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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, 2000
[ ] 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)
DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
COMMON STOCK, $0.01 PAR VALUE ON WHICH REGISTERED
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 5,
2001 as reported on the New York Stock Exchange, was approximately
$5,424,965,381.62. 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 5, 2001, registrant had 322,530,641 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Parts
III, of this Form 10-K Report: Proxy Statement for registrant's 2001 Annual
Meeting of 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 (together with 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 four markets of
broadband communications, networking infrastructure, storage infrastructure, and
storage area network systems. Our integrated circuits are used in a wide range
of communication devices, including devices used for wireless, broadband, data
networking, and set-top-box applications. We also provide other types of
integrated circuit products and board-level products for use in network
computing applications, 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") who sell products
targeted for applications in four major markets, which are:
- Broadband Communications;
- Networking Infrastructure;
- Storage Infrastructure; 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. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Part II herein.
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
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manufacturers, or OEMs, and a worldwide network of resellers under the
MetaStor(R) brand name. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Part II herein.
LSI Logic Corporation 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, 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
of 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 Gresham,
Oregon, and Tsukuba, 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.
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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.
- 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 located in major markets allows
us to provide customers with highly experienced engineers, to interact with
customer engineering management and system architects, to develop designs
for new products, and to provide continuing after-sale customer support.
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 use 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 customers who sell 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 broadband
communications, networking infrastructure and storage components.
Broadband Communications. For the burgeoning communications market, we offer a
broad array of products, including devices for wireless, broadband access and
networks and broadband entertainment 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.
- Broadband access and networks. We offer a blend of high-performance,
high-integration and low-power silicon solutions that are pivotal in development
of Internet infrastructure. We offer ADSL Analog Fronted End ("AFE") standard
products used in the broadband access network. We develop ASICs using ARM-based
processor cores, digital signal processor cores, high-speed transceiver cores
and mixed-signal cores, targeting the following markets: high speed metropolitan
and wide area networks, optical networking,
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wireless communications infrastucture, wireless local area networks, home
networking, residential broadband gateways, and digital subscriber lines
("xDSL").
- Broadband entertainment. Our channel and source products are complete
system solutions that are designed into digital set-top-box systems for
satellite, cable, and terresrial TV reception and Internet connectivity. We
target high-volume consumer product applications with advanced digital and mixed
signal technology, which is delivered to the market both in the form of
customer-specific solutions ("ASICs") and standard products. Furthermore, we
employ this technology to manufacture products incorporated in home video games,
digital audio processors, digital cameras, and DVD players.
Networking Infrastructure. We market a line of standard product physical layer
and switching devices as well as ASIC product offerings comprised of value-added
intellectual property such as Gigabit Ethernet, Fast Ethernet and Ethernet MACs
and PHYs, embedded processors, content addressable memories ("CAMs"), and high
speed serial transceivers optimized for backplane applications.
Storage Infrastructure
- Internet computing. We provide tools, libraries, semiconductor processes
and packaging products that enable our OEM customers to reliably develop
high-performance designs for advanced computer systems. 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 magnetic and
optical disk drives, scanners, printers, and disk and tape-based Storage
Systems. We offer industry leading I/O Standard Products including product
families in Fibre Channel, SCSI, and SCSI expanders, integrated circuits for
motherboard or adapter applications, host adapter boards, and software. We also
offer ASIC solutions to customers who develop Fibre Channel SAN switches and
host adapters, Storage systems, and HDD and tape peripherals. Our fibre channel
offerings include the GigaBlaze high 2Gb/s FC transceiver and the Merlin(TM)
family of high-performance Fibre Channel protocol controllers.
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 broadband communications,
networking infrastructure and storage infrastructure markets.
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.
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.
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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 network storage that
span our customers' enterprise, from workgroup to data center. The line ranges
from intelligent controller modules and drive modules to complete storage
systems. This allows our products to be integrated on a component basis or
aggregated into a complete storage solution, increasing OEM flexibility in
creating differentiated products. Modular products also allow our indirect
channel partners to customize solutions, bundling our products 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(R) E-Series storage systems for storage area
networks are an extension of the server-attached storage family. They combine
fibre channel performance with our proprietary Multi-Pathing Architecture to
deliver high performance for a wide variety of applications. High availability
and redundant, dual-active controllers and efficient management with
SANtricity(TM) Storage Manager software differentiate our storage from that of
our competitors.
- Server-Attached Storage. The MetaStor server-attached storage family
supports all high-use operating systems including Windows(R) NT, Solaris(TM),
HP-UX, AIX, SGI IRIX, NetWare, and Linux platforms. Our products allow customers
to increase storage capacity from 36 gigabytes (billions of information bytes)
to 16 terabytes (trillions of information bytes) per system. This means
customers can expand storage to their computer applications, maintain redundant
records and change configurations even when their systems are operating. The
result is a growth-oriented, highly available, easy to manage.
- SANtricity Storage Manager Software. This storage management software
helps users consolidate storage through the SANshare(TM) storage-partitioning
feature. In addition, this software provides a single management interface and
remote access capabilities, allowing centralized management of all MetaStor
storage. An enhanced graphical user interface makes the software quite easy to
use. Other features provide for automatic device discovery and one-button
configuration.
- Network-Attached Storage. The MetaStor N-Series is a family of
network-attached storage solutions that enable users to share files among a
variety of hosts, regardless of operating systems, lowering the cost of
ownership by consolidating storage and management functions in a single, open
storage environment. Features include multi-protocol support, a high-performance
file system, hot recovery point-in-time copies, a flexible backup solutions, and
enterprise-level storage management.
- Storage Controller Modules. Designed from the chip-level up, our storage
controller modules support both Ultra2 SCSI and Fibre Channel interfaces. Using
LSI Logic ASICs, the controllers deliver superior performance for both
high-transaction volume and large data block workloads. Combined with our drive
modules, each controller module manages scalable capacity up to 16 terabytes.
Modules can either be rack-mounted or installed desk-side configurations. Other
features include HotScale(TM) technology for dynamic system expansion and
reconfiguration, redundant dual-active controllers and automatic fail-over for
maximum data availability.
- Storage Drive Modules. Our storage drive modules increase storage
capacity and performance as needs change. Drive modules use our chip
capabilities to monitor power, temperature, and fans, and to relay information
back to the controller. And advanced technology from industry disk drive vendors
is integrated into the modules to maximize capacity and minimize floor space
requirements.
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As a major open computing vendor, we deliver storage systems that operate
within the Windows NT, UNIX, Solaris, NetWare, and Linux 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 2000, LSI Logic Storage Systems, Inc. enhanced its entire product line
when it introduced the E240, the E4400 and the N-Series. Customers of both the
E-Series and the N-Series can now migrate from the low-end of the product line
to the top without losing their storage investment. Users also can upgrade and
reconfigure systems dynamically without shuttling systems down and losing money.
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. We also offer a number of flexible services and
support programs that allow customers to choose the level of telephone and
onsite support appropriate to their needs.
MARKETING AND DISTRIBUTION
Semiconductor Marketing and Distribution
Our semiconductor products and design services are primarily sold through
our network of direct sales and marketing, 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 design and
purchase both ASICs and standard products from us for resale to their customers.
Other distributors focus solely on the sale of standard products. Our agreements
with distributors generally grant limited rights to return standard product
inventory and obtain credits for price reductions applicable to standard
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.
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
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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 broadband
communications, networking infrastructure, storage infrastructure 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 2000, Sun Microsystems, Inc. accounted for approximately 12% 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 and cut into die. Die that pass
initial tests are then sent to the assembly process where the fabricated
circuits are assembled into plastic package or laminate substrate ball grid
array. 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
ASIC circuits.
We own and operate manufacturing operations in the United States, Japan,
and Hong Kong. We utilize various high-performance CMOS process technologies in
the volume manufacture of our products. 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 is smaller than the drawn gate length. In this Report on Form 10-K, 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 million
usable gates on a single chip. Our G10(R) process technology is capable of
producing
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0.25-micron products. Volume production on our 0.13-micron G12(TM) process
technology began in the third quarter of 2000. In addition, in the first quarter
of 2000, we introduced a Gflx(TM), a new flexible process technology capable of
combining all of the system functions to create totally new classes of
communications products on a single chip. The Gflx technology is more than twice
as dense as the previous generation G12 process technology, allowing designers
to incorporate added functions onto a single chip. The 0.10-micron effective
channel length Gflx process technology offers 78 million usable logic gates.
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, G12, and Gflx 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 plastic wire-bond packaging
options.
Final assembly (i.e., assembly in a plastic or laminate substrate 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 substantially restricted and may involve significant expense
and delay in our technology advancements and manufacturing capabilities.
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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
and their U.S. subsidiaries, 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 have historically been
available on a continuous basis and in adequate quantities for our needs.
However, given the current power shortage in California, it is possible that the
shortage may spread to other areas of the country, including Oregon. 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
that 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 is generally within the control of the customer. For
example, there could be a significant time
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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., Texas Instruments, Inc., and Agilent
Technologies, Inc. Other competitors in strategic markets include Adaptec, Inc.,
QLogic Corporation, PMC-Sierra, Inc., Broadcom Corporation, and Conexant
Systems, Inc.
We also face competition from certain large foreign corporations, including
Philips Electronics, N.V., ST Microelectronics, S.A., and Toshiba 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 lower gross profit 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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price declines of our products, and therefore gross profit 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.
There is no assurance that these customers, which include Hewlett-Packard
Company, IBM Corporation, Sun Microsystems, Inc. and Unisys Corporation, will
continue to purchase our storage systems products.
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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In the Semiconductor segment, we also protect our trade secret and other
proprietary information through agreements with our customers, suppliers,
employees, 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.
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 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.
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 jurisdictions.
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).
YEAR AMOUNT PERCENT OF REVENUE
---- -------- ------------------
2000....................................... $378,936 14%
1999....................................... $297,554 14%
1998....................................... $291,125 19%
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 the first quarter of 2001 to be approximately 24% of
our revenues on a consolidated basis.
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WORKING CAPITAL
Information regarding our working capital practices is incorporated herein
by reference from Item 7 of Part II hereof under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity."
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
This information is included in Note 11 "Segment Reporting" of Notes to
Financial Statements and Supplementary Data, which information is incorporated
herein by reference to item 8 of Part II hereof.
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
any material 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, 2000, we had 7,221 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.
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RISK FACTORS
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Form 10-K 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 actual results could differ
materially 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 the 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 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;
- 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 affect our operating
results and financial condition.
OUR MANUFACTURING FACILITIES ARE SUBJECT TO DISRUPTION. 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. In addition, California is currently experiencing a power shortage,
which may spread to other areas of the country, such as Oregon, where our newest
wafer fabrication facility is located.
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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 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 2001 we anticipate
that we will spend approximately $500 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, 2000, we have convertible
notes outstanding of approximately $845 million.
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 and 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 that 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 than we do. 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 profit margins and loss of market share.
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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.
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. One customer represented 12%
of our total consolidated revenues for the year ended December 31, 2000. While
no customer represented 10% or more of the total revenue in the Semiconductor
segment for the year ended December 31, 2000, in the SAN Systems segment, there
were three customers with revenues representing 31%, 17% and 13% of total SAN
Systems revenues.
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
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- 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 in the past 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;
- 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
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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 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.
In February of 1999, a lawsuit alleging patent infringement was filed in
the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against 88
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 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, 2000, the discovery
had commenced but 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.
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.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning our principal
facilities.
PRINCIPAL LOCATIONS
NO. OF LEASED/ TOTAL
BUILDINGS LOCATION OWNED SQ. FT. USE
- --------- -------- ------- ------- ---
5 Milpitas, CA Leased 503,597 Executive Offices, Administration,
Engineering
1 Milpitas, CA Subleased 47,345 Occupied by subtenants
1 Fremont, CA Leased 74,000 Logistics
1 Fremont, CA Leased 39,246 Warehouse
2 Fremont, CA Leased 120,853 Office
2 Fremont, CA Subleased 154,441 Occupied by subtenants
3 Santa Clara, CA Leased 98,860 Manufacturing
1 San Jose, CA Leased 56,136 General Office, Engineering, Design
3 Gresham, OR Owned 532,400 Executive Offices, Engineering,
Manufacturing
1 Bracknell, UK Leased 70,000 Executive Offices, Design Center,
Sales
1 Tokyo, Japan Leased 24,271 Executive Offices, Design Center,
Sales
7 Tsukuba, Japan Owned 334,541 Executive Offices, Manufacturing
1 Etobicoke, Canada Subleased 14,005 Occupied by Subtenants
1 Tsuen Wan, HK Owned 26,000 Manufacturing Control, Assembly &
Test
2 Colorado Springs, CO Owned 415,593 Executive Offices, Manufacturing
2 Fort Collins, CO Owned 270,000 Executive Offices, Manufacturing
1 Wichita, KS Owned 332,000 Executive Offices, Manufacturing
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.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1995, the shares of our Canadian subsidiary,
LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were not held by LSI
Logic or a subsidiary 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 580,000 shares) of the
previously outstanding shares of LSI Canada, 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 originally 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. Through their
new attorney these parties have challenged the jurisdiction of the Court to
adjudicate LSI Canada's petition with respect to the issue of the fair value of
the shares and have asked the Court to dismiss those legal proceedings. Until
their petition is heard and resolved by the Court, a new trial date for the
pending matter is not expected to be set. These parties also have initiated a
new action in the Court,
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purporting also to represent all the parties who exercised dissent and appraisal
rights, alleging that actions of LSI Logic Corporation and certain named
directors and an officer of LSI Canada were oppressive of the rights of minority
shareholders in LSI Canada, for which these parties intend to seek damages. The
individuals who are named in these proceedings have indemnification agreements
with LSI Canada. The Court has scheduled a hearing for March 2001 at which these
issues will be addressed. 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 was filed in
the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against 88
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 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, 2000, the discovery
had commenced but 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 that 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 material adverse effect on the
Company's consolidated results of operations and financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:
EMPLOYED
NAME AGE POSITION SINCE
---- --- -------- --------
Wilfred J. Corrigan..... 63 Chairman and Chief Executive Officer 1981
John D'Errico........... 57 Executive Vice President, Storage Components 1984
Bruce Entin............. 49 Executive Vice President, Networking 1984
Infrastructure Group
Thomas Georgens......... 41 Executive Vice President, SAN Systems 1998
Bryon Look.............. 47 Executive Vice President and Chief Financial 1997
Officer
W. Richard Marz......... 57 Executive Vice President, Geographic Markets 1995
David G. Pursel......... 55 Vice President, General Counsel and Secretary 1996
Lewis C. Wallbridge..... 57 Vice President, Human Resources 1984
Giuseppe Staffaroni..... 49 Executive Vice President, Broadband 1990
Communications Group
Joseph M. Zelayeta...... 54 Executive Vice President, Worldwide Operations 1981
Mr. Corrigan and Mr. Wallbridge have been associated with the Company in
their present position for more than the past five years.
John D'Errico was named Executive Vice President, Storage Components in
August 2000. From August 1998 to August 2000, he was Vice President, Colorado
Operations. 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.
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Most recently, Mr. D'Errico served as Vice President and General Manager,
Pan-Asia from April 1997 to August 1998, and Vice President, JSI from July 1994
to April 1997.
Bruce Entin was named Executive Vice President of the Networking
Infrastructure Group in January 2001. A 16-year veteran of LSI Logic, Mr. Entin
most recently served as the Vice President and General Manager of the Internet
Computing Division from January 2000 to January 2001. From 1996 through 1998, he
served as Vice President of Customer Marketing, and in 1999, he served as Vice
President of Worldwide Marketing.
Thomas Georgens was named Executive Vice President, SAN Systems, in
November 2000. In August 1998, upon the acquisition of Symbios, Inc., a Storage
company, he was named Senior Vice President and General Manager, SAN Systems.
Mr. Georgens joined Symbios in 1996, where he served as Vice President and
General Manager of Storage Systems until its acquisition by LSI Logic. 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.
Bryon Look was named Executive Vice President and Chief Financial Officer
in November 2000. Mr. Look joined us in March 1997 as Vice President, Corporate
Development. Prior to joining LSI, during a 21-year career at Hewlett-Packard
Company, a computer company, he held a variety of management positions in
finance and research and development, with the most recent position being
Manager of Business Development for Hewlett-Packard's Corporate Development
department.
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
long-time senior sales and marketing executive at Advanced Micro Devices, Inc.,
a semiconductor manufacturer.
