1999
from $8 million in 1998. The increase was primarily the result of the
continuation of R&D activities of the Symbios business included in our
consolidated financial statements from August 1998.
R&D expenses increased $61 million or 27% to $291 million in 1998 from 1997 on a
consolidated basis. The increase was primarily attributable to the following:
- - A continuation of R&D activities of the former Symbios business 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 R&D facility.
As a percentage of revenues, R&D expenses were 14% in 1999, 19% in 1998 and 17%
in 1997 on a consolidated basis. R&D expenses as a percentage of revenues for
the Semiconductor segment decreased to 15% in 1999 from 20% in 1998. The
decrease in 1999 from 1998 is primarily attributable to the effects of our
restructuring programs established in the third quarter of 1998. (See Note 4 of
the Notes.) R&D expenses as a percentage of revenues for the SAN Systems segment
remained consistent at 9% in 1999 and 1998. As we continue our commitment to
technological leadership in our markets, we are targeting our R&D investment in
2000 to be approximately 16% of revenues on a consolidated basis.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A")
expenses increased 14% to $258 million during 1999 as compared to $226 million
in 1998. SG&A expenses for the Semiconductor segment increased 5% to $226
million in 1999 from $215 million in 1998. The increase was primarily
attributable to the inclusion of current expenses related to the former Symbios
business acquired on August 6, 1998, sales commissions on the increased revenues
and increased compensation costs during 1999. SG&A expenses for the SAN Systems
segment increased 174% to $32 million in 1999 from $12 million in 1998. The
increase was primarily attributable to the inclusion of current expenses related
to the former Symbios business acquired on August 6, 1998 along with increased
compensation costs in 1999.
SG&A expenses increased $30 million during 1998 as compared to 1997 on a
consolidated basis. The increase was primarily attributable to the inclusion of
SG&A expenses from the former Symbios business from August 6, 1998. As a
percentage of revenues, SG&A expenses decreased to 12% in 1999 from 15% in 1998
and 1997 on a consolidated basis. We expect that SG&A expenses as a percentage
of revenues will remain relatively flat at approximately 12% of revenues in the
next year.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
ZSP
On April 14, 1999, we acquired all of the outstanding capital stock of ZSP for a
total purchase price of $11.3 million which consisted of $7 million in cash
(including approximately $0.6 million in direct acquisition costs) and assumed
liabilities up to $4.3 million in accordance with the purchase agreement with
ZSP. The merger was accounted for as a purchase. (See Note 2 of the Notes.) ZSP,
a development stage semiconductor company, was involved in the design and
marketing of programmable digital signal processors for use in wired and
wireless communications. The results of operations of ZSP and estimated fair
value of assets acquired and liabilities assumed were included in our
consolidated financial statements as of April 14, 1999, the effective date of
the purchase, through the end of the period.
<PAGE> 16
In connection with the purchase of ZSP, we recorded a $4.6 million charge to
in-process research and development, referred to as IPR&D, during the second
quarter of 1999. The amount was determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed. We acquired ZSP's in-process digital signal processor
research and development project that was targeted at the telecommunications
market. This product was being developed specifically for voice-over-net or
voice-over-Internet protocol applications and was intended to have substantial
incremental functionality, greatly improved speed, and a wider range of
interfaces than ZSP's then current technology.
Net cash flows The value of the one project identified to be in process was
determined by estimating the future cash flows from the project once
commercially feasible, discounting the net cash flows back to their present
value and then applying a percentage of completion to the calculated value as
defined below. The net cash flows from the identified project were based on our
estimates of revenues, cost of revenues, research and development costs,
selling, general and administrative costs and applicable income taxes for the
project. These estimates were compared and found to be in line with industry
analysts' forecasts of growth in the telecommunications market.
Total revenues for ZSP were expected to peak in the years 2002 and 2003 and then
decline in 2004 as other new products were expected to become available. These
projections were based on our estimates of market size and growth, expected
trends in technology, and the expected timing of new product introductions by us
and our competitors.
Royalty rate We applied a royalty percentage of 25% to operating income for the
project in process to attribute value for dependency on predecessor core
technologies.
Discount rate The discount rate used was 25% for the project, a rate 1,000 basis
points higher than the industry weighted average cost of capital estimated at
approximately 15% to account for the risks associated with the inherent
uncertainties surrounding the successful development of the IPR&D, market
acceptance of the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of technological
advances which could impact the estimates described above.
Percent of completion The percentage of completion for the project was
determined using milestones representing management's estimate of effort, value
added, and degree of difficulty of the portion of the project completed as of
April 14, 1999, as compared to the remaining research and development to be
completed to bring the project to technical feasibility. The development process
was grouped into three phases with each phase containing between one and five
milestones. The three phases were:
- - Researching the market requirements and the engineering architecture and
feasibility studies;
- - Design and verification; and
- - Prototyping and testing the product (both internal and customer
testing).
ZSP's digital signal processor project started in May 1998. As of April 14,
1999, we estimated the project was 65% complete. As of the acquisition date, the
cost to complete the project was estimated at $1 million for the remainder of
1999.
The actual development timeline and costs were in line with estimates. However,
development of the technology remains a substantial risk to us due to factors
including the remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Failure to bring these products to market in a timely manner could adversely
affect sales and profitability of the combined company in the future.
<PAGE> 17
SYMBIOS
On August 6, 1998, we completed the acquisition of all of the outstanding
capital stock of Symbios. 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 our consolidated
financial statements as of August 6, 1998, the effective date of the purchase,
through the end of the period. (See Note 2 of the Notes.)
In connection with the purchase of Symbios, we recorded a $146 million charge to
IPR&D during the third quarter of 1998. The $146 million allocation of the
purchase price to IPR&D was determined by identifying research projects in areas
for which technological feasibility had not been established and no alternative
future uses existed. We acquired technology consisting of storage and
semiconductor research and development projects in process. The storage projects
consisted of designing controller modules, a new disk drive and a new version of
storage management software with new architecture to improve performance and
portability. The semiconductor projects consisted of client/server products
being designed with new architectures and protocols and a number of ASIC and
peripheral products that were being custom-designed to meet the specific needs
of certain customers. The amounts of IPR&D allocated to each category of
projects was $51 million for storage projects, $69 million for client/server
projects and $26 million for ASIC and peripheral projects.
Net cash flows The value of these projects was determined by estimating the
expected cash flows from the projects once commercially feasible, discounting
the net cash flows back to their present value and then applying a percentage of
completion to the calculated value as defined below. The net cash flows from the
identified projects were based on our estimates of revenues, cost of revenues,
research and development costs, selling, general and administrative costs, and
income taxes from those projects. These estimates were based on the assumptions
described below. The research and development costs included in the model
reflected costs to sustain projects, but excluded costs to bring in-process
projects to technological feasibility.
The estimated revenues were based on management projections of each in-process
project for semiconductor and storage products. 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. Total revenues
from the IPR&D product areas were expected to peak in the year 2001 and decline
from 2002 to 2005 as other new products were expected to become available. These
projections were 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 approximated Symbios' historical performance and were in
line with industry margins in the semiconductor and storage systems industry
sectors. The estimated selling, general and administrative costs were consistent
with Symbios' historical cost structure which was in line with industry averages
at approximately 15% of revenues. Research and development costs were consistent
with Symbios' historical cost structure.
Royalty rate We applied a royalty charge of 25% to operating income for each
in-process project to attribute value for dependency on predecessor core
technologies.
Discount rate The discount rate used in discounting the net cash flows from the
IPR&D projects back to their present value was 20% for semiconductor and 21% for
storage systems, a 500 basis point increase from the respective industry
weighted average cost of capital. The industry weighted average cost of capital
was approximately 15% for semiconductors and 16% for storage systems. We applied
the discount rates higher than the industry weighted average cost of capital 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 each project completed as of
August 6, 1998, as compared to the remaining research and development to be
completed to bring
<PAGE> 18
each project to technical feasibility. The development process was grouped into
three phases with each phase containing between one and five milestones. The
three phases were:
- - Researching the market requirements and the engineering architecture and
feasibility studies;
- - Design and verification; and
- - Prototyping and testing the product (both internal and customer
testing).
Each of these phases was subdivided into milestones, and then the status of each
of the projects was evaluated as of August 6, 1998. We estimated, as of the
acquisition date, the storage projects in aggregate were approximately 74%
complete and the aggregate costs to complete were $25.2 million ($5.7 million in
1998, $14.5 million in 1999 and $5.0 million in 2000). We estimated the
semiconductor projects were approximately 60% complete for client/server
products and 55% complete for ASIC and peripheral products. As of the
acquisition date, we expected the cost to complete all semiconductor products to
be approximately $24.1 million ($8.7 million in 1998, $14.8 million in 1999 and
$0.6 million in 2000).
Substantially all of the IPR&D projects were expected to be completed and
generating revenues within the 24 months following the acquisition date.
The actual development timeline and costs were in line with estimates as of
December 31, 1999. However, development of these technologies remains a
significant risk to us due to the remaining effort to achieve technical
feasibility, rapidly changing customer needs and significant competitive threats
from numerous companies. Failure to bring these products to market in a timely
manner could adversely affect sales and profitability of the combined company in
the future. Additionally, the value of other intangible assets acquired may
become impaired.
MINT
In July 1997, we acquired all issued and outstanding shares of the common stock
of Mint Technology, Inc. ("Mint") for $10 million in cash and options to
purchase approximately 1,363,452 shares of common stock with a fair value of $11
million. The acquisition was accounted for as a purchase. (See Note 2 of the
Notes.) Approximately $3 million of the purchase price was allocated to IPR&D
and was expensed in the third quarter of 1997. The nature of the projects in
process at the date of acquisition related to computer aided design tools, in
particular, those that would be used for functional verification of the chip
design. The additional costs to complete the tools were approximately $1 million
and were completed in the fourth quarter of 1997. The actual development
timeline and costs were in line with estimates.
RESTRUCTURING OF OPERATIONS AND OTHER NON-RECURRING ITEMS We recorded
restructuring of operations and other non-recurring net benefits of $2.1 million
in 1999. The net benefit reflected the combination of the following:
- - Approximately $2.9 million in restructuring charges and $5.5 million in
merger-related expenses associated in connection with the merger with
SEEQ on June 22, 1999 (see Note 2 of the Notes) which included $0.5
million in merger expenses recorded by SEEQ in the first quarter of
1999. The merger expenses related primarily to investment banking and
other professional fees directly attributable to the merger with SEEQ.
The restructuring charge was comprised of $1.9 million in write-downs of
fixed assets which were duplicative to the combined company, $0.5
million of exit costs relating to non-cancelable building lease
contracts and a $0.5 million provision for severance costs related to
the involuntary termination of certain employees. The exit costs and
employee severance costs were recorded in accordance with Emerging
Issues Task Force ("EITF") No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
fixed and other asset write-downs were recorded in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The restructuring actions as
outlined by the restructuring plan are intended to be executed to
completion by June 30, 2000, one year from the date the reserve was
taken.
<PAGE> 19
- - Approximately $10.5 million of 1998 restructuring reserve reversals
associated with a change in management estimate. (See Note 4 of the
Notes.) The amount consisted of the following:
- - $3.9 million of reserves for lease termination and non-cancelable
purchase commitments primarily in the U.S. and Europe;
- - $3.7 million of excess severance reserves in the U.S., Japan, and
Europe;
- - $2.0 million of reserves for manufacturing facility decommissioning
costs and other exit costs primarily in the U.S. and Japan; and
- - $0.9 million of related cumulative translation adjustments.
The change in management estimates of the reserve requirements stemmed primarily
from the following factors:
- - A significant increase in the requirement for manufacturing capacity to
meet expected sales growth which resulted in retention of certain
employees originally targeted for termination of employment and in
reversal of the reserve for decommissioning costs as a result of
retention of the U.S. and Japan operations facilities originally
targeted for sale; and
- - Our ability to exit lease commitments and non-cancelable purchase
commitments more favorably than originally anticipated in the U.S. and
Europe.
Description of 1998 Restructuring 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. (See Note 4 of the Notes.) 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 excluded 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 No. 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination."
Restructuring costs included the following elements:
- - $37.2 million related primarily to fixed assets impaired as a result of
the decision to close, by the third quarter of 1999, a manufacturing
facility in Tsukuba, Japan;
- - $16.3 million in workforce reduction costs;
- - $13.1 million in fixed asset and other asset write-downs, primarily in
the U.S., Japan, and Europe;
- - $4.7 million for termination of leases and maintenance contracts
primarily in the U.S. and Europe;
- - Approximately $2.4 million in other exit costs, which resulted
principally from the consolidation and closure of certain design
centers, sales facilities and administrative offices primarily in the
U.S. and Europe; and
- - $1.7 million for non-cancelable purchase commitments primarily in
Europe.
Other exit costs included $0.9 million related to payments made for early lease
contract terminations and the write-down of surplus assets to their estimated
realizable value; $0.7 million for the write-off of excess licenses for closed
locations in Europe and $0.8 million of other exit costs associated with the
consolidation of design centers worldwide.
The workforce reduction costs primarily included 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
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." As of December 31, 1998, the remaining cash
<PAGE> 20
requirements were related primarily to severance payouts. The severance
distributions were to be made out of our cash balance on hand at the time of the
distributions.
As a result of the execution of the restructuring plan announced in the third
quarter of 1998, we reduced employee expenses by approximately $37 million in
1999 and $4 million in the fourth quarter of 1998. Depreciation expense was
reduced by approximately $10 million in 1999 and $2 million in the fourth
quarter of 1998. We also realized additional savings of $3 million in 1999
related to reduced lease and maintenance contract expenses primarily associated
with the reduction in the number of engineering design centers, sales facilities
and administrative offices worldwide.
The ongoing savings from the restructuring plan associated with the acquisition
of SEEQ are not considered to be significant.
The restructuring actions, as outlined by the plan, were completed in the third
quarter of 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 in 1998 and 1999:
<TABLE>
<CAPTION>
September 30, 1998 December 31, December 31,
Restructuring 1998 Reserve 1999
(In thousands) Expense Utilized Balance Utilized Reversal Balance
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Write-down of manufacturing facility(a) $ 37,200 $(35,700) $ 1,500 $ (210) $ (1,290) $ --
Other fixed asset related charges(a) 13,100 (13,100) -- -- -- --
Payments to employees for severance(b) 16,300 (4,700) 11,600 (7,948) (3,652) --
Lease terminations and maintenance contracts(c) 4,700 (100) 4,600 (2,257) (2,343) --
Noncancelable purchase commitments(c) 1,700 (100) 1,600 (80) (1,520) --
Other exit costs(c) 2,400 (1,200) 1,200 (450) (750) --
Cumulative currency translation adjustment -- 1,512 1,512 (600) (912) --
-------- -------- -------- -------- -------- -------
Total $ 75,400 $(53,388) $ 22,012 $(11,545) $(10,467) $ --
======== ======== ======== ======== ======== =======
</TABLE>
(a) The $1.5 million balance for the write-down of the facility as of December
31, 1998 and the amount utilized in 1999 related to machinery and equipment
decommissioning costs in Japan. Amounts utilized in 1998 represent a
write-down of fixed assets due to impairment. The amounts were accounted for
as a reduction of the assets and did not result in a liability.
(b) Amounts utilized represent cash payments related to the severance of 358
employees in 1999 and 290 employees in 1998 worldwide.
