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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 JANUARY 1, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-11674
LSI LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF (I.R.S. 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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 requirement for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on February 2,
1995 as reported on the New York Stock Exchange, was approximately
$2,188,655,275. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 2, 1995, registrant had 57,183,177 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for registrant's 1995 Annual Meeting of
Stockholders is incorporated by reference into Part III of this Form 10-K
Report.
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PART I
ITEM 1. BUSINESS
GENERAL
LSI Logic Corporation (the "Company") is a leader in the design,
development, manufacture and marketing of high performance application-specific
integrated circuits ("ASICs"). The Company uses advanced process technology and
design methodology to design and develop highly complex ASICs and other
integrated circuits. The Company's sub-micron process technologies combined with
its product libraries, including CoreWare libraries, provide the Company with
the ability to integrate system level solutions on a single chip.
The Company focuses its product marketing strategy primarily on original
equipment manufacturers in the electronic data processing, telecommunications
and certain office automation industries and, within these industries,
emphasizes digital video, networking, desktop and personal computing and
wireless communication applications. The Company increasingly directs its
marketing and selling efforts towards a limited number of customers that are
acknowledged industry leaders in these markets.
The Company has developed and uses advanced manufacturing process
technologies, including 0.6-micron and 0.5-micron complementary metal oxide
semiconductor ("CMOS") processes, for the Company's advanced product offerings.
As process technology becomes more sophisticated, allowing greater density and
increased functionality on a single chip, the system-on-a-chip is becoming the
foundation of the Company's approach to the marketplace. The Company's CoreWare
methodology and sub-micron process technologies permit customers to combine
microprocessor "engines", logic blocks (including industry standard functions,
protocols and interfaces) and memory with a customer's proprietary logic on a
single chip. This allows the customer to differentiate its product and optimize
its application.
The Company was incorporated in California on November 6, 1980 and
reincorporated in Delaware on June 11, 1987. Its principal offices are located
at 1551 McCarthy Boulevard, Milpitas, California 95035, and its telephone number
at that location is (408) 433-8000. Except where otherwise indicated, references
to the "Company" means LSI Logic Corporation and its majority- and wholly-owned
subsidiaries.
BUSINESS STRATEGY
The Company's objective is to design and manufacture highly integrated,
complex semiconductor devices that provide its customers with system-level
solutions on silicon thereby allowing customers to get to market rapidly with
differentiated systems and products. To achieve this objective, the Company has
implemented a business strategy incorporating the following key elements:
- Target Growth Markets and Selected Customers. The Company has
increasingly directed its marketing and selling efforts toward selected
customers in certain growth markets. The Company targets high growth end
markets which are characterized by increasingly shortened product cycles
and ongoing changes in technological standards and performance
requirements. As a result, customers in these markets tend to benefit
from the flexibility of the Company's customized ASIC design methodology
to help differentiate their products while still complying with existing
and emerging global industry standards such as Ethernet and ATM
(Asynchronous Transfer Mode) in the networking market, PCI bus interface
in the personal computer market and MPEG2 (Motion Picture Experts Group)
for video compression applications in the digital video market.
- Emphasize CoreWare Methodology. The Company's CoreWare product library
approach and its sub-micron process technologies permit system-level
integration of microprocessors, logic blocks (including industry standard
functions, protocols and interfaces), memory and customer specific
proprietary logic functions on a single piece of silicon. This
methodology enables customers to improve the performance and reliability
of their products and differentiate their products while shortening
product development cycles and lowering development costs.
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- Promote Highly Integrated Design and Manufacturing Technology. The
Company's proprietary computer-aided design tools are highly integrated
with the Company's manufacturing process requirements, thereby providing
high predictability that the product's physical performance will mirror
the computer simulation of the chip and affording high predictability of
performance of products developed using the Company's design methodology.
The Company's sophisticated design tools, advanced process technology and
sub-micron manufacturing capability are intended to provide customers
highly integrated solutions that work right the first time.
- Flexibility in Design Engineering. The Company provides customers with a
comprehensive approach and a continuum of solutions for the design and
manufacture of ASICs. This allows customers substantial flexibility in
how they proceed with an ASIC design project. A customer may establish
product specifications for implementation into a particular chip design
by the customer's engineers, by the Company's engineers on a "turn-key"
basis or through a collaborative effort. The Company's design environment
includes expanded interface capabilities to certain third party EDA
software design tools from companies such as Cadence Design Systems,
Inc., Mentor Graphics Corporation and Synopsys, Inc.
- Maintain High-Quality and Cost-Effective Manufacturing. The Company
believes that owning its wafer manufacturing facilities not only provides
access to capacity but also improves quality, cost-effectiveness,
responsiveness to customers, ability to implement leading-edge process
technology and improve time-to-market as compared to companies that do
not own their own wafer fabrication facilities. The Company's
manufacturing operations are located in the United States, Japan and Hong
Kong. The Company performs substantially all of its packaging, assembly
and final test operations through third party subcontractors in various
locations. During 1994, the Company's United States production operations
received ISO-9002 certification, an important international measure for
quality.
- Offer Worldwide Services. The Company markets its products and services
on a worldwide basis through its direct sales, marketing and field
technical staff of approximately 750 employees (including its
subsidiaries in Europe, Canada and Japan), and through independent sales
representatives and distributors. The Company operates over 25 design
centers around the world to assist customers in product design
activities. The Company's network of design centers allows the Company to
provide its 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.
PRODUCTS AND SERVICES
Engineering
The Company has developed and offers to customers a wide variety of
engineering design services. The Company's engineering design service approach
allows the customers to determine the level of participation which the customers
will have in the design process. The Company may provide complete "turn-key"
engineering support for design projects where the customer provides high-level
functional objectives. This type of engineering support is well suited for a
customer's system-level design project in which the Company is engaged to
utilize one or more of its CoreWare library elements for delivering a system on
a single chip. However, the customer may also perform substantial design
activity on its own using either the Company's C-MDE design tools or any of a
variety of third party EDA vendor's design tools. Access to the Company's C-MDE
design tools is available at each of the Company's design centers and for
installation at a customer's site pursuant to a licensing agreement with the
Company. See "Properties." In addition, customers' designs that have originated
through the use of certain third party EDA vendors' design tools are
transferrable into the Company's ASIC design environment for manufacture of ASIC
devices by the Company.
The Company makes available various library elements, including
semiconductor macrocells (the basic silicon structures used in the design of
logic circuits and the larger predefined functional building blocks "megacells"
and "megafunctions"), technology data bases and design automation software
programs. The
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most complex of the Company's library elements are called cores which are
comprised of predefined and pretested cells of industry standard functions,
protocols and interfaces.
The ultimate output of the Company's integrated circuit design system is a
pattern generation tape from which the semiconductor "masks" or production
tooling is made. The system also produces a test tape which is readable by
standard industry semiconductor testing equipment. The Company's software design
tools support and automatically perform key elements of the design process from
circuit concept through physical layout of the circuit design and preparation of
pattern generation tapes.
After completion of the engineering design effort, the Company produces and
tests prototype circuits for shipment to the customer. Thereafter, the Company
will commence 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. The Company generally does not
have long-term volume production contracts with its customers. Whether any
specific ASIC design will result in volume production orders and the quantities
included in any such orders are factors beyond the control of the Company.
Insufficient orders will result in underutilization of the Company's
manufacturing facilities which would adversely impact the Company's operating
results.
Components
The Company makes available product solutions based upon metal programmable
array, cell-based and Embedded Array product architectures. The Company
emphasizes its CoreWare product library approach which permits customers to
improve the performance and reliability of their products. The Company also
offers products implementing the customer's own proprietary logic. The Company
offers a wide variety of die sizes and functionality configurations which are
available in different feature sizes and are based on different process
technologies.
A metal programmable array, also known as a gate array, is a matrix of
uncommitted transistors contained on a single chip. The gate array is
"programmed" (i.e., customized) only in the last steps of the fabrication
process. This enables the manufacturer to produce large quantities of
uncommitted gate arrays, known as "base arrays," and to benefit from the
economies of volume chip production. These basic silicon substrates are designed
and manufactured in a fashion similar to standard integrated circuits. The
individual elements are interconnected at the metallization step in the
manufacturing process to implement user defined functions. Gate arrays, when
compared to many standard logic circuits, provide the system manufacturer with
lower cost, higher reliability, lower power consumption, increased performance
and smaller end products.
The Company emphasizes its proprietary Channel-Free gate array architecture
for gate array designs. The Company's gate array products offer high levels of
design complexity. Base arrays for the Company's different gate arrays are mass
produced in a variety of die sizes and are held in inventory by the Company for
customization at a later time. During customization, the array is programmed
quickly by the interconnection of its logic elements into the circuit specified
by the customer.
The Company's cell-based technology allows the customer to combine standard
cells, memories such as fully static random access memory (RAM), static
multi-port RAM, metal programmable read only memory (ROM) and other dedicated
very large scale integration (VLSI) building blocks called megacells on a single
chip. Through combinations of these various cell-based structures, the Company
can provide the customer with customized solutions to a wide variety of digital
design problems.
In addition, the Company offers its customers the opportunity to create
proprietary base wafers by utilizing a combination of the Company's standard
cell technology with metal programmable Channel-Free gate array technology. This
Embedded Array product option can provide the customer with both high
performance and density features normally associated with cell-based technology
and with fast turnaround times resembling those available only for gate
array-based designs.