David G. Pursel was named Vice President, General Counsel and Secretary in
June 2000. He joined LSI Logic in February 1996 as Associate General Counsel,
Chief Intellectual Property Counsel, and Assistant Secretary. Prior to his
tenure with LSI Logic, Mr. Pursel held legal positions with Advanced Micro
Devices, Digital Equipment Corporation and The Boeing Company.
Giuseppe Staffaroni was named Executive Vice President Broadband
Communications Group in November 2000, having served as Vice President and
General Manager of the Broadband Communications Group since November 1999. Mr.
Staffaroni joined LSI Logic in 1990 as director of engineering in the company's
Milan, Italy design center. From January 1996 to October 1997, he was Director
of Marketing, and from November 1997 to October 1999, he was Vice President and
General Manager of the Communications Product Division. Prior to LSI Logic, Mr.
Staffaroni held management positions at Texas Instruments and AT&T
Microelectronics.
Joseph M. Zelayeta was named Executive Vice President, Worldwide Operations
in September 1997. Prior to that time, he served as Senior Vice President of
Research and Development, and General Manager of U.S. Operations between August
1995 and 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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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:
2000 1999
-------------- --------------
First Quarter................................. $30.00 - 88.25 $ 8.06 - 14.75
Second Quarter................................ $43.00 - 74.94 $13.75 - 23.09
Third Quarter................................. $28.88 - 60.00 $22.56 - 30.72
Fourth Quarter................................ $16.43 - 32.63 $22.06 - 35.63
-------------- --------------
Year.......................................... $16.43 - 88.25 $ 8.06 - 35.63
============== ==============
At March 5, 2001, there were approximately 3,883 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 existing credit agreement by and among us, LSI Logic Japan Semiconductor,
Inc., and ABN AMRO Bank N.V., as further described in Item 7 of Part II herein
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition and Liquidity", we are
prohibited from declaring or paying cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR CONSOLIDATED SUMMARY
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.................................................... $2,737,667 $2,089,444 $1,516,891 $1,322,626 $1,271,855
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues.......................................... 1,568,332 1,286,844 884,598 694,274 716,755
Research and development.................................. 378,936 297,554 291,125 229,735 187,749
Selling, general and administrative....................... 306,962 257,712 226,258 196,359 171,733
Acquired in-process research and development.............. 77,438 4,600 145,500 2,850 --
Restructuring of operations and other non-recurring items,
net..................................................... 2,781 (2,063) 75,400 -- --
Amortization of non-cash deferred stock compensation...... 41,113 -- -- -- --
Amortization of intangibles............................... 72,648 46,625 22,369 4,472 3,869
---------- ---------- ---------- ---------- ----------
Total costs and expenses............................ 2,448,210 1,891,272 1,645,250 1,127,690 1,080,106
---------- ---------- ---------- ---------- ----------
Income/(loss) from operations............................... 289,457 198,172 (128,359) 194,936 191,749
Interest expense............................................ (41,573) (39,988) (8,865) (1,860) (13,850)
Interest income and other, net.............................. 51,766 17,640 (8,952) 34,891 30,483
Gain on sale of equity securities........................... 80,100 48,393 16,671 -- --
---------- ---------- ---------- ---------- ----------
Income/(loss) before income taxes, minority interest and
cumulative effect of change in accounting principle....... 379,750 224,217 (129,505) 227,967 208,382
Provision for income taxes.................................. 142,959 65,030 9,905 60,819 57,521
---------- ---------- ---------- ---------- ----------
Income/(loss) before minority interest and cumulative effect
of change in accounting principle......................... 236,791 159,187 (139,410) 167,148 150,861
Minority interest in net income of subsidiaries............. 191 239 68 727 499
---------- ---------- ---------- ---------- ----------
Income/(loss) before cumulative effect of change in
accounting principle...................................... 236,600 158,948 (139,478) 166,421 150,362
Cumulative effect of change in accounting principle......... -- (91,774) -- (1,440) --
---------- ---------- ---------- ---------- ----------
Net income/(loss)........................................... $ 236,600 $ 67,174 $ (139,478) $ 164,981 $ 150,362
========== ========== ========== ========== ==========
Basic earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.................................... $ 0.76 $ 0.54 $ (0.49) $ 0.59 $ 0.58
Cumulative effect of change in accounting principle....... -- (0.31) -- -- --
---------- ---------- ---------- ---------- ----------
Net income/(loss)......................................... $ 0.76 $ 0.23 $ (0.49) $ 0.59 $ 0.58
========== ========== ========== ========== ==========
Diluted earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.................................... $ 0.70 $ 0.51 $ (0.49) $ 0.57 $ 0.54
Cumulative effect of change in accounting principle....... -- (0.28) -- -- --
---------- ---------- ---------- ---------- ----------
Net income/(loss)......................................... $ 0.70 $ 0.23 $ (0.49) $ 0.57 $ 0.54
========== ========== ========== ========== ==========
Year-end status:
Total assets.............................................. $4,197,487 $3,206,605 $2,823,805 $2,155,365 $1,974,628
Long-term debt............................................ $ 846,311 $ 671,775 $ 558,966 $ 69,455 $ 261,508
Stockholders' equity...................................... $2,498,137 $1,855,832 $1,524,473 $1,586,382 $1,330,528
========== ========== ========== ========== ==========
The Company's fiscal years ended on December 31 in 2000, 1999, 1998 and 1997
and the Sunday closest to December 31 in 1996. For presentation purposes, the
Consolidated Financial Statements refer to December 31 as year-end. During 2000,
the Company recorded amortization of non-cash deferred stock compensation of $41
million as a result of the adoption of FASB interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" which was
effective July 1, 2000. The acquisitions of DataPath Systems, Inc. and Syntax
Systems, Inc. closed on July 14, 2000 and November 29, 2000, respectively, after
the adoption of the new interpretation. (See Note 2 of the Notes to the
Consolidated Financial Statements.) During 2000, we recorded a $77 million
in-process research and development ("IPR&D") charge associated with the
acquisitions of ParaVoice, DataPath, Intraserver and the purchases of divisions
of NeoMagic and Cacheware. 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
to the Consolidated Financial Statements.) 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 to the Consolidated
Financial Statements.)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenues increased 31% to $2.74 billion in 2000 from 1999. The increase was
primarily the result of increased demand for products used in broadband
communications, networking infrastructure and storage infrastructure
applications and storage area network ("SAN") systems.
Gross profit margin increased to 43% in 2000 from 38% in 1999 primarily due
to improved utilization of our fabrication facilities as well as our focus on
communications and storage products as many of the products we offer in
broadband communications and storage infrastructure applications have higher
margins. Operating expenses increased 46% to $880 million in 2000 from $604
million in 1999. The increase was primarily a result of a $77.4 million charge
for acquired in-process research and development, $41.1 million amortization of
acquisition-related non-cash deferred stock compensation, $26.0 million
additional amortization of goodwill and additional increase in research and
development and selling, general and administrative expenses incurred in
connection with the acquisition of companies noted above. The acquired
in-process research and development and the deferred stock compensation stemming
from acquisitions are discussed further below and in Note 2 of the Notes. For
the years ended December 31, 2000 and 1999, gains on sale of equity securities
were $80.1 million and $48.4 million, respectively. For the year ended December
31, 2000, we recorded net income of $236.6 million or $0.70 income per diluted
share compared to net income for the same period in 1999 of $67.2 million or
$0.23 per diluted share. Net income in 1999 would have been $91.8 million or
$0.28 per share higher on a diluted basis but for the cumulative effect of a
change in accounting principle recorded in the first quarter of 1999. (See Note
1 of the Notes.)
Cash and short-term investments grew 71% to $1.13 billion as of December
31, 2000 from $661.3 million as of December 31, 1999. The increase is
attributable 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.
In 2000, 1999 and 1998, our fiscal year ended December 31. Fiscal years
2000, 1999 and 1998 were 52-week years.
STOCK SPLIT. 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.
ACQUISITIONS. 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. During 2000, we acquired a
division of NeoMagic Corporation ("NeoMagic"), a division of Cacheware, Inc.
("Cacheware"), Intraserver Technology, Inc. ("Intraserver"), DataPath Systems,
Inc. ("DataPath"), ParaVoice Technologies, Inc. ("ParaVoice") and Syntax
Systems, Inc. ("Syntax"). The acquisitions were accounted for as purchases, and
accordingly, the results of operations and estimated fair value of assets
acquired and liabilities assumed were included in our Consolidated Financial
Statements as of the effective date of each acquisition.
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The acquisitions are summarized below. (See Note 2 of the Notes to the
Consolidated Financial Statements referred to hereafter as "Notes".)
ACQUISITION PURCHASE IDENTIFIED DEFERRED
COMPANY DATE PRICE CONSIDERATION IPR&D GOODWILL INTANGIBLES COMPENSATION
------- ------------- -------- ------------------- ----- -------- ----------- ------------
(AMOUNTS IN MILLIONS)
Division of NeoMagic April 2000 $ 15.4 Cash $6.4 $ 1.9 $ 5.8 $ --
Division of Cacheware April 2000 22.2 Cash 8.3 8.5 5.2 --
Intraserver May 2000 62.9 1.2 million shares, 1.6 50.8 17.5 --
0.2 million options
DataPath July 2000 420.8 7.5 million shares, 54.2 154.0 17.4 201.6
1.6 million options
ParaVoice October 2000 38.6 Cash 7.0 10.4 21.2 --
Syntax November 2000 58.8 1.4 million shares, -- 42.0 25.4 2.5
0.6 million options
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.) 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.
While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, we recommend that you
read this discussion and analysis in conjunction with the remainder of this
Annual Report on Form 10-K.
We operate in an industry sector where stock values are highly volatile and
may be influenced by economic and other factors beyond our control. See
additional discussion contained in "Risk Factors" set forth in Part I of this
Annual Report on Form 10-K for the year ended December 31, 2000.
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.
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
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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.)
Total revenues increased 31% to $2.74 billion in 2000 from $2.09 billion
1999. Revenues for the Semiconductor segment increased 29% to $2.34 billion in
2000 from $1.81 billion in 1999. Significant factors that contributed to this
revenue growth included increased demand for products used in broadband
communications, networking infrastructure and storage infrastructure
applications, particularly in broadband access and networks and storage
components. Revenues for the SAN Systems segment increased 43% to $399.1 million
in 2000 from $279.3 million in 1999. The increase was attributable to growth in
demand for all products used in the SAN Systems segment. There were no
significant inter-segment revenues during the periods presented.
Total revenues increased 38% to $2.09 billion in 1999 from $1.52 billion in
1998. Revenues for the Semiconductor segment increased 27% to $1.8 billion in
1999 from $1.4 billion in 1998. Significant factors that 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. Revenues for the SAN Systems
segment increased 200% to $279.3 million in 1999 from $93.0 million in 1998. The
increase was primarily attributable to 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.
One customer represented 12% and 11% of our total consolidated revenues for
each of the years ended December 31, 2000 and 1999, respectively, and another
customer represented 12% of our total consolidated revenues for the year ended
December 31, 1998. No customer represented 10% or more of total revenues in the
Semiconductor segment for the year ended December 31, 2000. For the years ended
December 31, 1999 and 1998, one customer represented 10% and 13% of total
Semiconductor revenues, respectively. In the SAN Systems segment, there were
three customers with revenues representing 31%, 17% and 13% of total SAN Systems
revenues for the year ended December 31, 2000. During 1999, there were three
customers with revenues representing 29%, 27% and 14% of SAN Systems revenues.
During 1998, there were three customers with revenues representing 17%, 15% and
14% of SAN Systems revenues.
Revenues from domestic operations were $1.68 billion, representing 61% of
consolidated revenues for 2000, as compared to $1.21 billion and $957 million
for 1999 and 1998, representing 58% and 63% of consolidated revenues,
respectively.
We expect that first quarter 2001 revenues will decline approximately 30%
sequentially from the $751 million in the fourth quarter of 2000.
OPERATING COSTS AND EXPENSES. Key elements of the consolidated statements
of operations, expressed as a percentage of revenues for the respective segment,
were as follows:
2000 1999 1998
---- ---- ----
CONSOLIDATED:
Gross profit margin....................................... 43% 38% 42%
Research and development.................................. 14% 14% 19%
Selling, general and administrative....................... 11% 12% 15%
Income/(loss) from operations............................. 11% 9% (8)%
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Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:
2000 1999 1998
---- ---- ----
SEMICONDUCTOR SEGMENT:
Gross profit margin....................................... 44% 39% 42%
Research and development.................................. 15% 15% 20%
Selling, general and administrative....................... 11% 12% 15%
Income/(loss) from operations............................. 10% 10% (6)%
2000 1999 1998
---- ---- ----
SAN SYSTEMS SEGMENT:
Gross profit margin....................................... 38% 33% 32%
Research and development.................................. 7% 9% 9%
Selling, general and administrative....................... 13% 11% 13%
Income/(loss) from operations............................. 13% 9% (48)%
GROSS PROFIT 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
Silterra Malaysia Sdn. Bhd. (formerly known as 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 $120.0 million over three years during which
transfers and the performance of our obligations are scheduled to occur. (See
Note 3 of the Notes.) During 2000 and 1999, we provided engineering training
valued at $4.0 million and $2.0 million, respectively. The value of the
engineering training was recorded as a credit to cost of revenues. We will
provide an additional $2.0 million of engineering training over the remaining
contract term of one year, which also will be recorded as a credit to cost of
revenues.
The gross profit margin percentage for 2000 increased to 43% from 38% in
1999 on a consolidated basis, reflecting improved gross profit margins in both
of our segments. The gross profit margin percentage for the Semiconductor
segment was 44% in 2000 compared to 39% in 1999. The increase primarily
reflected a combination of the following factors:
- Increased production capacity utilization at our fabrication facility in
Gresham, Oregon, which commenced operations in December 1998, and
- Our focus on higher margin products used in broadband communications and
storage infrastructure applications.
The increase in gross profit margin in 2000 as compared to 1999 was offset
in part by the following factors:
- $11.1 million non-recurring charge associated with the elimination of a
non-strategic product area, and
- An increase in compensation-related expenses.
The gross profit margin percentage for the SAN Systems segment was 38% in
2000 compared to 33% in 1999. The increase is primarily attributable to changes
in product mix to include newer generation products, which have higher margins
than other SAN business products.
We expect first quarter 2001 gross profit margin to be approximately 40%.
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The gross profit margin percentage for 1999 decreased to 38% from 42% in
1998 on a consolidated basis. The gross profit 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.
The gross profit margin percentage for the SAN Systems segment was
relatively flat at 33% in 1999 compared to 32% in 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 profit
margin in future periods.
Changes in the relative strength of the yen may have a greater impact on
our gross profit margin than other foreign exchange fluctuations due to our
wafer fabrication operations in Japan. Although the yen strengthened (the
average yen exchange rate for 2000 appreciated 6% from 1999), the effect on
gross profit 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 profit margin or operating results.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
increased 27% to $378.9 million during 2000 as compared to $297.6 million in
1999. R&D expenses for the Semiconductor segment increased 29% to $351.7 million
in 2000 from $271.8 million in 1999. The increase was attributable to the
following factors:
- Increased R&D activities based on the acquisitions of companies during
2000 (See Note 2 of the Notes);
- Expenditures related to the continued development of advanced sub-micron
products and process technologies; and
- Increased compensation costs during 2000.
The increase was offset in part by $24.0 million and $15.0 million of
research and development benefits associated with a technology transfer
agreement entered into with Silterra in Malaysia during 2000 and 1999,
respectively. (See Note 3 of the Notes.) We will receive an additional $26.0
million in cash from Silterra over the remaining contract term of approximately
one year as consideration for technology to be transferred.
R&D expenses for the SAN Systems segment increased 6% to $27.2 million in
2000 from $25.7 million in 1999. The increase is primarily attributable to
increased compensation expenses.
Research and development expenses increased 2% to $297.6 million during
1999 as compared to $291.1 million in 1998. R&D expenses for the Semiconductor
segment decreased 4% to $271.8 million in 1999
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from $282.9 million in 1998. The decrease was primarily attributable to a $15.0
million research and development benefit associated with a technology transfer
agreement entered into with Silterra in Malaysia during 1999. (See Note 3 of the
Notes.) 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 $25.7 million in
1999 from $8.3 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.