(c) Amounts utilized represent cash charges.
AMORTIZATION OF INTANGIBLES Amortization of goodwill and other intangibles
increased to $47 million in 1999 from $22 million in 1998. The increase was
primarily related to additional amortization of goodwill associated with the
acquisition of Symbios in August of 1998 and the acquisition of ZSP in April of
1999.
Amortization of goodwill and other intangibles increased to $22 million in 1998
from $4 million in 1997. The increase was due to additional amortization of
goodwill associated with the acquisition of Symbios in August of 1998.
INTEREST EXPENSE Interest expense increased to $40 million in 1999 from $9
million in 1998. The increase was primarily attributable to interest expense on
the bank debt facilities, which we entered into in August 1998 to fund the
purchase of Symbios, and the Convertible Notes issued in March of 1999. (See
Note 8 of the Notes.) Additionally, in 1999, we are no longer capitalizing
interest associated with the construction of our fabrication facility in
Gresham, Oregon, as operations of the facility commenced in December 1998.
<PAGE> 21
Interest expense increased to $9 million in 1998 from $2 million in 1997. The
increase was primarily attributable to interest expense on the bank debt
facilities which we entered into in August 1998 to fund the purchase of Symbios.
It was offset in part by the capitalization of interest associated with the
construction of our fabrication facility in Gresham, Oregon.
INTEREST INCOME AND OTHER Interest income and other increased to $18 million in
income in 1999 from $9 million in expense in 1998. The increase in 1999 was
primarily attributable to the absence of the following events in 1999 which
occurred in 1998:
- - A $14 million write-down of our equity investment in two non-public
technology companies with impairment indicators not considered to be
temporary in 1998. (See Note 5 of the Notes.);
- - A $10 million write-down of fixed assets and capitalized software in
1998;
- - $3 million in foreign exchange losses which included a loss from the
decision to close interest rate swap contracts which converted the
interest associated with the yen borrowings by LSI Logic Japan
Semiconductor Inc. ("JSI"), our wholly-owned subsidiary, from adjustable
to fixed rates in 1998. (See Note 6 to the Notes.); and
- - A $3 million litigation settlement from the former SEEQ in the third
quarter of 1998.
The increase was offset in part by a reduction in interest income attributable
to the lower average balance of interest-generating cash, cash equivalents and
short-term investments and lower interest rates during 1999 as compared to 1998
and other miscellaneous items. The lower average balance of cash, cash
equivalents and short term investments resulted primarily from cash outlays
associated with the purchase of Symbios in the third quarter of 1998 and debt
repayments, net of borrowings, primarily during the first quarter of 1999.
Interest income and other decreased to $9 million in expense in 1998 from $35
million in income in 1997. The decrease was primarily attributable to a
reduction of $18 million in interest income due to the combination of 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 our fabrication facility in Gresham, Oregon.
Additionally, in 1998, we charged to other expense the charges noted above.
The decrease in interest income and other was offset in part by a $3 million
gain on the sale of a building owned by a European affiliate.
GAIN ON SALE OF EQUITY SECURITIES In the third quarter of 1999, we adopted a
program of regular selling of marketable equity securities. During 1999, we sold
certain marketable equity securities for $49 million in the open market,
realizing a pre-tax gain of approximately $48 million. In 1998, we recognized a
gain of $17 million on proceeds of $23 million from the sale of a long-term
investment in a non-public technology company.
PROVISION FOR (BENEFITS OF) INCOME TAXES In 1999, we recorded a provision for
income taxes with an effective tax rate of 29%. The tax rate in 1999 was
impacted by non-deductible transaction costs related to recent acquisitions and
the sale of certain equity investments that were subject only to the U.S.
federal and state statutory tax rates. Excluding these transactions, the
effective tax rate would have been 25%. The rates in 1998 and 1997 were 8% and
27%, respectively. The tax rate in 1998 was impacted by write-offs relating to
IPR&D and restructuring charges during the third quarter of 1998, which were not
currently deductible for tax purposes. Excluding these charges, the effective
tax rate would have been 25% in 1998. 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 credits.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES Minority interest in net income
of subsidiaries was $0.2 million in 1999, $0.1 million in 1998, and $0.7 million
in 1997. The change in minority interest was attributable to the composition of
earnings and losses among certain of our international affiliates for each of
the respective years. The decrease in 1998 from 1997 was also attributable to
the purchase of minority interest shares of our Japanese affiliate, LSI Logic
K.K.
<PAGE> 22
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In April 1998, the
Accounting Standards Executive Committee ("AcSEC") released Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities." The
SOP became effective for fiscal years beginning after December 15, 1998 and
required companies to expense all costs incurred or unamortized in connection
with start-up activities. Accordingly, we expensed the unamortized preproduction
balance of $92 million associated with the Gresham manufacturing facility, net
of tax, on January 1, 1999 and have presented it as a cumulative effect of a
change in accounting principle in accordance with SOP No. 98-5.
On November 21, 1997, the EITF issued EITF No. 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project That
Combines Business Process Reengineering and Information Technology
Transformation." EITF No. 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.)
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 detailed in Risk
Factors in Part I of our Annual Report on Form 10-K for the year ended December
31, 1999. These factors include, among others:
- - Cyclical nature of both the semiconductor and SAN systems industries and
the markets addressed by our products;
- - Availability and extent of utilization of manufacturing capacity;
- - Price erosion;
- - Competitive factors;
- - Timing of new product introductions;
- - Changes in product mix;
- - Fluctuations in manufacturing yields;
- - Product obsolescence;
- - Business and product market cycles;
- - Economic and technological risks associated with our acquisition and
alliance activities; and
- - The ability to develop and implement new technologies.
Our operating results could also be impacted by sudden fluctuations in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. We operate in a technologically
advanced, rapidly changing and highly competitive environment. We predominantly
sell custom products to customers operating in a similar environment.
Accordingly, changes in the conditions of any of our customers may have a
greater impact on our operating results and financial condition than if we
predominantly offered standard products that could be sold to many purchasers.
While we cannot predict what effect these various factors may have on our
financial results, the aggregate effect of these and other factors could result
in significant volatility in our future performance. To the extent our
performance may not meet expectations published by external sources, public
reaction could result in a sudden and significantly adverse impact on the market
price of our securities, particularly on a short-term basis.
We have international subsidiaries and distributors which operate and sell our
products globally. Further, we purchase a substantial portion of our raw
materials and manufacturing equipment from foreign suppliers and incur labor and
other operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries. We utilize forward exchange and purchased currency option contracts
to manage our exposure associated with net asset and liability positions and
cash flows denominated in non-functional currencies. (See Note 6 of the Notes.)
There is no assurance that these hedging transactions will eliminate exposure to
currency rate fluctuations that could affect our operating and/or cash flows.
<PAGE> 23
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 presented risks for
us. We use a significant number of computer software programs and operating
systems and there are areas in which the Year 2000 computer issue could
negatively impact our business and us. We did not experience any significant
interruption of computer systems during the critical transition from the year
1999 to 2000.
We engaged in a comprehensive program to assess our Year 2000 risk exposure and
to plan and implement remedial and corrective action where necessary. In
December 1999, we conducted a global Year 2000 drill to ensure our preparedness
for the event. We reviewed all of our major internal systems and did not uncover
anything that would have a material impact on those systems. We completed
analysis of our 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. To date, no critical supplier has informed us of any
significant disruptions associated with the Year 2000 matter. Our assessment
program also encompassed our own product offerings and there is no information
to indicate that Year 2000 issues will have a material impact on sales or
functionality of our product offerings.
We developed various types of contingency plans to address potential problems
with critical internal systems and third party interactions. Our contingency
plans included 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. We cannot assure you that a contingency plan put into
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 despite 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
and to plan our remediation, testing and contingency 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 assessment, remediation, testing and
planning directly related to Year 2000 issues were approximately $15 million. Of
this, approximately $7 million consisted of expenses attributed to redeployment
of labor resources and overhead, $3 million for the cost of software and
external consulting fees and $5 million for additional capital expenditures. The
capital expenditures represent the early replacement of information technology
equipment and software to obtain the full benefits of Year 2000 protections
versus the normal technical obsolescence replacement cycle. We cannot assure you
that additional expenditure of material amounts will not be required. Such
expenditures 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 will have a material adverse impact on our financial
condition or overall trends in results of operations. We cannot assure you that
a significant disruption in systems resulting from a Year 2000 problem will not
occur in the future, which could result in a material adverse impact on our
operating results and financial condition.
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments increased 127% to $661 million
in 1999 from $292 million in 1998. The increase was primarily generated from
operations partially offset by capital expenditures and repayment of debt
obligations, net of borrowings. The increase in cash and short-term investments
is also attributable to $49 million in proceeds from the sale of marketable
equity securities in the open market. In the third quarter of 1999, we adopted a
program of regular selling of marketable equity securities. Short-term
investments include $25 million of marketable equity securities which we plan to
sell within the next 12 months. (See Note 5 of the Notes.)
<PAGE> 24
Cash, cash equivalents and short-term investments decreased to $292 million in
1998 from $500 million in 1997. The decrease was primarily attributable to a
combination of the following factors:
- - Cash outlays associated with the purchase of Symbios;
- - Purchase of property and equipment for our Gresham, Oregon facility;
- - Decrease in cash provided by operating activities; and
- - Cash used to repay debt obligations.
The decrease was offset in part by proceeds from the sale of an investment in a
non-public technology company and proceeds received from employee stock
transactions.
WORKING CAPITAL Working capital increased to $813 million in 1999 from $239
million in 1998. The increase was primarily a result of the following factors:
- - Higher short-term investments attributable to purchases of debt and
equity securities, net of sales and maturities, with excess cash
generated from operations;
- - Lower current liabilities primarily resulting from the repayment of the
$150 million short-term debt facility (see Note 8 of the Notes), offset
in part by reclassification of the current portion of long-term
obligations due in 2000; and
- - Higher inventories reflecting the expectation of continued higher sales
in 2000 as compared to the beginning of 1999.
The increase in working capital was offset in part by higher accrued salaries,
wages and benefits as of December 31, 1999 as compared to December 31, 1998. The
increase in accrued salaries, wages and benefits was partially due to increases
in compensation levels and compensation related programs in 1999 as compared to
1998.
Working capital decreased to $239 million in 1998 from $449 million in 1997. The
decrease primarily reflected the combined effect of the following factors:
- - Lower cash balances resulting from the acquisition of Symbios;
- - Higher current liabilities as a result of the short-term portion of the
debt facility entered into to fund the Symbios purchase. (See Note 8 of
the Notes); and
- - Higher accrued salaries, wages and benefits and other accrued
liabilities.
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.
CASH AND CASH EQUIVALENTS GENERATED FROM OPERATING ACTIVITIES During 1999, we
generated $444 million of cash and cash equivalents from operating activities
compared to $229 million in 1998. The increase in cash and cash equivalents
generated from operating activities was primarily attributable to the following
factors:
- - Higher net income (before depreciation and amortization, write-off of
unamortized preproduction costs, acquired in-process research and
development, non-cash restructuring charges and gains and losses on
stock investments); and
- - An increase in accrued and other liabilities.
The increase in accrued liabilities was partly due to higher bonus accruals as
of December 31, 1999 as compared to December 31, 1998 as a result of higher
operating income in the fourth quarter of 1999 in accordance with the bonus
plan.
<PAGE> 25
The increased cash from operations was offset in part by an increase in accounts
receivable and inventories. The increase in accounts receivable was primarily a
result of higher revenues in the fourth quarter of 1999 as compared to the same
period of 1998 and the timing of payment receipt. Inventories were higher as
revenues are expected to continue to be higher in 2000 as compared to the
beginning of 1999.
During 1998, we generated $229 million of cash and cash equivalents from
operating activities compared to $405 million in 1997. The decrease in cash and
cash equivalents generated from operating activities was primarily attributable
to the following factors:
- - A decrease in accounts payable due to 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 fabrication facility in Gresham, Oregon
became ready to commence production;
- - Lower net income (before depreciation and amortization, acquired
in-process research and development, non-cash restructuring charges and
a gain on sale of stock investment); and
- - Increases in prepaids and other assets primarily as a result of 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 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 accrued and other liabilities related primarily to the restructuring
reserve established in the third quarter of 1998 (see Note 4 of the Notes) and
an increase in non-current deferred tax liabilities.
CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES Cash and cash equivalents
used in investing activities was $472 million in 1999, compared to $776 million
in 1998. The primary investing activities during 1999 included the following
factors:
- - Purchases and sales of debt and equity securities available-for-sale and
others;
- - Purchases of property and equipment; and
- - The acquisition of ZSP, a non-public technology company.
The decrease in cash used in investing activities in 1999 as compared to 1998
was primarily attributable to the acquisition of Symbios in 1998 (see Note 2 of
the Notes) and more purchases of property and equipment in 1998 for our facility
in Gresham, Oregon, which commenced operations in December of 1998. The decrease
was offset in part by higher purchases in 1999 of debt and equity securities
available-for-sale, net of maturities and sale of debt and equity securities
available-for-sale.
Cash and cash equivalents used in investing activities was $776 million in 1998,
compared to $346 million in 1997. The primary investing activities during 1998
included the following factors:
- - Acquisition of Symbios;
- - Purchases and sales of debt and equity securities available-for-sale;
- - Purchase of property and equipment for the Gresham facility;
- - Purchases and sales of non-marketable shares of other technology
companies; and
- - Acquisition of stock from minority-interest holders. (See Note 2 of the
Notes.)
We believe that maintaining technological leadership in the highly competitive
worldwide semiconductor industry requires substantial ongoing investment in
advanced manufacturing capacity. Net capital additions were $205 million in 1999
and $330 million in 1998. A decrease in additions from 1998 was primarily
attributable to reduced purchases of property and equipment related to
construction of the fabrication facility in Gresham, Oregon as compared to the
prior year. In order to maintain our position as a technological market leader,
we expect to increase the level of capital expenditures to $450 million in 2000.
<PAGE> 26
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES Cash and cash
equivalents provided by financing activities during 1999 totaled $52 million
compared to $635 million in 1998. The decrease in 1999 was primarily
attributable to proceeds from a credit agreement entered into in August 1998 to
finance the acquisition of Symbios and partial repayment in 1999. (See Note 2 of
the Notes.) The decrease was offset in part by proceeds from the issuance of the
4 1/4% Convertible Subordinated Notes in March of 1999. (See Note 8 of the
Notes.) The decrease was also offset in part by higher proceeds from our
employee stock option and purchase plans in 1999.
Cash and cash equivalents provided by financing activities during 1998 totaled
$635 million compared to $92 million used in financing activities in 1997. The
increase in cash provided by financing activities in 1998 related primarily to
$725 million in proceeds from the debt facility entered into to help fund the
purchase of Symbios (see Note 8 of the Notes) and $22 million in proceeds from
our employee stock option and stock purchase plans. The increase was offset in
part by the repayment of $102 million in borrowings and the repurchase of shares
of our common stock for approximately $6 million during 1998. (See Note 9 of the
Notes.)
On February 18, 2000, we issued $500 million of 4% Convertible Subordinated
Notes (the "2000 Convertible Notes") due in 2005. The 2000 Convertible Notes are
subordinated to all existing and future senior debt, are convertible at anytime
following issuance into shares of our common stock at a conversion price of
$140.569 per share ($70.2845 per share after giving effect to the two-for-one
common stock split announced January 25, 2000) and are redeemable at our option,
in whole or in part, at any time on or after February 20, 2003. Each holder of
the 2000 Convertible Notes has the right to cause us to repurchase all of such
holder's convertible notes at 100% of their principal amount plus accrued
interest upon the occurrence of certain events and in certain circumstances.
