UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
Mark One:
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 25, 1998.
------------------
Or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
------ ------
Commission file number 0-11879
VLSI TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2597282
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1109 McKay Drive, San Jose, California, 95131
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 434-3100
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
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 ( )
Shares outstanding of the Registrant's Common Stock as of September 25, 1998:
45,701,934
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
VLSI TECHNOLOGY, INC.
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - unaudited
(thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $130,838 $181,181 $409,935 $519,636
Cost of sales 80,494 100,241 248,421 298,776
-------- -------- -------- --------
Gross profit 50,344 80,940 161,514 220,860
-------- -------- -------- --------
Operating expenses:
Research and development 26,473 24,831 81,049 71,609
Marketing, general and
administrative 23,055 28,891 71,905 84,520
Special charge 7,400 - 7,400 -
-------- -------- -------- --------
Operating income (loss) (6,584) 27,218 1,160 64,731
Interest and other income and
expenses, net 4,423 3,423 16,607 9,660
Interest expense (2,714) (4,563) (9,418) (13,224)
-------- -------- -------- --------
Income (loss) from continuing
operations before provision
(benefit) for taxes on income (loss) (4,875) 26,078 8,349 61,167
Provision (benefit) for taxes on
income (loss) (1,320) 5,295 2,250 16,515
-------- -------- -------- --------
Income (loss) from continuing operations (3,555) 20,783 6,099 44,652
Loss from discontinued
operation, net of taxes - - - (2,550)
Gain on disposal, net of taxes - 7,723 - 7,723
-------- -------- -------- --------
Net income (loss) (3,555) 28,506 6,099 49,825
-------- -------- -------- --------
Other comprehensive income (loss),
net of tax:
Unrealized gain (loss)on available-
for-sale securities, net of
reclassification adjustment (5,671) 39 19,741 (22)
-------- -------- -------- --------
Comprehensive income (loss) $ (9,226) $ 28,545 $ 25,840 $ 49,803
======== ======== ======== ========
Net income (loss) per share - Basic:
Continuing operations $ (0.08) $ 0.44 $ 0.13 $ 0.96
Discontinued operation - 0.18 - 0.12
-------- -------- -------- --------
Total $ (0.08) $ 0.62 $ 0.13 $ 1.08
======== ======== ======== ========
Net income (loss) per share - Diluted:
Continuing operations $ (0.08) $ 0.41 $ 0.13 $ 0.91
Discontinued operation - 0.16 - 0.11
-------- -------- -------- --------
Total $ (0.08) $ 0.57 $ 0.13 $ 1.02
======== ======== ======== ========
Weighted-average common
shares outstanding - Basic 46,378 46,629 46,078 46,417
======== ======== ======== ========
Weighted-average common
shares outstanding and
assumed conversions - Diluted 46,378 49,894 47,215 48,672
======== ======== ======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - unaudited
(thousands, except per share amounts)
<CAPTION>
September 25, December 26,
1998 1997
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $103,066 $193,899
Marketable securities 186,488 89,585
Accounts receivable, net of allowance
for doubtful accounts and customer
returns of $1,800
($2,000 at December 26, 1997) 89,987 110,869
Inventories:
Raw materials 999 2,565
Work-in-process 32,488 40,796
Finished goods 12,006 8,514
-------- --------
Total inventories 45,493 51,875
Deferred and refundable income taxes 75,810 82,870
Prepaid expenses and other current assets 6,349 4,779
-------- --------
Total current assets 507,193 533,877
Property, plant and equipment, at cost 835,359 777,316
Accumulated depreciation and amortization (445,168) (396,412)
-------- --------
Net property, plant and equipment 390,191 380,904
Other assets 9,583 7,297
-------- --------
TOTAL ASSETS $906,967 $922,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,414 $ 57,469
Accrued compensation and benefits 32,753 31,091
Income taxes 14,188 11,436
Patent matters 13,916 23,738
Other accrued liabilities 39,119 59,620
Current portion of long-term debt - 2,874
-------- --------
Total current liabilities 157,390 186,228
Long-term debt 165,808 182,039
Other long-term obligations 23,770 24,960
Deferred income taxes 13,680 12,456
Stockholders' equity:
Preferred Shares, $.01 per value - -
Common Shares, $.01 par value 473 473
Treasury Common Shares, at cost (23,390) (32,653)
Additional paid-in capital 454,360 459,539
Retained earnings 97,499 91,400
Accumulated other comprehensive income 17,377 (2,364)