During 1994, the Company continued expanding its ASIC product lines and its
CoreWare product library elements. CoreWare library elements are complex VLSI or
large system-level pre-designed building blocks of
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integrated circuit logic functions. CoreWare elements may be either developed by
the Company or acquired under technology transfer or licensing agreements
between the Company and other developers. In addition, CoreWare elements are
highly integrated for use with the Company's proprietary software design tools
and those advanced manufacturing processes to which individual cores are
targeted.
The Company intends the CoreWare libraries it offers to be based upon
industry standard functions, protocols and interfaces, thereby positioning them
to be useful in a wide variety of systems applications. The additional
capability afforded by the Company's CoreWare product libraries allows customers
to increase functional integration, including system-level applications on a
single chip. The Company's CoreWare product libraries are designed to be used
with the customer's proprietary logic in gate array, cell-based or Embedded
Array product designs based upon the Company's design methodology. Expansion of
the Company's CoreWare library elements continued during 1994 and is expected to
continue into the foreseeable future.
The Company is increasingly emphasizing engineering development and
acquisition of CoreWare libraries and integration of CoreWare libraries into its
ASIC design capabilities in the Company's transition from manufacturing products
substantially based on the customer's proprietary logic design to emphasizing
ASIC opportunities that utilize the Company's CoreWare product libraries. There
can be no assurance, however, that the cores selected for investment of the
Company's financial and engineering resources will enjoy market acceptance or
that such cores can be successfully integrated into the Company's ASIC design
environment on a timely basis. See "Marketing and Customers."
Generally, new standard products developed by the Company are
implementations of emerging industry standard functions that the Company is
targeting for inclusion in its CoreWare library as well. The Company offers a
family of high-speed digital signal and image processing devices that perform a
wide variety of common digital signal processing operations. In 1994, the
Company introduced both a single chip MPEG2 audio/video decoder as a standard
product. To address the telecommunications market, the Company also approved in
1994 a portfolio of ATM-compliant application specific devices derived from the
Company's ATMizer architecture. The Company also recently announced its HYDRA-XS
four-chip solution as a 50MHz upgrade of its HYDRA product offering designed for
Pentium processor-based symmetric multiprocessing systems.
MANUFACTURING
The Company's manufacturing operations convert a customer's design into
packaged silicon chips and support customer volume production requirements.
Manufacturing begins with fabrication of uncommitted wafers (for gate array
ASICs) or custom diffused wafers (for cell-based ASICs). Although base layers
for cell-based designs are themselves customized, gate array wafers are not and
therefore may be inventoried by the Company pending customization accomplished
in the metallization stage of fabrication. In the next stage of manufacture,
metallization, layers of metal interconnects are diffused onto the wafer using
customized masks. Wafers are then tested, cut into die and sorted. The die that
have passed initial test are then assembled (embedded in and connected to one of
a wide variety of packages) and encapsulated. The finished devices then undergo
additional tests before shipment.
Currently, the Company's manufacturing facilities are located in the United
States, Japan and the Far East. Management and control of manufacturing
operations is performed by the Company's Hong Kong affiliate. Substantially all
of the Company's wafers are manufactured at its two wafer fabrication facilities
in Japan. In the first quarter of 1995, the Company became the sole owner of
those Japanese facilities, through the purchase of the former co-owner's
minority interest. Final assembly and test operations are conducted by the
Company's Hong Kong affiliate through independent subcontractors, and through
the Company's Fremont, California facility. In July 1997, Hong Kong will come
under the complete control of the Chinese government. There can be no assurance
that the Company and its affiliates will not experience a disruption in the flow
of products as a result of a reversion of control of Hong Kong to China, which
would cause a material adverse impact on the Company's operating results. In
addition to the possible reversion of Hong Kong to Chinese control, any
political or economic disruptions in the countries where the subcontractors are
located, could result in a material adverse impact on the Company's operating
results.
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The Company utilizes various high performance CMOS process technologies in
the volume manufacture of its products. The Company's newest facility in Japan
utilizes advanced process technologies in conjunction with computer integrated
manufacturing to produce both 0.6-micron products containing up to 600,000 gates
(or up to 2.4 million transistors on a single chip) and 0.5-micron products
containing up to 1.5 million gates (or up to 9 million transistors on a single
chip) and offers customers a high-volume, reliable source for manufacturing.
This 50,000 square foot facility has a highly automated production line,
providing greater productivity and product quality. Decisions such as
prioritization of specific customer requirements or maximizing machine
efficiencies can be made rapidly with the aid of computer integrated
manufacturing. The equipment installed at this facility accommodates both
current and expected future process requirements and automation standards. When
fully utilized, the new facility will double the Company's manufacturing
capacity provided by its other facilities.
Disruption of operations at any of the Company's primary manufacturing
facilities, particularly the Company's Japanese facilities, or any of its
subcontractors for any reason, including work stoppages, fire, earthquake or
other natural disasters, would cause delays in shipments of the Company's
products. There can be no assurance that alternate capacity, particularly wafer
production capacity, would be available on a timely basis or at all, or that if
available, they could be obtained on favorable terms. The Company has been
operating most of its manufacturing facilities at or close to capacity during
the last year. Although the Company currently has plans to increase its
production capacity through the installation of new production equipment at its
Japanese manufacturing facilities and its other facilities and is evaluating
other ways to increase capacity, there is no assurance that the Company will be
able to expand its manufacturing capacity to meet expected future demand, which
could result in a loss of customers and could materially and adversely affect
the Company's operating results. In addition, if demand for the Company's
products does not absorb the additional capacity, the increase in fixed costs
and operating expenses related to increases in production capacity may
materially and adversely affect the Company's operations. The Company has in the
past and will in the future, consider developing foundry relationships with
certain other semiconductor manufacturers whereby the Company may purchase
quantities of wafers (both unmetallized and metallized) that are manufactured to
the Company's specifications.
The semiconductor industry is capital intensive. In order to remain
competitive, the Company must continue to make significant investments in new
facilities and capital equipment. In the last four years, the Company has
expended approximately $490 million for property and equipment. The Company
expects to spend approximately $150 million for capital expenditures during 1995
and significant amounts in subsequent periods on facilities and capital
equipment. There can be no assurance that the Company will have the resources
available when needed to meet these requirements. The Company may be required to
seek additional equity or debt financing to fund further expansion of its
fabrication capacity or for other purposes. There can be no assurance that such
additional financing will be available when needed or, if available, will be on
satisfactory terms. In addition, these significant capital expenditures result
in a relatively high level of fixed costs. Accordingly, fluctuations in revenues
may significantly affect profitability.
In the assembly process, the fabricated circuit is encapsulated into
ceramic or plastic packages. The Company has developed a network of offshore
third-party assembly and final test subcontractors for plastic packaging.
Plastic packaging is normally associated with lower cost, commercially oriented
products. The Company has benefitted from the cost savings associated with these
third-party subcontractors. The Company performs ceramic package assembly for
its products at its Fremont, California facility. Ceramic packaging is primarily
utilized in applications involving the need to protect the circuit against a
potentially harsh operating environment, such as in military applications. The
Fremont assembly line has been specially equipped to support both the packaging
needs of military as well as selected commercial applications. The proportion of
ceramic packaging being done by independent assembly plants continues to
increase and the Company has begun ceramic packaging offshore.
Testing includes final test and final quality assurance acceptance.
Dedicated computer systems are used in this comprehensive testing sequence. The
test programs utilize the basic functional test criteria from the design
simulation which was generated and approved by the customers' design engineers.
Most product testing
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operations are currently conducted in close proximity to the particular facility
where assembly activities are performed. The Company intends to continue
increasing its use of independent assembly plants to test its products.
Certain of the raw materials used in the manufacture of circuits are
available from a limited number of suppliers in the United States and elsewhere.
For example, for several types of the integrated circuit packages that are
purchased by the Company, as well as by the majority of other companies in the
semiconductor industry, the Company must rely on one vendor for the majority of
its supply. The Company has in the past experienced, and anticipates that it may
in the future experience, difficulty in obtaining the most advanced plastic or
ceramic packaging for integrated circuits, which can cause shipment delays. The
Company does not have long-term fixed supply contracts with its suppliers.
Shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. If the Company were unable to
procure certain of such materials from any source, it would be required to
reduce its manufacturing operations. To date, the Company has experienced no
significant difficulty in obtaining the necessary raw materials. The Company's
operations depend upon a continuing adequate supply of electricity, natural gas
and water.
The semiconductor industry historically has been characterized by wide
fluctuations in product supply and demand. From time to time the industry also
has experienced significant downturns, often in connection with, or in
anticipation of maturing product cycles (of both the semiconductor companies and
their customers) and declines in general economic conditions. These downturns
have been characterized by diminished product demand, production overcapacity
and subsequent accelerated erosion of average selling prices, and in some cases,
have lasted for more than a year. For example, the Company believes that its
operating results were adversely affected by an industry-wide downturn in the
demand for semiconductors beginning in 1990, culminating in the Company's 1992
restructuring charge and reorganization of its operations. Currently, the
semiconductor industry in general, including the Company, is experiencing a
period of increased demand. There is no assurance that current levels of demand
for semiconductor products will continue. The Company may experience substantial
period-to-period fluctuations in future operating results due to general
industry conditions or events occurring in the general economy and the Company's
business could be materially and adversely affected by a significant
industry-wide downturn in the future.