Interest is payable semiannually. We paid approximately $15.3 million for debt
issuance costs related to the 2000 Convertible Notes. The debt issuance costs
are being amortized using the interest method. We used the net proceeds from the
2000 Convertible Notes to repay bank debt outstanding with a balance of $380
million as of December 31, 1999. (See Notes 8 and 13 of the Notes.)
During March of 1999, we issued $345 million of 4 1/4% Convertible Subordinated
Notes (the "1999 Convertible Notes") due in 2004. The 1999 Convertible Notes are
subordinated to all existing and future senior debt, are convertible in 60 days
following issuance into shares of our common stock at a conversion price of
$31.353 per share ($15.6765 per share after giving effect to the two-for-one
common stock split announced January 25, 2000) and are redeemable at our option,
in whole or in part, at any time on or after March 20, 2002. Each holder of the
1999 Convertible Notes has the right to cause us to repurchase all of such
holder's convertible notes at 100% of their principal amount plus accrued
interest upon the occurrence of certain events and in certain circumstances.
Interest is payable semiannually. We paid approximately $9.5 million for debt
issuance costs related to the 1999 Convertible Notes. The debt issuance costs
are being amortized using the interest method. We used the net proceeds from the
1999 Convertible Notes to repay existing debt obligations as described below.
On August 5, 1998, we 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 us,
JSI, ABN AMRO and thereafter syndicated to a group of lenders determined by ABN
AMRO and us. The credit agreement consisted of two credit facilities: a $575
million senior unsecured reducing revolving credit facility ("Revolver"), and a
$150 million senior unsecured revolving credit facility ("364-day Facility").
On August 5, 1998, we borrowed $150 million under the 364-day Facility and $485
million under the Revolver to help fund the purchase of Symbios. (See Note 2 of
the Notes.) On December 22, 1998, we borrowed an additional $30 million under
the Revolver. The credit facilities allowed for borrowings at adjustable rates
of LIBOR/TIBOR with a 1.25% spread. As of March 31, 1999, the spread changed to
1%. Interest payments are due quarterly. The 364-day Facility expired on August
3, 1999 by which time borrowings outstanding were fully paid in accordance with
the credit agreement. The Revolver is for a term of four years with the
principal reduced quarterly beginning on December 31, 1999. In November 1999, an
amendment was made to the credit agreement whereby mandatory repayments would
not exceed the amount necessary to reduce the commitment to $241 million. The
Revolver includes a term loan sub-facility in the amount of 8.6 billion yen made
available to JSI over the same term. The yen
<PAGE> 27
term loan sub-facility is for a period of four years with no required payments
until it expires on August 5, 2002. Pursuant to the restated credit agreement,
on August 30, 1998, JSI repaid its existing 11.4 billion yen ($79.2 million)
credit facility and borrowed 8.6 billion yen ($84 million at December 31, 1999),
bearing interest at adjustable rates, to finance capital expenditures related to
its manufacturing operations. In March of 1999, we repaid the full $150 million
outstanding under the 364-day Facility and $186 million outstanding under the
Revolver using the proceeds from the 1999 Convertible Notes as described above.
Borrowings outstanding under the Revolver including the yen sub-facility were
approximately $380 million as of December 31, 1999. Borrowings outstanding under
the 364-day Facility and the Revolver including the yen sub-facility were
approximately $740 million as of December 31, 1998. As of December 31, 1999, the
interest rate for the Revolver and the yen sub-facility was 7.07% and 1.29%,
respectively. As of December 31, 1998, the interest rate for the 364-day
Facility and the Revolver ranged from 6.65% to 6.82%, and the interest rate for
the yen sub-facility was 1.99%.
In accordance with the terms of our existing credit arrangement, we must comply
with certain financial covenants related to profitability, tangible net worth,
liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. As of December 31, 1999 and 1998, we were in compliance with these
covenants.
It is our policy to reinvest our earnings internally, and we do not anticipate
paying any cash 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, JSI and ABN AMRO, we are prohibited from
declaring or paying cash dividends.
In order to remain competitive, we must continue to make significant investments
in new facilities and capital equipment. We may seek additional equity or debt
financing from time to time. We believe that our existing liquid resources and
funds generated from operations, combined with funds from such financing and our
ability to borrow funds, will be adequate to meet our operating and capital
requirements and obligations through the foreseeable future. However, we cannot
be certain that additional financing will be available on favorable terms.
Moreover, any future equity or convertible debt financing will decrease the
percentage of equity ownership of existing stockholders and may result in
dilution, depending on the price at which the equity is sold or the debt is
converted.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges, and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 by one year. Upon adoption of SFAS No. 133, we will be required to
adjust hedging instruments to fair value in the balance sheet, and recognize the
offsetting gain or loss as transition adjustments to be reported in net income
or other comprehensive income, as appropriate, and presented in a manner similar
to the cumulative effect of a change in accounting principle. While we believe
the adoption of this statement will not have a significant effect on our results
of operations, the impact of the adoption of SFAS No. 133 as of the effective
date cannot be reasonably estimated at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have foreign 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.
Furthermore, in order to finance our acquisition activities and capital
expenditures, we have bank borrowings at adjustable interest rates at December
31, 1999 and 1998. 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. Changes in interest rates on the bank obligations are in part
mitigated by changes in interest rates on our investments in debt securities. We
use various hedge instruments, primarily forward contracts with maturities of
<PAGE> 28
six months or less and currency option contracts, to manage our exposure
associated with net asset and liability positions and cash flows denominated in
non-functional currencies. We have also used interest rate swap contracts to
manage our interest rate risk on yen denominated debt obligations. 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. There were no interest rate swap
contracts outstanding as of December 31, 1999 and 1998. (See Note 6 of the
Notes.) We did not purchase or hold derivative financial instruments for trading
purposes as of December 31, 1999 and 1998.
INTEREST RATE SENSITIVITY We are subject to interest rate risk on our investment
portfolio and outstanding debt. An interest rate move of 56 basis-points (10% of
our weighted-average worldwide interest rate in 1999) affecting our
floating-rate financial instruments as of December 31, 1999, including both debt
obligations and investments, would not have a significant effect on our
financial position, results of operations and cash flows over the next fiscal
year, assuming that the investment balance remains approximately consistent. In
1998, an interest rate move of 45 basis points (10% of our weighted-average
worldwide interest rate in 1998) affecting our interest sensitive investments
would also not have had a significant effect on our financial position, results
of operations and cash flows.
FOREIGN CURRENCY EXCHANGE RISK Based on our overall currency rate exposure at
December 31, 1999, including derivative financial instruments and nonfunctional
currency denominated receivables and payables, a near-term 10% appreciation or
depreciation of the U.S. dollar would not have a significant effect on our
financial position, results of operations and cash flows over the next fiscal
year. In 1998, a near-term 10% appreciation or depreciation of the U.S. dollar
would also not have had a significant effect.
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(In thousands, except per-share amounts) 1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 250,603 $ 210,306
Short-term investments 410,730 81,220
Accounts receivable, less allowances of $11,346 and $3,949 275,620 249,106
Inventories 243,896 181,440
Deferred tax assets 66,212 62,699
Prepaid expenses and other current assets 41,223 52,250
---------- ----------
Total current assets 1,288,284 837,021
Property and equipment, net 1,323,501 1,486,256
Goodwill and other intangibles 293,631 332,779
Other assets 301,189 167,749
---------- ----------
Total assets $3,206,605 $2,823,805
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 189,293 $ 195,228
Accrued salaries, wages and benefits 77,277 47,988
Other accrued liabilities 110,229 109,236
Income taxes payable 41,536 57,993
Current portion of long-term obligations 56,996 187,852
---------- ----------
Total current liabilities 475,331 598,297
---------- ----------
Deferred taxes liabilities 75,771 61,536
Other long-term obligations 793,461 634,261
---------- ----------
Total long-term obligations and deferred taxes liabilities 869,232 695,797
---------- ----------
Commitments and contingencies (Note 12)
Minority interest in subsidiaries 6,210 5,238
---------- ----------
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized -- --
Common stock; $.01 par value; 450,000 shares authorized; 299,572 and
287,734 shares outstanding 2,996 2,878
Additional paid-in capital 1,271,093 1,133,780
Retained earnings 435,552 368,378
Accumulated other comprehensive income 146,191 19,437
---------- ----------
Total stockholders' equity 1,855,832 1,524,473
---------- ----------
Total liabilities and stockholders' equity $3,206,605 $2,823,805
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 30
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 2,089,444 $ 1,516,891 $ 1,322,626
----------- ----------- -----------
Costs and expenses:
Cost of revenues 1,286,844 884,598 694,274
Research and development 297,554 291,125 229,735
Selling, general and administrative 257,712 226,258 196,359
Acquired in-process research and development 4,600 145,500 2,850
Restructuring of operations and other non-recurring item, net (2,063) 75,400 --
Amortization of intangibles 46,625 22,369 4,472
----------- ----------- -----------
Total costs and expenses 1,891,272 1,645,250 1,127,690
----------- ----------- -----------
Income/(loss) from operations 198,172 (128,359) 194,936
Interest expense (39,988) (8,865) (1,860)
Interest income and other, net 17,640 (8,952) 34,891
Gain on sale of equity securities 48,393 16,671 --
----------- ----------- -----------
Income/(loss) before income taxes, minority interest
and cumulative effect of change in accounting principle 224,217 (129,505) 227,967
Provision for income taxes 65,030 9,905 60,819
----------- ----------- -----------
Income/(loss) before minority interest and cumulative
effect of change in accounting principle 159,187 (139,410) 167,148
Minority interest in net income of subsidiaries 239 68 727
----------- ----------- -----------
Income/(loss) before cumulative effect of change in
accounting principle 158,948 (139,478) 166,421
Cumulative effect of change in accounting principle (91,774) -- (1,440)
----------- ----------- -----------
Net income/(loss) $ 67,174 $ (139,478) $ 164,981
=========== =========== ===========
Basic earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle $ 0.54 $ (0.49) $ 0.59
Cumulative effect of change in accounting principle (0.31) -- --
----------- ----------- -----------
Net income/(loss) $ 0.23 $ (0.49) $ 0.59
=========== =========== ===========
Diluted earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle $ 0.51 $ (0.49) $ 0.57
Cumulative effect of change in accounting principle (0.28) -- --
----------- ----------- -----------
Net income/(loss) $ 0.23 $ (0.49) $ 0.57
=========== =========== ===========
Shares used in computing per share amounts:
Basic 292,848 286,306 281,760
=========== =========== ===========
Diluted 325,088 286,306 292,892
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------- Paid-in Retained Comprehensive
(In thousands) Shares Amount Capital Earnings Income/(Loss) Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 262,610 $ 2,626 $ 959,623 $ 342,875 $ 25,404 $ 1,330,528
Net income 164,981
Foreign currency translation adjustments (37,876)
Total comprehensive income 127,105
Purchase of common stock under
stock repurchase program (4,800) (48) (59,833) (59,881)
Issuance to employees under
stock option and purchase plans 3,680 37 24,402 24,439
Tax benefit of employee stock transactions 11,200 11,200
Issuance of stock from conversion
of Convertible Subordinated Notes,
net of deferred offering costs 23,470 235 141,473 141,708
Fair value of options issued in
conjunction with the acquisition
of Mint Technology, Inc 11,283 11,283
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 284,960 2,850 1,088,148 507,856 (12,472) 1,586,382
Net loss (139,478)
Foreign currency translation adjustments 31,909
Total comprehensive loss (107,569)
Purchase of common stock under
stock repurchase program (890) (9) (5,652) (5,661)
Issuance to employees under
stock option and purchase plans 3,664 37 21,705 21,742
Common stock to be issued for
litigation settlement 1,406 1,406
Tax benefit of employee stock transactions 3,026 3,026
Fair value of options issued in conjunction
with the acquisition of Symbios, Inc 25,147 25,147
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 287,734 2,878 1,133,780 368,378 19,437 1,524,473
Net income 67,174
Foreign currency translation adjustments 37,050
Unrealized gain on available-for-sale
securities 89,704
Total comprehensive income 193,928
Issuance to employees under
stock option and purchase plans 11,838 118 89,313 89,431
Tax benefit of employee stock transactions 48,000 48,000
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 299,572 $ 2,996 $ 1,271,093 $ 435,552 $ 146,191 $ 1,855,832
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income/(loss) $ 67,174 $ (139,478) $ 164,981
Adjustments:
Depreciation and amortization 367,157 227,424 168,246
Write-off of unamortized preproduction costs 97,356 -- --
Acquired in-process research and development 4,600 145,500 2,850
Non-cash restructuring (benefits)/charges, net (7,107) 75,400 --
Common stock issued for litigation -- 1,406 --
Gain on sale of equity securities (48,393) (16,671) --
Changes in:
Accounts receivable (20,300) 32,744 (34,157)
Inventories (58,929) 6,992 (15,374)
Prepaid expenses and other assets (21,830) (57,805) (31,804)
Accounts payable (13,988) (67,831) 111,499
Accrued and other liabilities 78,071 21,593 38,947
----------- ----------- -----------
Net cash provided by operating activities 443,811 229,274 405,188
----------- ----------- -----------
Investing activities:
Purchase of debt and equity securities available-for-sale (608,017) (326,979) (1,134,838)
Maturities and sales of debt and equity
securities available-for-sale 304,315 631,755 1,319,823
Purchase of equity securities (5,778) (9,216) (10,704)
Proceeds from sale of equity securities 49,407 23,106 --
Purchases of property and equipment, net of retirements (205,172) (329,892) (513,510)
Acquisition of ZSP Technology,Inc (6,779) -- --
Acquisition of Symbios, net of cash acquired -- (763,683) --
Acquisition of Mint Technology, Inc., net of cash acquired -- -- (6,863)
Acquisition of stock from minority interest holders -- (599) --
----------- ----------- -----------
Net cash used in investing activities (472,024) (775,508) (346,092)
----------- ----------- -----------
Financing activities:
Proceeds from borrowings 345,000 724,682 34,193
Repayment of debt obligations (373,063) (101,781) (90,428)
Debt issuance costs (9,488) (3,846) --
Purchase of common stock under repurchase program -- (5,661) (59,881)
Issuance of common stock, net 89,431 21,742 24,444
----------- ----------- -----------
Net cash provided by/(used in) financing activities 51,880 635,136 (91,672)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 16,630 7,317 (5,038)
----------- ----------- -----------
Increase/(decrease) in cash and cash equivalents 40,297 96,219 (37,614)
----------- ----------- -----------
Cash and cash equivalents at beginning of period 210,306 114,087 151,701
----------- ----------- -----------
Cash and cash equivalents at end of period $ 250,603 $ 210,306 $ 114,087
=========== =========== ===========
Supplemental non-cash disclosures:
Conversion of subordinated debentures to common stock $ -- $ -- $ 141,708
=========== =========== ===========
Tax benefit of employee stock transactions $ 48,000 $ 3,026 $ 11,200
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS LSI Logic Corporation ("the Company" or "LSI") is a leading
supplier of high-performance integrated circuits and highly scalable enterprise
storage systems. The Company is focused on the three major, rapidly growing
markets of communications, network computing, and storage area network ("SAN")
systems. The Company's integrated circuits are used in a wide range of
communications devices, including for wireless, broadband, data networking, and
set-top-box applications. The Company also features a diverse and innovative SAN
systems product line.