-------- --------
Total stockholders' equity 546,319 516,395
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $906,967 $922,078
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - unaudited
(thousands)
<CAPTION>
Nine Months Ended
---------------------------
Sept. 25, Sept. 26,
1998 1997
-------- --------
Increase (decrease) in cash
and cash equivalents
<S> <C> <C>
Operating activities:
Net income $ 6,099 $ 49,825
Adjustments to reconcile net income
to cash generated by operations:
Depreciation and amortization 76,570 83,120
Special charge 7,400 -
Gain on sale of marketable securities (4,664) -
Gain on repurchase of convertible notes (847) -
Gain on COMPASS sale, net of discontinued operation - (10,592)
Deferred income taxes 1,210 (9,367)
Changes in operating assets and liabilities:
Accounts receivable 20,882 (6,293)
Inventories 6,382 271
Accounts payable, income taxes payable and
accrued liabilities (33,632) 13,398
Other (4,722) (3,359)
-------- --------
Cash generated by operations 74,678 117,003
-------- --------
Investing activities:
Purchases of marketable securities (258,440) (183,024)
Proceeds from sale of marketable securities 24,587 -
Proceeds from maturities of marketable securities 172,593 179,463
Purchases of property, plant and equipment (111,500) (62,758)
Sale of property, plant and equipment 27,674 -
Proceeds from sale of COMPASS, net of cash sold - 25,516
-------- --------
Net cash flow used for investing activities (145,086) (40,803)
-------- --------
Financing activities:
Payments on debt and capital lease obligations (13,799) (11,053)
Repurchase of convertible notes (5,720) -
Repurchase Treasury Shares (11,956) (17,015)
Issuance of Common and Treasury Shares, net 11,050 13,185
-------- --------
Net cash flow used for financing activities (20,425) (14,883)
-------- --------
Net increase (decrease) in cash and cash equivalents (90,833) 61,317
Cash and cash equivalents, beginning of period 193,899 139,074
-------- --------
Cash and cash equivalents, end of period $103,066 $200,391
======== ========
Supplemental disclosures:
Cash outflows for property, plant and equipment $111,500 $ 62,758
Change in accrued capital acquisitions 1,061 3,531
-------- --------
Property, plant and equipment additions $112,561 $ 66,289
======== ========
Interest paid $ 8,604 $ 10,869
======== ========
Income taxes paid, net $ 2,766 $ 6,758
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying interim consolidated condensed financial statements have
been prepared in conformance with generally accepted accounting principles,
consistent with those applied in the VLSI Technology, Inc. Annual Report on
Form 10-K for the fiscal year ended December 26, 1997 (the 1997 Annual
Report). This Quarterly Report on Form 10-Q (Form 10-Q) should be read in
conjunction with the 1997 Annual Report. The interim financial statements
are unaudited, but reflect all normal recurring adjustments that are, in
the opinion of management, necessary for a fair statement of results for
the interim periods presented. The results for the third quarter and nine
months ended September 25, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 25, 1998.
2. On July 15, 1998, VLSI announced a reduction in workforce of approximately
190 positions. Certain dispersed manufacturing functions are being
consolidated and certain general and administrative activities are being
re-sized in response to the current semiconductor slowdown and in order to
fund future technology and product investments. As a result of this action,
the Company recorded a special charge of $7.4 million against operating
income in the third quarter of 1998. Of the $7.4 million, approximately
$6.3 million relates to severance costs and $1.1 million relates to certain
asset writedowns. During the third quarter of 1998, the Company paid
approximately $3.0 million in severance costs. The Company expects the
remaining severance costs to be paid in the fourth quarter of 1998.
3. ARM Holdings PLC (ARM) made an initial public offering (IPO) of its common
stock in April 1998. As an early stage investor in ARM, the Company's
investment equated to 2.5 million shares at the time of the IPO, and the
Company participated in the IPO by selling approximately 20% of such
shares. The Company's historical cost basis and carrying value of the ARM
shares was not significant. As a result of the ARM IPO, VLSI realized a
gain of almost $4.7 million during the quarter ended June 26, 1998, which
is included in interest and other income and expenses, net. Under the
provisions of the IPO, the Company was precluded from selling its remaining
investment in ARM until October 1998.