As a percentage of revenues, R&D expenses were 14% in 2000, 14% in 1999 and
19% in 1998 on a consolidated basis. R&D expenses as a percentage of revenues
for the Semiconductor segment were 15% in 2000, 15% in 1999 and 20% in 1998. The
decrease from 1998 to 1999 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
were 7% in 2000, 9% in 1999 and 9% in 1998. As we continue our commitment to
technological leadership in our markets, we are targeting our R&D investment in
the first quarter of 2001 to be approximately 24% of revenues on a consolidated
basis.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased 19% to $307.0 million during 2000 as compared to
$257.7 million in 1999. SG&A expenses for the Semiconductor segment increased
13% to $255.2 million in 2000 from $225.8 million in 1999. The increase was
primarily attributable to sales commissions on increased revenues and increased
compensation costs based on an increase in headcount in 2000. SG&A expenses for
the SAN Systems segment increased 62% to $51.8 million in 2000 from $32.0
million in 1999. The increase in SG&A expenses was primarily attributable to an
increase in compensation costs based on an increase in headcount in 2000 and
also an increase in commission expenses for sales personnel based on the
increased revenues during 2000.
Selling, general and administrative expenses increased 14% to $257.7
million during 1999 as compared to $226.3 million in 1998. SG&A expenses for the
Semiconductor segment increased 5% to $225.8 million in 1999 from $214.6 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 $32.0
million in 1999 from $11.7 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.
As a percentage of revenues, SG&A expenses decreased to 11% in 2000 from
12% in 1999 and 15% in 1998 on a consolidated basis. SG&A expenses as a
percentage of revenues for the Semiconductor segment were 11% in 2000, 12% in
1999 and 15% in 1998. SG&A expenses as a percentage of revenues for the SAN
Systems segment were 13% in 2000, 11% in 1999 and 13% in 1998. We expect that
SG&A expenses as a percentage of revenues will be approximately 16% of revenues
on a consolidated basis in the first quarter 2001.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. During 2000, we recorded a
$77.4 million in-process research and development ("IPR&D") charge associated
with the acquisitions of ParaVoice, DataPath, Intraserver and the purchase of
divisions of NeoMagic and Cacheware. There was no IPR&D charge recorded in
connection with the acquisition of Syntax. During 1999, we recorded a $4.6
million IPR&D charge associated with the acquisition of ZSP. See additional
information provided below.
The amounts of IPR&D were determined by identifying research projects for
which technological feasibility had not been established and no alternative
future uses existed as of the respective acquisition dates.
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ParaVoice. On October 23, 2000, we entered into an Asset Acquisition
Agreement ("Agreement") with ParaVoice. Under the agreement, we acquired certain
tangible and intangible assets associated with ParaVoice's Voice over Internet
Protocol ("VoIP") and Voice over DSL ("VoDSL") technology. The acquisition is
intended to combine VoIP and VoDSL technology with our ZSP digital signal
processor to offer complete single-chip solutions in the fast-growing global
communication area in the Semiconductor segment. The acquisition was accounted
for as a purchase and the total purchase price was $38.6 million in cash.
Accordingly, the estimated fair value of assets acquired was included in our
consolidated financial statements as of October 23, 2000, the effective date of
the purchase, through the end of the period.
In connection with the asset purchase from ParaVoice, we recorded a $6.9
million charge to in-process research and development during the fourth quarter
of 2000. The project was for the development of ParaVoice's VoIP products, which
will be a fully integrated hardware/software telecommunications solution
targeted to mid-scale transport and gateway.
The value of the 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 net cash flows from the
identified project were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the project. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition, and are
in line with industry averages and projected growth for the Semiconductor
market. Total revenues for the project are expected to extend through 2005.
These projections were based on estimates of market size and growth, expected
trends in technology and the expected timing of new product introductions.
The discount rate used was 50% for the project, a rate 2800 basis points
higher than the industry weighted average cost of capital estimated at
approximately 22% 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.
The percentage of completion for the project was determined based on
research and development expenses incurred as of October 23, 2000 for the
project as a percentage of total research and development expenses to bring the
project to technological feasibility. Development of ParaVoice's VoIP products
started in late 1999. As of October 23, 2000, we estimated that the project was
23% complete. As of the acquisition date, the cost to complete the project is
estimated at $6.3 million and $7.3 million for 2001 and 2002, respectively. As
of December 31, 2000, the actual development timeline and costs are in line with
estimates.
DataPath. On July 14, 2000, we acquired DataPath, a privately held supplier
of communications chips for broadband, data networking and wireless
applications, pursuant to the terms of the Agreement and Plan of Reorganization
and Merger. DataPath's stockholders received 0.4269 shares of our common stock
for each DataPath share. Accordingly, we issued approximately 7.5 million shares
of our common stock for all the outstanding common shares of DataPath common
stock. Additionally, outstanding options to acquire DataPath common stock as of
the acquisition date were converted to options to acquire approximately 1.6
million shares of our common stock. The acquisition of DataPath is expected to
enhance our standard product offerings in the communications market in the
Semiconductor segment.
The total purchase price for DataPath was $420.8 million, which includes
deferred compensation on unvested stock options and stock awards assumed as part
of the purchase. The acquisition was accounted for as a purchase. (See Note 2 of
the Notes). Accordingly, the results of operations of DataPath and estimated
fair value of assets acquired and liabilities assumed were included in our
consolidated financial statements as of July 14, 2000, the effective date of the
purchase, through the end of the period.
In connection with the purchase of DataPath, we recorded a $54.2 million
charge to in-process research and development during the third quarter of 2000.
The amount was determined by identifying research projects for which
technological feasibility had not been established and no alternative future
uses existed. As of the acquisition date, there were various projects that met
the above criteria. The majority of the projects
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32
identified consist of Read Channel, Asynchronous Digital Subscriber Line
("ADSL") and Tuner technologies.
The value of the projects identified to be in progress was determined by
estimating the future 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. The net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the projects. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages and growth estimates in the semiconductor
industry. Total revenues for the projects are expected to extend through 2004,
2006 and 2007 for Read Channel, ADSL and Tuner Technologies, respectively. These
projections were based on estimates of market size and growth, expected trends
in technology and the expected timing of new product introductions by us and our
competitors.
We applied a royalty rate of 20% to operating income for Read Channel and
ADSL projects and 3% for Tuner projects to attribute value for dependency on
predecessor core technologies. The discount rate used was 20% for the projects,
a rate of 500 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.
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 July 14, 2000, as
compared to the remaining research and development to be completed to bring the
project to technological feasibility. The development process is grouped into
three phases, with each phase containing between one and five milestones. The
three phases are:
- Researching the market requirements and the engineering architecture and
feasibility studies;
- Design and verification milestones; and
- Prototyping and testing the product (both internal and customer testing).
As of July 14, 2000, we estimated the projects were approximately 50%, 65%
and 75% complete in aggregate for Read Channel, ADSL and Tuner Technologies,
respectively. As of the acquisition date, the cost to complete the projects is
estimated at $8.3 million and $2.8 million for ADSL and Tuner projects,
respectively, through early 2002 and $32.8 million for Read Channel projects
through 2004. As of December 31, 2000, the actual development timeline and costs
are in line with estimates.
Intraserver. On May 26, 2000, we acquired Intraserver pursuant to the terms
of the Agreement and Plan of Reorganization and Merger. Intraserver's
stockholders received 2.2074 shares of our common stock for each Intraserver
share. Accordingly, we issued approximately 1.2 million shares of our common
stock for all the outstanding common shares of Intraserver common stock.
Additionally, outstanding options to acquire Intraserver common stock as of the
acquisition date were converted to options to acquire approximately 0.2 million
shares of our common stock. The acquisition of Intraserver is expected to
enhance our host adapter board and other product offerings in the storage
infrastructure and communications markets in the Semiconductor segment.
The total purchase price for Intraserver was $62.9 million and the
acquisition was accounted for as a purchase. (See Note 2 of the Notes).
Accordingly, the results of operations of Intraserver and estimated fair value
of assets acquired and liabilities assumed were included in our consolidated
financial statements as of May 26, 2000, the effective date of the purchase,
through the end of the period.
In connection with the purchase of Intraserver, we recorded a $1.6 million
charge to in-process research and development during the second quarter of 2000.
The amount was determined by identifying research projects for which
technological feasibility had not been established and no alternative future
uses existed. As of the acquisition date, there were various projects which met
the above criteria. The majority of the projects
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33
identified are targeted to high-end data storage and communication devices,
where I/O functionality and speed is critical.
The value of the projects identified to be in progress was determined by
estimating the future 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. The net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the projects. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages and growth estimates in the storage and host bus
adapter sector of the semiconductor industry. Total revenues for the projects
are expected to extend through 2005. These projections were based on estimates
of market size and growth, expected trends in technology and the expected timing
of new product introductions by us and our competitors.
We applied a royalty rate of 30% to operating income for the project in
process to attribute value for dependency on predecessor core technologies. The
discount rate used was 30% for the project, a rate of 700 basis points higher
than the industry weighted average cost of capital estimated at approximately
22% 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.
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 May 26, 2000, as
compared to the remaining research and development to be completed to bring the
project to technological feasibility. The development process is grouped into
three phases with each phase containing between one and five milestones. The
three phases are:
- Researching the market requirements and the engineering architecture and
feasibility studies;
- Design and verification milestones; and
- Prototyping and testing the product (both internal and customer testing).
As of May 26, 2000, the Company estimated the projects were 58% complete in
aggregate (ranging from 20% to 95%). As of the acquisition date, the costs to
complete the project were $0.5 million in 2000 and early 2001. As of December
31, 2000, the development timeline and costs are in line with estimates.
Division of Cacheware. On April 27, 2000, we entered into an Asset Purchase
Agreement ("the Agreement") with Cacheware. Under the Agreement, we acquired
certain tangible and intangible assets associated with Cacheware's storage area
network business. ("SAN Business"). The acquisition is intended to provide a key
technology to enhance our SAN solutions. The SAN Business is included in our SAN
Systems segment. The acquisition was accounted for as a purchase. Accordingly,
the results of operations of the SAN Business and estimated fair value of assets
acquired were included in our consolidated financial statements as of April 27,
2000, the effective date of the purchase, through the end of the period. We paid
approximately $22.2 million in cash, which included direct acquisition costs of
$0.2 million for investment banking, legal and accounting fees. (See Note 2 of
the Notes.)
In connection with the asset purchase from Cacheware, we recorded an $8.3
million charge to in-process research and development during the second quarter
of 2000. The project was for development of a SAN appliance.
The value of the project identified to be in progress 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 net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the project. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages for data storage and industry analysts' forecasts
of growth. Total revenues for the project are expected to extend
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34
through 2003. These projections were based on estimates of market size and
growth, expected trends in technology, and the expected timing of new product
introductions.
We applied a royalty rate of 30% to operating income for the project in
process to attribute value for dependency on predecessor core technologies. The
discount rate used was 30% for the project, a rate 880 basis points higher than
the industry weighted average cost of capital estimated at approximately 21.2%
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.
The percentage of completion for the project was determined based on
research and development expenses incurred as of April 27, 2000 for the project
as a percentage of total research and development expenses to bring the project
to technological feasibility.
Development of the SAN appliance was started in January 1999. As of April
27, 2000, we estimated that the project was 90% complete and that remaining
costs to complete the project would be $0.4 million in 2000 and early 2001. As
of December 31, 2000, the actual development timeline and costs are in line with
estimates.
Division of NeoMagic. On April 13, 2000, we entered into an Asset Purchase
Agreement (the "Agreement") with NeoMagic. Under the Agreement, we acquired
certain tangible and intangible assets from NeoMagic, which includes NeoMagic's
optical read-channel mixed-signal design team and RF intellectual property. The
acquisition is intended to enhance and accelerate our set-top decoder product
offerings in the Semiconductor segment. The acquisition was accounted for as a
purchase and the total purchase price was $15.4 million in cash. Accordingly,
the estimated fair value of assets acquired and liabilities assumed were
included in our consolidated financial statements as of April 13, 2000, the
effective date of the purchase, through the end of the period.
In connection with the asset purchase from NeoMagic, we recorded a $6.4
million charge to in-process research and development during the second quarter
of 2000. The project was for development of a 2-chip controller chipset.
The value of the 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 net cash flows from the
identified projects were based on estimates of revenues, cost of revenues,
research and development costs, selling general and administrative costs and
applicable income taxes for the project. These estimates do not account for any
potential synergies that may be realized as a result of the acquisition and are
in line with industry averages and projected growth for the Semiconductor
market. Total revenues for the project are expected to extend through 2004.
These projections were based on estimates of market size and growth, expected
trends in technology and the expected timing of new product introductions.
We applied a royalty rate of 30% to operating income for the project in
process to attribute value for dependency on predecessor core technologies. The
discount rate used was 30% for the project, a rate 730 basis points higher than
the industry weighted average cost of capital estimated at approximately 22.7%
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. As of April 13, 2000, the Company estimated that the project
was 68% complete. As of the acquisition date, the project costs were estimated
at $3.0 million for the remainder of 2000 and $4.0 million in 2001. As of
December 31, 2000, the actual development timeline and costs are in line with
estimates.
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 $7.0 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
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35
("DSPs") 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.
In connection with the purchase of ZSP, we recorded a $4.6 million charge
to in-process research and development 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 in process that was targeted at the telecommunications market. This
product is being developed specifically for voice-over-net or
voice-over-internet protocol applications and is intended to have substantial
incremental functionality, greatly improved speed and a wider range of
interfaces than ZSP's then current technology.
The value of the one project identified to be in progress 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 are 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. Estimated total revenues are expected to peak in the
years 2002 and 2003 and then decline in 2004 as other new products are expected
to become available. These projections are based on our estimates of market size
and growth, expected trends in technology and the expected timing of new product
introductions by us and our competitors.
We applied a royalty percentage of 25% of operating income for the project
in process to attribute value for dependency on predecessor core technologies.
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.
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 technological feasibility. The development process is grouped into
three phases, with each phase containing between one and five milestones. The
three phases are:
- Researching the market requirements and the engineering architecture and
feasibility studies;
- Design and verification milestones; and
- Prototyping and testing the product (both internal and customer testing).
Development of ZSP's digital signal processor project started in May 1998.
As of April 14, 1999, we estimated the project was 65% complete. The project was
completed in 1999.
However, development of the above noted technologies remains a significant
risk to us due to the remaining effort to achieve technological feasibility,
rapidly changing customer markets and significant competitive threats from
numerous companies. Failure to bring the product 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.
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.)
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36
In connection with the purchase of Symbios, we recorded a $145.5 million
charge to IPR&D during the third quarter of 1998. The $145.5 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 $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 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 profit 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.
We applied a royalty charge of 25% to operating income for each in-process
project to attribute value for dependency on predecessor core technologies.
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.
The percentage of completion for each project was determined using
milestones representing management's estimate of effort, value added, and degree
of difficulty of the portion of each project completed as of August 6, 1998, as
compared to the remaining research and development to be completed to bring each
project to technical feasibility. The development process 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).
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37
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). The actual development timeline and costs were in line
with estimates as of December 31, 2000.
RESTRUCTURING OF OPERATIONS AND OTHER NON-RECURRING ITEMS. We recorded
restructuring of operations and other non-recurring net charges of $2.8 million
in 2000. The net charges reflected the combination of the following:
- On February 22, 2000, we entered into an agreement with a third party to
outsource certain testing services presently performed by us at our
Fremont, California facility. The agreement provides for the sale and
transfer of certain test equipment and related peripherals for total
proceeds of approximately $10.7 million. We recorded a loss of
approximately $2.2 million associated with the agreement. (See Note 4 of
the Notes.)
- In March 2000, we recorded approximately $1.1 million of non-cash
compensation related expenses resulting from a Separation Agreement
entered into during the quarter with a former employee and a $0.5 million
benefit for the reversal of reserves established in the second quarter of
1999 for merger related expenses in connection with the merger with SEEQ
Technology, Inc. ("SEEQ") discussed below.
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 that 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 were completed by June 30, 2000, one year from the
date the reserve was taken.
- 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.
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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 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;
- $13.1 million in fixed asset and other asset write-downs, primarily in
the U.S., Japan, and Europe;
- $16.3 million in workforce reduction costs;
- $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;
and
- 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.
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
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 $37.0
million in 1999 and $4.0 million in the fourth quarter of 1998.