Over the past five years, the Company has restructured its worldwide
manufacturing operations. This process has included, among other things, the
closing of older process technology operations in Germany, the United Kingdom
and Canada, the consolidation of certain manufacturing to facilities in the
United States and Japan, and the transfer of certain packaging, assembly and
final test operations to subcontractors in various locations. The Company
continues to evaluate its worldwide manufacturing operations to effect
additional cost-savings and technological improvements.
To remain competitive, the Company must develop and implement new process
technologies in order to reduce semiconductor die size, increase device
performance and improve manufacturing yields, to adapt products and processes to
technological changes and adopt emerging industry standards. If the Company is
not able to successfully implement new process technologies and to achieve
volume production of new products at acceptable yields using new manufacturing
processes, the Company's operating results will be adversely affected.
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. Similarly, procurement of certain
types of materials required by the Company's manufacturing technologies are
closely linked with certain equipment selections. When the Company implements
specific technology choices, it may become dependent upon certain sole- or
single- source vendors. Accordingly, the Company's capability to switch to other
technologies and vendors may be substantially restricted and may involve
significant expense and delay in the Company's technology advancements and
manufacturing capabilities. The semiconductor equipment and materials industries
also include a number of vendors that are relatively small and have limited
resources. Several of these vendors provide equipment and or services to the
Company. The Company does not have long-term supply or service agreements with
vendors of certain critical items. Additionally, there can be no assurance
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that disruptions in these vendors' ability to perform will not occur. Should the
Company experience such disruptions, the Company's operations could be adversely
affected.
In countries in which the Company is conducting business in local currency,
currency exchange fluctuations could adversely affect the Company's revenues and
costs. A substantial portion of the costs of the Company's manufacturing
operations are denominated in Japanese yen. In addition, the Company purchases a
substantial portion of its raw materials and equipment from foreign suppliers
and incurs labor costs in foreign locations. A portion of these transactions are
denominated in currencies other than in U.S. dollars, principally in Japanese
yen. International sales are generally denominated in local currencies. The
Company also has borrowings denominated in yen, which totaled approximately 14
billion yen (approximately $142 million) at December 31, 1994. Such transactions
and borrowings expose the Company to exchange rate fluctuations for the period
of time from inception of the transaction until it is settled. In recent years,
the yen has fluctuated substantially against the U.S. dollar. The Company has
entered and will from time to time enter into hedging transaction in order to
minimize exposure to currency rate fluctuations. There can be no assurance that
such hedging transactions will minimize exposure to currency rate fluctuations
or that fluctuations in the currency exchange rates in the future will not have
an adverse impact on the Company's results of operations. In addition, there can
be no assurance that inflation rates in countries where the Company conducts
operations will not adversely affect the Company's operating results in the
future.
Both manufacturing and sales of the Company's products may be affected
adversely 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 affect adversely the Company's ability to manufacture or sell in
foreign markets.
MARKETING AND CUSTOMERS
The Company has focused its marketing efforts primarily on the electronic
data processing, telecommunications and certain office automation industries
and, within these industries emphasizes digital video, networking, desktop and
personal computing and wireless communication applications.
The Company has increasingly directed its marketing and selling efforts
towards selected customers that are acknowledged industry leaders in these
markets. The Company's strategy is to leverage its systems-level ASIC strength
to shift its emphasis from the small design "glue logic" type of account to the
type of account where the Company can bring greater intellectual property to the
relationship. The Company, however, expects that this strategy will result in
the Company becoming increasingly dependent on a limited number of customers for
a substantial portion of its revenues. For example, during 1994, 58% of the
Company's revenues were generated from sales to its top ten customers.
The Company markets its products and services through its worldwide direct
sales and marketing organization which consists of approximately 750 employees
(including subsidiaries), and through independent sales representatives and
distributors. All of the Company's design centers also include a direct sales
office. See "Properties." For information concerning foreign operations, see
Note 9 of Notes to Consolidated Financial Statements. International sales are
generally denominated in local currencies. International sales are subject to
risks common to export activities, including governmental regulations, trade
barriers, tariff increases and currency fluctuations. To date, the Company has
not experienced any material difficulties because of these risks.
In 1994, 1993 and 1992 Sun Microsystems, Inc. accounted for approximately
14%, 12%, and 15%, respectively, of the Company's revenues. In 1994, Intel
Corporation accounted for approximately 11% of the Company's revenues.
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BACKLOG
Generally, the Company's customers are not subject to long-term contracts,
but to purchase orders which are accepted by the Company. Quantities of the
Company's products to be delivered and delivery schedules under purchase orders
outstanding from time to time are frequently revised to reflect changes in
customer needs. In addition, the timing of the performance of design services
included in the Company's backlog at any particular time is generally within the
control of the customer, not the Company. For these reasons, the Company's
backlog as of any particular date is not a meaningful indicator of future sales.
COMPETITION
The Company's competitors include many large domestic and foreign companies
which have substantially greater financial, technical and management resources
than the Company, as well as emerging companies attempting to sell products to
specialized markets such as those addressed by the Company. Several major
diversified electronics companies, including Fujitsu, Ltd., Toshiba Corporation,
NEC Corporation and a number of United States semiconductor manufacturers,
including AT&T, Motorola Inc. and Texas Instruments Incorporated, offer ASIC
products and/or offer products which are competitive to the product lines of the
Company. In addition, there is no assurance that certain large customers, some
of whom the Company has licensed to use elements of its process and product
technologies, will not develop internal design and production operations to
produce their own ASICs.
The principal factors on which competition in the ASIC market is based
include design capabilities (including both the software design tool features,
compatibility with industry standard design tools, CoreWare library and the
skills of the design team), quality, delivery time and price. The Company
believes that it presently competes favorably with respect to these factors, and
that its success will depend on its continued ability to provide its customers
with a complete range of design services, products and manufacturing
capabilities. There can be no assurance, however, that other custom logic design
approaches will not be developed which could have an adverse impact on the
Company's business and results of operations.
The Company is increasingly emphasizing its CoreWare product offerings and
methodology. The Company believes that this strategy presents a new business
opportunity for which the Company believes it has a present competitive
advantage. Although there may be other companies that offer similar types of
products, the Company currently offers different capabilities than those
companies. As the market for the CoreWare approach grows, the Company expects
alternative solutions to be offered by its competitors and that competition will
intensify. There can be no assurance that the Company's CoreWare product
approach will receive market acceptance, that a competitor's product will not
achieve greater acceptance or that as competition intensifies, the Company's
future operating results will not be adversely impacted. Important competitive
factors will include the content, quantity and quality of CoreWare library
elements available, the quality of process technology, the ability of a company
to offer its customers systems-level expertise and the ability of a customer to
customize and differentiate its product. There can be no assurance that the
Company will be able to compete favorably in these areas.
RESEARCH AND DEVELOPMENT
The semiconductor industry is characterized by rapid changes in both
product and process technologies. Because of continual improvements in these
technologies, the Company believes that its future success will depend, in part,
upon its ability to continue to improve its product and process technologies and
to develop new technologies in a cost effective manner in order to maintain the
performance advantages of its products and processes relative to competitors, to
adapt products and processes to technological changes and to adopt emerging
industry standards. If the Company is not able to successfully implement these
new process technologies and to achieve volume production of new products at
acceptable yields using new manufacturing processes, the Company's operating
results will be adversely affected.
The Company's research and development emphasizes the development of new
advanced products, improvements in process technologies, enhancements of design
automation software capabilities, and cost reduction of existing products.
During 1994, 1993 and 1992, the Company expended $98,978,000, $78,995,000
8
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and $78,825,000, respectively, on its research and development activities. The
Company expects to continue to make significant investments in research and
development activities and believes such investments are critical to its ability
to continue to compete with other ASIC manufacturers. See "Management's
Discussion and Analysis."
PATENTS, TRADEMARKS AND LICENSES
The Company owns various United States and international patents and has
additional patent applications pending relating to certain of its products and
technologies. The Company also maintains trademarks on certain of its products
and services. Although the Company believes that patent and trademark protection
have value, the rapidly changing technology in the semiconductor industry makes
the Company's future success dependent primarily upon the technical competence
and creative skills of its personnel rather than on patent and trademark
protection.
As is typical in the semiconductor industry, the Company has from time to
time received, and may in the future receive, communications from other parties
asserting patent rights, mask work rights, copyrights or trademark rights that
such other parties allege cover certain of the Company's products, processes,
technologies or information. Several such assertions relating to patents are in
various stages of evaluation. The Company is considering whether to seek
licenses with respect to certain of these claims. Litigation has arisen with
respect to one of these assertions. Based on industry practice, the Company
believes that licenses or other rights, if necessary, could be obtained on
commercially reasonable terms. Nevertheless, no assurance can be given that
licenses can be obtained, or if obtained will be on acceptable terms or that
litigation or other administrative proceedings will not occur. The inability to
obtain licenses or other rights or to obtain such licenses or rights on
favorable terms or litigation arising out of such other parties' assertions,
could have a material adverse effect on the Company's future operating results.
See "Legal Proceedings."