The Company operates in two reportable segments: the Semiconductor segment and
the SAN Systems segment. In the Semiconductor segment, the Company designs,
develops, manufactures and markets integrated circuits, including
application-specific integrated circuits ("ASICs"), application-specific
standard products and related products and services. Semiconductor design and
service revenues include engineering design services, licensing of our advanced
design tools software, and technology transfer and support services. The
Company's customers use these services in the design of increasingly advanced
integrated circuits characterized by higher levels of functionality and
performance. The proportion of revenues from ASIC design and related services
compared to semiconductor product sales varies among customers depending upon
their specific requirements. In the SAN Systems segment, the Company designs,
manufactures, markets and supports high-performance data storage management and
storage systems solutions and a complete line of Redundant Array of Independent
Disks ("RAID") systems, subsystems and related software. The SAN Systems segment
was added in August 1998 with the purchase of Symbios.
(See Notes 2 and 11 of the Notes.)
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 January 25, 2000, we announced a two-for-one stock split, which was declared
by the Board of Directors as a 100% stock dividend payable to stockholders of
record on February 4, 2000 as one new share of common stock for each share held
on that date. The newly issued common stock shares were distributed on February
16, 2000. In the Notes, stockholders' equity has been restated to give
retroactive recognition to the two-for-one common stock split announced on
January 25, 2000 for all periods presented by reclassifying the par value of the
newly issued shares arising from the split from additional paid-in capital to
common stock. In addition, all references in the financial statements to number
of shares, per share amounts, stock option data and market prices of the
Company's common stock have been restated.
On June 22, 1999, the Company and SEEQ Technology, Inc. ("SEEQ") were combined
in a transaction accounted for as a pooling of interests. All financial
information has been restated retroactively to reflect the combined operations
of the Company and SEEQ as if the combination had occurred at the beginning of
the earliest period presented. (See Note 2 of the Notes.) Prior to the
combination, SEEQ's fiscal year-end was the last Sunday in September of each
year whereas the Company operates on a year ending on December 31. SEEQ's
financial information has been recast to conform to the Company's year-end.
There were no significant differences between the accounting policies of the
Company and SEEQ.
On April 14, 1999, the Company acquired all of the outstanding capital stock of
ZSP in a merger transaction accounted for as a purchase. Accordingly, the
results of operations of ZSP and the estimated fair value of assets
<PAGE> 34
acquired and liabilities assumed were included in the Company's consolidated
financial statements as of April 14, 1999, the effective date of the purchase,
through the end of the period. (See Note 2 of the Notes.) There were no
significant differences between the accounting policies of the Company and ZSP.
On August 6, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Symbios from Hyundai Electronics America. HEA is a
majority-owned subsidiary of Hyundai Electronics Industries Co., Ltd., a Korean
corporation. The transaction was accounted for as a purchase, and accordingly,
the results of operations of Symbios and the 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. (See Note 2 of the Notes.) There were 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 the 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.
During 1997, the Company changed its fiscal year from a 52-53 week year to a
year ending December 31. Fiscal years 1999 and 1998 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the 1999 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 generally classified and accounted for as available-for-sale.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reassesses the classification at each
reporting date. Investments in debt and equity securities classified as
held-to-maturity are reported at amortized cost plus accrued interest, and
securities classified as available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, recorded as a separate
component of comprehensive income in shareholders' equity until realized. (See
Note 5 of the Notes.) Interest and amortization of premiums and discounts for
debt and equity securities are included in interest income. Gains and losses on
securities sold are determined based on the specific identification method and
are included in other income. For all investment securities, unrealized losses
that are other than temporary are recognized in net income. The Company does not
hold these securities for speculative or trading purposes.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The estimated fair value of
financial instruments is 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 amount of financial instruments presented in the Company's
consolidated balance sheets approximates fair value at December 31, 1999 and
1998. (See Note 5 of the Notes.) The book value of the existing debt at December
31, 1999 and 1998 also approximates fair value as the debt is at adjustable
rates. (See Note 8 of the Notes.) The Company utilizes various hedge
instruments, primarily forward contracts and currency option contracts, to
manage its exposure associated with firm intercompany and third-party
transactions and net asset and liability positions denominated in non-functional
currencies. All derivatives are off-balance-sheet and therefore have no carrying
value. Because the Company hedges only with
<PAGE> 35
instruments that have high correlation with the underlying exposure and are
highly effective in offsetting underlying price movement, change in derivative
fair value are expected to be offset by changes in pricing.
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, networking and consumer electronics
manufacturers, with the remainder distributed across other industries. Amounts
due from one of the Company's customers accounted for 13% and 17% of trade
receivables at December 31, 1999 and 1998, respectively. The Company did not
engage in sales of accounts receivable during 1999. During 1998, the Company
sold approximately $77 million (discounted at short-term yen borrowing rates,
averaging 0.4%) of its Japanese sales affiliate's accounts receivable throughout
the year 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. One customer accounted for 11% of
the Company's consolidated revenues for the year ended December 31, 1999, and
another customer accounted for 12% and 22% of the Company's consolidated
revenues for the years ended December 31, 1998 and 1997, respectively. 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.
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 during the construction period. 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:
Buildings and improvements 20-40 years
Equipment 3-6 years
Furniture and fixtures 3-5 years
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 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." The SOP is effective for fiscal years beginning after
December 15, 1998 and required companies to expense all costs incurred or
unamortized in connection with start-up activities. Accordingly, the Company
expensed the unamortized preproduction balance of $92 million, net of tax,
associated with the Gresham manufacturing facility, on January 1, 1999 and has
presented it as a cumulative effect of a change in accounting principle in
accordance with the SOP No. 98-5. Until 1998, incremental costs incurred in
connection with developing major production capabilities at new manufacturing
plants, including facility carrying costs and costs to qualify production
processes, were capitalized and amortized over the expected useful lives of the
manufacturing processes utilized in the plants, generally four years.
Amortization commenced when the manufacturing plant became capable of volume
production, which was generally characterized by meeting certain reliability,
defect density and service cycle time criteria defined by management. The
preproduction costs were included in property and equipment at December 31,
1998. The Company recorded approximately $2 million in amortization of
preproduction costs in 1998 related to the fabrication facility in Gresham,
Oregon.
<PAGE> 36
GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles acquired
in connection with the acquisition of ZSP in April 1999, Symbios in August 1998,
Mint in 1997 and the purchase of common stock from minority stockholders were
approximately $377 million and $369 million, and related accumulated
amortization were $83 million and $36 million at December 31, 1999 and 1998,
respectively. (See Note 2 of the Notes.) 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 residual goodwill, which are being amortized over a weighted average life of
seven to eight years. Goodwill and other intangibles are evaluated for
impairment based on the related estimated undiscounted cash flows.
OTHER ASSETS Long-term investments in marketable and restricted shares of
technology companies are included in other assets. The marketable investments
are accounted for as available-for-sale and are reported at fair value with
unrealized gains and losses, net of related tax, recorded as a separate
component of comprehensive income in shareholders' equity until realized in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." (See Note 5 of the Notes.) Gains and losses on securities
sold are based on the specific identification method and are included in other
income. The investments in restricted and non-marketable shares are recorded at
cost. For all investment securities, unrealized losses that are other than
temporary are recognized in net income. The Company does not hold these
securities for speculative or trading purposes.
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 lives of the projects, typically a two
to five year period. The Company had $157 million and $90 million of capitalized
software costs and $89 million and $28 million of accumulated amortization
included in other assets at December 31, 1999 and 1998, 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 Reengineering 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.
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.
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.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation,
including stock options granted and shares issued under the Employee Stock
Purchase Plan, using the intrinsic value method prescribed in 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 the Notes.)
<PAGE> 37
EARNINGS PER SHARE Basic earnings per share ("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 repurchased upon the exercise of stock options. A reconciliation
of the numerators and denominators of the basic and diluted per share amount
computations is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----------------------------------------------------------------------------------------
Per-Share Per-Share
(In thousands except per share amounts) Income* Shares+ Amount Income* Shares+ Amount Income*
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income/(loss) before cumulative
effect of change in accounting
principle $ 158,948 292,848 $ 0.54 $(139,478) 286,306 $ (0.49) $ 166,421
--------- ---------
Cumulative effect of change
in accounting principle (91,774) 292,848 (0.31) -- -- (1,440)
Net income/(loss) available to
common stockholders 67,174 292,848 0.23 (139,478) 286,306 (0.49) 164,981
--------- ---------
Effect of dilutive securities:
Stock options 14,634 --
41/4% Convertible
Subordinated Notes 8,126 17,606 -- -- --
51/2% Convertible
Subordinated Notes -- -- -- -- 1,279
Diluted EPS:
Net income/(loss) before cumulative
effect of change in accounting
principle (adjusted for assumed
conversion of debt) 167,074 325,088 0.51 (139,478) 286,306 (0.49) 167,700
--------- ---------
Cumulative effect of change in
accounting principle (91,774) 325,088 (0.28) -- -- (1,440)
---------
Net income/(loss) available to
common stockholders $ 75,300 325,088 $ 0.23 $(139,478) 286,306 $ (0.49) $ 166,260
--------- ---------
</TABLE>
<TABLE>
Year Ended December 31,
1997
-----------------------
Per-Share
(In thousands except per share amounts) Shares+ Amount
--------- ---------
<S> <C> <C>
Basic EPS:
Net income/(loss) before cumulative
effect of change in accounting
principle 281,760 $ 0.59
---------
Cumulative effect of change
in accounting principle 281,760 --
Net income/(loss) available to
common stockholders 281,760 0.59
---------
Effect of dilutive securities:
Stock options 5,632
41/4% Convertible
Subordinated Notes --
51/2% Convertible
Subordinated Notes 5,500
Diluted EPS:
Net income/(loss) before cumulative
effect of change in accounting
principle (adjusted for assumed
conversion of debt) 292,892 0.57
---------
Cumulative effect of change in
accounting principle 292,892 --
---------
Net income/(loss) available to
common stockholders 292,892 $ 0.57
---------
</TABLE>
* Numerator
+ Denominator
Options to purchase approximately 4,122,000 shares and 6,428,000 shares were
outstanding at December 31, 1999 and 1997, respectively, but were not included
in the computation of diluted shares for the year ended December 31, 1999 and
1997, respectively, because the exercise prices of these options were greater
than the average market price of common shares for the respective years. The
exercise price of these options ranged from $22.66 to $32.53 and $16.00 to
$29.07 at December 31, 1999 and 1997, respectively. In 1998, all options
outstanding of approximately 40,234,000 were excluded from the calculation of
diluted shares because of their antidilutive effect on earnings per share as the
Company incurred a net loss for the year.
RELATED PARTY TRANSACTIONS There were no significant related party transactions
during the years ended December 31, 1999, 1998 and 1997.
COMPREHENSIVE INCOME Comprehensive income is defined as a change in equity of a
company during a period from transactions and other events and circumstances
excluding transactions resulting from investments by owners and distributions to
owners. The primary difference between net income and comprehensive income, for
the Company, arises from foreign currency translation adjustments and an
unrealized gain on available-for-sale securities, net of applicable taxes.
Comprehensive income is shown in the statement of stockholders' equity. As of
December 31, 1999, the accumulated other comprehensive income consisted of $90
million of unrealized gain on available-for-sale securities, net of the related
tax effect of $48 million, and $56 million of foreign currency translation
adjustments, net of the related tax effect of $30 million. As of December 31,
1998, the accumulated other comprehensive income represented $19 million of
foreign currency translation adjustments, net of the related tax effect of $10
million. AS
<PAGE> 38
of December 31, 1997, the accumulated other comprehensive loss represented
$12 million of foreign currency translation adjustments, net of the related tax
effect of $7 million.
SEGMENT REPORTING The Company operates in two reportable segments: the
Semiconductor segment and the SAN Systems segment. (See Note 11 of the Notes.)
The SAN Systems segment was added in August 1998 with the purchase of Symbios.
(See Note 2 of the Notes.) The SAN Systems segment did not meet the requirement
for a reportable segment as defined in SFAS No. 131 for the year ended and as of
December 31, 1998. However, for purposes of comparability, segment information
for the year ended and as of December 31, 1998 is included throughout this
report.
NOTE 2 - BUSINESS COMBINATIONS
MERGER WITH SEEQ
As discussed in Note 1, on June 22, 1999, the Company and SEEQ were combined.
SEEQ was formed in January 13, 1981 and engaged in the development, production
and sale of state-of-the-art semiconductor data communications devices. The
stock for stock transaction was approved by the shareholders of SEEQ. In
December 1999, SEEQ was merged with and into LSI with LSI continuing as the
surviving corporation in the merger. As a result of the merger, the separate
existence of SEEQ ceased. Under the terms of the Agreement and Plan of
Reorganization and Merger, SEEQ's shareholders received 0.1518 of a share of the
Company's common stock for each SEEQ share. Accordingly, the Company issued
approximately 5 million shares of its common stock for all the outstanding
shares of SEEQ common stock. Additionally, outstanding options to acquire SEEQ
common stock as of the merger date were converted to options to acquire 0.8
million shares of the Company's common stock.
The merger was accounted for as a pooling of interests. Accordingly, the
Company's financial statements have been restated retroactively to include the
financial results of SEEQ for all periods presented. Selected financial
information for the combining entities included in the consolidated statements
of operations for the six month period ended June 30, 1999 (unaudited), the
interim period nearest the merger date, and the years ended December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended June 30, December 31,
(In thousands) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
LSI $ 949,915 $ 1,490,701 $ 1,290,275
SEEQ 14,714 26,190 32,351
----------- ----------- -----------
Combined $ 964,629 $ 1,516,891 $ 1,322,626
=========== =========== ===========
Net (loss)/income:
LSI $ (75,148) $ (131,632) $ 159,248
SEEQ (2,785) (7,846) 5,733
----------- ----------- -----------
Combined $ (77,933) $ (139,478) $ 164,981
=========== =========== ===========
</TABLE>
Adjustments to conform accounting policies of SEEQ to those of LSI were not
significant to the combined financial results. There were no inter-company
transactions between the two companies for the periods presented.
<PAGE> 39
RESTRUCTURING AND MERGER RELATED EXPENSES ASSOCIATED WITH THE SEEQ MERGER In
connection with the merger with SEEQ on June 22, 1999, the Company recorded
approximately $2.9 million in restructuring charges and $5.5 million in
merger-related expenses which included $0.5 million recorded by SEEQ in the
first quarter of 1999. The merger expenses related primarily to investment
banking and other professional fees directly attributable to the merger with
SEEQ. The restructuring charge was comprised of $1.9 million in write-downs of
fixed assets which were duplicative to the combined company, $0.5 million of
exit costs relating to non-cancelable building lease contracts and a $0.5
million provision for severance costs related to the involuntary termination of
certain employees. The exit costs and employee severance costs were recorded in
accordance with EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The fixed and other
asset write-downs were recorded in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The restructuring actions as outlined by the restructuring plan are
intended to be completed by June 30, 2000, one year from the date the reserve
was taken. Approximately $0.5 million of severance was paid to three employees
terminated during the year.