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Depreciation expense was reduced by approximately $10.3 million in 1999 and $1.7
million in the fourth quarter of 1998. We also realized additional savings of
$3.0 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:
SEPTEMBER 30,
1998 DECEMBER 31, DECEMBER 31,
RESTRUCTURING 1998 RESERVE 1999
EXPENSE UTILIZED BALANCE UTILIZED REVERSAL BALANCE
------------- -------- ------------ -------- -------- ------------
(IN THOUSANDS)
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) $--
======= ======== ======= ======== ======== ===
- ---------------
(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 $72.6 million in 2000 from $46.6 million in 1999. The increase was
primarily related to additional amortization of goodwill associated with the
acquisitions of Syntax, ParaVoice, DataPath, Intraserver and the acquisition of
divisions of Cacheware and NeoMagic. (See Note 2 of the Notes.)
Amortization of goodwill and other intangibles increased to $46.6 million
in 1999 from $22.4 million in 1998. The increase was due to additional
amortization of goodwill associated with the acquisitions of Symbios in August
1998 and ZSP in April 1999.
AMORTIZATION OF NON-CASH DEFERRED STOCK COMPENSATION. Amortization of
non-cash deferred stock compensation of $41.1 million in 2000 is due to non-cash
deferred stock compensation of $204.1 million recorded in connection with the
acquisitions of DataPath Systems, Inc. and Syntax Systems, Inc., which closed on
July 14, 2000 and November 29, 2000, respectively (See Note 2 of the Notes).
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INTEREST EXPENSE. Interest expense increased to $41.6 million in 2000 from
$40.0 million in 1999. The increase was primarily attributable to increased debt
outstanding due to the issuance of $500.0 million of 4% Convertible Subordinated
Notes (the "2000 Convertible Notes"), offset in part by lower interest rates
(see Note 8 of the Notes.)
Interest expense increased to $40.0 million in 1999 from $8.9 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 1999 (the "1999 Convertible
Notes"). (See Note 8 of the Notes.) Beginning in January 1999, we no longer
capitalize interest associated with the construction of our fabrication facility
in Gresham, Oregon, as operations of the facility commenced in December 1998.
INTEREST INCOME AND OTHER. Interest income and other increased to $51.8
million in income in 2000 from $17.6 million in income in 1999. The increase was
primarily attributable to the following events in 2000, which were absent in
1999:
- $5.7 million pre-tax gain on the sale of a U.S. facility in Fremont,
California, and
- $33.8 million of additional interest income due to higher average
balances of interest-generating cash, cash equivalents and short-term
investments and higher interest rates.
The above-noted increase was offset in part by net losses on disposals of
fixed assets, bank fees and other miscellaneous expenses during 2000.
Interest income and other increased to $17.6 million in income in 1999 from
$9.0 million in expense in 1998. The increase in 1999 was primarily attributable
to the absence of the following events in 1999 that occurred in 1998:
- A $14.3 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 $10.0 million write-down of fixed assets and capitalized software in
1998;
- $3.2 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 $3.2 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.
GAIN ON SALE OF EQUITY SECURITIES. During 2000, we sold certain marketable
equity securities for $78.8 million in the open market, realizing a pre-tax gain
of approximately $73.3 million. In 2000, we also recognized a $6.8 million
pre-tax gain associated with equity securities of a certain technology company
that was acquired by another technology company. In 1999, we recognized a gain
of $48.4 million on proceeds of $49.4 million from the sale of marketable
securities. In 1998, we recognized a gain of $16.7 million on proceeds of $23.1
million from the sale of a long-term investment in a non-public technology
company.
PROVISION FOR INCOME TAXES. In 2000, we recorded a provision for income
taxes with an effective tax rate of 38%. The tax rate in 2000 was affected 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 1999 and 1998 were 29% and 8%, respectively. The tax
rate in the years presented was lower than the U.S. statutory rate
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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 2000, $0.2 million in 1999 and $0.1
million in 1998. 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.
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 $91.8 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.
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 this Annual Report on Form 10-K for the year ended December
31, 2000, which are incorporated by reference into Management's Discussion and
Analysis. 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 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
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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 results.
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.
FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments increased 71% to $1.13
billion in 2000 from $661.3 million in 1999. The increase was primarily a result
of proceeds from the issuance of the 2000 Convertible Notes, net of repayment of
the existing debt, and proceeds from our employee stock option and purchase
plans, partially offset by capital expenditures and cash paid for the purchase
of common stock under our repurchase program and the acquisition of non-public
technology companies. (See Note 2 of the Notes.) The increase was also
attributable to proceeds from the sale of marketable equity securities in the
open market. At December 31, 2000, short-term investments include $60.0 million
of marketable equity securities. (See Note 5 of the Notes.)
Cash, cash equivalents and short-term investments increased 127% to $661.3
million in 1999 from $291.5 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 $49.4 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. At
December 31, 1999, short-term investments included $25.0 million of marketable
equity securities that were sold during 2000. (See Note 5 of the Notes.)
WORKING CAPITAL. Working capital increased to $1.45 billion in 2000 from
$813.0 million in 1999. The increase was primarily a result of the following
factors:
- Higher short-term investments resulting from purchases of debt and equity
securities, net of sales and maturities and marketable equity securities
reclassified from long-term assets. (See Notes 5 and 8 of the Notes);
- Higher net accounts receivable due to increased revenue and the timing of
shipments when comparing the fourth quarter of 2000 to the fourth quarter
of 1999. Shipments during the fourth quarter of 1999 were more linear
throughout the quarter whereas during the fourth quarter of 2000,
shipments increased towards the end of the quarter;
- Lower current portion of long-term obligations resulting from repayment
of the Revolver. (See Note 8 of the Notes.); and
- Higher inventory reflecting the combination of higher sales in 2000 as
compared to 1999 and lower than expected sales during the fourth quarter
of 2000.
The increase in working capital was offset in part by higher accrued
salaries, wages and benefits and other liabilities primarily due to increases in
headcount mainly resulting from acquisitions of companies (See Note 2 of the
Notes) as of December 31, 2000 as compared to December 31, 1999, higher income
taxes payable due to the higher income tax rate applied in 2000 primarily due to
the DataPath acquisition, and also by higher trade accounts payable compared to
1999.
Working capital increased to $813.0 million in 1999 from $238.7 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;
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- Lower current liabilities primarily resulting from the repayment of the
$150.0 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.
CASH AND CASH EQUIVALENTS GENERATED FROM OPERATING ACTIVITIES. During 2000,
we generated $565.4 million of cash and cash equivalents from operating
activities compared to $443.8 million in 1999. The increase in net cash and cash
equivalents provided by operating activities was primarily attributable the
following factors:
- Higher net income (before depreciation and amortization, write-off of
acquired in-process research and development, non-cash restructuring
charges, amortization of non-cash deferred stock compensation and gains
on stock investments); and
- An increase in trade accounts payable and accrued and other liabilities.
The increase in trade accounts payable reflects higher purchases during
the fourth quarter of 2000 as compared to the same period of 1999 and the
timing of invoice receipt and payment. The increase in accrued and other
liabilities was primarily attributable to higher income taxes payable due
to a higher provision for income taxes for 2000, net of payment and
higher deferred tax liabilities recorded in conjunction with the
acquisition of DataPath.
The increase in cash from operations was offset in part by an increase in
accounts receivable, inventories and prepaid expenses and other assets. The
increase in accounts receivable was primarily a result of higher revenues in the
fourth quarter of 2000 as compared to the same period of 1999 and the timing of
payment receipt. Higher inventory reflects the combination of higher sales in
2000 as compared to 1999 and lower than expected sales during the fourth quarter
of 2000. The increase in prepaid and other assets was primarily a result of
higher deferred tax assets recorded as of December 31, 2000 as compared to the
balance as of December 31, 1999 and increased capitalized software and
intellectual property during 2000 as compared to 1999.
During 1999, we generated $443.8 million of cash and cash equivalents from
operating activities compared to $229.3 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.
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.
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CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES. Cash and cash
equivalents used in investing activities was $753.3 million in 2000, compared to
$472.0 million in 1999. The primary investing activities during 2000 included
the following:
- Higher purchases of debt and equity securities available-for-sale and
others, net of maturities and sales;
- Higher purchases of property and equipment; and
- Acquisitions of non-public technology companies (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 $276.6
million in 2000 and $205.2 million in 1999. In order to maintain our position as
a technological market leader, we expect the level of capital expenditures to be
approximately $500 million in 2001.
Cash and cash equivalents used in investing activities was $472.0 million
in 1999, compared to $775.5 million in 1998. The primary investing activities
during 1999 included the following:
- 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 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 PROVIDED BY FINANCING ACTIVITIES. Cash and cash
equivalents provided by financing activities during 2000 totaled $183.7 million
compared to $51.9 million in 1999. The increase was primarily attributable to
proceeds from the 2000 Convertible Notes, net of repayment of the Revolver (see
Note 8 of the Notes) and higher proceeds from our employee stock option and
purchase plans in 2000. The increase was offset in part by debt issuance costs
associated with the 2000 Convertible Notes and cash paid for the repurchase of
our common stock under the repurchase program in 2000.
Cash and cash equivalents provided by financing activities during 1999
totaled $51.9 million compared to $635.1 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 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.
On February 18, 2000, we issued $500.0 million of 4% Convertible
Subordinated Notes due in 2005. The 2000 Convertible Notes are subordinated to
all existing and future senior debt, are convertible, at the option of the
holder, at any time following issuance, into shares of our common stock at a
conversion price of $70.2845 per share 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. The net proceeds from the 2000
Convertible Notes were used to repay outstanding bank debt with a balance of
approximately $380.0 million as of December 31, 1999 as described below.
During March 1999, we issued $345.0 million of 4 1/4% Convertible
Subordinated Notes due in 2004. The 1999 Convertible Notes are subordinated to
all existing and future senior debt, are convertible, at the option of the
holder, 60 days following issuance, into shares of our common stock at a
conversion price of $15.6765 per share and are redeemable at our option, in
whole or in part, at any time on or after March 20, 2002. Each
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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
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 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, LSI Logic Japan Semiconductor, Inc. ("JSI") and ABN AMRO, and was
thereafter syndicated to a group of lenders determined by ABN AMRO and us. The
credit agreement consisted of two credit facilities: a $575.0 million senior
unsecured reducing revolving credit facility ("Revolver"), and a $150.0 million
senior unsecured revolving credit facility ("364-day Facility").
On August 5, 1998, we borrowed $150.0 million under the 364-day Facility
and $485.0 million under the Revolver. On December 22, 1998, we borrowed an
additional $30.0 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 $241.0 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 then 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 1999, we repaid the
full $150.0 million outstanding under the 364-day Facility and $186.0 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 $380.0 million as of December 31, 1999.
We repaid the outstanding balance for the Revolver in February 2000 using
proceeds from the 2000 Convertible Notes. As of December 31, 1999, the interest
rate for the Revolver and the yen sub-facility was 7.07% and 1.29%,
respectively.
On April 21, 2000, the credit agreement was superseded by the Second
Amended and Restated Credit Agreement by and among us, JSI, ABN AMRO and a group
of lenders determined by ABN AMRO to terminate the yen sub-facility and modify
certain covenant requirements.
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, 2000 and 1999, 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 existing credit agreement, 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.
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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 recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures 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. In June 2000, the FASB issued SFAS Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 138 amends certain terms and conditions of SFAS 133. The
Company adopted SFAS No. 133 and 138 on January 1, 2001. The adoption did not
have a significant impact on the consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, ("SAB
101"), "Revenue Recognition" in Financial Statements. SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 is effective no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
company adopted SAB 101 in the fourth quarter of 2000, effective as of the
beginning of the year. The adoption did not have a significant impact on the
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN"), "Accounting
for Certain Transactions Involving Stock Compensation -- an Interpretation of
APB 25." This interpretation clarifies (a) the definition of an employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option plan or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, however certain conclusions
in this Interpretation cover specific events that occur after either December
15, 1998, or January 12, 2000. To the extent that this Interpretation covers
events occurring during the period after December 15, 1998, or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company adopted FIN No. 44 as of July 1, 2000.
ITEM 7A. 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. As a
result, our cash flow and earnings are exposed to fluctuations in foreign
currency exchange rates. We attempt to limit these exposures through operational
strategies and financial market instruments. We use various hedge instruments,
primarily forward contracts with maturities of six months or less and currency
option contracts, to manage our exposure associated with net asset and liability
positions and cash flows denominated in non-functional currencies. We did not
purchase or hold derivative financial instruments for trading purposes as of
December 31, 2000 and 1999.
INTEREST RATE SENSITIVITY. We are subject to interest rate risk on our
investment portfolio and outstanding debt. An interest rate move of 41
basis-points (10% of our weighted-average worldwide interest rate in 2000)
affecting our floating-rate financial instruments as of December 31, 2000,
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 consistent. In
1999, an interest rate move of 56 basis points (10% of our weighted-average
worldwide interest rate in 1999) affecting our interest
45
47
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
exposures at December 31, 2000, 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 1999 and 1998, a near-term 10% appreciation or depreciation
of the U.S. dollar would also not have had a significant effect.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
ASSETS
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Cash and cash equivalents................................... $ 235,895 $ 250,603
Short-term investments...................................... 897,347 410,730
Accounts receivable, less allowances of $8,297 and
$11,346................................................... 522,729 275,620
Inventories................................................. 290,375 243,896
Deferred tax assets......................................... 54,552 66,212
Prepaid expenses and other current assets................... 71,342 41,223
---------- ----------
Total current assets.............................. 2,072,240 1,288,284
Property and equipment, net................................. 1,278,683 1,323,501
Goodwill and other intangibles.............................. 580,861 293,631
Other assets................................................ 265,703 301,189
---------- ----------
Total assets...................................... $4,197,487 $3,206,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 268,215 $ 189,293
Accrued salaries, wages and benefits........................ 87,738 77,277
Other accrued liabilities................................... 181,199 110,229
Income taxes payable........................................ 88,752 41,536
Current portion of long-term obligations.................... 1,030 56,996
---------- ----------
Total current liabilities......................... 626,934 475,331
---------- ----------
Deferred taxes liabilities.................................. 130,616 75,771
Other long-term obligations................................. 936,058 793,461
---------- ----------
Total long-term obligations and deferred taxes
liabilities..................................... 1,066,674 869,232
---------- ----------
Commitments and contingencies (Note 12)
Minority interest in subsidiaries........................... 5,742 6,210
---------- ----------
Stockholders' equity:
Preferred shares; $.01 par value; 2,000 shares authorized... -- --
Common stock; $.01 par value; 1,300,000 shares authorized;
321,523 and 299,572 shares outstanding.................... 3,215 2,996
Additional paid-in capital.................................. 1,931,564 1,271,093
Deferred compensation....................................... (163,045) --
Retained earnings........................................... 672,152 435,552
Accumulated other comprehensive income...................... 54,251 146,191
---------- ----------
Total stockholders' equity........................ 2,498,137 1,855,832
---------- ----------
Total liabilities and stockholders' equity........ $4,197,487 $3,206,605
========== ==========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues............................................... $2,737,667 $2,089,444 $1,516,891
---------- ---------- ----------
Costs and expenses:
Cost of revenues..................................... 1,568,332 1,286,844 884,598
Research and development............................. 378,936 297,554 291,125
Selling, general and administrative.................. 306,962 257,712 226,258
Acquired in-process research and development......... 77,438 4,600 145,500
Restructuring of operations and other non-recurring
items, net........................................ 2,781 (2,063) 75,400
Amortization of non-cash deferred stock
compensation(*)................................... 41,113 -- --
Amortization of intangibles.......................... 72,648 46,625 22,369
---------- ---------- ----------
Total costs and expenses..................... 2,448,210 1,891,272 1,645,250
---------- ---------- ----------
Income/(loss) from operations.......................... 289,457 198,172 (128,359)
Interest expense....................................... (41,573) (39,988) (8,865)
Interest income and other, net......................... 51,766 17,640 (8,952)
Gain on sale of equity securities...................... 80,100 48,393 16,671
---------- ---------- ----------
Income/(loss) before income taxes, minority interest
and cumulative effect of change in accounting
principle............................................ 379,750 224,217 (129,505)
Provision for income taxes............................. 142,959 65,030 9,905
---------- ---------- ----------
Income/(loss) before minority interest and cumulative
effect of change in accounting principle............. 236,791 159,187 (139,410)
Minority interest in net income of subsidiaries........ 191 239 68
---------- ---------- ----------
Income/(loss) before cumulative effect of change in
accounting principle................................. 236,600 158,948 (139,478)
Cumulative effect of change in accounting principle.... -- (91,774) --
---------- ---------- ----------
Net income/(loss)...................................... $ 236,600 $ 67,174 $ (139,478)
========== ========== ==========
Basic earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.............................. $ 0.76 $ 0.54 $ (0.49)
Cumulative effect of change in accounting
principle......................................... -- (0.31) --
---------- ---------- ----------
Net income/(loss).................................... $ 0.76 $ 0.23 $ (0.49)
========== ========== ==========
Diluted earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.............................. $ 0.70 $ 0.51 $ (0.49)
Cumulative effect of change in accounting
principle......................................... -- (0.28) --
---------- ---------- ----------
Net income/(loss).................................... $ 0.70 $ 0.23 $ (0.49)
========== ========== ==========
Shares used in computing per share amounts:
Basic................................................ 310,813 292,848 286,306
========== ========== ==========
Diluted.............................................. 354,337 325,088 286,306
========== ========== ==========
- ---------------
(*) Amortization of non-cash deferred stock compensation, if not shown
separately, of $0.1 million, $29 million and $12 million would have been
included in cost of revenues, research and development, and selling, general
and administrative expenses respectively, for the year ended December 31,
2000.