4. In September 1997, the Company sold its software business, COMPASS Design
Automation Inc. (COMPASS), to Avant! Corporation (Avant!). As a result,
the Company recognized an after-tax gain of approximately $7.7 million in
the third quarter of 1997 net of the after-tax loss from COMPASS for the
quarter of $2.9 million. COMPASS revenues were $6.5 million for the three
months ended September 26, 1997 and $28.2 million for the nine months ended
September 26, 1997.
5. Marketable securities are liquid investments with original maturities
greater than 90 days. The Company classifies these investments as
available-for-sale and records the unrealized gains and losses in a
separate component of equity as accumulated other comprehensive income, as
well as reporting the changes in such balances on the face of the income
statement as other comprehensive income.
6. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS 130) was effective beginning with the Company's
1998 first fiscal quarter. FAS 130 requires comprehensive income be
reported with the same prominence as other financial statements. As such,
the Company has included these amounts on the face of the income statement.
Comprehensive income includes net income plus other comprehensive income.
Other comprehensive income for VLSI is comprised of changes in unrealized
gains or losses on available-for-sale securities, net of tax.
Accumulated other comprehensive income and changes thereto in 1998 consist
of (thousands):
Accumulated other comprehensive income at
December 26, 1997 (unrealized loss on available-
for-sale securities, net of tax of $1,477) $(2,364)
Change for the nine months ended September 25, 1998:
Unrealized gain on available-for-sale securities 30,486
Tax effect on unrealized gain (11,296)
Reclassification adjustment for recovered losses
included in net income for the nine-month period,
net of tax of $344 551
-------
Accumulated other comprehensive income at
September 25, 1998 (unrealized gain on
available-for-sale securities, net of tax) $17,377
=======
The $22,000 unrealized loss for the nine months ended September 26, 1997 is
net of tax benefit of $16,000.
7. Prior year's third quarter and nine-month period net income per share
figures have been restated as required by FAS 128. Net income per share,
Basic and Diluted, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
-------- -------- -------- --------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss):
Continuing operations $(3,555) $20,783 $ 6,099 $44,652
Discontinued operation - 7,723 - 5,173
------- ------- ------- -------
Total $(3,555) $28,506 $ 6,099 $49,825
======= ======= ======= =======
Weighted-average common shares
- Basic 46,378 46,629 46,078 46,417
Dilutive options - 3,265 1,137 2,255
------- ------- ------- -------
Adjusted weighted-average
common shares and assumed
conversions - Diluted 46,378 49,894 47,215 48,672
======= ======= ======= =======
Net income (loss) per share
- Basic:
Continuing operations (0.08) 0.44 0.13 0.96
Discontinued operation - 0.18 - 0.12
------- ------- ------- -------
Total $ (0.08) $ 0.62 $ 0.13 $ 1.08
======= ======= ======= =======
Net income (loss) per share
- Diluted:
Continuing operations (0.08) 0.41 0.13 0.91
Discontinued operation - 0.16 - 0.11
------- ------- ------- -------
Total $ (0.08) $ 0.57 $ 0.13 $ 1.02
======= ======= ======= =======
</TABLE>
The effect of stock options is excluded from weighted-average common shares
in the third quarter of 1998 and the effect of convertible debt is excluded
in all periods from income available to shareholders and adjusted weighted-
average common shares because they would have been antidilutive. The
following amounts have been excluded:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
Income available to shareholders,
net of tax $ 2,585 $ 2,846 $ 7,780 $ 7,792
======= ======= ======= =======
Potentially dilutive shares 3,774 3,148 3,133 3,148
======= ======= ======= =======
</TABLE>
8. In January 1996, the Board of Directors (Board) authorized the Company to
repurchase shares of the Company's Common Stock on the open market or in
privately negotiated transactions. The Board authorized the Company to re-
issue these shares at any later date through certain of its employee stock
plans and/or to fund stock or asset acquisitions authorized by the Board.
During the first nine months of 1998, the Company repurchased 1.1 million
shares at an average per share price of $11.12. The Company may, from time
to time, continue to repurchase additional shares.