The Company has also entered into certain license agreements which
generally provide for the non-exclusive licensing of design and product
manufacturing rights and for cross-licensing of future improvements developed by
either party.
ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various environmental controls
on the use and discharge of certain chemicals and gases used in semiconductor
processing. The Company's facilities have been designed to comply with these
regulations and the Company believes that its activities conform to present
environmental regulations. Increasing public attention has, however, been
focused on the environmental impact of electronics and semiconductor
manufacturing operations. While the Company to date has not experienced any
materially adverse effects on its business from environmental regulations, there
can be no assurance that such regulations will not be amended so as to impose
expensive obligations on the Company. In addition, violations of environmental
regulations or unpermitted discharges of hazardous substances could result in
the necessity for additional capital improvements to comply with such
regulations or to restrict discharges, liability to Company employees and/or
third parties, and business interruptions as a consequence of permit suspensions
or revocations or as a consequence of the granting of injunctions requested by
governmental agencies or private parties.
EMPLOYEES
At January 1, 1995, the Company and its subsidiaries had approximately
3,750 employees, including approximately 750 in field marketing and sales,
approximately 445 in product marketing and support, approximately 625 in
engineering and research and development activities, approximately 1,430 in
manufacturing and approximately 260 in executive and administrative activities.
The Company's future success depends in large part on the continued service
of its key technical and management personnel and on its 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. The competition for
such personnel is intense, and the loss of key
9
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employees could have a material adverse effect on the Company. The Company has
never had a work stoppage, slow-down or strike and no United States employees
are represented by a labor organization. The Company considers its employee
relations to be good.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning the Company's
principal facilities.
Principal Locations
NO. OF LEASED/ TOTAL
BUILDINGS LOCATION OWNED SQ. FT. USE
- - --------- ---------------- ------ -------- -------------------------------------------
7 Milpitas, CA Leased 485,760 Corporate Offices, Administration,
Engineering, Manufacturing
1 Fremont, CA Leased 74,000 Manufacturing
1 Fremont, CA Owned 65,000 Manufacturing
2 Santa Clara, CA Leased 83,290 Research and Development
1 Fremont, CA Leased 39,246 Shipping and Receiving
1 Bracknell, Leased 18,000 Executive Offices, Design Center Sales
United Kingdom
1 Tokyo, Japan Leased 24,263 Executive Offices, Design Center Sales
2 Tsukuba, Japan Owned 221,000 Executive Offices, Manufacturing
1 Calgary, Canada Leased 15,000 Executive Offices, Design Center Sales
1 Tsuen Wan, Hong Owned 26,000 Manufacturing, Assembly & Test
Kong
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The Company maintains leased regional office space for its field sales
offices at the locations described below, some of which also contain design
centers as indicated. In addition, the Company maintains design centers at
various distributor locations.
Regional Offices
U.S. LOCATIONS: NON-U.S. LOCATIONS:
---------------------------------- ----------------------------------
*Encino, CA *Burnaby, British Columbia, Canada
Grass Valley, CA *Etobicoke, Ontario, Canada
*Irvine, CA *Kanata, Ontario, Canada
Mountain View, CA *Montreal, Quebec, Canada
San Diego, CA *Paris, France
Boca Raton, FL Berlin, Germany
*Melbourne, FL *Munich, Germany
Atlanta, GA *Stuttgart, Germany
*Schaumburg, IL *Ramat Hasharon, Israel
*Waltham, MA *Milan, Italy
*Bethesda, MD *Osaka, Japan
*Minneapolis, MN *Seoul, Korea
*Raleigh, NC *Livingstone, Scotland
*Edison, NJ Madrid, Spain
Hopewell Junction, NY *Kista, Sweden
Victor, NY *Taipei, Taiwan
Beaverton, OR
Hanover, PA
Austin, TX
*Dallas, TX
Houston, TX
*Bellevue, WA
- - ---------------
* Indicates location of Design Center as well as Sales Office
Leased facilities described above are subject to operating leases which
expire in 1995 through 2005. See Note 10 of Notes to Consolidated Financial
Statements.
Although the Company has plans to acquire additional equipment, the Company
believes that its existing facilities and equipment are well maintained, in good
operating condition and are adequate to meet its current requirements.
ITEM 3. LEGAL PROCEEDINGS
On July 9, 1990, Texas Instruments Incorporated ("TI") filed a complaint in
the United States District Court in Dallas, Texas and with the International
Trade Commission ("ITC") against the Company and four other defendants, Analog
Devices, Inc., Integrated Device Technology, Inc., VLSI Technology, Inc. and
Cypress Semiconductor Corporation. In these complaints, TI alleged that the
Company's manufacturing processes relating to device encapsulation in certain
types of plastic packages infringe certain of TI's patents.
In the ITC action, TI sought to prohibit the importation into the U.S. of
such plastic encapsulated devices assembled offshore and to enjoin the sale of
any inventory of such devices which were previously imported. On October 15,
1991, the Administrative Law Judge ("ALJ") determined that the TI patent was
valid and that the plastic encapsulation process used by the Company referred to
as "opposite-side" gated encapsulation infringed the TI patent. The ALJ also
determined that the plastic encapsulation process referred to as "same-side"
gated encapsulation did not infringe the TI patent. On December 3, 1991, the ITC
issued a notice of its intent not to review the ALJ's determination on
non-infringement by the "same-side" gated process, thereby confirming the ALJ's
determination. On February 19, 1992, the ITC issued its final order
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which confirmed the ALJ's determination regarding validity of the TI patent and
infringement by the "opposite-side" gated process. Pursuant thereto, the ITC
issued a limited exclusion order applicable to future imports of integrated
circuits manufactured using the "opposite-side" gated process into the United
States and a cease and desist order applicable to sales of previously imported
integrated circuits manufactured using the "opposite-side" gated process. Since
August 23, 1994, the expiration date of the TI patent, the ITC final order no
longer operates to exclude from importation any integrated circuit devices
regardless of the manner in which they are packaged. Since the beginning of
1992, the Company's plastic encapsulation operations have only used the
non-infringing "same-sided" gating process. The Court of Appeals for the Federal
Circuit has affirmed the ruling of the ITC in all respects in March 1993.
In TI's United States District Court action, TI originally sought to enjoin
the Company from assembling and selling plastic encapsulated integrated circuits
in the U.S. However, both patents in the case have since expired so an
injunction will not be available. In addition, TI seeks damages in an
unspecified amount for alleged prior patent infringement. A trial date has been
set for April 1995.
The Company believes that it has meritorious defenses to the District Court
action and intends to defend itself vigorously. The Company also believes that
the ultimate outcome of this action will not result in a material adverse effect
on the Company's consolidated financial position or results of operations. No
assurance can be given, however, that this matter will be resolved without the
payment of damages and other costs, thereby having an adverse effect on the
Company.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business.
The Company's Common Stock is traded on the NYSE under the symbol LSI. The
following table sets forth, for the periods indicated, high and low sale prices
for the Common Stock on the NYSE.