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER
---------------- PAID-IN STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS INCOME/(LOSS) TOTAL
------- ------ ---------- ------------ -------- ------------- ----------
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
Net income............................... 236,600
Foreign currency translation
adjustments............................ (33,650)
Unrealized (loss) on available-for-sale
Securities............................. (58,290)
Total comprehensive income............... 144,660
Purchase of common stock under stock
repurchase program..................... (1,500) (15) (49,281) (49,296)
Issuance to employees under stock option
and purchase plans..................... 13,352 134 125,945 126,079
Tax benefit of employee stock
transactions........................... 51,450 51,450
Issuance of common stock in conjunction
with acquisitions (Note 2)............. 10,099 100 532,357 532,457
Deferred stock compensation (Note 2)..... $(204,158) (204,158)
Amortization of deferred stock
compensation........................... 41,113 41,113
======= ====== ========== ========= ======== ======== ==========
Balances at December 31, 2000............ 321,523 $3,215 $1,931,564 $(163,045) $672,152 $ 54,251 $2,498,137
======= ====== ========== ========= ======== ======== ==========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- --------- ---------
Operating activities:
Net income/(loss).................................... $ 236,600 $ 67,174 $(139,478)
Adjustments:
Depreciation and amortization........................ 403,961 367,157 227,424
Amortization of non-cash deferred stock
compensation...................................... 41,113 -- --
Write-off of unamortized preproduction costs......... -- 97,356 --
Acquired in-process research and development......... 77,438 4,600 145,500
Non-cash restructuring (benefits)/charges, net....... 2,781 (7,107) 75,400
Common stock issued for litigation................... -- -- 1,406
Gain on sale of equity securities.................... (80,100) (48,393) (16,671)
Tax benefit of employee stock transactions........... 51,450 48,000 3,026
Changes in working capital components, net of assets
acquired and liabilities assumed in business
combinations:
Accounts receivable............................... (246,755) (20,300) 32,744
Inventories....................................... (47,136) (58,929) 6,992
Prepaid expenses and other assets................. (103,183) (21,830) (57,805)
Accounts payable.................................. 80,498 (13,988) (67,831)
Accrued and other liabilities..................... 148,750 30,071 18,567
----------- --------- ---------
Net cash provided by operating activities............ 565,417 443,811 229,274
----------- --------- ---------
Investing activities:
Purchase of debt and equity securities
available-for-sale................................ (1,432,515) (608,017) (326,979)
Maturities and sales of debt and equity securities
available-for-sale................................ 989,129 304,315 631,755
Purchase of equity securities........................ (26,664) (5,778) (9,216)
Proceeds from sale of stock investments.............. 78,770 49,407 23,106
Acquisitions of non-public technology companies and
stock from minority interest holders.............. (85,402) (6,779) (599)
Purchases of property and equipment, net of
retirements....................................... (276,633) (205,172) (329,892)
Acquisition of Symbios, net of cash acquired......... -- -- (763,683)
----------- --------- ---------
Net cash used in investing activities................ (753,315) (472,024) (775,508)
----------- --------- ---------
Financing activities:
Proceeds from borrowings............................. 500,000 345,000 724,682
Repayment of debt obligations........................ (376,658) (373,063) (101,781)
Debt issuance costs.................................. (15,300) (9,488) (3,846)
Purchase of common stock under repurchase program.... (49,296) -- (5,661)
Issuance of common stock, net........................ 124,975 89,431 21,742
----------- --------- ---------
Net cash provided by financing activities............ 183,721 51,880 635,136
----------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (10,531) 16,630 7,317
----------- --------- ---------
Increase/(decrease) in cash and cash equivalents....... (14,708) 40,297 96,219
----------- --------- ---------
Cash and cash equivalents at beginning of period....... 250,603 210,306 114,087
----------- --------- ---------
Cash and cash equivalents at end of period............. $ 235,895 $ 250,603 $ 210,306
=========== ========= =========
See Notes to Consolidated Financial Statements.
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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 four major, rapidly
growing markets of broadband communications, networking infrastructure, storage
infrastructure and storage area network ("SAN") systems.
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 to the Consolidated Financial Statements referred to hereafter as
"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, the Company 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.
During 2000, the Company acquired a division of NeoMagic Corporation
("NeoMagic"), a division of Cacheware, Inc. ("Cacheware"), Intraserver
Technology, Inc. ("Intraserver"), DataPath Systems, Inc. ("DataPath"), ParaVoice
Technologies, Inc. ("ParaVoice") and Syntax Systems, Inc. ("Syntax"). The
acquisitions were accounted for as purchases and accordingly, the results of
operations and estimated fair value of assets acquired and liabilities assumed
were included in the Company's consolidated financial statements as of the
effective date of each acquisition. These transactions are summarized below.
There were
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53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
no significant differences between the accounting policies of LSI and the
companies acquired. (See Note 2 of the Notes.)
ACQUISITION PURCHASE IDENTIFIED DEFERRED
COMPANY DATE PRICE CONSIDERATION IPR&D GOODWILL INTANGIBLES COMPENSATION
------- ------------- -------- ------------------- ----- -------- ----------- ------------
(AMOUNTS IN MILLIONS)
Division of
NeoMagic........... April 2000 $ 15.4 Cash $6.4 $ 1.9 $ 5.8 $ --
Division of
Cacheware.......... April 2000 22.2 Cash 8.3 8.5 5.2 --
Intraserver.......... May 2000 62.9 1.2 million shares, 1.6 50.8 17.5 --
0.2 million options
DataPath............. July 2000 420.8 7.5 million shares, 54.2 154.0 17.4 201.6
1.6 million options
ParaVoice............ October 2000 38.6 Cash 7.0 10.4 21.2 --
Syntax............... November 2000 58.8 1.4 million shares, -- 42.0 25.4 2.5
0.6 million options
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 August 6, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Symbios from Hyundai Electronics America ("HEA").
HEA is a majority-owned subsidiary of Hyundai Electronics Industries Co., Ltd.,
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.
The Company's fiscal year ends on December 31. Fiscal years 2000, 1999 and
1998 were 52-week years.
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 materially from these
estimates.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 2000 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
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54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
component of comprehensive income in stockholders' equity until realized (See
Note 5 of the Notes.) Gains and losses on securities sold are determined based
on the specific identification method and are included in interest income and
other. 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. At December 31, 2000, the estimated fair value of the 2000 and
1999 Convertible Subordinated Notes was $356.9 million and $388.6 million,
respectively. At December 31, 1999, the estimated fair value of the 1999
Convertible Subordinated Notes was $783.2 million. The book value of existing
bank debt at December 31, 1999 approximated fair value as the debt was at
adjustable rates. The Company utilizes various hedge instruments, primarily
forward contracts and currency option contracts, to manage its exposure
associated with 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.
All derivatives are off-balance-sheet and therefore have no carrying value.
Because the Company hedges only with instruments that have a 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.
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, 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. In
June 2000, the FASB issued SFAS Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". SFAS No. 138 amends
certain terms and conditions of SFAS 133. The Company adopted SFAS No. 133 and
138 on January 1, 2001. The adoption did not have a significant impact on the
consolidated financial statements.
CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS. Financial
instruments that 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. No
customers accounted for greater than or equal to 10% of trade receivables as of
December 31, 2000. Amounts due from one of the Company's customers accounted for
13% of trade receivables at December 31, 1999. The Company did not engage in
sales of accounts receivable during 1999. 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 12% and
11% of the Company's consolidated revenues for the years ended December 31, 2000
and 1999, respectively, and another
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55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customer accounted for 12% of the Company's consolidated revenues for the year
ended December 31, 1998. 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
include 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 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.
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles acquired in
connection with business acquisitions in 2000 and 1999 and the purchase of
common stock from minority stockholders were approximately $737 million and $377
million, and related accumulated amortization was $156 million and $83 million
at December 31, 2000 and 1999, 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, customer base, workforce in place, trademarks and residual goodwill,
which are being amortized over a weighted average life of six 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 stockholders' 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 gain on
sale of equity securities. 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.
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOFTWARE. The Company capitalizes 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 $137 million and $157 million of
capitalized software costs and $72 million and $89 million of accumulated
amortization included in other assets at December 31, 2000 and 1999,
respectively. Software amortization totaling $41 million, $25 million and $17
million was included in the Company's results of operations during 2000, 1999
and 1998.
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. Product 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. All amounts
billed to a customer related to shipping and handling are classified as revenue
while all costs incurred by the Company for shipping and handling are classified
as costs of goods sold.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition" in Financial Statements. SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 is effective no later than
the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company adopted SAB 101 in the fourth quarter of 2000, effective as of the
beginning of the year. The impact of the adoption was not significant to the
consolidated financial statements.
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.)
In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." This Interpretation clarifies (a) the definition of
an employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option plan or award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. FIN No. 44 is effective
July 1, 2000, however, certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. To the
extent that this Interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. The Company adopted FIN No. 44 on July 1,
2000. Amortization of non-cash deferred stock compensation of $41 million in
2000 is due to non-cash deferred stock compensation of $204 million recorded in
connection with the acquisitions of DataPath Systems, Inc. and Syntax Systems,
Inc., which closed on July 14, 2000 and November 29, 2000, respectively (See
Note 2 of the Notes).
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 (denomi-
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
nator) 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:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ -------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT INCOME* SHARES+ AMOUNT
-------- ------- --------- -------- ------- --------- --------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Basic EPS:
Net income/(loss) before
cumulative effect of
change in accounting
principle................. $236,600 310,813 $0.76 $158,948 292,848 $0.54 $(139,478) 286,306 $(0.49)
----- ----- ------
Cumulative effect of change
in accounting principle... -- -- -- (91,774) 292,848 (0.31) -- --
Net income/(loss) available
to Common stockholders.... 236,600 310,813 0.76 67,174 292,848 0.23 (139,478) 286,306 (0.49)
----- ----- ------
Effect of dilutive
securities:
Stock options and
restricted Stock awards
(See Note 2)............ 21,517 14,634
4 1/4% Convertible
Subordinated Notes...... 10,997 22,007 8,126 17,606
Diluted EPS:
Net income/(loss) before
cumulative effect of
change in accounting,
principle (adjusted for
assumed conversion of
debt)..................... 247,597 354,337 0.70 167,074 325,088 0.51 (139,478) 286,306 (0.49)
----- ----- ------
Cumulative effect of change
in accounting principle... -- -- -- (91,774) 325,088 (0.28) --
Net income/(loss) available
to Common stockholders.... $247,597 354,337 $0.70 $ 75,300 325,088 $0.23 $(139,478) 286,306 $(0.49)
----- ----- ------
- ---------------
* Numerator
+ Denominator
Options to purchase approximately 6,573,340 shares and 4,122,000 shares
were outstanding at December 31, 2000 and 1999, respectively, but were not
included in the computation of diluted shares for the year ended December 31,
2000 and 1999, 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 $26.38 to $72.25 and $22.66 to
$32.53 at December 31, 2000 and 1999, respectively. In 1998, all outstanding
options to purchase approximately 40,234,000 shares 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, 2000, 1999 and 1998, other than
as listed in Note 3.
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 unrealized gains on available-for-sale securities, net of
applicable taxes. Comprehensive income is shown in the statement of
stockholders' equity. As of December 31, 2000, the accumulated other
comprehensive income consisted of $31 million of unrealized gains on
available-for-sale securities, net of the related tax effect of $17 million, and
$23 million of foreign currency translation adjustments, net of the related tax
effect of $12 million. As of December 31, 1999, the accumulated other
comprehensive income consisted of $90 million of unrealized gain
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
2000
ACQUISITION OF SYNTAX. On November 29, 2000, LSI acquired Syntax Systems,
Inc. ("Syntax"), a privately held supplier of software pursuant to the terms of
the Agreement and Plan of Reorganization and Merger. Syntax's stockholders
received 0.1896 shares of the Company's common stock for each Syntax share.
Accordingly, the Company issued approximately 1.4 million shares of its common
stock for all the outstanding common shares of Syntax common stock.
Additionally, outstanding options to acquire Syntax common stock as of the
acquisition date were converted to options to acquire approximately 0.6 million
shares of the Company's common stock. The acquisition of Syntax is expected to
enhance the power of scalable storage hardware and the flexibility of
cross-platform computing software to offer a complete solution for centralized
storage management in the SAN Systems segment.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of Syntax and estimated fair value of assets acquired and
liabilities assumed were included in the Company's consolidated financial
statements as of November 29, 2000, the effective date of the purchase, through
the end of the period. There are no significant differences between the
accounting policies of the Company and Syntax.
The total purchase price for Syntax was $58.8 million, which includes
deferred compensation on unvested options and stock awards assumed as part of
the purchase. On July 1, 2000, FIN No. 44 was adopted by the Company as
discussed in Note 1. The acquisition of Syntax closed on November 29, 2000,
after the effective date of the new interpretation. In accordance with FIN No.
44, the intrinsic value of the unvested options and restricted awards assumed as
part of the transaction as of the closing date was recorded as deferred stock
compensation to be amortized over the respective vesting periods of the options
and awards. For presentation purposes, the deferred stock compensation on
restricted stock awards and unvested options is included in the components of
purchase price noted below.
The components of purchase price are as follows:
(IN THOUSANDS)
--------------
Fair value of common shares issued.......................... $42,673
Fair value of options assumed............................... 15,522
Direct acquisition costs.................................... 600
-------
Total purchase price........................................ $58,795
=======
The fair value of common shares issued was determined using a price of
approximately $30.71 per share, which represents the average closing stock price
for the period two days before and after the date the number of LSI common
shares to be issued was fixed. The fair value of common shares issued includes
approximately $0.9 million of deferred stock compensation associated with
approximately 0.04 million restricted common shares that were assumed as part of
the transaction. The value of the restricted shares was determined using the
closing stock price on November 29, 2000; the date the acquisition was
consummated. The deferred
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
compensation was included as a component of stockholders' equity and will be
amortized over the vesting period of the awards of twelve to eighteen months.
The fair value of the options assumed was determined using the
Black-Scholes value. The fair value includes approximately $1.6 million of
deferred stock compensation associated with the intrinsic value of unvested
options using the closing stock price on the date the transaction was
consummated. The deferred compensation was included as a component of
stockholders' equity and will be amortized over the remaining vesting period of
the options ranging from one to five years.
Direct acquisition costs consist of investment banking, legal and
accounting fees.
The total purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows:
(IN THOUSANDS)
--------------
Fair value of tangible net liabilities acquired............. $(11,107)
Current technology.......................................... 12,990
Customer base............................................... 5,010
Assembled workforce......................................... 7,370
Excess of purchase price over net assets acquired........... 42,011
--------
Total purchase price excluding deferred stock
compensation.............................................. 56,274
Total deferred stock compensation........................... 2,521
--------
Total purchase price........................................ $ 58,795
========
Useful life of intangible assets. The amount allocated to current
technology, customer base, assembled workforce and excess of purchase price over
net assets acquired is being amortized over their estimated weighted average
useful life of six years using the straight-line method.
ACQUISITION OF PARAVOICE. On October 23, 2000, the Company entered into an
Asset Acquisition Agreement with ParaVoice. Under the agreement, the Company
acquired certain tangible and intangible assets associated with ParaVoice's
Voice over Internet Protocol ("VoIP") and Voice over DSL ("VoDSL") technology.