The following table sets forth the SEEQ restructuring reserves as of June 22,
1999, the merger date, and activity against the reserve since then:
<TABLE>
<CAPTION>
Balance Balance
(In thousands) June 22, 1999 Utilized December 31, 1999
------------- -------- ------------------
<S> <C> <C> <C>
Write-down of fixed assets(a) $ 1,854 $(1,854) $ --
Noncancelable building lease contracts 490 (10) 480
Payments to employees for severance 516 (516) --
------- ------- -------
Total $ 2,860 $(2,380) $ 480
======= ======= =======
</TABLE>
(a) The amount utilized represents a write-down of fixed assets due to
impairment. The amount was accounted for as a reduction of the assets
and did not result in a liability.
ACQUISITION OF ZSP
As discussed in Note 1, on April 14, 1999, the Company acquired all of the
outstanding capital stock of ZSP, a semiconductor company that designs and
markets programmable digital signal processors. The acquisition was accounted
for as a purchase. Accordingly, the results of operations of ZSP and the
estimated fair value of assets acquired and liabilities assumed were included in
the Company's consolidated financial statements as of April 14, 1999, the
effective date of the purchase, through the end of the period. There were no
significant differences between the accounting policies of the Company and ZSP.
The Company paid $7 million in cash which included direct acquisition costs of
$0.6 million for investment banking legal and accounting fees in addition to
liabilities assumed of $4.3 million. The total purchase price of $11.3 million
was allocated to the estimated fair value of assets acquired and liabilities
assumed based on independent appraisals, where appropriate, and management
estimates as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible net liabilities $(301)
In-process research and development 4,600
Other current technology 2,600
Excess of purchase price over net assets acquired 4,370
---------
$11,269
=========
</TABLE>
The Company accrued approximately $0.7 million of exit costs for a
non-cancelable building lease contract and to prepare the building for sublease.
The exit costs were accrued as a liability assumed in the purchase price
allocation in accordance with EITF No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." The Company expects no other
additional liabilities that may result in an adjustment to the allocation of the
purchase price. Pro forma results of operations have not been presented as ZSP's
operations were not
<PAGE> 40
significant to the Company's consolidated operations, and therefore, the pro
forma results would not significantly differ from the Company's historical
results.
IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the purchase of ZSP, the
Company recorded a $4.6 million charge to IPR&D during the second quarter of
1999. The amount was determined by identifying research projects for which
technological feasibility had not been established and no alternative future
uses existed. The Company acquired ZSP's in-process digital signal processors
research and development project that was targeted at the telecommunications
market. This product was being developed specifically for voice-over-net or
voice-over-Internet protocol applications and was intended to have substantial
incremental functionality, greatly improved speed and wider range of interfaces
than ZSP's then current technology.
The value of the one project identified to be in process was determined by
estimating the future cash flows from the project once commercially feasible,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value. The percentage of completion
for the project was determined using milestones representing management's
estimate of effort, value added and degree of difficulty of the portion of the
project completed as of April 14, 1999, as compared to the remaining research
and development to be completed to bring the project to technical feasibility.
The development process was grouped into three phases with each phase containing
between one and five milestones. The three phases were: (i) researching the
market requirements and the engineering architecture and feasibility studies;
(ii) design and verification; and (iii) prototyping and testing the product
(both internal and customer testing). ZSP's digital signal processor project
started in May 1998. As of April 14, 1999, the Company estimated that the
project was 65% complete.
The actual development timeline and costs were in line with estimates. However,
development of the technology remains a substantial risk to the Company due to
factors including the remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other companies.
Additionally, the value of the other intangible assets acquired may become
impaired. Failure to bring these products to market in a timely manner could
adversely affect sales and profitability of the combined company in the future.
USEFUL LIFE OF INTANGIBLE ASSETS ACQUIRED The amount allocated to current
technology and residual goodwill is being amortized over their estimated
weighted average useful life of seven years using a straight-line method.
ACQUISITION OF SYMBIOS
As discussed in Note 1, the Company completed the acquisition of all of the
outstanding capital stock of Symbios from HEA on August 6, 1998.
The 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 which were resolved in February of 1999 without a change to
the accrual. The purchase was financed using a combination of cash reserves and
a credit facility bearing interest at adjustable rates. (See Note 8 of the
Notes.) 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.
<PAGE> 41
The total purchase price was allocated as follows (in millions):
<TABLE>
<CAPTION>
<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
Excess of purchase price over net assets acquired 83
----
$804
====
</TABLE>
SYMBIOS INTEGRATION The Company has taken certain actions to combine the Symbios
operations with those of LSI Logic and, in certain instances, to consolidate
duplicative operations. Adjustments to accrued integration costs related to
Symbios were recorded as an adjustment to the fair value of net assets in the
purchase price allocation. The Company finalized the integration plan as of
December 31, 1998. Accrued integration charges included $4 million related to
involuntary separation and relocation benefits for approximately 200 Symbios
employees and $1.4 million in other exit costs primarily relating to the closing
of Symbios sales offices and the termination of certain contractual
relationships. The Symbios integration related accruals were based upon
management's current estimate of integration costs and were in accordance with
EITF No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."
During the third quarter of 1999, the Company completed the activities
underlying the integration plan outlined above. The following table sets forth
the Company's Symbios integration activity against the accrual established on
August 6, 1998, the acquisition date:
<TABLE>
<CAPTION>
Integration of Balance Balance
Symbios December 31, December 31,
(In thousands) August 6, 1998 Utilized 1998 Utilized 1999
-------------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Payments to employees for severance
and relocation(a) $ 4,000 $(1,640) $ 2,360 $(2,360) $--
Other exit costs(b) 1,437 (435) 1,002 (1,002) --
------- ------- ------- ------- ---
Total $ 5,437 $(2,075) $ 3,362 $(3,362) $--
======= ======= ======= ======= ===
</TABLE>
(a) Amounts utilized represent cash payments related to the severance and
relocation of 152 employees in 1999 and 47 employees in 1998.
(b) Amounts utilized represent cash payments to third parties to terminate
certain contractual relationships.
No significant adjustments were made to the reserve during the periods
presented.
IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the purchase of Symbios,
the Company recorded a $145.5 million charge to IPR&D during the third quarter
of 1998. The amount was determined by identifying research projects in areas for
which technological feasibility had not been established and no alternative
future uses existed. The Company acquired technology consisting of storage and
semiconductor R&D projects in process. The storage projects consisted of
designing controller modules, a new disk drive and a new version of storage
management software with new architectures to improve performance and
portability. The semiconductor projects consisted of client/server products
being designed with new architectures and protocols and a number of ASIC and
peripheral products that were being custom designed to meet the specific needs
of specific customers. The amounts of IPR&D allocated to each category of
projects was approximately $50.7 million for storage projects, $69.1 million for
client/server projects and $25.7 million for ASIC and peripheral projects.
The value of these projects was determined by estimating the expected cash flows
from the projects once commercially feasible, discounting the net cash flows
back to their present value and then applying a percentage of completion to the
calculated value.
<PAGE> 42
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 R&D to be completed to bring each project to technical
feasibility. The development process was grouped into three phases with each
phase containing between one and five milestones. The three phases were: (i)
researching the market requirements and the engineering architecture and
feasibility studies; (ii) the design and verification; and (iii) prototyping and
testing the product (both internal to the Company and customer testing). Each of
these phases was subdivided into milestones, and then the status of each of the
projects was evaluated as of August 6, 1998. We estimated, as of the acquisition
date, the storage projects in aggregate were approximately 74% complete,
semiconductor projects were approximately 60% complete for client/server
projects and 55% complete for ASIC and peripheral projects.
The actual development timeline was in line with original estimates as of
December 31, 1999. However, development of these technologies remains a
significant risk to the Company due to the remaining effort to achieve
technological feasibility, rapidly changing customer needs and significant
competitive threats from numerous companies. Failure to bring these products to
market in a timely manner could adversely affect sales and profitability of the
combined company in the future. Additionally, the value of other intangible
assets acquired may become impaired.
USEFUL LIVES OF INTANGIBLE ASSETS The estimated weighted average useful life of
the intangible assets for current technology, assembled workforce, trademarks
and residual goodwill, created as a result of the acquisition, is approximately
eight years.
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 period presented. The
summary combines the results of operations as if Symbios had been acquired as of
the beginning of the period 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 acquisition of Symbios and
elimination of certain notes receivable assumed to be repaid as of the beginning
of the period presented, changes in interest expense because of the debt entered
into with the purchase and the repayment of certain debt assumed to be repaid as
of the beginning of the period presented. (See Note 8 of the Notes.)
Additionally, IPR&D of $145.5 million discussed above has been excluded from the
period presented as it arose from the acquisition of Symbios. The restructuring
charge of $75.4 million did not relate to the acquisition of Symbios and
accordingly was included in the preparation of the pro forma results. (See Note
4 of the Notes.)
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
(In thousands, except per-share amounts) (Unaudited )
-----------------
<S> <C>
Revenue $ 1,875,247
Net loss $ (4,843)
Basic loss per share $ (0.02)
Diluted loss per share $ (0.02)
</TABLE>
ACQUISITION OF MINORITY INTEREST
During the third quarter of 1998, the Company acquired 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. The excess of the
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, 1999 and 1998. There were no minority interest
purchases during 1999 and 1997.
<PAGE> 43
ACQUISITION OF MINT
In July 1997, the Company acquired all issued and outstanding shares of common
stock of 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 ASICs 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
1,363,452 shares of common stock with a fair 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 IPR&D 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. The nature of the projects in process at
the date of acquisition related to computer aided design tools, in particular,
those that would be used for functional verification of the chip design. The
additional costs to complete the tools were approximately $850,000 and were
completed in the fourth quarter of 1997. The actual development timeline and
costs were in line with estimates.
NOTE 3 - LICENSE AGREEMENT
In 1999, the Company and Wafer Technology (Malaysia) Sdn. Bhd. ("Silterra")
entered into a technology transfer agreement under which the Company grants
licenses to Silterra with respect to certain of the Company's wafer fabrication
technologies and provides associated manufacturing training and related
services. In exchange, The Company receives cash and equity consideration valued
at $120 million over three years for which transfers and obligations of the
Company are scheduled to occur. During 1999, the Company transferred technology
to Silterra valued at $15 million in total. The amount was recorded as an offset
to the Company's R&D expenses. In addition, the Company provided engineering
training with a value of $2 million. The amount was recorded as an offset to
cost of revenues.
NOTE 4 - RESTRUCTURING
During the third quarter of 1999, the Company completed the activities
underlying the restructuring plan which was originally established in the third
quarter of 1998. During the year ended December 31, 1999, the Company utilized
$11.5 million of restructuring reserves which consisted of severance payments of
$7.9 million for 358 employees terminated during the year, $2.3 million for
early lease contract terminations and to exit non-cancelable purchase
commitments, $0.7 million of manufacturing facility decommissioning costs in
Japan and other exit costs, and $0.6 million of currency translation
adjustments.
During 1999, the Company determined that $10.5 million of the restructuring
reserve originally established in the third quarter of 1998 would not be
utilized because of a change in management's estimate of the reserve
requirements. The amount consisted of the following:
- - $3.9 million of reserves for lease termination and non-cancelable
purchase commitments primarily in the U.S. and Europe;
- - $3.7 million of excess severance reserves in the U.S., Japan and Europe;
- - $2.0 million of reserves for manufacturing facility decommissioning
costs and other exit costs primarily in the U.S. and Japan; and
- - $0.9 million of related cumulative translation adjustments.
The change in management estimates of the reserve requirements stemmed primarily
from the following factors:
- - A significant increase in the requirement for manufacturing capacity to
meet expected sales growth which resulted in retention of certain
employees originally targeted for termination of employment and in
reversal of the reserve for decommissioning costs as a result of
retention of the U.S. and Japan operation facilities originally targeted
for sale; and
- - The Company's ability to exit lease commitments and non-cancelable
purchase commitments more favorably than originally anticipated in the
U.S. and Europe.
Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the year ended December 31, 1999.
<PAGE> 44
DESCRIPTION OF 1998 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
acquired on August 6, 1998 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 excluded any integration
costs relating to Symbios. As discussed in Note 2 of the Notes, integration
costs relating to Symbios were accrued as a liability assumed in the purchase in
accordance with EITF No. 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
Restructuring costs consisted of $37.2 million related primarily to fixed assets
impaired as a result of the decision to close a manufacturing facility in
Tsukuba, Japan by the third quarter of 1999; $4.7 million for termination of
leases and maintenance contracts primarily in the U.S. and Europe; $1.7 million
for non-cancelable purchase commitments primarily in Europe; $13.1 million in
fixed asset and other asset write-downs primarily in the U.S., Japan and Europe;
approximately $2.4 million in other exit costs, which resulted principally from
the consolidation and closure of certain design centers, sales facilities and
administrative offices primarily in the U.S. and Europe; and workforce reduction
costs of $16.3 million.
Other exit costs included $0.9 million related to payments made for early lease
contract terminations and the write-down of surplus assets to their estimated
realizable value; $0.7 million for the write-off of excess licenses for closed
locations in Europe and $0.8 million of other exit costs associated with the
consolidation of design centers worldwide. The workforce reduction costs
primarily included 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 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,"
was the result of independent appraisals and use of management estimates.
Severance costs and other above noted exit costs were determined in accordance
with EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity."
The following table sets forth the Company's 1998 restructuring reserves as of
September 30, 1998 and activity against the reserve since then:
<TABLE>
<CAPTION>
Restructuring
Expense Balance Balance
(In thousands) September 30, December 31, Reserve December 31,
1998 Utilized 1998 Utilized Reversal 1999
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Write-down of manufacturing facility(a) $ 37,200 $(35,700) $ 1,500 $ (210) $ (1,290) $--
Other fixed asset related charges(a) 13,100 (13,100) -- -- -- --
Payments to employees for severance(b) 16,300 (4,700) 11,600 (7,948) (3,652) --
Lease terminations and maintenance
contracts(c) 4,700 (100) 4,600 (2,257) (2,343) --
Noncancelable purchase commitments(c) 1,700 (100) 1,600 (80) (1,520) --
Other exit costs(c) 2,400 (1,200) 1,200 (450) (750) --
Cumulative currency translation
adjustment -- 1,512 1,512 (600) (912) --
-------- -------- -------- -------- -------- ---
Total $ 75,400 $(53,388) $ 22,012 $(11,545) $(10,467) $--
======== ======== ======== ======== ======== ===
</TABLE>
(a) Amounts utilized in 1998 reflect a write-down of fixed assets due to
impairment. The amounts were accounted for as a reduction of the assets and
did not result in a liability. The $1.5 million balance as of December 31,
1998 and the amount utilized in 1999 for the write-down of the facility
related to machinery and equipment decommissioning costs in Japan.
(b) Amounts utilized represent cash payments related to the severance of 358
and 290 employees during 1999 and 1998, respectively.
(c) Amounts utilized represent cash charges.