HIGH LOW
--- ---
FISCAL 1993
First Quarter............................................. $14 1/8 $10 1/4
Second Quarter............................................ 15 1/2 10 1/2
Third Quarter............................................. 19 1/4 14 1/4
Fourth Quarter............................................ 17 1/8 13
FISCAL 1994
First Quarter............................................. 23 15 1/2
Second Quarter............................................ 26 3/8 16 3/4
Third Quarter............................................. 35 3/4 22 7/8
Fourth Quarter............................................ 45 3/8 34 5/8
FISCAL 1995
First Quarter (through February 7, 1995).................. 47 3/4 36 1/2
On February 7, 1995, the last reported sale price of the Common Stock on
the NYSE was $46 5/8 per share. As of December 31, 1994, there were 1,732
holders of record of the Common Stock of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- --------- -------- ----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA(1):
Revenues................................................................ $655,491 $697,838 $ 617,468 $718,812 $ 901,830
-------- -------- --------- -------- ----------
Costs and expenses:
Cost of revenues...................................................... 443,759 457,692 408,318 438,523 520,150
Research and development.............................................. 60,196 80,802 78,825 78,995 98,978
Selling, general and administrative................................... 117,318 136,811 129,254 117,452 124,936
Restructuring of operations........................................... 44,000 5,626 101,785 -- --
-------- -------- --------- -------- ----------
Total costs and expenses............................................ 665,273 680,931 718,182 634,970 744,064
-------- -------- --------- -------- ----------
Income (loss) from operations........................................... (9,782) 16,907 (100,714) 83,842 157,766
Interest expense........................................................ (21,256) (19,371) (11,567) (9,621) (18,455)
Interest income and other............................................... 12,517 14,722 12,413 6,500 16,858
-------- -------- --------- -------- ----------
Income (loss) before income taxes, minority interest and extraordinary
credit................................................................ (18,521) 12,258 (99,868) 80,721 156,169
Provision for income taxes.............................................. 11,685 6,129 8,521 24,221 43,679
-------- -------- --------- -------- ----------
Income (loss) before minority interest and extraordinary credit......... (30,206) 6,129 (108,389) 56,500 112,490
Minority interest in net income (loss) of subsidiaries.................. 1,065 (2,212) 1,819 2,750 3,747
-------- -------- --------- -------- ----------
Income (loss) before extraordinary credit............................... (31,271) 8,341 (110,208) 53,750 108,743
Extraordinary credit resulting from the retirement of debt.............. 955 -- -- -- --
-------- -------- --------- -------- ----------
Net income (loss)....................................................... $(30,316) $ 8,341 $(110,208) $ 53,750 $ 108,743
======== ======== ========= ======== =========
Primary income (loss) per share:
Net income (loss) before extraordinary credit......................... $ (0.74) $ 0.19 $ (2.48) $ 1.09 $ 1.98
Extraordinary credit.................................................. 0.02 -- -- -- --
-------- -------- --------- -------- ----------
Net income (loss) per share........................................... $ (0.72) $ 0.19 $ (2.48) $ 1.09 $ 1.98
======== ======== ========= ======== =========
Fully diluted net income per share.................................... * * * $ 1.05 $ 1.85
======== =========
Common shares and common share equivalents used in computing per share
amounts:
Primary............................................................... 42,063 43,376 44,478 49,531 54,953
======== ======== ========= ======== =========
Fully diluted......................................................... * * * 54,813 62,714
======== =========
AS OF DECEMBER 31,
-------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- --------- -------- ----------
(in thousands)
BALANCE SHEET DATA(2):
Working capital......................................................... $231,248 $225,193 $ 133,640 $230,513 $ 422,916
Total assets............................................................ 771,682 748,456 747,438 859,010 1,270,374
Long-term debt, capital lease obligations and other long-term
liabilities........................................................... 189,785 166,107 218,837 246,314 288,496
Stockholders' equity.................................................... 267,729 293,075 197,728 292,434 544,906
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QUARTERLY FINANCIAL DATA(1):
1993 1994
------------------------------------------ -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
(in thousands, except per share data) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $168,928 $177,080 $183,761 $189,043 $193,812 $212,106 $240,218 $255,694
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues........................ 103,921 108,246 112,001 114,355 115,387 123,337 138,219 143,207
Research and development................ 18,998 19,408 19,134 21,455 23,141 22,467 26,834 26,536
Selling, general and administrative..... 29,205 29,007 29,910 29,330 29,457 31,102 30,645 33,732
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses.............. 152,124 156,661 161,045 165,140 167,985 176,906 195,698 203,475
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations.................... 16,804 20,419 22,716 23,903 25,827 35,200 44,520 52,219
Interest expense.......................... (2,175) (2,384) (2,538) (2,524) (3,788) (5,665) (4,822) (4,180)
Interest income and other................. 1,697 2,512 1,818 473 4,798 4,127 3,263 4,670
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes and minority
interest................................ 16,326 20,547 21,996 21,852 26,837 33,662 42,961 52,709
Provision for income taxes................ 4,901 6,164 6,599 6,557 7,514 9,425 12,028 14,712
Minority interest in net income (loss) of
subsidiaries............................ 814 1,313 1,022 (399) (32) 799 1,465 1,515
-------- -------- -------- -------- -------- -------- -------- --------
Net income................................ $ 10,611 $ 13,070 $ 14,375 $ 15,694 $ 19,355 $ 23,438 $ 29,468 $ 36,482
======== ======== ======== ======== ======== ======== ======== ========
Primary net income per share.............. $ 0.22 $ 0.27 $ 0.29 $ 0.31 $ 0.37 $ 0.44 $ 0.52 $ 0.62
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted net income per share........ * * * $ 0.30 $ 0.36 $ 0.41 $ 0.49 $ 0.59
======== ======== ======== ======== ========
Common shares and common share equivalents
used in computing per share amounts
Primary................................. 47,452 48,874 50,249 50,936 51,631 53,112 56,394 58,851
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted........................... * * * 56,042 57,582 64,051 63,938 64,718
======== ======== ======== ======== ========
- - ---------------
* Fully diluted amount disclosures are not required because they are
substantially the same as primary amounts disclosed for these periods.
(1) The Company's fiscal year ends on the Sunday closest to December 31. For
presentation purposes, the consolidated financial statements refer to
December 31 as year end. Fiscal 1993 was a 53-week year, whereas, 1994,
1992, 1991 and 1990 were 52-week years. The fourth quarter of 1993 was a
14-week quarter, whereas the first, second and third quarters were 13-week
quarters. The additional week in the fourth quarter of 1993 did not have a
significant impact on the Company's results of operations.
(2) Certain reclassifications have been made to the 1992 and 1993 consolidated
financial statements to conform to the 1994 presentation. Such
reclassifications had no effect on results of operations or stockholders'
equity. Excludes the effect of the Company's January 26, 1995 acquisition of
all minority-owned common shares (a 45% interest) of its Japanese
manufacturing subsidiary as well as the defeasance of the resultant debt.
These activities had the effect of reducing minority interest in
subsidiaries by $92.8 million and reducing cash by $125.9 million and
increasing property and equipment by $33.1 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenues for the Company increased 25% to $902 million in 1994 compared to
$719 million in 1993. Income from operations increased 88% to $158 million in
1994 compared to $84 million in 1993. Net income was $109 million in 1994
compared to $54 million in 1993. Fully diluted earnings per share increased to
$1.85 per share in 1994 from $1.05 per share in 1993.
The improvement in 1994 operating income resulted primarily from increased
product demand, greater factory utilization, improved plant efficiencies and a
shift in product mix combined with management's continuing cost containment
efforts. In addition, the Company's Japanese manufacturing affiliate started
volume production at its new wafer fabrication facility during 1994. The Company
continued to lower operating costs and to focus its efforts on key strategic
products resulting in higher profitability on increased revenues for each
quarter throughout 1994.
While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, it is recommended that
this discussion and analysis be read in conjunction with the balance of the
Company's Annual Report on Form 10-K for the year ended January 1, 1995. The
Company operates on a 52/53 week fiscal year which ends on the Sunday closest to
December 31. Fiscal years 1994 and 1992 were 52-week years, whereas 1993 was a
53-week year. The additional week in fiscal 1993 did not have a significant
effect on the Company's results of operations.
RESULTS OF OPERATIONS
REVENUES The Company operates in one industry segment and designs,
develops, manufactures and markets application-specific integrated circuit
(ASIC) technology and related products. Design and services revenues include
engineering design services, licensing of the Company's advanced design tools
software, and technology transfer and support services. Component sales
generally are preceded by customer purchases of the Company's various design
services. The Company's customers have used these services in the design of
increasingly advanced integrated circuits characterized by increased
functionality and performance. The proportion of revenues from ASIC design and
related services compared to component product sales varies among customers
depending upon their specific requirements. The following table presents
components of revenue as a percentage of total revenues:
1994 1993 1992
----- ----- -----
Component products................................ 89% 87% 83%
Design and services............................... 11 13 17
----- ----- -----
100% 100% 100%
===== ===== =====
Total revenues grew to $902 million in 1994 from $719 million in 1993.
Total revenue growth and the increase in component product revenue as a
percentage of total revenues in 1994 was primarily attributable to increased
customer demand for the Company's products, including the Company's
system-on-a-chip CoreWare products, the introduction of new products and
increased manufacturing capacity as the Company's Japanese affiliate's new wafer
manufacturing facility started volume production in 1994.
Total revenue growth and the increase in component product revenue as a
percentage of total revenues in 1993 was primarily attributable to expanded
component product offerings and increasingly complex ASIC designs. Other factors
contributing to the increase in 1993 revenues were increased demand for the
Company's ASIC and Reduced Instruction Set Computing (RISC) products and a
slight increase in average selling prices (ASPs), partially offset by lower
demand in the military market and the discontinuance of certain commodity
products.
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OPERATING COSTS AND EXPENSES Key elements of the consolidated statements
of operations, expressed as a percentage of revenues, were as follows:
1994 1993 1992
---- ---- -----
Gross margin....................................... 42.3% 39.0% 33.9%
Research and development expense................... 11.0 11.0 12.8
Selling, general and administrative expense........ 13.9 16.3 20.9
Income (loss) from operations...................... 17.5 11.7 (16.3)
GROSS MARGIN Gross margin continued to improve in 1994 and in 1993
primarily as a result of greater factory utilization and improved plant
efficiencies. In addition, volume production at the Company's new wafer
fabrication facility in Japan during 1994, a shift in the Company's product mix,
increased demand for the Company's sub-micron products and terms negotiated with
third-party subcontractors also had a favorable impact on the gross margin
during 1994.
The Company's operating environment combined with the resources required to
operate in the semiconductor industry requires managing a variety of factors
such as factory capacity and utilization, manufacturing yields, product mix,
availability of certain raw materials, terms negotiated with third-party
subcontractors and foreign exchange fluctuations. Changes in the relative
strength of the yen may have a greater impact on the Company's gross margin than
other foreign exchange fluctuations due to the Company's large wafer fabrication
operations in Japan. Volume production capacity at the second Japanese wafer
fabrication facility is expected to continue to increase throughout 1995,
thereby significantly increasing factory capacity by the end of 1995. In the
event that demand for the Company's products does not absorb this additional
capacity at a sufficient rate, the Company's gross margin could be negatively
impacted in 1995.