The acquisition is intended to combine VoIP and VoDSL technology with the
Company's ZSP digital signal processor to offer complete single-chip solutions
in the fast-growing global communication area in the Semiconductor segment. The
acquisition was accounted for as a purchase and the total purchase price was
$38.6 million in cash. Accordingly, the estimated fair value of assets acquired
was included in the Company's consolidated financial statements as of October
23, 2000, the effective date of the purchase through the end of the period.
The Company paid approximately $38.6 million in cash, which included direct
acquisition costs of $0.2 million for investment banking, legal and accounting
fees. The total purchase price was allocated to the estimated fair value of
assets acquired based on independent appraisals and management estimates as
follows:
(IN THOUSANDS)
--------------
Fair value of tangible net assets acquired.................. $ 93
In-process research and development......................... 6,950
Current technology.......................................... 18,040
Assembled workforce......................................... 3,150
Excess of purchase price over net assets acquired........... 10,387
-------
$38,620
=======
In-process research and development. In connection with the purchase of the
ParaVoice, the Company recorded a $6.95 million charge to in-process research
and development during the fourth quarter of 2000. The amount was determined by
identifying research projects for which technological feasibility had not been
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
established and for which no alternative future uses existed. As of the
acquisition date, there was only one project that met the above criteria. The
project was for development of VoIP technology applications.
The value of the project identified to be in progress 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 based on research and development expenses
incurred as of October 23, 2000 for the project as a percentage of total
research and development expenses to bring the project to technological
feasibility. The discount rate used was 50% for the project. Development of VoIP
technology applications was started in late 1999. As of October 23, 2000, the
Company estimated that the project was 23% complete.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible asset. The amount allocated to current
technology, assembled workforce and excess of purchase price over net assets
acquired is being amortized over their estimated weighted average useful life of
six years using the straight-line method.
ACQUISITION OF DATAPATH. On July 14, 2000, LSI acquired DataPath, a
privately held supplier of communications chips for broadband, data networking
and wireless applications, pursuant to the terms of the Agreement and Plan of
Reorganization and Merger. DataPath's stockholders received 0.4269 shares of the
Company's common stock for each DataPath share. Accordingly, the Company issued
approximately 7.5 million shares of its common stock for all the outstanding
common shares of DataPath common stock. Additionally, outstanding options to
acquire DataPath common stock as of the acquisition date were converted to
options to acquire approximately 1.6 million shares of the Company's common
stock. The acquisition of DataPath is expected to enhance the Company's standard
product offerings in the Semiconductor segment.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of DataPath and estimated fair value of assets acquired and
liabilities assumed were included in the Company's consolidated financial
statements as of July 14, 2000, the effective date of the purchase, through the
end of the period. There are no significant differences between the accounting
policies of the Company and DataPath.
The total purchase price for DataPath was $420.8 million, which includes
deferred compensation on unvested options and stock awards assumed as part of
the purchase. On July 1, 2000, the Company adopted FIN No. 44 (See Note 1 of the
Notes.) The acquisition of DataPath closed on July 14, 2000, after the effective
date of the new interpretation. In accordance with FIN No. 44, the intrinsic
value of the unvested options and restricted awards assumed as part of the
transaction as of the closing date was recorded as deferred compensation to be
amortized over the respective vesting periods of the options and awards. For
presentation purposes, the deferred compensation on restricted stock awards and
unvested options are included in the components of purchase price noted below.
The components of purchase price are as follows:
(IN THOUSANDS)
--------------
Fair value of common shares issued.......................... $345,914
Fair value of options assumed............................... 66,475
Direct acquisition costs.................................... 8,436
--------
Total purchase price........................................ $420,825
========
The fair value of common shares issued was determined using a price of
approximately $46.11 per share, which represents the average closing stock price
for the period two days before and after the date the number of LSI common
shares to be issued was fixed. The fair value of common shares issued includes
approximately
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$133.3 million of deferred stock compensation associated with approximately 2.3
million restricted common shares that were assumed as part of the transaction.
The value of the restricted shares was determined using the closing stock price
on July 14, 2000; the date the acquisition was consummated. The deferred
compensation was included as a component of stockholders' equity and will be
amortized over the vesting period of the awards of two to three years.
The fair value of the options assumed was determined using the
Black-Scholes value. The fair value includes approximately $68.3 million of
deferred stock compensation associated with the intrinsic value of unvested
options using the closing stock price on the date the transaction was
consummated. The deferred compensation was included as a component of
stockholders' equity and will be amortized over the remaining vesting period of
the options ranging from two to four years.
Direct acquisition costs consist of investment banking, legal and
accounting fees.
The total purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows:
(IN THOUSANDS)
--------------
Fair value of tangible net liabilities acquired............. $ (6,383)
In-process research and development......................... 54,155
Current technology.......................................... 17,438
Excess of purchase price over net assets acquired........... 153,978
--------
Total purchase price excluding deferred stock
compensation.............................................. 219,188
Total deferred stock compensation........................... 201,637
--------
Total purchase price........................................ $420,825
========
In-process research and development. In connection with the purchase of
DataPath, the Company recorded a $54.2 million charge to in-process research and
development during the third quarter of 2000. The amount was determined by
identifying research projects for which technological feasibility had not been
established and for which no alternative future uses existed. As of the
acquisition date, there were various projects that met the above criteria. The
majority of the projects identified consist of Read Channel, Asynchronous
Digital Subscriber Line ("ADSL") and Tuner technologies.
The value of the projects identified to be in progress was determined by
estimating the future 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. The discount rate used was 20%
for the projects. The percentage of completion for the projects was determined
using milestones representing estimates of effort, value added and degree of
difficulty of the portion of the projects completed as of July 14, 2000, as
compared to the total research and development to be completed to bring the
projects to technological feasibility. The development process is grouped into
three phases, with each phase containing between one and five milestones. The
three phases are (i) researching the market requirements and the engineering
architecture and feasibility studies, (ii) design and verification milestones,
and (iii) prototyping and testing the product (both internal and customer
testing). As of July 14, 2000, the Company estimated the projects for Read
Channel, ADSL and Tuner technologies were approximately 50%, 65% and 75%
complete, respectively.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology and excess of purchase price over net assets acquired is being
amortized over their estimated weighted average useful life of six years using
the straight-line method.
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITION OF INTRASERVER. On May 26, 2000, LSI acquired Intraserver
pursuant to the terms of the Agreement and Plan of Reorganization and Merger.
Intraserver's stockholders received 2.2074 shares of the Company's common stock
for each Intraserver share. Accordingly, the Company issued approximately 1.2
million shares of its common stock for all the outstanding common shares of
Intraserver common stock. Additionally, outstanding options to acquire
Intraserver common stock as of the acquisition date were converted to options to
acquire approximately 0.2 million shares of the Company's common stock. The
acquisition of Intraserver is expected to enhance the Company's host adapter
board and other product offerings in the storage infrastructure and
communications markets in the Semiconductor segment.
The acquisition was accounted for as a purchase. Accordingly, the results
of operations of Intraserver and estimated fair value of assets acquired and
liabilities assumed were included in the Company's consolidated financial
statements as of May 26, 2000, the effective date of the purchase, through the
end of the period. There are no significant differences between the accounting
policies of the Company and Intraserver.
The total purchase price for Intraserver was $62.9 million comprised of the
following components:
(IN THOUSANDS)
--------------
Fair value of common shares issued.......................... $54,851
Fair value of options assumed............................... 7,022
Direct acquisition costs.................................... 1,016
-------
$62,889
=======
The fair value of common shares issued was determined using a price of
$45.83 per share, which represents the average closing stock price for the
period two days before and after the date the number of LSI common shares to be
issued was fixed. The fair value of the options assumed was determined using the
Black-Scholes value. Direct acquisition costs consist of investment banking,
legal and accounting fees.
The total purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows:
(IN THOUSANDS)
Fair value of tangible net liabilities acquired............. $(6,956)
In-process research and development......................... 1,588
Current technology.......................................... 13,975
Trademarks.................................................. 1,285
Assembled workforce......................................... 2,200
Excess of purchase price over net assets acquired........... 50,797
-------
$62,889
=======
In-process research and development. In connection with the purchase of
Intraserver, the Company recorded a $1.6 million charge to in-process research
and development during the second quarter of 2000. The amount was determined by
identifying research projects for which technological feasibility had not been
established and for which no alternative future uses existed. As of the
acquisition date, there were various projects that met the above criteria. The
majority of the projects identified are targeted for high-end data storage and
communication devices where I/O functionality and speed is critical.
The value of the projects identified to be in progress was determined by
estimating the future 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. The discount rate used was 30%
for the project. The percentage of completion for the projects was determined
using milestones representing estimates of effort, value added and degree of
difficulty of the portion of the projects completed as of May 26, 2000, as
compared to the total research and development to be completed to bring the
projects to technological feasibility. The development process is grouped into
three phases, with each phase containing between one and
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
five milestones. The three phases are (i) researching the market requirements
and the engineering architecture and feasibility studies, (ii) design and
verification milestones, and (iii) prototyping and testing the product (both
internal and customer testing). Development of Intraserver's projects started in
January 2000. As of May 26, 2000, the Company estimated the projects were
approximately 58% complete in aggregate (ranging from 20% to 95%).
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology, trademarks, assembled workforce and excess of purchase price over
net assets acquired is being amortized over their estimated weighted average
useful life of six years using the straight-line method.
ACQUISITION OF A DIVISION OF CACHEWARE. On April 27, 2000, the Company
entered into an Asset Purchase Agreement ("the Agreement") with Cacheware. Under
the Agreement, the Company acquired certain tangible and intangible assets
associated with Cacheware's storage area network business ("SAN Business"). The
acquisition is intended to provide a key technology to enhance the Company's SAN
solutions. The SAN Business is included in the Company's SAN Systems segment.
The Company offered employment to former Cacheware engineers in the United
States. The acquisition was accounted for as a purchase. Accordingly, the
results of operations of the SAN Business and estimated fair value of assets
acquired were included in the Company's consolidated financial statements as of
April 27, 2000, the effective date of the purchase, through the end of the
period.
The Company paid approximately $22.2 million in cash, which included direct
acquisition costs of $0.2 million for investment banking, legal and accounting
fees. The total purchase price was allocated to the estimated fair value of
assets acquired based on independent appraisals and management estimates as
follows:
(IN THOUSANDS)
Fair value of tangible net assets acquired.................. $ 156
In-process research and development......................... 8,345
Current technology.......................................... 4,051
Assembled workforce......................................... 1,160
Excess of purchase price over net assets acquired........... 8,488
-------
$22,200
=======
In-process research and development. In connection with the purchase of the
SAN Business from Cacheware, the Company recorded an $8.3 million charge to
in-process research and development during the second quarter of 2000. The
amount was determined by identifying research projects for which technological
feasibility had not been established and for which no alternative future uses
existed. As of the acquisition date, there was only one project that met the
above criteria. The project was for development of a SAN appliance for customers
in the Company's SAN Systems segment.
The value of the project identified to be in progress 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 discount rate used was 30%
for the project. The percentage of completion for the project was determined
based on research and development expenses incurred as of April 27, 2000 for the
project as a percentage of total research and development expenses to bring the
project to technological feasibility. Development of the SAN appliance was
started in January 1999. As of April 27, 2000, the Company estimated that the
project was 90% complete.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
threats from other companies. Additionally, the value of other intangible assets
acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology, assembled workforce and excess of purchase price over net assets
acquired is being amortized over their estimated weighted average useful life of
six years using the straight-line method.
ACQUISITION OF A DIVISION OF NEOMAGIC. On April 13, 2000, the Company
entered into an Asset Purchase Agreement ("Agreement") with NeoMagic. Under the
Agreement, the Company acquired certain tangible and intangible assets from
NeoMagic, which include NeoMagic's optical read-channel mixed-signal design team
and RF intellectual property. The acquisition is intended to enhance and
accelerate the Company's set-top decoder product offerings in the Semiconductor
segment. The Company offered employment to former NeoMagic engineers in the
United States and United Kingdom. The acquisition was accounted for as a
purchase. Accordingly, the results of operations and the estimated fair value of
assets acquired and liabilities assumed were included in the Company's
consolidated financial statements as of April 13, 2000, the effective date of
the purchase.
The Company paid approximately $15.4 million in cash which included direct
acquisition costs of $0.2 million for investment banking, legal and accounting
fees. The total purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows:
(IN THOUSANDS)
Fair value of tangible net assets acquired.................. $ 1,294
In-process research and development......................... 6,400
Current technology.......................................... 3,800
Assembled workforce......................................... 2,000
Excess of purchase price over net assets acquired........... 1,871
-------
$15,365
=======
In-process research and development. In connection with the asset purchase
from NeoMagic, the Company recorded a $6.4 million charge to in-process research
and development during the second quarter of 2000. The amount was determined by
identifying research projects for which technological feasibility had not been
established and for which no alternative future uses existed. As of the
acquisition date, there was only one project that met the above criteria. The
project was for development of a 2-chip controller chipset.
The value of the project identified to be in progress 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 discount rate used was 30%
for the project. The percentage of completion for the project was determined
based on research and development expenses incurred as of April 13, 2000 for the
project as a percentage of total research and development expenses to bring the
project to technological feasibility. Development of the 2-chip controller
chipset started in December 1999. As of April 13, 2000, the Company estimated
that the project was 68% complete.
Development of the technology remains a substantial risk to the Company due
to factors including the remaining effort to achieve technological feasibility,
rapidly changing customer markets and competitive threats from other companies.
Additionally, the value of other intangible assets acquired may become impaired.
Useful life of intangible assets. The amount allocated to current
technology, assembled workforce and excess of purchase price over net assets
acquired is being amortized over their estimated weighted average useful life of
six years using the straight-line method.
63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited pro forma statement of earnings information has not been
presented because the effects of these acquisitions were not material on either
an individual or an aggregate.
1999
MERGER WITH SEEQ. 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 year ended December 31, 1998 are
as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
---------------- -----------------
(IN THOUSANDS)
Net sales:
LSI....................................... $949,915 $1,490,701
SEEQ...................................... 14,714 26,190
-------- ----------
Combined.................................. $964,629 $1,516,891
======== ==========
Net loss:
LSI....................................... $(75,148) $ (131,632)
SEEQ...................................... (2,785) (7,846)
-------- ----------
Combined.................................. $(77,933) $ (139,478)
======== ==========
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.
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 that 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 were
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 1999.
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the SEEQ restructuring reserves as of June
22, 1999, the merger date, and activity against the reserve since then:
BALANCE BALANCE BALANCE
JUNE 22, 1999 UTILIZED DECEMBER 31, 1999 UTILIZED DECEMBER 31, 2000
------------- -------- ----------------- -------- -----------------
(IN THOUSANDS)
Write-down of fixed assets(a)..... $1,854 $(1,854) $ -- -- $--
Non-cancelable building lease
contracts....................... 490 (10) 480 (480) --
Payments to employees for
severance....................... 516 (516) -- --
------ ------- ---- ----- --
Total................... $2,860 $(2,380) $480 $(480) $--
====== ======= ==== ===== ==
- ---------------
(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):
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
=======
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 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 only 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
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 excess of purchase price over net assets acquired is being
amortized over their estimated weighted average useful life of seven years using
a straight-line method.
Unaudited pro forma statement of earnings information has not been
presented because the effects of these acquisitions were not material on either
an individual or an aggregate.
1998
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.
The total purchase price was allocated as follows (in millions):
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
====
Symbios integration. The Company has taken certain actions to combine the
Symbios operations with those of LSI 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 approxi-
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
mately 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:
INTEGRATION OF BALANCE BALANCE
SYMBIOS DECEMBER 31, DECEMBER 31,
AUGUST 6, 1998 UTILIZED 1998 UTILIZED 1999
-------------- -------- ------------ -------- ------------
(IN THOUSANDS)
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) $--
====== ======= ====== ======= ==
- ---------------
(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.
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, 2000. However, development of these technologies remains a
significant risk to the Company due to the remaining effort to
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 excess of purchase price over net assets acquired, 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.)
YEAR ENDED
DECEMBER 31, 1998
(UNAUDITED)
---------------------
(IN THOUSANDS, EXCEPT
PER-SHARE AMOUNTS)
Revenue.................................................... $1,875,247
Net loss................................................... $ (4,843)
Basic loss per share....................................... $ (0.02)
Diluted loss per share..................................... $ (0.02)
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, 2000 and 1999. There
were no minority interest purchases during the years ended December 31, 2000 and
1999.