NOTE 5 - CASH AND INVESTMENTS
<PAGE> 45
As of December 31, 1999 and 1998, cash and cash equivalents and short-term
investments included the following debt and equity securities:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Overnight deposits $ 34,994 $ 82,591
Corporate debt securities 15,138 --
Commercial paper 4,951 44,803
-------- --------
Total held-to-maturity $ 55,083 $127,394
Cash 195,520 82,912
-------- --------
Total cash and cash equivalents $250,603 $210,306
-------- --------
SHORT-TERM INVESTMENTS
Corporate debt securities $178,284 $ 34,545
Commercial paper 99,475 --
Auction rate preferred 74,928 5,013
Certificates of deposits 27,967 --
Equity securities 25,000 --
U.S. government and agency securities 5,076 5,065
Time deposits -- 24,934
Bank notes -- 11,663
-------- --------
Total available-for-sale $410,730 $ 81,220
-------- --------
</TABLE>
Unrealized holding gains and losses of held-to-maturity securities and
available-for-sale debt securities were not significant and accordingly the
amortized cost of these securities approximated fair market value at December
31, 1999 and 1998. Securities classified as held-to-maturity were included in
cash equivalents, and debt securities classified as available-for-sale were
included in short-term investments as of December 31, 1999 and 1998. Contract
maturities of these securities were within one year as of December 31, 1999.
Realized gains and losses for held-to-maturity securities and available-for-sale
debt securities were not significant for the year ended December 31, 1999, 1998
and 1997.
At December 31, 1999, the Company had marketable equity securities with an
aggregate carrying value of $153 million, $25 million of which were classified
as short-term investments on the Company's consolidated balance sheet. The
remaining balance was included in other long-term assets. There were no
significant investments in marketable equity securities as of December 31, 1998.
The unrealized gain of $90 million, net of the related tax effect of $48
million, on these equity securities was included in accumulated comprehensive
income as of December 31, 1999. In the third quarter of 1999, the Company
adopted a program of regular selling of marketable equity securities. During
1999, the Company sold the equity securities for $49 million in the open market,
realizing a pre-tax gain of approximately $48 million.
In the third quarter of 1998, the Company wrote down to estimated fair value two
long-term non-marketable equity investments. The write-down consisted of $12
million for the Company's 2.4% equity investment in a non-public foundry company
and $2 million for the Company's equity investment in a non-public technology
company. The estimated fair values established for these investments were
determined by use of management's estimates. The decline in value of the
investments was not considered by management to be temporary. In the fourth
quarter of 1998, the Company recognized a gain of $17 million on proceeds of $23
million from a sale of one of its equity investments in a non-public technology
company.
<PAGE> 46
There were no significant gains or losses realized on investments in debt and
equity securities for the year ended December 31, 1997.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company has foreign subsidiaries which operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in foreign currency exchange rates and interest rates. The Company
utilizes various hedge instruments, primarily forward contracts and currency
option contracts, to manage its exposure associated with firm intercompany and
third-party transactions and net asset and liability positions denominated in
non-functional currencies. The Company does not hold derivative financial
instruments for speculative or trading purposes.
The Company enters into forward contracts to hedge firm asset and liability
positions and cash flows denominated in non-functional currencies. The following
table summarizes by major currency the forward exchange contracts outstanding as
of December 31, 1999 and 1998. The buy amount represents the U.S. dollar
equivalent of commitments to purchase foreign currencies, and the sell amount
represents the U.S. dollar equivalent of commitments to sell foreign currencies.
Foreign currency amounts were translated at rates current at December 31, 1999
and 1998. These contracts will expire through March 2000.
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Buy/(Sell):
Japanese Yen $ 22,194 $--
Netherlands Guilder 43,145 --
Japanese Yen (3,397) --
</TABLE>
These forward contracts are considered identifiable hedges, and recognition of
gains and losses is deferred until settlement of the underlying commitments.
Realized gains and losses are recorded as other income or expense when the
underlying exposure materializes or the hedged transaction is no longer expected
to occur. Realized gains and losses included in interest income and other were
not significant for the years ended December 31, 1999, 1998 and 1997.
Currency option contracts are treated as hedges of third-party yen revenue
exposures. At December 31, 1999, there were no purchased currency option
contracts outstanding. At December 31, 1998, a total of $130 million of currency
option contracts were outstanding which expired quarterly through June 1999.
Recognition of gains is deferred until the exposure underlying the option is
recorded. Option premiums are amortized over the lives of the contracts.
Realized gains and losses are recorded as an offset to revenue and were not
significant for the years ended December 31, 1999, 1998 and 1997. There were no
deferred premiums outstanding as of December 31, 1999. The deferred premiums on
all outstanding options were $5.5 million as of December 31, 1998, and included
in other current assets.
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 LSI Logic Japan Semiconductor, Inc. ("JSI"), a
wholly owned subsidiary of the Company, from adjustable to fixed rates. The
contracts were closed because the underlying debt was repaid as discussed in
Note 8 of the Notes. The $1.5 million loss associated with the interest rate
swap contracts was included in interest income and other for the year ended
December 31, 1998. As of December 31, 1999 and 1998, there were no interest rate
swap contracts outstanding.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No.
<PAGE> 47
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," which deferred the effective date
of SFAS No. 133 by one year. Upon adoption of SFAS No. 133, the Company will be
required to adjust hedging instruments to fair value in the balance sheet, and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle.
While the Company believes the adoption of this statement will not have a
significant effect on the Company's results of operations, the impact of the
adoption of SFAS No. 133 as of the effective date cannot be reasonably estimated
at this time.
NOTE 7 - BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
----------- -----------
<S> <C> <C>
Inventories:
Raw materials $ 20,294 $ 32,347
Work-in-process 139,698 53,042
Finished goods 83,904 96,051
----------- -----------
$ 243,896 $ 181,440
=========== ===========
Property and equipment:
Land $ 60,978 $ 50,278
Buildings and improvements 495,505 459,157
Equipment 1,562,453 1,349,303
Leasehold improvements 54,271 56,898
Preproduction engineering -- 97,356
Furniture and fixtures 52,847 49,820
Construction in progress 135,883 210,426
----------- -----------
2,361,937 2,273,238
Accumulated depreciation and amortization (1,038,436) (786,982)
----------- -----------
$ 1,323,501 $ 1,486,256
=========== ===========
</TABLE>
The Company had $97 million of unamortized preproduction engineering costs at
December 31, 1998 associated with the construction of the fabrication facility
in Gresham, Oregon. This 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 AcSEC released SOP No. 98-5, "Reporting on the Costs of Start-up
Activities." The SOP was effective for fiscal years beginning after December 15,
1998 and required companies to expense all costs incurred or unamortized in
connection with start-up activities. Accordingly, the Company expensed the
unamortized preproduction engineering cost balance of $92 million, net of tax,
on January 1, 1999 and has presented it as a cumulative effect of a change in
accounting principle in accordance with SOP No. 98-5. As of December 31, 1998,
the preproduction engineering costs were included in property and equipment and
accumulated amortization for the preproduction engineering costs was $27
million.
An allocation of interest costs incurred on borrowings during a period required
to complete construction of the asset is capitalized as part of the historical
cost of acquiring certain assets. Capitalized interest included in property and
equipment totaled $29 million at December 31, 1999 and 1998. Interest
capitalized was $12 million and $5 million for the year ended December 31, 1998
and 1997, respectively. No interest was capitalized during 1999. Accumulated
amortization of capitalized interest was $11 million and $9 million at December
31, 1999 and 1998, respectively.
<PAGE> 48
NOTE 8 - DEBT
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
Notes payable to banks $ 379,823 $ 739,774
Convertible Subordinated Notes 345,000 --
Capital lease obligations 3,948 7,044
--------- ---------
728,771 746,818
Current portion of long-term debt, capital lease obligations and
short-term borrowings (56,996) (187,852)
--------- ---------
Long-term debt and capital lease obligations $ 671,775 $ 558,966
========= =========
</TABLE>
During March of 1999, the Company issued $345 million of 41/4% Convertible
Subordinated Notes (the "1999 Convertible Notes") due in 2004. The 1999
Convertible Notes are subordinated to all existing and future senior debt, are
convertible 60 days following issuance into shares of the Company's common stock
at a conversion price of $31.353 per share ($15.6765 per share after giving
effect to the two-for-one common stock split announced January 25, 2000) and are
redeemable at the option of the Company, in whole or in part, at any time on or
after March 20, 2002. Each holder of the convertible notes has the right to
cause the Company to repurchase all of such holder's convertible notes at 100%
of their principal amount plus accrued interest upon the occurrence of certain
events and in certain circumstances. Interest is payable semiannually. The
Company paid approximately $9.5 million for debt issuance costs related to the
1999 Convertible Notes. The amount was capitalized in other assets and is being
amortized over the life of the 1999 Convertible Notes using the interest method.
The net proceeds of the 1999 Convertible Notes were used to repay existing debt
obligations as described below.
On February 18, 2000, the Company issued $500 million of 4% Convertible
Subordinates Notes (the "2000 Convertible Notes."). See Note 13 of the Notes for
a further description of the 2000 Convertible Notes.
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 syndicated to a group of lenders
determined by ABN AMRO and the Company. The credit agreement consisted of two
credit facilities: a $575 million senior unsecured reducing revolving credit
facility ("Revolver"), and a $150 million senior unsecured revolving credit
facility ("364-day Facility").
On August 5, 1998, the Company borrowed $150 million under the 364-day Facility
and $485 million under the Revolver. On December 22, 1998, the Company borrowed
an additional $30 million under the Revolver. The credit facilities allowed for
borrowings at adjustable rates of LIBOR/TIBOR with a 1.25% spread. As of March
31, 1999, the spread changed to 1%. Interest payments are due quarterly. The
364-day Facility expired on August 3, 1999 by which time borrowings outstanding
were fully paid in accordance with the credit agreement. The Revolver is for a
term of four years with the principal reduced quarterly beginning on December
31, 1999. In November 1999, an amendment was made to the credit agreement
whereby mandatory repayments would not exceed the amount necessary to reduce the
commitment to $241 million. The Revolver includes a term loan sub-facility in
the amount of 8.6 billion yen made available to JSI over the same term. The yen
term loan sub-facility is for a period of four years with no required payments
until it expires on August 5, 2002. Pursuant to the restated credit agreement,
on August 30, 1998, JSI repaid its existing 11.4 billion yen ($79.2 million)
credit facility and borrowed 8.6 billion yen ($84 million at December 31, 1999)
bearing interest at adjustable rates. In March of 1999, the Company repaid the
full $150 million outstanding under the 364-day Facility and $186 million
outstanding under the Revolver using the proceeds from the 1999 Convertible
Notes as described above. Borrowings outstanding under the Revolver including
the yen sub-facility were approximately $380 million as of December 31, 1999.
Borrowings outstanding under the 364-day Facility and the Revolver including the
yen sub-facility were approximately $740 million as of December 31, 1998. As of
December 31, 1999, the interest rate for the Revolver and the yen sub-facility
was 7.07%
<PAGE> 49
and 1.29%, respectively. As of December 31, 1998, the interest rate for the
364-day Facility and the Revolver ranged from 6.65% to 6.82%, and the interest
rate for the yen sub-facility was 1.99%.
In accordance with the terms of its existing credit agreement, the Company must
comply with certain financial covenants related to profitability, tangible net
worth, liquidity, senior debt leverage, debt service coverage and subordinated
indebtedness. As of December 31, 1999 and 1998, the Company was in compliance
with these covenants.
Pursuant to the amended and restated credit agreement dated as of September 22,
1998, by and among the Company, JSI and ABN AMRO, the Company is prohibited from
declaring or paying cash dividends.
Aggregate principal payments required on outstanding debt and capital lease
obligations are $57 million, $1 million, $325 million, $0.5 million, $345
million and $0.3 million for the year ended December 31, 2000, 2001, 2002, 2003,
2004 and thereafter, respectively.
The Company paid $37 million, $9 million and $9 million in interest during 1999,
1998 and 1997, respectively.
NOTE 9 - COMMON STOCK
On January 25, 2000, we announced a two-for-one stock split, which was declared
by the Board of Directors as a 100% stock dividend payable to stockholders of
record on February 4, 2000 as one new share of common stock for each share held
on that date. The newly issued common stock shares were distributed on February
16, 2000. All references to stock option data of the Company's common stock
below have been restated retroactively to reflect the two-for-one common stock
split as if it occurred for all periods presented.
The following summarizes all shares of common stock reserved for issuance as of
December 31, 1999:
<TABLE>
<CAPTION>
(In thousands) Number of
Shares
-------------
<S> <C>
Issuable upon:
Exercise of stock options, including options available for grant 67,666
Purchase under Employee Stock Purchase Plan 1,194
-------------
68,860
=============
</TABLE>
The Company's Board of Directors approved an action which authorizes management
to acquire up to 10 million and 8 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 0.9 million and 4.8 million shares of its
common stock from the open market for approximately $6 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 further stock
repurchases was rescinded by the Company's Board of Directors in February of
1999.
STOCK OPTION PLANS On August 13, 1999, the Board of Directors approved the 1999
Nonstatutory Stock Option Plan ("1999 NSO Plan") under which 14 million shares
have been reserved for issuance under the 1999 NSO Plan. Under the terms of the
1999 NSO Plan, the Company may grant stock options to its employees, excluding
officers, with an exercise price no less than the fair market 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.
<PAGE> 50
The 1991 Equity Incentive Plan, as amended on July 30, 1997, enables the Company
to grant stock options to its employees and 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 62.5 million
shares have been reserved for issuance under this plan, including 12.5 million
shares approved by the Company's Board of Directors and stockholders in 1999.
The Company's 1982 Incentive Stock Option Plan is administered by the Board of
Directors. Terms of that plan required that the exercise price of options be no
less than the fair value at the date of grant and that options be granted only
to employees and consultants of the Company. Generally, options granted vested
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 Incentive Stock Option Plan
expired by its terms. Accordingly, no further options may be granted thereunder.
Certain options previously granted under that plan remained outstanding at
December 31, 1999.
In May 1995, the stockholders approved the 1995 Director Option Plan, which
replaced the 1986 Directors' Stock Option Plan, and reserved 1,000,000 shares
for issuance thereunder. Terms of the 1995 Director Option 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. On May 7, 1999, the
stockholders approved an amendment to the 1995 Director Option Plan to increase
the annual grant of options to each non-employee director to 25,000, which fully
vest six months after grant. Certain options previously granted under the 1986
Directors' Stock Option Plan remained outstanding at December 31, 1999.
In connection with the merger with SEEQ (see Note 2 of the Notes), each
outstanding stock option under SEEQ's Stock Option Plan was converted to an
option of the Company's common stock at a ratio of 0.1518. As a result,
outstanding options to purchase 760,878 shares were assumed. No further options
may be granted under the SEEQ Stock Option Plan. All tables presented below were
retroactively restated as if the merger occurred at the beginning of the periods
presented.
In connection with the acquisition of Symbios (see Note 2 of the Notes), each
outstanding stock option under Symbios' Stock Option Plan was converted to an
option of the Company's common stock at a ratio of 2.0188. As a result,
outstanding options to purchase 4,147,186 shares were assumed. No further
options may be granted under the Symbios Stock Option Plan.
In connection with the acquisition of Mint (see Note 2 of the Notes), each
outstanding stock option under Mint's Stock Option Plan was converted to an
option of the Company's common stock at a ratio of 1.2572. As a result,
outstanding options to purchase 1,363,452 shares were assumed. No further
options may be granted under the Mint Stock Option Plan.
At December 31, 1999, shares available for grant under all stock option plans
were 18,957,000.