RESEARCH AND DEVELOPMENT Although research and development (R&D)
expenditures increased by $20 million, R&D expenses as a percentage of revenues
(11%) in 1994 remained approximately the same as in 1993. The level of R&D
spending is attributed to the Company's continued commitment to technological
leadership in the ASIC, CoreWare and application-specific standard product
(ASSP) markets. The Company anticipates continuing its investment in R&D at a
rate between 10-12% of revenues in future years. During 1994, this investment
was primarily for development of advanced manufacturing processes, development
of new advanced products, and enhancements of the Company's design automation
software capability. R&D expenses in 1993 decreased as a percentage of revenues
primarily due to higher revenues in 1993.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative
(SG&A) expenses as a percentage of revenues decreased to 14% in 1994 compared to
16% in 1993 and 21% in 1992. The decline in SG&A expenses as a percentage of
revenues in 1994 and 1993 was primarily a result of increased revenues and
management's continuing cost containment efforts since the 1992 restructuring.
RESTRUCTURING In 1992, the Company's cost structure, combined with
worldwide economic conditions and declines in the military, aerospace, European
and personal computer markets, made it difficult to achieve profitability. The
high cost of manufacturing in Europe and the continuing losses on chipset
products were the primary contributors to the need to restructure. Rather than
attempt to address the problems with a short-term view, the Company determined
that a comprehensive, fundamental restructuring of its approach to product
emphasis and getting its products to market would better serve the Company's
long-term goal of continuing profitability. The Company's restructuring plan,
implemented in the third quarter of 1992, contemplated revising its global
manufacturing strategy, streamlining operations, discontinuing certain commodity
products and focusing its product strategy on high-end technology solutions.
Specifically, it involved the shutdown of the Braunschweig, Germany test and
assembly facility, the planned phase-out of the Milpitas, California wafer
manufacturing facility, the consolidation of certain U.S. manufacturing
operations, downsizing the chipset operation of its former subsidiary, Headland
Technology Inc., and severance costs for approximately 500 employees worldwide.
The $101.8 million restructuring charge included: the write-down and write-off
of manufacturing facilities, equipment and improvements; the estimated operating
costs attributable to the phase-out, closure and consolidation of these
manufacturing facilities; the write-down of commodity chipset
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product inventories; the severance of manufacturing and other personnel; the
consolidation of certain U.S. and foreign sales offices, design centers and
administrative organizations; and certain legal and other costs.
The following table sets forth the Company's 1992 restructuring expense,
remaining reserves at December 31, 1993 and 1994 (which are accounted for as
components of fixed assets, inventories and current liabilities) and charges
taken from the date the restructuring commenced through December 31, 1993 and
during 1994:
1992
RESTRUCTURING BALANCE BALANCE
(in thousands) EXPENSE UTILIZED* 12/31/93 UTILIZED* ADJUSTED 12/31/94
------------- --------- -------- -------- -------- --------
Write-down of manufacturing facility(a)............. $ 14,700 $(14,700 ) $ -- $(14,000) $14,000 $ --
Other fixed asset related charges(b)................ 35,500 (20,500 ) 15,000 (600) (3,300 ) 11,100
Other provisions for phase-down and consolidation of
manufacturing facilities(b)....................... 13,500 (7,000 ) 6,500 (2,200) (800 ) 3,500
Write-down of inventories(a)........................ 10,900 (8,600 ) 2,300 (200) (2,100 ) --
Payments to employees for severance(c).............. 8,000 (5,400 ) 2,600 -- (1,100 ) 1,500
Relocation, lease terminations and other(b)......... 19,200 (2,700 ) 16,500 (600) (6,700 ) 9,200
------------- --------- -------- -------- -------- --------
Total....................................... $ 101,800 $(58,900 ) $42,900 $(17,600) $ -- $25,300
============ ======== ======== ======== ======== ========
- - ---------------
* Net of cumulative currency translation adjustments.
(a) Amounts utilized represent non-cash charge-offs.
(b) Amounts utilized represent both cash and non-cash items. Aggregate cash
charges totaled $3.1 million.
(c) Amounts utilized represent cash payments.
By the end of 1993, the Company had completed the following actions in
accordance with its original plan:
(1) Phased-out the German test and assembly operations: Restructuring
reserves were utilized for employee terminations ($3.9 million), fixed
asset dispositions ($7.6 million), inventory write-offs ($2.5 million)
and other charges ($3.2 million). In addition, the German facility was
written-down ($14.7 million) to its net realizable value of $14
million. Operating losses incurred during the phase-out period and
ongoing maintenance costs ($5.3 million) associated with the facility
were also applied against the reserves.
(2) Discontinued the chipset business: Restructuring reserves were utilized
for inventory write-downs ($3.3 million) and other costs including
those associated with abandoned facility leases ($1.9 million).
(3) Phased-down its Milpitas wafer manufacturing facility: Restructuring
reserves were used for fixed asset write-offs ($5.2 million), inventory
write-offs ($2.8 million) and other costs ($1.7 million).
(4) Phased-out certain U.S. assembly and test operations: Restructuring
reserves were used for fixed asset write-offs ($2.1 million).
(5) Consolidated certain U.S. sales offices and design centers:
Restructuring reserves were used for employee terminations ($1.5
million), lease terminations ($1.4 million) and fixed asset write-offs
($1.8 million).
The above actions included termination of approximately 350 employees.
During 1994, the Company determined that the originally estimated costs of
the phase-out of the Milpitas manufacturing facility exceeded the expected
remaining costs of the phase-out. The Company also determined that the time
required to sell the Braunschweig, Germany building may be significantly in
excess of the original estimate. The Braunschweig facility is a special purpose
facility containing a "clean-room" environment and is located in an economically
depressed area of Germany. Management believes that the total reserves
established are adequate to cover uncertainties in connection with these
matters. Significant restructuring activity for 1994 included: (1) additional
write-down of the German manufacturing facility held for sale which the Company
has not been able to dispose of; and (2) continued phase-down of the Milpitas
wafer manufacturing facility including additional asset write-downs and movement
of equipment to subcon-
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tractors. The Company is currently operating the Milpitas facility and is
continuing to evaluate the feasibility of future operations at such facility or
phasing out the facility by the end of 1995. Remaining reserves at December 31,
1994 include approximately $14.8 million for the continued phase-down of the
California manufacturing facilities, $2.5 million for continued maintenance of
the vacant Braunschweig facility and $8 million for other corporate matters.
INTEREST EXPENSE Interest expense increased $9 million in 1994 as compared
to 1993 primarily due to the discontinuance of interest capitalization in
connection with the construction of the Japanese wafer fabrication facility and
the Company's issuance of $144 million of 5 1/2% Convertible Subordinated Notes.
These increases were offset in part by the redemption of the 6 1/4% Convertible
Subordinated Debentures during 1994 (see Note 6 of Notes to Consolidated
Financial Statements) and the increase in interest rates during 1994. Interest
expense decreased $2 million in 1993 due primarily to increased capitalization
of interest expense and a reduction in the average interest rate of debt
outstanding in 1993 compared to 1992. Interest expense of $5.8 million and $3.1
million was capitalized in 1993 and 1992, respectively, in connection with
financing for the capacity expansion of the Company's new wafer fabrication
facility in Japan. Additional savings were experienced in 1993 and 1992 by
repaying certain European borrowings and repaying debt with higher interest
rates.
INTEREST INCOME AND OTHER Interest income and other increased $10 million
in 1994 from 1993 due principally to increased interest income as a result of
higher average cash and investment balances compared to 1993 and increased
average interest rates during 1994. Other income increased due to higher foreign
currency gains, offset partially by increased goodwill amortization attributable
to the repurchases of minority interest holdings throughout 1994. Interest and
other income decreased $6 million in 1993 from 1992 due principally to declining
interest rates and lower foreign exchange gains in 1993 and a benefit from the
resolution of certain claims in 1992.
PROVISION FOR INCOME TAXES In 1994 and 1993, the Company's effective tax
rates were 28% and 30% respectively. The Company has provided a valuation
allowance for deferred tax assets, except to the extent of taxable income in the
carryback period, based on management's assessment that realization of such
deferred tax assets is not assured. The Company's effective rate was lower than
U.S. statutory rates primarily due to reductions in the valuation allowance
provided under FAS 109 and other credits. The Company's effective tax rate in
1992 was 9%.
MINORITY INTEREST The changes in minority interest between 1994, 1993, and
1992 were primarily attributable to the composition of earnings and losses among
certain of the Company's international affiliates for each of the respective
years and the repurchase of some of the LSI Logic K.K. minority-owned common
stock in 1994 and 1993.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The Company believes that
its future operating results will continue to be subject to quarterly variations
based upon a wide variety of factors, including the cyclical nature of both the
semiconductor industry and the markets addressed by the Company's products,
price erosion, competitive factors, fluctuations in manufacturing yields, the
timing of new product introductions, changes in product mix, the availability
and extent of utilization of manufacturing capacity, product obsolescence and
the ability to develop and implement new technologies. The Company's 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 the Company does business. As a participant in the semiconductor
industry, the Company operates in a technologically advanced, rapidly changing
and highly competitive environment. The Company predominantly sells custom
products to customers operating in a similar environment. Accordingly, changes
in the conditions of any of the Company's customers may have a greater impact on
the Company than if the Company offered standard products that could be sold to
many purchasers. While the Company cannot predict what effect these various
factors may have on its financial results, the aggregate effect of these and
other factors could result in significant volatility in the Company's future
performance and stock price. To the extent the Company's performance may not
meet expectations published by external sources, public reaction
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could result in a sudden and significantly adverse impact on the market price of
the Company's securities, particularly on a short-term basis.