NOTE 3 -- LICENSE AGREEMENT
In the second quarter of 1999, the Company and Silterra Malaysia Sdn. Bhd.
(formerly known as 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. The Company transferred technology to Silterra valued at $24
million and $15 million for the years ended December 31, 2000 and 1999,
respectively. 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
$4 million and $2 million for the years ended December 31, 2000 and 1999,
respectively. The amount was recorded as an offset to cost of revenues.
68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RESTRUCTURING AND OTHER NON-RECURRING ITEMS
2000
On February 22, 2000, the Company entered into an agreement with a third
party to outsource certain testing services presently performed by the Company
at its Fremont, California facility. The agreement provides for the sale and
transfer of certain test equipment and related peripherals for total proceeds of
approximately $10.7 million. The Company recorded a loss of approximately $2.2
million associated with the agreement. In March 2000, the Company recorded
approximately $1.1 million of non-cash compensation-related expenses resulting
from a separation agreement entered into during the quarter with a former
employee and a $0.5 million benefit for the reversal of reserves established in
the second quarter of 1999 for merger related expenses in connection with the
merger with SEEQ discussed in Note 2.
1999
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, we recorded 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.)
During 1999, the Company determined that $10.5 million of the restructuring
reserve from 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 terminations 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 on more favorable terms 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.
1998
Description of 1998 restructuring. 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
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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; $13.1 million in fixed asset and
other asset write-downs primarily in the U.S., Japan and Europe; workforce
reduction costs of $16.3 million; $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 and 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.
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:
RESTRUCTURING
EXPENSE BALANCE BALANCE
SEPTEMBER 30, DECEMBER 31, RESERVE DECEMBER 31,
1998 UTILIZED 1998 UTILIZED REVERSAL 1999
------------- -------- ------------ -------- -------- ------------
(IN THOUSANDS)
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) $--
======= ======== ======= ======== ======== ===
(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.
70
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
As of December 31, 2000 and 1999, cash and cash equivalents and short-term
investments included the following debt and equity securities:
2000 1999
-------- --------
(IN THOUSANDS)
CASH AND CASH EQUIVALENTS
Overnight deposits.......................................... $ 51,862 $ 34,994
Commercial paper............................................ 31,658 4,951
Corporate and municipal debt securities..................... 5,705 15,138
-------- --------
Total held-to-maturity............................ 89,225 55,083
Cash........................................................ 146,670 195,520
-------- --------
Total cash and cash equivalents................... $235,895 $250,603
======== ========
SHORT-TERM INVESTMENTS
Corporate debt securities................................... $488,592 $178,284
Commercial paper............................................ 203,952 99,475
Auction rate preferred...................................... 69,731 74,928
Certificates of deposit..................................... 23,308 27,967
Equity securities........................................... 60,000 25,000
U.S. government and agency securities....................... 51,764 5,076
-------- --------
Total available-for-sale.......................... $897,347 $410,730
======== ========
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, 2000 and 1999. 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, 2000 and 1999. Contract
maturities of these securities were within one year as of December 31, 2000.
Realized gains and losses for held-to-maturity securities and available-for-sale
debt securities were not significant for the years ended December 31, 2000, 1999
and 1998.
At December 31, 2000 and 1999, the Company had marketable equity securities
with an aggregate carrying value of $66 million and $153 million, respectively,
$60 million and $25 million of which was classified as short-term investments on
the Company's consolidated balance sheet, respectively. The remaining balance
was included in other long-term assets. As of December 31, 2000, an unrealized
gain of $31 million, net of the related tax effect of $17 million, on these
equity securities was included in accumulated comprehensive income. As of
December 31, 1999, an unrealized gain of $90 million, net of the related tax
effect of $48 million, was included in accumulated other comprehensive income.
In the third quarter of 1999, the Company adopted a program of regularly
selling marketable equity securities. During 2000, the Company sold equity
securities for $79 million in the open market, realizing a pre-tax gain of
approximately $73 million. In addition, the Company realized a pre-tax gain of
approximately $7 million associated with equity securities of a certain
technology company that was acquired by another technology company during the
year. During 1999, the Company sold equity securities for $49 million in the
open market, realizing a pre-tax gain of approximately $48 million.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 based on management's estimates. The decline in value of the investments
was considered by management to be other than 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.
NOTE 6 -- DERIVATIVE FINANCIAL INSTRUMENTS
The Company has foreign subsidiaries that 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, 2000 and 1999. 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, 2000
and 1999. These contracts will expire through June 2001.
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Buy/(Sell):
Japanese Yen........................................... $17,306 $22,194
British Pound.......................................... 4,485 --
Euro................................................... 46,135 43,145
Japanese Yen........................................... (6,448) (3,397)
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, 2000, 1999 and 1998.
Currency option contracts are treated as hedges of third-party yen revenue
exposures. At December 31, 2000 and December 31, 1999, there were no purchased
currency option contracts outstanding. 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,
2000, 1999 and 1998. There were no deferred premiums outstanding as of December
31, 2000 and 1999.
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., 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, 2000 and 1999, there were no interest rate swap contracts
outstanding.
72
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- BALANCE SHEET DETAIL
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Inventories:
Raw materials........................................... $ 36,133 $ 20,294
Work-in-process......................................... 129,394 139,698
Finished goods.......................................... 124,848 83,904
----------- -----------
$ 290,375 $ 243,896
=========== ===========
Property and equipment:
Land.................................................... $ 55,846 $ 60,978
Buildings and improvements.............................. 477,175 495,505
Equipment............................................... 1,620,472 1,562,453
Leasehold improvements.................................. 54,373 54,271
Furniture and fixtures.................................. 53,874 52,847
Construction in progress................................ 164,026 135,883
----------- -----------
2,425,766 2,361,937
Accumulated depreciation and amortization............... (1,147,083) (1,038,436)
----------- -----------
$ 1,278,683 $ 1,323,501
=========== ===========
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.
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, 2000, 1999 and 1998.
Interest capitalized was $12 million for the year ended December 31, 1998. No
interest was capitalized during 2000 and 1999. Accumulated amortization of
capitalized interest was $15 million, $11 million and $9 million at December 31,
2000, 1999 and 1998, respectively.
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- DEBT
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
2000 Convertible Subordinated Notes......................... $500,000 $ --
1999 Convertible Subordinated Notes......................... 345,000 345,000
Notes payable to banks...................................... -- 379,823
Capital lease obligations................................... 2,341 3,948
-------- --------
847,341 728,771
Current portion of long-term debt, capital lease obligations
and short-term borrowings................................. (1,030) (56,996)
-------- --------
Long-term debt and capital lease obligations................ $846,311 $671,775
======== ========
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 $70.2845 per share 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 approximately $380 million as of
December 31, 1999 as described below.
During March 1999, the Company 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 60 days following issuance into shares of the Company's common stock
at a conversion price of $15.6765 per share and are redeemable at the option of
the Company, in whole or in part, at any time on or after March 20, 2002. Each
holder of the convertible notes has the right to cause the Company to repurchase
all of such holder's convertible notes at 100% of their principal amount plus
accrued interest upon the occurrence of certain events and in certain
circumstances. Interest is payable semiannually. The Company paid approximately
$9.5 million for debt issuance costs related to the 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 August 5, 1998, the Company entered into a credit agreement with ABN
AMRO Bank N.V. ("ABN AMRO"). The credit agreement was restated and superseded by
the Amended and Restated Credit Agreement dated as of September 22, 1998 by and
among the Company, LSI Logic Japan Semiconductor, Inc. ("JSI") and ABN AMRO, and
was thereafter syndicated to a group of lenders determined by ABN AMRO and the
Company ("Notes payable to banks"). 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 were 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 was for a term of four years with the principal reduced quarterly
beginning
74
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 then 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 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. The Company repaid the outstanding balance for the Revolver in
February 2000 As of December 31, 1999, the interest rate for the Revolver and
the yen sub-facility was 7.07% and 1.29%, respectively.
On April 21, 2000, the credit agreement was superseded by the Second
Amended and Restated Credit Agreement by and among the Company, JSI, ABN AMRO
and a group of lenders determined by ABN AMRO to terminate the yen sub-facility
and modify certain covenant requirements.
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, 2000 and 1999, the Company was in
compliance with these covenants. Pursuant to the existing credit agreement, the
Company is prohibited from declaring or paying cash dividends.
Aggregate principal payments required on outstanding debt and capital lease
obligations are $1 million, $0.4 million, $0.3 million, $345.6 million and $500
million for the years ended December 31, 2001, 2002, 2003, 2004 and 2005,
respectively. There are currently no payments required after December 31, 2005.
The Company paid $30 million, $37 million and $9 million in interest during
2000, 1999 and 1998, respectively.
NOTE 9 -- COMMON STOCK
Authorized shares. On May 4, 2000, the stockholders of the Company approved
an increase to the number of authorized shares of common stock from 450 million
to 1.3 billion.
The following summarizes all shares of common stock reserved for issuance
for the employee stock option and purchase plans as of December 31, 2000:
NUMBER OF
SHARES
----------------
(IN THOUSANDS)
Issuable upon:
Exercise of stock options, including options available for
grant.................................................. 83,755
Purchase under Employee Stock Purchase Plan............... 1,065
----------------
84,820
================
Stock Split. 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.
Stock repurchase program. On July 28, 2000, the Company's Board of
Directors authorized a new stock repurchase program in which up to 5 million
shares of the Company's common stock may be repurchased in
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the open market from time to time. Accordingly, the Company repurchased 1.5
million shares of its common stock in the open market for approximately $49.3
million during the year ended December 31, 2000. The transactions were recorded
as reductions to common stock and additional paid-in capital. There were no
stock repurchases in 1999.
In August 1997, the Company's Board of Directors authorized management to
acquire up to 10 million shares of the Company's common stock in the open market
at current market prices. Accordingly, the Company repurchased 0.9 million
shares of its common stock from the open market for approximately $6 million in
1998. The transactions were recorded as reductions to common stock and
additional paid-in capital. The authorization for further stock repurchases
under this plan was rescinded by the Company's Board of Directors in February
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 were reserved for issuance. In August 2000, 12 million additional shares
were approved by the Board of Directors for issuance for a total of 26 million
shares 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 that is 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.
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 72.5 million shares have been reserved for issuance under this plan,
including 10 million shares approved by the stockholders in May 2000.
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, 2000.
In May 1995, the stockholders approved the 1995 Director Option Plan, which
replaced the 1986 Directors' Stock Option Plan, and reserved 1 million 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. None of the options previously granted under the
1986 Directors' Stock Option Plan remained outstanding at December 31, 2000.
In connection with the acquisition of Syntax Systems, Inc. (see Note 2 of
the Notes), each outstanding stock option under Syntax's Stock Option Plan was
converted to an option of the Company's common stock at a ratio of 0.1896. As a
result, outstanding options to purchase 611,241 shares were assumed. No further
options may be granted under the Syntax Stock Option Plan.
In connection with the acquisition of DataPath Systems, Inc. (see Note 2 of
the Notes), each outstanding stock option under DataPath's Stock Option Plan was
converted to an option of the Company's
76
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock at a ratio of 0.4269. As a result, outstanding options to purchase
1,560,823 shares were assumed. No further options may be granted under the
DataPath Stock Option Plan.
In connection with the acquisition of Intraserver Technology, Inc. (see
Note 2 of the Notes), each outstanding stock option under Intraserver's Stock
Option Plan was converted to an option of the Company's common stock at a ratio
of 2.2074. As a result, outstanding options to purchase 154,709 shares were
assumed. No further options may be granted under the Intraserver Stock Option
Plan.
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.
At December 31, 2000, remaining shares available for grant under all stock
option plans were approximately 28,591,455.
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, 2000, 1999 and 1998 (share amounts in thousands):
2000 1999 1998
----------------- ----------------- -----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
Options outstanding at
January 1............... 48,709 $ 16.73 40,232 $ 10.92 28,080 $ 12.17
Options assumed........... 2,327 6.19 -- -- 4,148 6.97
Options canceled.......... (5,833) (27.94) (2,830) (13.13) (4,866) (13.15)
Options granted........... 18,069 41.47 18,848 25.73 14,140 9.82
Options exercised......... (8,108) (10.70) (7,541) (9.38) (1,270) (6.08)
------ ------- ------ ------- ------ -------
Options outstanding at
December 31............. 55,164 $ 24.09 48,709 $ 16.73 40,232 $ 10.92
====== ======= ====== ======= ====== =======
Options exercisable at
December 31............. 19,250 $ 14.62 16,139 $ 11.00 14,250 $ 10.20
====== ======= ====== ======= ====== =======
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant option groups outstanding at December 31, 2000 and related
weighted average exercise price and contractual life information is as follows
(share amounts in thousands):
OUTSTANDING EXERCISABLE
---------------- ---------------- REMAINING
SHARES PRICE SHARES PRICE LIFE (YEARS)
------ ------ ------ ------ ------------
Options with exercise prices
ranging from:
$0.01 to $5.00................... 1,207 $ 1.81 974 $ 1.96 4.38
$5.01 to $10.00.................. 9,951 8.23 5,127 8.10 7.59
$10.01 to $15.00................. 10,078 12.39 6,316 12.09 6.53
$15.01 to $20.00................. 7,146 17.44 3,112 16.61 7.74
$20.01 to $25.00................. 1,625 20.95 539 21.24 8.24
$25.01 to $30.00................. 9,729 29.28 2,054 29.26 8.89
Greater than $30.00.............. 15,428 43.83 1,128 34.01 9.24
------ ------ ------ ------ ----
55,164 $24.09 19,250 $14.62 8.06
====== ====== ====== ====== ====
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 acquisition of Syntax on November 29, 2000,
DataPath on July 14, 2000 and Intraserver on May 26, 2000, the merger with SEEQ
on June 22, 1999, and the purchase of Symbios on August 6, 1998. (See Note 2 of
the Notes.) The weighted average estimated grant date fair value, as defined by
SFAS No. 123, of options granted during 2000, 1999 and 1998 was $30.86, $14.35
and $5.43 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:
2000 1999 1998
------ ----- -----
Expected life (years)...................................... 3.85 4.76 4.85
Risk-free interest rate.................................... 6.28% 5.55% 5.00%
Volatility................................................. 108.15% 60.46% 56.99%
Dividend yield............................................. -- -- --
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 2000,
1999 and 1998 were approximately 5.2 million, 4.3 million and 2.2 million shares
of common stock at an average price of $6.30, $5.20 and $6.93 per share,
respectively. During 1997, the Company's stockholders approved an amendment to
the Company's Employee Stock Purchase Plan to increase the number of shares
reserved for issuance by 1 million 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. An additional 2.5 million and 1.5 million shares were
reserved for this Plan in 2000 and 1999, respectively.
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 2000, 1999 and 1998 was $13.83, $8.30 and $2.97 per share,
respectively. The estimated grant date fair value was calculated using the
Black-Scholes model. The
78
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
2000 1999 1998
----- ----- -----
Expected life (years)....................................... 0.63 0.75 1.25
Risk-free interest rate..................................... 6.07% 4.95% 4.42%
Volatility.................................................. 98.82% 60.30% 59.06%
Dividend yield.............................................. -- -- --
Stock purchase rights. In November 1988, the Company implemented a plan to
protect stockholders' rights in the event of a proposed takeover of the Company.
The plan was amended and restated in November 1998. Under the plan, each share
of the Company's outstanding common stock carries one Preferred Share Purchase
Right. 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 proforma 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,
2000, 1999 and 1998.
2000 1999 1998
-------- ------- ---------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Pro forma net income/(loss)
Basic................................................ $140,964 $10,679 $(193,346)
Diluted.............................................. $150,055 $10,679 $(193,346)
Pro forma net income/(loss) per share
Basic................................................ $ 0.45 $ 0.04 $ (0.68)
Diluted.............................................. $ 0.43 $ 0.04 $ (0.68)
For the year ended December 31, 2000, common equivalents of approximately
6.2 million shares and interest expense of $11 million, net of taxes, associated
with the 2000 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. For the year ended December 31, 1999, common
equivalents of approximately 17.6 million shares and interest expense of $8
million, net of taxes, associated with the 1999 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
2000, 1999 and 1998 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.