<PAGE> 51
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, 1999, 1998 and 1997 (share amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 40,232 $10.92 28,080 $12.17 22,216 $10.43
Options assumed -- -- 4,148 6.97 1,364 8.36
Options canceled (2,830) (13.13) (4,866) (13.15) (2,352) (13.60)
Options granted 18,848 25.73 14,140 9.82 9,196 15.39
Options exercised (7,541) (9.38) (1,270) (6.08) (2,344) (4.77)
------- ------ ------- ------ ------- ------
Options outstanding at December 31 48,709 $16.73 40,232 $10.92 28,080 $12.17
======= ====== ======= ====== ======= ======
Options exercisable at December 31 16,139 $11.00 14,250 $10.20 8,850 $ 8.94
======= ====== ======= ====== ======= ======
</TABLE>
Significant option groups outstanding at December 31, 1999 and related weighted
average exercise price and contractual life information is as follows (share
amounts in thousands):
<TABLE>
<CAPTION>
Options with exercise Outstanding Exercisable Remaining
prices ranging from: Shares Price Shares Price Life (years)
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$0.99 to $5.00 1,464 $ 2.88 1,440 $ 2.86 3.59
$5.01 to $10.00 11,842 8.34 4,806 7.53 8.35
$10.01 to $15.00 14,090 12.35 6,768 12.08 7.27
$15.01 to $20.00 7,402 17.04 2,466 16.06 7.96
$20.01 to $25.00 1,456 21.78 408 20.96 8.13
greater than $25.00 12,455 30.50 251 29.07 9.63
------ ------ ------ ------ ------
48,709 $16.73 16,139 $11.00 8.16
====== ====== ====== ====== ======
</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 of the options
assumed as part of the merger with SEEQ on June 22, 1999, the purchase of
Symbios on August 6, 1998 and Mint in July of 1997. (See Note 2 of the Notes.)
The weighted average estimated grant date fair value, as defined by SFAS No.
123, of options granted during 1999, 1998 and 1997 was $14.35, $5.43 and $8.53
per option, respectively. The estimated grant date fair value was 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
were included in the estimated grant date fair value calculations for the
Company's stock option awards:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Expected life (years) 4.76 4.85 4.57
Risk-free interest rate 5.55% 5.00% 5.99%
Volatility 60.46% 56.99% 55.63%
Dividend yield -- -- --
</TABLE>
STOCK PURCHASE PLAN Since 1983, the Company has offered an Employee Stock
Purchase Plan under which rights are granted to all employees to purchase shares
of common stock at 85% of the lesser of the fair market value of such shares at
the beginning of an offering period or the end of each six-month segment within
such an offering period. Sales under the Employee Stock Purchase Plan in 1999,
1998 and 1997 were approximately 4,297,000, 2,168,000 and 1,338,000 shares of
common stock at an average price of $5.20, $6.93 and $9.89 per share,
respectively. During 1997, the Company's stockholders approved an amendment to
the Company's Employee Stock
<PAGE> 52
Purchase Plan to increase the number of shares reserved for issuance by
1,000,000 shares. Additionally in 1997, the stockholders approved an amendment
to the Company's Employee Stock Purchase Plan to increase the number of shares
of common stock reserved for issuance 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
Stock Purchase Plan on the last day of the preceding fiscal year. On May 7,
1999, the stockholders approved an Amended and Restated Employee Stock Purchase
Plan to increase the number of shares reserved for issuance thereunder by
1,500,000, to change the enrollment date, to reduce the length of the offering
period from two years to one year and to grant the Board of Directors authority
to alter the purchase price of the shares and make their administrative changes.
Shares available for future purchases under the Employee Stock Purchase Plan
were approximately 1,194,000 at December 31, 1999.
The weighted average estimated grant date fair value, as defined by SFAS No.
123, of rights to purchase stock under the Employee Stock Purchase Plan granted
in 1999, 1998 and 1997 was $8.30, $2.97 and $6.50 per share, respectively. The
estimated grant date fair value was calculated using the Black-Scholes model.
The following weighted average assumptions were included in the estimated grant
date fair value calculations for rights to purchase stock under the Company's
Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Expected life (years) 0.75 1.25 1.25
Risk-free interest rate 4.95% 4.42% 5.82%
Volatility 60.30% 59.06% 57.90%
Dividend yield -- -- --
</TABLE>
STOCK PURCHASE RIGHTS In November of 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 of 1998. Under the plan, each
share of the Company's outstanding common stock carries one Preferred Share
Purchase Right. Each Preferred Share Purchase Right entitles the holder, under
certain circumstances, to purchase one-thousandth of a share of Preferred Stock
of the Company or its acquirer at a discounted price. The Preferred Share
Purchase 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, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income/(loss)
Basic $ 10,679 $ (193,346) $ 135,461
Diluted $ 10,679 $ (193,346) $ 136,740
Pro forma net income/(loss) per share
Basic $ 0.04 $ (0.68) $ 0.48
Diluted $ 0.04 $ (0.68) $ 0.47
</TABLE>
For the year ended December 31, 1999, common equivalents of approximately
17,606,000 shares and interest expense of $8 million, net of taxes, associated
with the Convertible Subordinated Notes were excluded from the computation of
pro forma diluted earnings per share as a result of their antidilutive effect on
pro forma earnings per share. (See Note 8 of the Notes.) The pro forma effect on
net income and net income per share for 1999, 1998 and 1997 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.
<PAGE> 53
NOTE 10 - INCOME TAXES
The provision for taxes consisted of the following:
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
Federal $ 17,507 $ 11,075 $ 12,726
State 1,678 2,560 4,172
Foreign 47,535 22,075 43,106
--------- --------- ---------
Total 66,720 35,710 60,004
--------- --------- ---------
DEFERRED LIABILITY (BENEFIT):
Federal (3,658) (8,396) 5,135
State (569) (2,085) 1,575
Foreign 2,537 (15,324) (5,895)
--------- --------- ---------
Total (1,690) (25,805) 815
--------- --------- ---------
Total $ 65,030 $ 9,905 $ 60,819
========= ========= =========
</TABLE>
The domestic and foreign components of income before income taxes and minority
interest were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic $ 198,039 $ (36,857) $ 69,054
Foreign 26,178 (92,648) 158,913
--------- --------- ---------
Income before income taxes and minority interest $ 224,217 $(129,505) $ 227,967
========= ========= =========
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries aggregate to
approximately $210 million at December 31, 1999, 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.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, were as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 22,046 $ 43,347
Tax credit carryovers 2,380 2,380
Future deductions for purchased intangible assets 48,240 45,239
Future deductions for reserves and other 84,482 90,791
--------- ---------
Total deferred tax assets 157,148 181,757
Valuation allowance (23,056) (58,166)
--------- ---------
Net deferred tax assets 134,092 123,591
Deferred tax liabilities--depreciation and amortization (87,879) (84,644)
--------- ---------
Total net deferred tax assets $ 46,213 $ 38,947
========= =========
</TABLE>
<PAGE> 54
The change in deferred taxes includes $5.6 million of deferred taxes included in
the cumulative effect of change in accounting principle. The deferred tax assets
valuation allowance at December 31, 1999 and 1998 is attributed to U.S. federal,
state and foreign deferred tax assets which result primarily from restructuring
and other one-time charges, and net operating loss carryovers. Management
believed that the realization of deferred tax assets was not assured in the
years presented, other than to the extent of taxable income for the carryover
period.
Differences between the Company's effective tax rate and the federal statutory
rate were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $ 78,476 35% $(44,886) (35%) $ 79,788 35%
State taxes, net of federal benefit 1,091 -- 2,049 2% 3,937 2%
Difference between U.S. and foreign
tax rates 37,091 17% 21,970 17% (22,453) (10%)
Nondeductible expenses (2,603) (1%) 6,200 5% 2,847 1%
Foreign tax credits (10,973) (5%) (420) -- (1,195) --
Research and development tax credit (5,000) (2%) (2) -- (4,500) (2%)
Benefit of deferred tax assets
not previously recognized (33,826) (15%) 24,438 19% (2,029) (1%)
Other 774 -- 556 -- 4,424 2%
-------- -------- -------- -------- -------- --------
Effective tax rate $ 65,030 29% $ 9,905 8% $ 60,819 27%
======== ======== ======== ======== ======== ========
</TABLE>
The Company paid $14 million, $30 million and $31 million for income taxes in
1999, 1998 and 1997, respectively.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1991 through 1996. 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. Final proposed adjustments have not
been received for these years. 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
The Company operates in two reportable segments: the Semiconductor segment and
the SAN Systems segment. In the Semiconductor segment, the Company designs,
develops, manufactures and markets integrated circuits, including
application-specific integrated circuits, application-specific standard products
and related products and services. Semiconductor design and service revenues
include engineering design services, licensing of our advanced design tools
software, and technology transfer and support services. The Company's customers
use these services in the design of increasingly advanced integrated circuits
characterized by higher levels of functionality and performance. The proportion
of revenues from ASIC design and related services compared to semiconductor
product sales varies among customers depending upon their specific requirements.
In the SAN Systems segment, the Company designs, manufactures, markets and
supports high performance data storage management and storage systems solutions
and a complete line of RAID systems, subsystems and related software.
<PAGE> 55
INFORMATION ABOUT PROFIT OR LOSS AND ASSETS The following is a summary of
operations by segment for the years ending December 1999 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Semiconductor $ 1,810,111 $ 1,423,858
SAN Systems 279,333 93,033
----------- -----------
Total $ 2,089,444 $ 1,516,891
=========== ===========
INCOME/(LOSS) FROM OPERATIONS:
Semiconductor $ 172,628 $ (83,796)
SAN Systems 25,544 (44,563)
----------- -----------
Total $ 198,172 $ (128,359)
=========== ===========
</TABLE>
The SAN Systems segment was added in August 1998 with the purchase of Symbios
(see Note 2 of the Notes) and therefore no comparative segment information is
available for the year ended December 31, 1997. Intersegment revenues for the
periods presented above were not significant. Restructuring of operations and
other non-recurring items were included in the Semiconductor segment.
One customer represented 11% of the Company's total consolidated revenues for
the year ended December 31, 1999, and another customer represented 12% and 22%
of the Company's total consolidated revenues for the years ended December 31,
1998 and 1997, respectively. In the Semiconductor segment, one customer
represented 10%, 13% and 22% of the total Semiconductor revenues for the years
ended December 31, 1999, 1998 and 1997, respectively. In the SAN Systems
segment, there were three customers with revenues representing 29%, 27% and 14%
of total SAN Systems revenues for the year ended December 31, 1999. During 1998,
there were three customers with revenues representing 17%, 15% and 14% of SAN
systems revenues.
The following is a summary of total assets by segment as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
---------- ----------
<S> <C> <C>
TOTAL ASSETS:
Semiconductor $3,051,865 $2,673,362
SAN Systems 154,740 150,443
---------- ----------
Total $3,206,605 $2,823,805
========== ==========
</TABLE>
The SAN Systems segment did not meet the requirement for a reportable segment as
defined in SFAS No. 131 for the year ended and as of December 31, 1998. However,
for purposes of comparability, revenues, income/(loss) from operations by
segment for the year ended December 31, 1998 and total assets by segment as of
December 31, 1998 were included in the above tables.
<PAGE> 56
INFORMATION ABOUT GEOGRAPHIC AREAS The Company's significant operations outside
the United States include manufacturing facilities, design centers and sales
offices in Japan, Europe and Pan Asia. The following is a summary of operations
by entities located within the indicated geographic areas for 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
United States $1,209,177 $ 957,257 $ 649,703
Japan 282,749 261,705 366,508
Europe 290,428 218,015 240,249
Pan Asia 307,090 79,914 66,166
---------- ---------- ----------
Total $2,089,444 $1,516,891 $1,322,626
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
---------- ----------
<S> <C> <C>
LONG-LIVED ASSETS:
United States $1,521,067 $1,589,451
Japan 226,898 301,423
Europe 8,089 24,286
Pan Asia 94,387 44,966
---------- ----------
Total $1,850,441 $1,960,126
========== ==========
</TABLE>
United States revenues include export sales. 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.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases the majority of its facilities and certain equipment under
non-cancelable operating leases which expire through 2020. The facilities lease
agreements typically provide for base rental rates which are increased at
various times during the terms of the lease and for renewal options at the fair
market rental value.
In June of 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 ($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, 1999. There were no significant gains or
losses from these leasing transactions for the year ended December 31, 1999,
1998 and 1997. The majority of the lease terms will expire in 2000 at which
time, the Company is required to pay the terminal residual amount, which
represents 20% of the original acquisition cost of equipment leased. Minimum
rental payments under these operating leases, including option periods, are $45
million in 2000 and $3 million 2001, which include the terminal residual amount
of $25 million in 2000 and $2 million in 2001.
Future minimum payments under other operating lease agreements are $25 million,
$22 million, $16 million, $8 million, $6 million and $11 million for the years
ended December 31, 2000, 2001, 2002, 2003, 2004 and thereafter, respectively.
Rental expense under all operating leases was $58 million, $59 million and $59
million for the years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 57
During the third quarter of 1995, the remaining shares of the Company's Canadian
subsidiary, LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were
previously owned by other parties were acquired by another one of the Company's
subsidiaries. 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.
Until their petition is heard and resolved by the Court, a new trial date for
the pending matter is not expected to be set. They have also initiated 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 the Company cannot give any assurances regarding the resolution
of these matters, the final outcome is not expected to have a material adverse
effect on the Company's 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.
In February of 1999, 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 the Company. The case
number is CIV990377PHXRGS. The patents involved in this lawsuit are alleged to
relate to semiconductor manufacturing and computer imaging, including the use of
bar coding for automatic identification of articles. In September of 1999, the
Company filed an answer denying infringement, raising affirmative defenses and
asserting a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelson's patents. As of December 31, 1999,
discovery had not commenced and no trial date had been set. While the Company
cannot make any assurance regarding the eventual resolution of this matter, it
is not expected to have a material adverse effect on the Company's 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 final outcome of such matters is
not expected to have a significant adverse effect on the Company's consolidated
financial position or results of operations.
NOTE 13 - SUBSEQUENT EVENTS
On February 18, 2000, the Company issued $500 million of 4% Convertible
Subordinated Notes (the "2000 Convertible Notes") due in 2005. The 2000
Convertible Notes are subordinated to all existing and future senior debt, are
convertible at any time following issuance into shares of the Company's common
stock at a conversion price of $140.569 per share ($70.2845 per share after
giving effect to the two-for-one common stock split announced January 25, 2000)
and are redeemable at the Company's option, in whole or in part, at any time on
or after February 20, 2003. Each holder of the 2000 Convertible Notes has the
right to cause the Company to repurchase all of such holder's convertible notes
at 100% of their principal amount plus accrued interest upon the occurrence of
certain events and in certain circumstances. Interest is payable semiannually.
The Company paid approximately $15.3 million for debt issuance costs related to
the 2000 Convertible Notes. The debt issuance costs are being amortized using
the interest method. The net proceeds from the 2000 Convertible Notes were used
to repay bank debt outstanding with a balance of $380 million as of December 31,
1999.
<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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States 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.