The Company currently has international subsidiaries which operate and sell
the Company's products in various global markets. The Company purchases a
substantial portion of its raw materials and equipment from foreign suppliers,
and incurs labor costs, particularly at its Japanese manufacturing facility, in
foreign currencies. As a result, the Company is exposed to international factors
such as changes in foreign currency exchange rates or weak economic conditions
of the respective countries in which the Company operates. The Company utilizes
various instruments, primarily forward exchange and currency swap contracts, to
manage its exposure associated with currency fluctuation on intercompany
transactions and certain foreign currency denominated commitments. At December
31, 1994, the Company had various forward exchange contracts outstanding valued
at approximately $23 million (see Note 3 of Notes to Consolidated Financial
Statements).
The Company's corporate headquarters and manufacturing facilities are
located near major earthquake faults. As a result, in the event of a major
earthquake the Company could suffer damages which could materially and adversely
affect the operating results and financial condition of the Company.
FINANCIAL CONDITION AND LIQUIDITY
CURRENT ASSETS Cash, cash equivalents and short-term investments rose to
$429 million at December 31, 1994 from $202 million at December 31, 1993. The
increase of $227 million is primarily attributable to cash flows of $255 million
generated from operations, the issuance of $144 million of Convertible
Subordinated Notes and the issuance of $17 million of common stock under stock
option and stock purchase plans, partially offset by net capital expenditures of
approximately $167 million and $25 million in repayments of debt obligations.
In January 1995, the Company acquired all minority-owned common shares (a
45% interest) of its Japanese manufacturing subsidiary, Nihon Semiconductor,
Inc. (NSI), from Kawasaki Steel Corporation (KSC) for a total of $175 million to
be paid to KSC over eight years. The Company has defeased this obligation
through payment of $125.9 million to an unrelated party and has been legally
released from the obligation by KSC. The acquisition was accounted for as a
purchase.
Receivables grew 22% to $152 million at December 31, 1994 from $124 million
at December 31, 1993. The increase is primarily attributable to higher revenues
in 1994 as compared to 1993, partially offset by a decrease in average days
sales outstanding to 54 days in 1994 from 62 days in 1993.
The Company maintained higher inventory levels of $108 million at December
31, 1994 compared to $69 million a year ago in response to increased customer
demand and just-in-time requirements. A significant portion of this inventory
was produced at the Company's new sub-micron wafer fabrication facility in Japan
which began volume production in the first quarter of 1994.
Other current assets increased 40% or $12 million at December 31, 1994 from
$30 million at December 31, 1993. The increase is primarily due to increased
deferred tax benefits (see Note 8 of Notes to Consolidated Financial
Statements).
PROPERTY AND EQUIPMENT The Company believes that maintaining technological
leadership in the highly competitive worldwide semiconductor industry requires
ongoing substantial investment in advanced manufacturing capacity. Net capital
expenditures were $167 million in 1994 and $88 million in 1993. These capital
investments were primarily for the capacity expansion of the new wafer
fabrication facility in Japan and the upgrade of the U.S. research and
development facilities with state-of-the-art equipment. In 1993, costs of $27
million were capitalized as preproduction engineering in connection with the
development of production capabilities, qualification of production processes
and carrying costs of the new facility. These costs are being amortized over
four years, the expected useful life of the manufacturing process utilized in
the plant. Normal production (which is generally characterized by meeting
certain reliability, defect density and service cycle time criteria defined by
management) started in the first quarter of 1994. The expenditures were
primarily funded by bank borrowings and cash flows from operations. All prior
preproduction engineering costs were fully amortized as of December 31, 1993 and
there was no capitalization of preproduction engineering costs
19
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during 1994. Management expects to invest approximately $150 million in capital
equipment in 1995, primarily to increase capacity at its Japanese wafer
manufacturing facilities.
OTHER ASSETS Other assets decreased 9% to $44 million at December 31, 1994
from $48 million at December 31, 1993. The decrease is primarily attributable to
an additional write-down of a vacated manufacturing facility held-for-sale to
its estimated net realizable value (see Note 5 of Notes to Consolidated
Financial Statements), offset in part by an increase in goodwill as the Company
continued to repurchase common stock from minority stock holders of LSI Logic
K.K. during 1994. Goodwill of approximately $5.7 million and $3.8 million, net
of accumulated amortization of $2.9 million and $1.9 million, was included in
other assets at December 31, 1994 and 1993, respectively.
CURRENT LIABILITIES Current liabilities increased 58% to $308 million at
December 31, 1994 from $195 million a year ago primarily as a result of
increased accounts payable and income taxes payable, partially offset by a
reduction in restructuring liabilities (see Note 5 of Notes to Consolidated
Financial Statements).
LONG-TERM DEBT The net increase in long-term debt from December 31, 1993
to December 31, 1994 is attributed to the Company's issuance of $144 million of
5 1/2% Convertible Subordinated Notes offset in part by the Company's redemption
of all of its $98 million of 6 1/4% Convertible Subordinated Debentures during
1994 (see Note 6 of Notes to Consolidated Financial Statements).
MINORITY INTEREST During 1994 and 1993, the Company repurchased a portion
of the LSI Logic K. K. common stock from minority stockholders for approximately
$14 million and $1 million, respectively. The acquisitions were accounted for as
purchases, and the excess of the purchase price over the fair value was
allocated to goodwill which is being amortized over seven years. As of December
31, 1994, the Company owned 78% of LSI Logic K. K.
In January 1995, the Company acquired all minority-owned common stock (a
45% interest) of its Japanese manufacturing subsidiary, Nihon Semiconductor,
Inc., from Kawasaki Steel Corporation. The acquisition was accounted for as a
purchase, and the excess of the total acquisition cost over the recorded value
of assets acquired was allocated to property, plant and equipment based on its
fair value (see Note 11 of Notes to Consolidated Financial Statements).
LIQUIDITY During 1994, the Company entered into a credit agreement with a
group of banks which provided for an unsecured $60 million revolving credit
facility. The agreement includes certain financial and non-financial covenants,
with which the Company was in compliance at December 31, 1994. The Company has
never borrowed under the credit facility. Each of the Company's significant
foreign affiliates have lines of credit available for local currency borrowings.
Foreign bank lines of credit as of December 31, 1994 were not significant.
The Company believes that its level of financial resources is an important
competitive factor in its industry. Accordingly, the Company may, from time to
time, seek additional equity or debt financings. The Company believes that
existing liquid resources and funds generated from operations combined with
funds from such financings and its ability to borrow funds will be adequate to
meet its operating and capital requirements and obligations for the next 12
months. There can be no assurance that such additional financing will be
available when needed or, if available, will be on favorable terms. Any future
equity financings will decrease existing stockholders' percentage equity
ownership and may, depending on the price at which the equity is sold, result in
dilution.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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) present fairly, in all material respects, the
financial position of LSI Logic Corporation and its subsidiaries at December 31,
1994 and 1993, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
SAN JOSE, CALIFORNIA
JANUARY 26, 1995
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CONSOLIDATED BALANCE SHEETS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
ASSETS
1994 1993
---------- --------
Cash and cash equivalents............................................ $ 224,503 $121,319
Short-term investments............................................... 204,008 80,764
Accounts receivable, less allowance for doubtful accounts of $4,044
and $2,470......................................................... 152,244 124,384
Inventories.......................................................... 107,824 69,066
Prepaid expenses and other current assets............................ 42,275 30,165
---------- --------
Total current assets....................................... 730,854 425,698
---------- --------
Property and equipment, net.......................................... 495,549 385,063
Other assets......................................................... 43,971 48,249
---------- --------
Total assets............................................... $1,270,374 $859,010
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................................................... $ 165,612 $ 66,822
Accrued salaries, wages and benefits................................. 29,251 24,397
Accrued restructuring costs.......................................... 19,800 29,503
Other accrued liabilities............................................ 30,192 34,657
Income taxes payable................................................. 38,916 17,079
Current portion of long-term debt, capital lease obligations and
short-term borrowings.............................................. 24,167 22,727
---------- --------
Total current liabilities.................................. 307,938 195,185
---------- --------
Long-term debt, capital lease obligations and other long-term
liabilities........................................................ 288,496 246,314
---------- --------
Deferred income taxes................................................ 6,861 6,337
---------- --------
Minority interest in subsidiaries.................................... 122,173 118,740
---------- --------
Commitments and contingencies........................................ -- --
---------- --------
Stockholders' equity:
Preferred shares; 2,000 shares authorized.......................... -- --
Common stock; $.01 par value; 73,500 shares authorized: 57,144 and
49,728 shares outstanding....................................... 571 497
Additional paid-in capital......................................... 401,840 273,933
Retained earnings (deficit)........................................ 67,070 (41,673)
Cumulative translation adjustment.................................. 75,425 59,677
---------- --------
Total stockholders' equity................................. 544,906 292,434
---------- --------
Total liabilities and stockholders' equity................. $1,270,374 $859,010
========= ========
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1993 1992
-------- -------- ---------
Revenues...................................................... $901,830 $718,812 $ 617,468
-------- -------- ---------
Costs and expenses:
Cost of revenues............................................ 520,150 438,523 408,318