9. The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights and positions. Periodically, the
Company is made aware that technology used by the Company in the
manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the
Company's manufacture of products has infringed on valid rights held by
others could have a material adverse effect on the Company's financial
position or results of operations and may require material changes in
production processes and products. The Company continually evaluates the
adequacy of its reserves for asserted and unasserted patent matters. The
reserve is based on the best available information at the time and it is
reasonably possible that the Company's estimate of the exposure for patent
matters could materially change at any given time.
In response to a claim by Motorola of infringement by VLSI of Motorola's
patents, in April 1998 the Company concluded a multi-year patent license
agreement with Motorola. Under the agreement, the Company paid initial
consideration valued at $8 million, in a combination of cash and restricted
stock. Further, the Company has a royalty obligation through the term of
the agreement in amounts not considered material to the results of any one
quarter. The Company had previously made sufficient reserves regarding this
matter.
10. On May 14, 1998, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
shares of Common Stock by 100,000,000 shares and to eliminate the Series B
and Junior Common Stock, none of which were outstanding. The new number of
shares that the Company has the authority to issue is 202,000,000, of which
200,000,000 shall be Common Shares and 2,000,000 shall be Preferred Shares.
Par value continues at $.01 per each share, common or preferred.
11. In September and October 1998, the Company made available to all employees
the choice to reprice previously granted options. Regranted options will
retain their prior vesting schedule, but will not be exercisable for nine
months from the date of regrant. Options to purchase approximately 6.8
million shares, at original prices ranging from $7.50 to $37.00 per share,
were eligible to be regranted at the fair market value as of the effective
dates of the repricings, which ranged from $7.38 to $7.50 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MDA) should be read in conjunction with the 1997 Annual Report,
inclusive of the MDA therein.
This MDA 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 factors, including the
risk factors set forth herein and in the 1997 Annual Report. Statements made
herein are as of the date of filing of this quarterly report with the
Securities and Exchange Commission. The Company disclaims any obligation to
update the contents of those statements subsequent to the filing of this Form
10-Q, except as may be required by law.
The following table summarizes the Company's operating results for the quarter
and nine months ended September 25, 1998 as compared to the quarter and nine
months ended September 26, 1997 (dollars are in thousands and percentages are
expressed as a percentage of net revenues):
<TABLE>
<CAPTION>
Quarter Ended September Nine Months Ended September
----------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $130,838 100.0% $181,181 100.0% $409,935 100.0% $519,636 100.0%
Gross profit 50,344 38.5 80,940 44.7 161,514 39.4 220,860 42.5
Research & development 26,473 20.2 24,831 13.7 81,049 19.8 71,609 13.8
Marketing, general and
administrative 23,055 17.6 28,891 16.0 71,905 17.5 84,520 16.3
Special charge 7,400 5.7 - - 7,400 1.8 - -
Operating income (loss) (6,584) (5.0) 27,218 15.0 1,160 0.3 64,731 12.4
Interest and other income
(expense), net 1,709 1.3 (1,140) (0.6) 7,189 1.8 (3,564) (0.7)
Income (loss) from
continuing operations (3,555) (2.7) 20,783 11.5 6,099 1.5 44,652 8.6
Net income (loss) $ (3,555) (2.7)% $ 28,506 15.7% 6,099 1.5% $ 49,825 9.6%
</TABLE>
Net loss was $3.6 million in the third quarter and net income was $6.1 million
in the first nine months of 1998, compared to net income of $28.5 million and
$49.8 million in the third quarter and first nine months of 1997. These
decreases are primarily a result of a decrease in net revenues and the special
charge of $7.4 million recorded in the third quarter of 1998. The decrease in
net income in the first nine months of 1998 is partially offset by certain
gains included in interest and other income (expense) as discussed later in
this section.
Net revenues in the third quarter and first nine months of 1998 decreased
27.8% and 21.1% from the comparable 1997 periods. These decreases are due to
both decreases in units shipped and declines in average sales prices,
primarily in the Company's communications and consumer products. The decrease
in units shipped reflects business uncertainties in the Asia-Pacific region,
and residual inventory adjustments at a range of customers. The decrease in
average sales prices is consistent with competitive pricing and reflects
changes in the mix of the Company's products.
International net revenues (including export sales) decreased as a percentage
of net revenues to 47.8% in the first nine months of 1998 compared to 49.5% in
the first nine months of 1997. International net revenues decreased in dollar
amount in the third quarter of 1998 compared to the third quarter of 1997, but
increased as a percentage of revenue to 46.3% compared to 44.5% in the same
periods. These decreases in net revenues are a result of a decline in net
revenues in Europe, primarily in communications products with world-wide
customers, including some of which have been affected by the changes in the
Asia-Pacific region.