San Jose, California
February 18, 2000
<PAGE> 59
FIVE YEAR CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands, except per share amounts) 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,089,444 $ 1,516,891 $ 1,322,626 $ 1,271,855 $ 1,288,790
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues 1,286,844 884,598 694,274 716,755 679,588
Research and development 297,554 291,125 229,735 187,749 126,911
Selling, general and administrative 257,712 226,258 196,359 171,733 163,286
Acquired in-process research
and development 4,600 145,500 2,850 -- --
Restructuring of operations and other
non-recurring items, net (2,063) 75,400 -- -- (114)
Amortization of intangibles 46,625 22,369 4,472 3,869 2,296
----------- ----------- ----------- ----------- -----------
Total costs and expenses 1,891,272 1,645,250 1,127,690 1,080,106 971,967
----------- ----------- ----------- ----------- -----------
Income/(loss) from operations 198,172 (128,359) 194,936 191,749 316,823
Interest expense (39,988) (8,865) (1,860) (13,850) (16,776)
Interest income and other, net 17,640 (8,952) 34,891 30,483 35,448
Gain on sale of equity securities 48,393 16,671 -- -- --
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes,
minority interest and cumulative effect
of change in accounting principle 224,217 (129,505) 227,967 208,382 335,495
Provision for income taxes 65,030 9,905 60,819 57,521 93,790
----------- ----------- ----------- ----------- -----------
Income/(loss) before minority interest
and cumulative effect of change in
accounting principle 159,187 (139,410) 167,148 150,861 241,705
Minority interest in net income of subsidiaries 239 68 727 499 3,042
----------- ----------- ----------- ----------- -----------
Income/(loss) before cumulative effect of
change in accounting principle 158,948 (139,478) 166,421 150,362 238,663
Cumulative effect of change in
accounting principle (91,774) -- (1,440) -- --
----------- ----------- ----------- ----------- -----------
Net income/(loss) $ 67,174 $ (139,478) $ 164,981 $ 150,362 $ 238,663
=========== =========== =========== =========== ===========
Basic earnings per share:
Income/(loss) before cumulative effect
of change in accounting principle $ 0.54 $ (0.49) $ 0.59 $ 0.58 $ 0.95
Cumulative effect of change in
accounting principle (0.31) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income/(loss) $ 0.23 $ (0.49) $ 0.59 $ 0.58 $ 0.95
=========== =========== =========== =========== ===========
Diluted earnings per share:
Income/(loss) before cumulative effect
of change in accounting principle $ 0.51 $ (0.49) $ 0.57 $ 0.54 $ 0.86
Cumulative effect of change in
accounting principle (0.28) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income/(loss) $ 0.23 $ (0.49) $ 0.57 $ 0.54 $ 0.86
=========== =========== =========== =========== ===========
Year-end status:
Total assets $ 3,206,605 $ 2,823,805 $ 2,155,365 $ 1,974,628 $ 1,865,708
Long-term debt $ 671,775 $ 558,966 $ 69,455 $ 261,508 $ 201,033
Stockholders' equity $ 1,855,832 $ 1,524,473 $ 1,586,382 $ 1,330,528 $ 1,227,029
----------- ----------- ----------- ----------- -----------
</TABLE>
The Company's fiscal years ended on December 31 in 1999, 1998 and 1997 and the
Sunday closest to December 31 in 1996 and 1995. For presentation purposes, the
Consolidated Financial Statements refer to December 31 as year-end. During 1999,
the Company expensed an unamortized preproduction balance of $92 million, net of
taxes, associated with the manufacturing facility in Gresham, Oregon and has
presented it as a cumulative effect of a change in accounting principle in
accordance with SOP No. 98-5, "Reporting on the Costs of Start-up Activities."
(See Notes 1 and 7 of the Notes.) During 1998, the Company reported a charge for
restructuring of $75 million (see Note 4 of the Notes) and in-process research
and development costs of $146 million related to the acquisition of Symbios on
August 6, 1998. (See Note 2 of the Notes.)
<PAGE> 60
INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------
(In thousands, except per share amounts) First Second Third Fourth
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenues $463,617 $501,012 $539,959 $584,856
Gross profit 161,726 186,614 214,174 240,086
Income before cumulative effect of change in
accounting principle 4,010 9,831 51,924 93,183
Cumulative effect of change in accounting principle (91,774) -- -- --
Net (loss)/income (87,764) 9,831 51,924 93,183
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $0.01 $0.03 $0.18 $0.31
Cumulative effect of change in accounting principle (0.32) -- -- --
Net (loss)/income $(0.31) $0.03 $0.18 $0.31
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $0.01 $0.03 $0.16 $0.28
Cumulative effect of change in accounting principle (0.31) -- -- --
Net (loss)/income $(0.30) $0.03 $0.16 $0.28
YEAR ENDED DECEMBER 31, 1998
Revenues $332,730 $336,272 $396,871 $451,018
Gross profit 145,182 156,428 171,471 159,212
Net income/(loss) 31,416 31,379 (212,030) 9,757
Basic net income/(loss) per share: $0.11 $0.11 $(0.74) $0.03
Diluted net income/(loss) per share: $0.11 $0.11 $(0.74) $0.03
</TABLE>
During 1999, the Company expensed an unamortized pre-production balance of $92
million, net of taxes, associated with the manufacturing facility in Gresham,
Oregon and has presented it as a cumulative effect of a change in accounting
principle in accordance with SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." (See Note 1 and 7 of the Notes.) The Company reported a charge for
restructuring of $75 million in the third quarter of 1998 (see Note 4 of the
Notes) and a charge for in-process research and development of $146 million
related to the acquisition of Symbios on August 6, 1998. (See Note 2 of the
Notes.)
LSI Logic logo design, ATMizer, CoreWare, FlexStream, G12, Gflx, GigaBlaze,
HyperPHY, Integra, Merlin, MetaStor, MiniRISC, Right-First-Time, SEEQ,
SureConnex, The System on a Chip Company, TinyRISC, Viper, ZSP are trademarks
of LSI Logic Corporation. Rambus is a registered trademark of Rambus Inc. Oak
DSPCore is a registered trademark of DSP Group, Inc., used under license. All
other brand and product names may be trademarks of their respective companies.
<PAGE> 61
CORPORATE INFORMATION
<TABLE>
<S> <C>
HEADQUARTERS ADDRESS FINANCIAL LITERATURE
LSI Logic Corporation Publications of interest to current and potential
1551 McCarthy Blvd investors, including copies of the Company's current
Milpitas CA 95035 10-K filed with the Securities and Exchange
Commission, are available without charge by calling
REGISTRAR & TRANSFER AGENT 1.800.574.4286. Outside the U.S. and Canada, phone
Bank Boston, N.A. 719.533.7679. Financial information is also
c/o EquiServe available over the World Wide Web at
Stockholder Services http://www.lsilogic.com/investor.
P.O. Box 8040
Boston MA 02266-8040 STOCKHOLDER INQUIRIES
1.800.730.6001 To notify LSI Logic of address changes, lost
www.equiserve.com certificates or transfers of stock, stockholders of
record should contact the Company's Registrar and
INDEPENDENT ACCOUNTANTS Transfer Agent, EquiServe. Stockholders of record
PricewaterhouseCoopers LLP who receive more than one copy of this annual report
10 Almaden Blvd can contact EquiServe to arrange to have their
San Jose CA 95113 accounts consolidated. Stockholders who own LSI
Logic stock through a brokerage can contact their
LEGAL COUNSEL broker to request consolidation of their accounts.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road INQUIRIES CONCERNING THE COMPANY
Palo Alto CA 94304 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
</TABLE>
Operating expenses, EBG per diluted share and EBG are intended to present the
Company's operating results, excluding amortization of goodwill and special
items, for the periods presented. This format is not in accordance with
Generally Accepted Accounting Principles. The items excluded from EBG and
operating expenses are outlined below.
*Operating expenses for the three months ended March 31, June 30, September 30
and December 31, 1999 exclude amortization of intangibles of approximately $11
million for the three months ended March 31, 1999 and approximately $12
million for each of the three months ended June 30, September 30 and December
31 of 1999, acquired in-process research and development from the purchase of
ZSP Technology, Inc. of approximately $5 million for the three months ended
June 30, 1999 and restructuring of operations and other non-recurring items,
net, for the three months ended March 31, June 30 and September 30 of 1999 of
approximately a benefit of $2 million, a charge of $8 million and a benefit of
$8 million, respectively. (See Notes 2 and 4 of the Notes to the Consolidated
Financial Statements.)
**EBG per diluted share for each of the three months ended March 31, June 30,
September 30 and December 31 of 1999 exclude the special items as noted above
under the discussion of special items excluded from operating expenses and the
gains on sale of equity securities of $42 million for the three months ended
December 31, 1999.
EBG for the years ended December 31, 1999 and 1998 exclude amortization of
goodwill of $47 million for the year ended December 31, 1999 and $22 million
for the year ended December 31, 1998, acquired in-process research and
development of approximately $5 million for the year ended December 31, 1999
and $146 million for the year ended December 31, 1998, restructuring of
operations and other non-recurring items, net, of approximately a benefit of
$2 million for the year ended December 31, 1999 and a charge of $75 million
for the year ended December 31, 1998, gains on the sale of equity investments
of approximately $42 million for the year ended December 31, 1999 and $17
million for the year ended December 31, 1998 and other special items for the
year ended December 31, 1998 of $29 million consisting of the impairment of
stock investments, write-offs of assets not relating to restructuring and
litigation settlement costs.
The provision for income taxes to calculate EBG was calculated using the
Company's normal 25% tax rate for the periods presented.
EEO/AA Employer
(C)2000, LSI Logic Corporation.
Printed in U.S.A.
<PAGE> 62
CORPORATE DIRECTORY
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Wilfred J. Corrigan Wilfred J. Corrigan R. Douglas Norby
Chairman Chairman Executive Vice President
Chief Executive Officer Chief Executive Officer Chief Financial Officer
R. Douglas Norby John P. Daane David E. Sanders
Executive Vice President Executive Vice President Vice President
Chief Financial Officer Communications Products Group General Counsel & Secretary
T.Z. Chu John J. D'Errico Lewis C. Wallbridge
Retired President Executive Vice President Vice President
Hoefer Pharmacia Biotech, Inc. Storage I/O Components & Human Resources
Colorado Operations
Dr. Malcolm R. Currie Joseph M. Zelayeta
President Thomas Georgens Executive Vice President
Chief Executive Officer Senior Vice President & Worldwide Operations
Currie Technologies, Inc. General Manager
SAN Systems
James H. Keyes
Chairman W. Richard Marz
Chief Executive Officer Executive Vice President
Johnson Controls, Inc. Geographic Markets
Matthew J. O'Rourke
Consultant; Retired Partner,
Price Waterhouse LLP
VICE PRESIDENTS
Maniam B. Alagaratnam Donald J. Esses Jordan S. Plofsky
Package Development U.S. Manufacturing General Manager
Networking Products Division
Norman L. Armour Darrell L. Jones
General Manager Colorado Operations Ranko L. Scepanovic
Gresham Operations Advanced Development Labs
David M. Jones
Danny Biran General Manager Richard D. Schinella
General Manager Storage ASIC Division Wafer Process R&D &
Wireless Products Division Santa Clara Operations
Dan King
Thomas Daniel Quality & Reliability Giuseppe Staffaroni
ASIC Technology General Manager
Charles E. Laughlin Broadband Products Division
Bruce A. Decock General Manager
Information Technology LSI Logic Japan Chiaki Terada
Chief Information Officer Semiconductor, Inc. President
LSI Logic K.K.
W. Hugh Durdan Theodore Leno
General Manager Assembly & Test Operations Frank A. Tornaghi
Consumer Products Division North America Sales
Bryon Look
Daniel L. Ellsworth Treasurer, Lam H. Truong
Memory & Mixed Signal Corporate Development & Internet Business Solutions
Strategic Planning
Ronald L. Engelbrecht Mark D. Wadlington
General Manager Cliff Marks General Manager
Engineering & Wichita Operations European Sales Asia/Pacific
Bruce L. Entin Diana L. Matley Daniel M. Weed
General Manager Investor Relations Worldwide Engineering Services
Internet Computing Division
Marlon R. Murzello Jeff Wolf
Consumer Technology Consumer Products Marketing
Engineering
Bill Wuertz
Willsie H. Nelson General Manager
Worldwide Logistics Storage Standard Products
King F. Pang
Digital Video Engineering
</TABLE>
<PAGE> 63
[LSI LOGIC CORPORATION LETTERHEAD]
LSI LOGIC CORPORATION
1551 McCarthy Blvd.
Milpitas, CA 95035
United States
Tel: 408.433.8000
Fax: 408.954.3220
http://www.lsilogic.com
LSI LOGIC EUROPE, LTD. LSI LOGIC HONG KONG, LIMITED
Greenwood House 7/F Southeast Industrial Building
London Road 611-619 Castle Peak Road
Bracknell Tsuen Wan
Berkshire RG12 2UB New Territories Hong Kong
United Kingdom Tel: 852.2405.8600
Tel: 441.344.426544 Fax: 852.2412.7820
Fax: 441.344.481039
LSI LOGIC STORAGE SYSTEMS, INC.
LSI LOGIC K.K. 3718 North Rock Road
Rivage-Shinagawa Building 14F Wichita KS 67226
4-1-8 Konan United States
Minato-ku Tel: 316.636.8000
Tokyo 108 Fax: 316.636.8889
Japan
Tel: 81.3.5463.7811 MINT TECHNOLOGY, INC.
Fax: 81.3.5463.7825 77 South Bedford Street
Suite 220
LSI LOGIC JAPAN Burlington MA 01803
SEMICONDUCTOR, INC.
United States
10 Kitahara Tsukuba-shi
Tel: 781.685.3800
Ibaraki-ken 300-32
Fax: 781.685.3801
Japan
Tel: 81.298.64.7229
Fax: 81.298.64.3362
<PAGE> 64
STOCK INFORMATION
On January 25, 2000, we announced a two-for-one stock split, which was declared
by the Board of Directors as a 100% stock dividend payable to stockholders of
record on February 4, 2000 as one new share of common stock for each share held
on that date. The newly issued common stock shares were distributed on February
16, 2000. In the following table, market prices of our common stock have been
restated to give retroactive recognition to the two-for-one common stock split.
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:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
First Quarter $8.06--14.75 $9.66--13.75
Second Quarter $13.75--23.09 $10.38--14.69
Third Quarter $22.56--30.72 $5.75--12.56
Fourth Quarter $22.06--35.63 $5.25--10.25
---------------- ----------------
Year $8.06--35.63 $5.25--14.69
================ ================
</TABLE>
At February 23, 2000, there were approximately 3,628 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
cash 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 cash dividends.
STOCK PRICE MOVEMENT - CHART
TRADING VOLUME - CHART
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
(as of March 15, 2000)
Mint Technology, Inc.
LSI Logic Export Sales Corp.
LSI Logic Asia, Inc.
LSI Logic Leasing Company
LSI Logic Storage Systems, Inc.
Symbios International, Inc.
LSI Logic International Services, Inc.
LSI Logic Netherlands B.V. (a holding company)
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 Netherlands Antilles B.V. (a holding company subsidiary of LSI Logic
Netherlands B.V.)
LSI Logic HK Holdings (a subsidiary of LSI Logic Netherlands Antilles B.V.)
LSI Logic Hong Kong, Ltd. (a subsidiary of LSI Logic Netherlands Antilles 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.)
1
<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, No. 333-74627, No. 333-81435, No.
333-81433, No. 333-81437, No. 333-90951) of LSI Logic Corporation of our report
dated February 18, 2000 relating to the financial statements, which appears in
the Annual Report to Stockholders, which is incorporated in this Annual Report
on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 17, 2000
2
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