Research and development.................................... 98,978 78,995 78,825
Selling, general and administrative......................... 124,936 117,452 129,254
Restructuring of operations................................. -- -- 101,785
-------- -------- ---------
Total costs and expenses................................. 744,064 634,970 718,182
-------- -------- ---------
Income (loss) from operations................................. 157,766 83,842 (100,714)
Interest expense.............................................. (18,455) (9,621) (11,567)
Interest income and other..................................... 16,858 6,500 12,413
-------- -------- ---------
Income (loss) before income taxes and minority interest....... 156,169 80,721 (99,868)
Provision for income taxes.................................... 43,679 24,221 8,521
-------- -------- ---------
Income (loss) before minority interest........................ 112,490 56,500 (108,389)
Minority interest in net income of subsidiaries............... 3,747 2,750 1,819
-------- -------- ---------
Net income (loss)............................................. $108,743 $ 53,750 $(110,208)
======== ======== =========
Net income (loss) per share:
Primary.................................................. $ 1.98 $ 1.09 $ (2.48)
======== ======== =========
Fully diluted............................................ $ 1.85 $ 1.05
======== ========
Common share and common share equivalents used in computing
per share amounts:
Primary.................................................. 54,953 49,531 44,478
======== ======== =========
Fully diluted............................................ 62,714 54,813
======== ========
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
--------------- PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ ---------- --------- ----------- ---------
(IN THOUSANDS)
Balances at December 31, 1991....... 43,727 $437 $ 235,246 $ 14,785 $42,607 $ 293,075
Issuance to employees under stock
option and purchase plans......... 1,683 17 9,933 9,950
Aggregate adjustment from
translation of financial
statements into U.S. dollars...... 4,911 4,911
Net loss............................ (110,208) (110,208)
------ ------ ---------- --------- ----------- ---------
Balances at December 31, 1992....... 45,410 454 245,179 (95,423) 47,518 197,728
Issuance to employees under stock
option and purchase plans......... 4,318 43 28,754 28,797
Aggregate adjustment from
translation of financial
statements into U.S. dollars...... 12,159 12,159
Net income.......................... 53,750 53,750
------ ------ ---------- --------- ----------- ---------
Balances at December 31, 1993....... 49,728 497 273,933 (41,673) 59,677 292,434
Issuance to employees under stock
option and purchase plans......... 2,559 26 17,177 17,203
Tax benefit of employee stock
transactions...................... 13,674 13,674
Issuance upon conversion of 6 1/4%
debentures........................ 4,857 48 97,056 97,104
Aggregate adjustment from
translation of financial
statements into U.S. dollars...... 15,748 15,748
Net income.......................... 108,743 108,743
------ ------ ---------- --------- ----------- ---------
Balances at December 31, 1994....... 57,144 $571 $ 401,840 $ 67,070 $75,425 $ 544,906
====== ====== ======== ========= ======== =========
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1994 1993 1992
--------- --------- ---------
Operating activities:
Net income (loss)........................................ $ 108,743 $ 53,750 $(110,208)
Adjustments:
Depreciation and amortization.......................... 103,648 65,417 71,063
Non-cash restructuring costs........................... -- -- 100,853
Minority interest in net income of subsidiaries........ 3,747 2,750 1,819
Provision for bad debt................................. 1,154 961 1,740
Change in:
Accounts receivable................................. (23,152) (15,082) (13,030)
Inventories......................................... (34,051) (3,596) 13,422
Prepaid expenses and other assets................... (5,494) 741 8,737
Accounts payable.................................... 93,578 (52,136) 33,732
Accrued and other liabilities....................... 18,367 29,952 8,076
Accrued restructuring costs......................... (11,702) (9,167) (7,568)
--------- --------- ---------
Net cash provided by operating activities.............. 254,838 73,590 108,636
--------- --------- ---------
Investing activities:
Purchase of debt and equity securities
available-for-sale.................................. (292,584) -- --
Maturities and sales of debt and equity securities
available-for-sale.................................. 167,152 -- --
Change in short-term investments....................... -- (15,476) 32,004
Purchases of property and equipment, net of
retirements......................................... (166,421) (87,899) (142,714)
Acquisition of stock from minority interest holders.... (14,173) (970) --
--------- --------- ---------
Net cash used in investing activities............... (306,026) (104,345) (110,710)
--------- --------- ---------
Financing activities:
Issuance of Convertible Subordinated Notes............. 143,750 -- --
Proceeds from borrowings............................... 5,061 57,588 52,470
Repayment of debt obligations.......................... (23,883) (26,866) (37,148)
Repurchase of Convertible Subordinated Debentures...... (1,112) (5,000) --
Issuance of common stock, net.......................... 17,203 28,797 9,950
--------- --------- ---------
Net cash provided by financing activities........... 141,019 54,519 25,272
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................ 13,353 10,452 4,402
--------- --------- ---------
Increase in cash and cash equivalents.................... 103,184 34,216 27,600
Cash and cash equivalents at beginning of period......... 121,319 87,103 59,503
--------- --------- ---------
Cash and cash equivalents at end of period............... $ 224,503 $ 121,319 $ 87,103
========= ========= =========
Schedule of noncash transactions:
Conversion of subordinated debentures to common
stock............................................... $ 97,104
=========
Tax benefit from stock transactions.................... $ 13,674
=========
See accompanying notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
LSI Logic Corporation (the "Company") has adopted accounting policies which
are generally accepted in the industry in which it operates. Following are the
Company's more significant accounting policies:
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. Accounts denominated in
foreign currencies have been translated using the foreign currencies as the
functional currencies. Assets and liabilities of foreign operations are
translated to U.S. dollars at current rates of exchange, and revenues and
expenses are translated using weighted average rates. Gains and losses from
foreign currency translation are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
as a component of interest income and other.
Minority interest in subsidiaries represents the minority stockholders'
proportionate share of the net assets and results of operations of the Company's
majority-owned subsidiaries. Sales of common stock of the Company's subsidiaries
and repurchases of such shares result in changes in the Company's proportionate
share of the subsidiaries' net assets. The Company reflects such changes as an
element of additional paid-in-capital. In January 1995, the Company acquired all
minority owned common stock (a 45% interest) of its Japanese manufacturing
subsidiary, Nihon Semiconductor, Inc., from Kawasaki Steel Corporation. (see
Note 11 of Notes to Consolidated Financial Statements).
The Company's fiscal year ends on the Sunday closest to December 31. For
presentation purposes, the consolidated financial statements and notes refer to
December 31 as year end. Fiscal years 1994 and 1992 were 52 week years, whereas
1993 was a 53 week year. The additional week in 1993 did not have a significant
effect on the Company's results of operations.
Cash equivalents and short-term investments Effective January 3, 1994, the
Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires investments in debt and equity securities to be classified as
"held-to-maturity," "trading," or "available-for-sale." Investments in debt and
equity securities classified as held-to-maturity are reported at amortized cost
and securities available-for-sale are reported at fair value with unrealized
gains and losses, net of related tax, if any, reported as a separate component
of stockholders' equity. The Company currently does not actively trade
securities. Realized gains and losses are based on the book value of specific
securities sold and were immaterial during 1994 and 1993. The cumulative effect
of adopting SFAS No. 115 was not material.
All highly liquid investments purchased with an original maturity of ninety
days or less are considered to be cash equivalents. Marketable short-term
investments are accounted for as available-for-sale. All other cash equivalents
and short-term investments are accounted for as held-to-maturity. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reassesses the classification at each reporting date.
Concentration of credit risk of financial instruments Financial
instruments which potentially subject the Company to credit risk consist of cash
equivalents, short-term investments and accounts receivable. Cash equivalents
and short-term investments are maintained with high quality institutions, the
composition and maturities of which are regularly monitored by management. A
majority of the Company's trade receivables are derived from sales to large
multinational computer, telecommunication and electronics manufacturers, with
the remainder distributed across other industries. Amounts due from the
Company's two largest customers in 1994 and largest customer in 1993 accounted
for 18% and 9% of trade receivables at December 31, 1994 and 1993, respectively.
Concentrations of credit risk with respect to trade receivables are considered
to be limited due to the quantity of customers comprising the Company's customer
base, and their dispersion across industries and geographies. The Company
performs ongoing credit evaluations of its
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customers' financial condition and requires collateral as considered necessary.
Write-offs of uncollectible amounts have been immaterial.
Fair value disclosures of financial instruments The estimated fair value
amounts have been determined by the Company, using available market information
and valuation methodologies considered to be appropriate. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value amounts.
The estimated value of the Company's long-term debt was $360 million and
$220 million at December 31, 1994 and 1993, respectively. The estimated fair
value of all other financial instruments at December 31, 1994 and 1993 was not
materially different from the values presented in the consolidated balance
sheets.
Inventories Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis for raw materials and is computed on a
currently adjusted standard basis (which approximates first-in, first-out) for
work-in-process and finished goods.
Property and equipment Property and equipment is recorded at cost and
includes interest on funds borrowed to finance construction. The Company
completed construction and capitalized interest of $5.8 million during 1993.
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 ranging from four to forty years. Amortization of
leasehold improvements is computed using the shorter of the remaining term of
the Company's facilities leases or the estimated useful lives of the
improvements. Depreciation for