Gross profit margins decreased to 38.5% and 39.4% in the third quarter and
first nine months of 1998 from 44.7% and 42.5% for the comparable 1997
periods, due to the lower sales volume, which resulted in under-utilization of
fabrication capacity and related fixed costs not being fully absorbed. The
effect of under-utilization was partially offset by lower costs due to expense
reduction measures taken during the second and third quarters of 1998.
Research and development expenditures increased by $1.6 million and $9.4
million in the third quarter and first nine months of 1998 compared to the
same 1997 periods. These increases reflect the Company's continuing investment
in new technologies and products. The increase in research and development
expenditures, combined with lower net revenues, resulted in research and
development expenditures increasing as a percentage of net revenues to 20.2%
and 19.8% in the third quarter and first nine months of 1998 from 13.7% and
13.8% in the same 1997 periods.
Marketing, general and administrative expenses for the third quarter and first
nine months of 1998 decreased by $5.8 million and $12.6 million from the third
quarter and the first nine months of the prior year reflecting the Company's
cost control efforts, commensurate with current revenue levels. As a
percentage of net revenues, these expenses increased to 17.6% and 17.5% in the
third quarter and first nine months of 1998 from 16.0% and 16.3% for the
comparable 1997 periods.
In the third quarter of 1998, VLSI reduced its workforce by approximately 190
positions. Certain dispersed manufacturing functions are being consolidated
during 1998, and certain general and administrative activities are being re-
sized in response to the current semiconductor slowdown and in order to fund
future technology and product investments. As a result of this action, the
Company recorded a special charge of $7.4 million against operating income in
the third quarter of 1998. Of the $7.4 million, approximately $6.3 million
relates to severance costs and $1.1 million relates to certain asset
writedowns. During the third quarter of 1998 the Company paid approximately
$3.0 million in severance costs. The Company expects the remaining severance
costs to be paid in the fourth quarter of 1998. If business conditions
significantly deteriorate, additional actions, which might include further
lay-offs, together with their corresponding special charges, may occur in
future periods and would have an adverse effect on results of operations.
Interest and other income (expense), net was income of $1.7 million and $7.2
million in the third quarter and first nine months of the current year as
compared to expense of $1.1 million and $3.6 million in the same periods a
year ago. These improvements primarily reflect a gain of $0.8 million on the
repurchase of $6.7 million face value of the Company's convertible notes in
the third quarter of 1998 and a gain of almost $4.7 million on the sale of ARM
securities in their April 1998 IPO. Interest expense for the third quarter and
first nine months of 1998 decreased as compared to the comparable periods in
1997 due to retirement of equipment loans and increased capitalized interest.
Higher cash and marketable securities balances yielded higher interest income
in the 1998 periods.
In September 1997, the Company sold its software business, COMPASS Design
Automation Inc. (COMPASS), to Avant! Corporation (Avant!). As a result, the
Company recognized an after-tax gain of approximately $7.7 million in the
third quarter of 1997 net of the after-tax loss from COMPASS for the quarter
of $2.9 million. COMPASS revenues were $6.5 million for the three months ended
September 26, 1997 and $28.2 million for the nine months ended September 26,
1997.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. Implementation of FAS 133 is required for years beginning
after June 15, 1999, but may be early adopted. Upon adoption, transition
adjustments will be reported in net income or other comprehensive income, as
appropriate, reflecting the effect of a change in accounting principle. The
Company has not determined whether to early adopt FAS 133 or whether adoption
of this Statement may have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
FACTORS AFFECTING FUTURE RESULTS
The Company's business is subject to numerous risks, any one of which, alone
or in combination, could have a material adverse effect on future results of
operations. Some of these factors are:
The Company's stock price, like that of other technology companies, is subject
to significant volatility. If revenue or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate adverse
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance. Past financial
performance should not be considered a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
During the first nine months of 1998 and 1997, the Company's top 20 customers
represented approximately three-quarters of the Company's net revenues. During
1996 and 1995, the Company's top 20 customers represented approximately two-
thirds of net revenues. The Company's largest customer, Ericsson, accounted
for 28% of net revenues in the first nine months of 1998 while approximating
29% of net revenues for all of 1997. As a result of the concentration of the
Company's customer base, loss of business or cancellation of orders from any
of these customers, significant changes in scheduled deliveries to any of
these customers or decreases in the prices of products sold to any of these
customers could have a material adverse effect on the Company's results of
operations.