79
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- INCOME TAXES
The provision for taxes consisted of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- ------- --------
(IN THOUSANDS)
CURRENT:
Federal........................................... $108,974 $17,507 $ 11,075
State............................................. 5,880 1,678 2,560
Foreign........................................... 41,162 47,535 22,075
-------- ------- --------
Total..................................... 156,016 66,720 35,710
-------- ------- --------
DEFERRED LIABILITY (BENEFIT):
Federal........................................... (7,640) (3,658) (8,396)
State............................................. (1,750) (569) (2,085)
Foreign........................................... (3,667) 2,537 (15,324)
-------- ------- --------
Total..................................... (13,057) (1,690) (25,805)
-------- ------- --------
TOTAL............................................... $142,959 $65,030 $ 9,905
======== ======= ========
The domestic and foreign components of income before income taxes and
minority interest were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Domestic.......................................... $169,449 $198,039 $ (36,857)
Foreign........................................... 210,301 26,178 (92,648)
-------- -------- ---------
Income before income taxes and minority
interest........................................ $379,750 $224,217 $(129,505)
======== ======== =========
Undistributed earnings of the Company's foreign subsidiaries aggregate
approximately $317 million at December 31, 2000, 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:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $ 15,949 $ 22,046
Tax credit carryovers..................................... 10,852 2,380
Future deductions for purchased intangible assets......... 71,175 48,240
Future deductions for reserves and other.................. 42,971 84,482
-------- --------
Total deferred tax assets......................... 140,947 157,148
Valuation allowance....................................... (19,553) (23,056)
-------- --------
Net deferred tax assets................................... 121,394 134,092
DEFERRED TAX LIABILITIES -- depreciation and amortization... (89,622) (87,879)
-------- --------
Total net deferred tax assets..................... $ 31,772 $ 46,213
-------- --------
80
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with acquisitions in the current year, the Company recorded
deferred tax assets of $2.2 million and deferred tax liabilities of $29.7
million. The deferred tax assets valuation allowance at December 31, 2000 and
1999 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.
At December 31, 2000, the Company had net operating loss carryovers of
approximately $49 million, which will expire from 2004 through 2018. These net
operating loss carryovers primarily relate to recent acquisitions and are
subject to certain limitations under IRC sec.382. The Company had tax credits of
approximately $11 million, which will expire beginning in 2004.
Differences between the Company's effective tax rate and the federal
statutory rate were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
(IN THOUSANDS)
Federal statutory rate......... $132,913 35% $ 78,476 35% $(44,886) (35)%
State taxes, net of federal
benefit...................... 2,685 1% 1,091 -- 2,049 2%
Difference between U.S. and
foreign tax rates............ (23,542) (6)% 37,091 17% 21,970 17%
Nondeductible expenses......... 73,048 20% (2,603) (1)% 6,200 5%
Foreign tax credits............ (29,542) (8)% (10,973) (5)% (420) --
Research and development tax
credit....................... (10,000) (3)% (5,000) (2)% (2) --
Benefit of deferred tax assets
not previously recognized.... (3,503) (1)% (33,826) (15)% 24,438 19%
Other.......................... 900 -- 774 -- 556 --
-------- --- -------- --- -------- ---
Effective tax rate............. $142,959 38% $ 65,030 29% $ 9,905 8%
======== === ======== === ======== ===
The Company paid $28 million, $14 million and $30 million for income taxes
in 2000, 1999 and 1998, respectively.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1993 through 1996. 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.
81
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information about profit or loss and assets. The following is a summary of
operations by segment for the years ending December 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
REVENUES:
Semiconductor.................................... $2,338,557 $1,810,111 $1,423,858
SAN Systems...................................... 399,110 279,333 93,033
---------- ---------- ----------
Total.................................... $2,737,667 $2,089,444 $1,516,891
---------- ---------- ----------
INCOME/(LOSS) FROM OPERATIONS:
Semiconductor.................................... $ 238,134 $ 172,628 $ (83,796)
SAN Systems...................................... 51,323 25,544 (44,563)
---------- ---------- ----------
Total.................................... $ 298,457 $ 198,172 $ (128,359)
---------- ---------- ----------
The SAN Systems segment was added in August 1998 with the purchase of
Symbios (see Note 2 of the Notes). 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 12% and 11% of the Company's total consolidated
revenues for each of the years ended December 31, 2000 and 1999, respectively,
and another customer represented 12% of the Company's total consolidated
revenues for the year ended December 31, 1998. No customer represented 10% or
more of the total revenue in the Semiconductor segment for the year ended
December 31, 2000. For the years ended December 31, 1999 and 1998, one customer
represented 10% and 13% of the total Semiconductor revenues, respectively. In
the SAN Systems segment, there were three customers with revenues representing
31%, 17% and 13% of total SAN Systems revenues for the year ended December 31,
2000. During 1999, there were three customers with revenues representing 29%,
27% and 14% of SAN systems revenues. 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,
2000, 1999 and 1998:
DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
TOTAL ASSETS:
Semiconductor.................................... $3,851,849 $3,051,865 $2,673,362
SAN Systems...................................... 345,638 154,740 150,443
---------- ---------- ----------
Total.................................... $4,197,487 $3,206,605 $2,823,805
========== ========== ==========
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 2000,
1999 and 1998.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
REVENUES:
United States.................................... $1,678,709 $1,209,177 $ 957,257
Japan............................................ 289,149 282,749 261,705
Europe........................................... 373,945 290,428 218,015
Pan Asia......................................... 395,864 307,090 79,914
---------- ---------- ----------
Total.................................... $2,737,667 $2,089,444 $1,516,891
========== ========== ==========
82
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
LONG-LIVED ASSETS:
United States.................................... $1,662,184 $1,521,067 $1,589,451
Japan............................................ 185,758 226,898 301,423
Europe........................................... 8,844 8,089 24,286
Pan Asia......................................... 147,574 94,387 44,966
---------- ---------- ----------
Total.................................... $2,004,360 $1,850,441 $1,960,126
========== ========== ==========
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
In March 2000, the Company entered into a master lease and security
agreement with a group of companies ("Lessor") for up to $250 million for
certain wafer fabrication equipment. Each lease supplement pursuant to the
transaction will have a lease term of three years with two consecutive 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 termination value. Through December 31, 2000, the Company had
drawn down $53 million, $59 million, $46 million and $74 million as the first,
second, third and fourth supplements, respectively, pursuant to the agreement.
Minimum rental payments under these operating leases, including option periods,
are $52.3 million in 2001, $49.6 million in 2002, $44.1 million in 2003, $37.9
million in 2004 and $21.4 million in 2005. Under this lease, the Company is
required to maintain compliance with certain financial covenants. The Company
was in compliance with these covenants as of December 31, 2000.
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 that are increased at
various times during the terms of the lease and for renewal options at the fair
market rental value.
In June 1995, the Company, through its Japanese subsidiary, entered into a
master lease agreement and a master purchase agreement with a group of leasing
companies ("Lessor") for up to 15 billion yen ($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, 2000. There were no significant gains or
losses from these leasing transactions for the year ended December 31, 2000,
1999 and 1998. The majority of the lease terms expired in 2000, the remaining
outstanding lease expires in January 2001, 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 $2.3 million 2001, which
include the terminal residual amount of $1.8 million in 2001.
Future minimum payments under other operating lease agreements are $28
million, $23 million, $18 million, $12 million, $9 million and $24 million for
the years ending December 31, 2001, 2002, 2003, 2004, 2005 and thereafter,
respectively. Rental expense under all operating leases was $64 million; $58
million and $59 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
83
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the third quarter of 1995, the shares of our Canadian subsidiary,
LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were not held by LSI
Logic or a subsidiary 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 580,000 shares) of the
previously outstanding shares of LSI Canada, 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 originally 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. Through their
new attorney these parties have challenged the jurisdiction of the Court to
adjudicate LSI Canada's petition with respect to the issue of the fair value of
the shares and have asked the Court to dismiss those legal proceedings. Until
their petition is heard and resolved by the Court, a new trial date for the
pending matter is not expected to be set. These parties also have initiated a
new action in the Court, purporting also to represent all the parties who
exercised dissent and appraisal rights, alleging that actions of LSI Logic
Corporation and certain named directors and an officer of LSI Canada were
oppressive of the rights of minority shareholders in LSI Canada, for which these
parties intend to seek damages. The individuals who are named in these
proceedings have indemnification agreements with LSI Canada. The Court has
scheduled a hearing for March 2001 at which these issues will be addressed.
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 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, 2000,
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.
84
86
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of LSI Logic Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 87 present fairly, in all material
respects, the financial position of LSI Logic Corporation and its subsidiaries
(the "Company") at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 23, 2001
85
87
SUPPLEMENTARY FINANCIAL DATA
Interim Financial Information (Unaudited)
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 2000
Revenues........................................... $615,186 $644,328 $727,578 $750,575
Gross profit....................................... 249,686 276,350 314,770 328,529
Income before cumulative effect of change in
accounting principle............................. 86,243 70,576 18,096 61,685
Cumulative effect of change in accounting
principle........................................ -- -- -- --
Net income......................................... 86,243 70,576 18,096 61,685
Basic earnings per share:
Income before cumulative effect of change in
accounting principle.......................... $ 0.28 $ 0.23 $ 0.06 $ 0.19
Cumulative effect of change in accounting
principle..................................... -- -- -- --
Net income....................................... $ 0.28 $ 0.23 $ 0.06 $ 0.19
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle.......................... $ 0.25 $ 0.21 $ 0.06 $ 0.18
Cumulative effect of change in accounting
principle..................................... -- -- -- --
Net income....................................... $ 0.25 $ 0.21 $ 0.06 $ 0.18
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
During the second, third and fourth quarters of 2000, the Company recorded
in-process research and development ("IPR&D") charge of $16 million, $54 million
and $7 million, respectively, in connection with the purchases of divisions of
NeoMagic and Cacheware and acquisitions of Intraserver, DataPath and ParaVoice.
(See Note 2 of the Notes to the Consolidated Financial Statements.) During the
third and fourth quarters of 2000, the Company recorded amortization of non-cash
deferred stock compensation of $19 million and $22 million, respectively, as a
result of the adoption of FASB interpretation ("FIN") No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (See Note 2 of the Notes to
the Consolidated Financial Statements). During the first quarter of 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 to the Consolidated Financial Statements.)
86
88
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
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 2, 2001, and certain of
the information to be included therein is incorporated by reference herein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's executive officers required by this
Item is incorporated by reference to the section entitled "Executive Officers of
the Registrant" in Part I of this Form 10-K. The information concerning Section
16(a) reporting is incorporated by reference to "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"Executive Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"Security Ownership" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's 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 contained in
this Form 10-K:
PAGE IN THE
FORM 10-K
-----------
Consolidated Balance Sheets -- As of December 31, 1999 and
2000...................................................... 47
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 2000, 1999 and 1998.................... 48
Consolidated Statements of Stockholders' Equity -- For the
Three Years Ended December 31, 2000, 1999 and 1998........ 49
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 2000, 1999 and 1998.................... 50
Notes to Consolidated Financial Statements.................. 51 - 84
Report of Independent Accountants........................... 85
Effective beginning 1990, we changed our fiscal year end from December 31
to the 52- or 53-week period that 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
87
89
schedules for fiscal years 1990 through 1996 refer to December 31 as the
year-end. Fiscal year 1997 was a 53-week year, fiscal years 1998, 1999 and 2000
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.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 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.
2.2 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.
2.3 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.
2.4 Agreement and Plan of Reorganization dated May 20, 2000 by
and among Registrant, Diamond Acquisition Corporation,
DataPath Systems, Inc., and certain individuals named
therein. Incorporated by reference to exhibits filed with
Registrant's Form 8-K filed May 24, 2000.
3.1 Restated Certificate of Incorporation of Registrant.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8 (No.
333-46436) filed September 22, 2000.
3.2 Amended and Restated 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, 2000.
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.
4.4 See Exhibit 3.1.
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 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.*
10.4 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.*
88
90
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.5 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.
10.6 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.
10.7 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.*
10.8 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.*
10.9 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.*
10.10 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.*
10.11 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.
10.12 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.
10.13 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.*
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 Amended and Restated Participation Agreement by and among
Registrant, and ABN AMRO Bank N.V., ABN AMRO Bank N.V. as
agent for Lessors and Participants dated April 18, 2000.
Incorporated by reference to exhibits with Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 2,
2000.
10.19 Second Amended and Restated Credit Agreement dated as of
April 21, 2000, by and among Registrant, LSI Logic Japan
Semiconductor, 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, 2000.
10.20 IntraServer Technology, Inc. 1998 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-38746) filed on June 7, 2000.
10.21 DataPath Systems, Inc. Amended 1994 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-42888) filed on August 2,
2000.
89
91
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.22 DataPath Systems, Inc. Amended and Restated 1997 Stock
Option Plan. Incorporated by reference to exhibits filed
with Registrant's Form S-8 (No. 333-42888) filed on August
2, 2000.
10.23 Syntax Systems, Inc. Restated Stock Option Plan of January
5, 1999. Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-52050) filed on December 18,
2000.
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 91)
- ---------------
* Denotes management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
During the fourth quarter ended December 31, 2000, we filed the following
Current Reports on Form 8-K:
On October 25, 2000, pursuant to Item 5 to report information set forth in
the Registrant's press release dated October 24, 2000.
On December 12, 2000, pursuant to Item 5 to report information set forth in
the Registrant's press release dated December 5, 2000.
(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, Gflx, 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.
90
92
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 8, 2001
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilfred J. Corrigan and David G. Pursel, 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILFRED J. CORRIGAN Chairman of the Board and Chief March 8, 2001
- ----------------------------------------------------- Executive Officer (Principal
(Wilfred J. Corrigan) Executive Officer)
/s/ BRYON LOOK Executive Vice President and March 8, 2001
- ----------------------------------------------------- Chief Financial Officer
(Bryon Look) (Principal Financial Officer and
Accounting Officer)
/s/ T.Z. CHU Director March 8, 2001
- -----------------------------------------------------
(T.Z. Chu)
/s/ MALCOLM R. CURRIE Director March 8, 2001
- -----------------------------------------------------
(Malcolm R. Currie)
/s/ JAMES H. KEYES Director March 8, 2001
- -----------------------------------------------------
(James H. Keyes)
/s/ R. DOUGLAS NORBY Director March 8, 2001
- -----------------------------------------------------
R. Douglas Norby
/s/ MATTHEW O'ROURKE Director March 8, 2001
- -----------------------------------------------------
(Matthew O'Rourke)
/s/ LARRY W. SONSINI Director March 8, 2001
- -----------------------------------------------------
(Larry W. Sonsini)
91
93
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 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.
2.2 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.
2.3 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.
2.4 Agreement and Plan of Reorganization dated May 20, 2000 by
and among Registrant, Diamond Acquisition Corporation,
DataPath Systems,Inc., and certain individuals named
therein. Incorporated by reference to exhibits filed with
Registrant's Form 8-K filed May 24, 2000.
3.1 Restated Certificate of Incorporation of Registrant.
Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8 (No.
333-46436) filed September 22, 2000.
3.2 Amended and Restated 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, 2000.
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.
4.4 See Exhibit 3.1.
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 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.*
10.4 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.*
10.5 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.
92
94
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.6 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.
10.7 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.*
10.8 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.*
10.9 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.*
10.10 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.*
10.11 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.
10.12 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.
10.13 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.*
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 Amended and Restated Participation Agreement by and among
Registrant, and ABN AMRO Bank N.V., ABN AMRO Bank N.V. as
agent for Lessors and Participants dated April 18, 2000.
Incorporated by reference to exhibits with Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 2,
2000.
10.19 Second Amended and Restated Credit Agreement dated as of
April 21, 2000, by and among Registrant, LSI Logic Japan
Semiconductor, 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, 2000.
10.20 IntraServer Technology, Inc. 1998 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-38746) filed on June 7, 2000.
10.21 DataPath Systems, Inc. Amended 1994 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-42888) filed on August 2,
2000.
93
95
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.22 DataPath Systems, Inc. Amended and Restated 1997 Stock
Option Plan. Incorporated by reference to exhibits filed
with Registrant's Form S-8 (No. 333-42888) filed on August
2, 2000.
10.23 Syntax Systems, Inc. Restated Stock Option Plan of January
5, 1999. Incorporated by reference to exhibits filed with
Registrant's Form S-8 (No. 333-52050) filed on December 18,
2000.
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 91)
- ---------------
* Denotes management contract or compensatory plan or arrangement
94