The Company has a high concentration of sales to the communications and
consumer digital entertainment markets. Such markets are rapidly evolving and
are characterized by intense competition among suppliers of integrated
circuits, many of whom have substantially greater experience and resources
than the Company. If the Company or its customers, due to competition or other
factors, is unable to capture and maintain significant market share in these
areas, there could be a material adverse effect on the Company's results of
operations.
The Company's success depends on its ability to continue to develop and
introduce new products that compete effectively on the basis of price and
performance and that satisfy customer requirements. New product development
often requires long-term forecasting of markets, market trends, development
and implementation of new processes and technologies and substantial capital
commitments. In addition, semiconductor design and process methodologies are
subject to rapid technological change. Decreases in geometries call for
sophisticated design efforts, advanced manufacturing equipment and cleaner
fabrication environments. If the Company is unable to design, develop,
manufacture and market new products successfully or introduce new design and
process methodologies in a timely manner, its operating results will be
materially adversely affected.
The Company sells its products under terms and conditions customarily found in
the semiconductor industry. Sales of these products are subject to customer
cancellation with limited advance notice to the Company prior to scheduled
shipment. Due to the Company's relatively narrow customer base for certain
devices and the short product life cycles of such products, such cancellations
can leave the Company with significant inventory exposure, which could have a
material adverse effect on the Company's operating results.
The semiconductor industry has a history of cyclicality and is characterized
by short product life cycles, continuous evolution of process technology, high
fixed costs, additions of manufacturing capacity in large increments and wide
fluctuations in product supply and demand. The industry can move from a period
of capacity shortages to a period of excess capacity, or vice versa, in a very
short time. During a period of excess capacity, profitability can drop sharply
as factory utilization declines and high fixed costs of operating a wafer
fabrication facility are spread over a lower net revenue base. During a period
of capacity shortage, there can be no assurance that the Company can achieve
timely, cost-effective access to additional capacity if and when needed.
A factor affecting the Company's long-term growth is its ability to expand
manufacturing capacity. To address these long-term capacity needs, in October
1997, the Company entered into an agreement with Wafer Technology (Malaysia)
Sdn Bhd, a Malaysian Company (WTM), whereby WTM would build a subcontract
wafer fabrication facility in Malaysia as well as to mutually convert and
operate the VLSI San Jose wafer fab facility as a prototype and development
facility. Given the current semiconductor industry slowdown and the financial
market condition in Malaysia, there can be no assurance that the project will
be completed as planned. In the event this potential future capacity is not
available to VLSI when needed and could not be substituted by alternate
sources of supply, future growth could be impaired.
The fabrication of integrated circuits is an extremely complex and precise
process consisting of hundreds of separate steps and requiring production in a
highly controlled, clean environment. Minute impurities, errors in any step of
the fabrication process, defects in the masks used to print circuits on a
wafer or a number of other factors can cause a substantial percentage of
wafers to be rejected or numerous die on each wafer to be non-functional.
Semiconductor manufacturing also requires a constant upgrading of process
technology to remain competitive. The Company is preparing for the conversion
of its San Antonio facility from six-inch to eight-inch wafer capability in
1999. Any significant expansion or upgrade of semiconductor manufacturing
capacity has attendant risks. Inefficiencies caused by the work associated
with the modifications of the manufacturing facilities could adversely affect
the Company's results of operations.
The Company relies on outside suppliers for a significant portion of its
assembly and test operations. Allocations by these suppliers of assembly and
test capacity to the Company depend on the Company's needs and supply
availability during periods of capacity shortages. The Company has no long-
term contractual commitments from these suppliers. Any reduction in allocation
from these suppliers could adversely affect the Company's results of
operations. The Company's foreign subcontract manufacturing arrangements are
also subject to risks such as changes in government policies, transportation
delays, fluctuations in foreign exchange rates and export and tax controls.
While the Company has not experienced any supply issues as a result of recent
economic events in Asia, there can be no assurances that changes in the Asian
economy will not affect its Asia-based suppliers thereby materially adversely
affecting the Company's results of operations.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights and positions. Periodically, the Company is
made aware that technology used by the Company in the manufacture of some or
all of its products may infringe on product or process technology rights held
by others. Resolution of whether the Company's manufacture of products has
infringed on valid rights held by others could have a material adverse effect
on the Company's financial position or results of operations and may require
material changes in production processes and products. The Company continually
evaluates the adequacy of its reserves for asserted and unasserted patent
matters. The reserve is based on the best available information at the time
and it is reasonably possible that the Company's estimate of the exposure for
patent matters could materially change at any given time.
VLSI has entered into licensing agreements and technology exchange agreements
with various strategic partners and other third parties in order to allow VLSI
access to third party technology or to allow third parties access to the
Company's technology. The Company is unable to predict whether license
agreements can be obtained or renewed on terms acceptable to the Company or
the magnitude of the costs associated with such terms. Failure to obtain or
renew such licenses could have a material adverse effect on the Company's
financial position or results of operations.
Management believes that the future success of VLSI will depend in part on its
ability to attract and retain qualified employees, including management and
technical and design personnel. During the third quarter of 1998, the
Company's President and Chief Financial Officer left the Company. The Company
is currently in the process of filling open positions in the senior management
and engineering arenas. Delays in replacing senior management may adversely
effect implementation of the Company's strategic plans. Any significant delays
in filling technical positions will lead to delays in the introduction of
various products currently being developed, as well as the research and
development associated with potential new products.
Other factors that may adversely affect the Company's future results include
natural disasters and environmental and other governmental regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Results" in Item 7 of Part II of the
1997 Annual Report on Form 10-K.
YEAR 2000 & EURO
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year, thus rendering them
incapable of properly managing and manipulating data that includes both 20th
and 21st century dates (Year 2000 Compliant). In connection with a normal plan
of upgrading its computer resources, the Company is currently installing
various new internal information systems in connection with operating its
business. The vendors of these systems have represented that these systems
are Year 2000 Compliant. The Company has completed the assessment and
analysis of its central information technology systems and has completed the
assessment of its manufacturing equipment. The analysis of the Company's
manufacturing equipment is expected to be completed by the end of 1998. The
Company believes that its central information technology systems are Year 2000
Compliant and that its manufacturing equipment will be determined Year 2000
Compliant. The Company is also in the process of determining what other
changes to its other information systems are necessary in order to make them
Year 2000 Compliant. While the Company currently expects that the Year 2000
will not pose significant internal operational problems, delays in the
implementation of new information systems, or a failure to fully identify all
Year 2000 dependencies in the Company's systems, could have a material adverse
effect on the Company's results of operations.
The Company is assessing its products to ensure that they are Year 2000
Compliant. To date, the ongoing assessment has revealed that the majority of
the Company's products do not have a date feature or functionality. The
Company anticipates completing this product assessment and analysis by the end
of 1998, and will notify its customers of its findings by mail and by posting
this information on the Company's web site. The inability of Company products
to properly manage and manipulate data in the Year 2000 could result in a
material adverse impact on the Company, including increased warranty costs,
customer satisfaction issues and potential lawsuits.
The Company has prepared and sent surveys to its critical suppliers and
vendors to determine the extent to which the Company's capabilities are
vulnerable to failure by those third parties to remediate their own Year 2000
issues. The Company is currently receiving responses to those surveys and
anticipates that the analysis of this information will be completed by March
30, 1999. The Company will proceed with further analysis or testing of its
vendors' systems as needed. However, there is no guarantee that the systems
and products of other companies on which the Company relies will be timely
converted or that they will not have a material adverse impact on the Company.
The Company is in the process of developing a contingency plan. This plan is
expected to be in place in the first half of 1999. The inability of the
Company to develop and implement a contingency plan could result in a material
adverse impact on the Company.
The Company currently estimates that total Year 2000 costs will be less than
$5 million. Accordingly, the Company believes it has sufficient resources for
the Year 2000 project from currently available cash, cash equivalents, liquid
investments, cash flow expected from operations and/or borrowings under the
committed credit agreement. The cost estimate is based on the current
assessment of the Company's Year 2000 readiness needs and is subject to
change.
Effective January 1, 1999 eleven countries in Europe will begin the process of
converting their sovereign currencies into one uniform currency, the EURO. As
of January 1, 1999 these countries will adopt the EURO as their legal currency
with an aim to completely eliminate the sovereign currencies by July 1, 2002.
The Company believes this change will not materially affect its business,
information systems or consolidated financial position, results of operations
or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
VLSI generates cash from operations, debt and equipment financings and sales
of its securities. Principal uses of cash include purchases of capital
equipment needed for semiconductor manufacturing and engineering, the
repurchase of Company debt and equity securities and payments of debt and
lease obligations.
At September 25, 1998, total cash, cash equivalents and marketable securities
increased $6.1 million from the 1997 fiscal year-end balance. As of September
25, 1998, the fair market value gain adjustment included in marketable
securities was $27.6 million. Working capital increased to $349.8 million at
September 25, 1998 compared to $347.6 million at December 26, 1997.
During the nine months ended September 25, 1998, the Company generated $74.7
million of cash from operations, a 36.2% decrease from the $117.0 million of
cash generated from operations for the nine months ended September 26, 1997. A
decrease in net revenues in 1998 resulted in less net income, offset by a
reduction in accounts receivable and the $7.4 million special charge recorded
in the third quarter of 1998 (as previously discussed under "Results of
Operations" above). The 1998 gain on sale of marketable securities reflects
the sale of ARM securities in connection with their IPO. Inventories were
reduced to lower levels in 1998 to reflect recent lower net revenues. Accounts
payable, income taxes payable and accrued liabilities at September 25, 1998
decreased by $33.7 million from December 26, 1997 compared to an increase of
$13.4 million for the first nine months of 1997. The change to a decrease in
1998 primarily reflects consideration paid in relation to the Motorola
settlement, as discussed in footnote 9, and the effects of the Company's cost
reduction programs.
Cash used for investing activities was $145.1 million for the nine months
ended September 25, 1998, as compared to $40.8 million for the nine months
ended September 26, 1997. Marketable securities transactions resulted in
increased cash outflow of $57.7 million in 1998 from 1997 levels as more of
the Company's cash is in marketable securities. VLSI invested $112.6 million
in property, plant and equipment during the first nine months of 1998 compared
to $66.3 million in the comparable 1997 period, and sold an additional $27.7
million of equipment in connection with sale-leaseback transactions. VLSI
currently estimates that total capital expenditures for 1998 will be
approximately $150 million. These expenditures are being used to expand deep
sub-micron wafer fabrication capability at the San Antonio facility, implement
the San Jose facility's eight-inch prototype line, deploy EDA tools, prepare
to convert the San Antonio facility from six-inch to eight-inch wafer
technology and upgrade other equipment.
Cash used for financing activities was $20.4 million in the first nine months
of 1998 compared to $14.9 million in the same 1997 period. The increase is
primarily a result of the repurchase of the Company's convertible notes and
the repayment of certain secured equipment loans in conjunction with the sale-
leaseback of equipment.
At September 25, 1998 the Company has an unutilized committed bank line of
credit of $100.0 million, expiring in December 2000. While the Company
believes that its current capital resources are sufficient to meet its near-
term needs, in order to meet its longer-term needs, VLSI continues to
investigate the possibility of generating financial resources through
technology or manufacturing partnerships, additional equipment financings,
operating leases and offerings of debt or equity securities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 1998, Lemelson Medical Education & Research Foundation, Limited
Partnership ("Lemelson") filed a complaint in the United States District Court
for the District of Arizona alleging that the Company, along with twenty-five
other semiconductor companies, infringes sixteen U.S. patents owned by
Lemelson and relating to the manufacture of semiconductor devices. Lemelson
seeks a judgment against the defendants of willful infringement, injunctive
relief, trebled actual damages and attorneys' fees. The Company has yet to be
served by Lemelson and therefore no answer to the complaint is required at
this time. Should the Company eventually be served, it believes it has
meritorious defenses and will defend the case vigorously.
The Company is also currently a party to various other legal actions arising
out of the normal course of business, none of which are expected to have a
material adverse effect on the Company's financial position or results of
operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - See Index to Exhibits on Page 17
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VLSI TECHNOLOGY, INC.
(Registrant)
Date: December 1, 1998 By: /s/ Victor K. Lee
-------------------------- -------------------------------
Victor K. Lee
Vice President and Controller
(Principal Accounting Officer)
