-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATGOGdHOFmOk4cnHgSq0VqiF17sf2UqOPwKxSXaBx+lmN+EDnC2UhYrDf6BjZg+B FR+T2VKSI9wVLVkJ8HCgyQ== 0000703360-98-000015.txt : 19980807 0000703360-98-000015.hdr.sgml : 19980807 ACCESSION NUMBER: 0000703360-98-000015 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSI LOGIC CORP CENTRAL INDEX KEY: 0000703360 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942712976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-10317 FILM NUMBER: 98678362 BUSINESS ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084338000 MAIL ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 10-Q/A 1 FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 28, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File Number: 0-11674 LSI LOGIC CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2712976 (State of Incorporation) (I.R.S. Employer Identification Number) 1551 McCarthy Boulevard Milpitas, California 95035 (Address of principal executive offices) (408) 433-8000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO As of July 31, 1998 there were 140,945,232 shares of registrant's Common Stock, $.01 par value, outstanding. LSI LOGIC CORPORATION Form 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX Page No. PART I Financial Information Item 1 Financial Statements Consolidated Condensed Balance Sheets - June 30, 1998 and December 31, 1997 3 Consolidated Condensed Statements of Operations - Three-Month and Six-Month Periods Ended June 30, 1998 and 1997 4 Consolidated Condensed Statements of Cash Flows - Six-Month Periods Ended June 30, 1998 and 1997 5 Notes to Consolidated Condensed Financial Statements 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II Other Information Item 1 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 Item 6 Exhibits and Reports on Form 8-K 16 PART I Item 1. Financial Statements
LSI LOGIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) June 30, December 31, 1998 1997 ASSETS Cash and cash equivalents $131,119 $104,571 Short-term investments 278,111 386,369 Accounts receivable, less allowance for doubtful 231,461 210,141 accounts of $2,548 and $2,597 Inventories 101,379 102,267 Other current assets 82,132 67,113 Total current assets 824,202 870,461 Property and equipment, net 1,165,206 1,123,909 Other assets 142,664 132,542 Total assets $2,132,072 $2,126,912 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $174,077 $211,135 Accrued salaries, wages and benefits 48,652 38,422 Other accrued liabilities 51,520 56,802 Income taxes payable 83,647 87,257 Current portion of long-term obligations and short-term borrowings 40,955 44,615 Total current liabilities 398,851 438,231 Long-term obligations and deferred income taxes 111,810 117,511 Minority interest in subsidiaries 4,920 5,197 Commitments and contingencies - - Stockholders' equity: Preferred shares; $.01 par value; - - 2,000 shares authorized Common stock; $.01 par value; 450,000 shares authorized; 1,409 1,401 140,917 and 140,161 shares outstanding Additional paid-in capital 977,416 965,422 Retained earnings 674,099 611,622 Cumulative translation adjustment (36,433) (12,472) Total stockholders' equity 1,616,491 1,565,973 Total liabilities and stockholders' $2,132,072 $2,126,912 equity
See accompanying notes to unaudited consolidated condensed financial statements.
LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Revenues $330,101 $332,004 $654,951 $640,392 Costs and expenses: Cost of revenues 175,845 168,999 358,951 333,119 Research and 64,846 58,068 128,688 108,452 development Selling, general and administrative 50,590 49,274 94,342 94,332 Total costs and expenses 291,281 276,341 581,981 535,903 Income from operations 38,820 55,663 72,970 104,489 Interest expense - - - (1,497) Interest income and other 3,925 7,993 10,385 14,080 Income before income 42,745 63,656 83,355 117,072 taxes Provision for income taxes 10,711 17,857 20,878 32,866 Net income $32,034 $45,799 $62,477 $84,206 Net income per share: Basic $0.23 $0.32 $0.44 $0.62 Diluted $0.23 $0.32 $0.44 $0.59 Shares used in computing per share amounts: Basic 140,837 141,733 140,540 135,896 Dilutive 142,293 144,998 141,949 144,447
See accompanying notes to unaudited consolidated condensed financial statements.
LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 1998 1997 Operating activities: Net income $62,477 $84,206 Adjustments: Depreciation and amortization 90,605 79,558 Minority interest in net income of 157 380 subsidiaries Changes in: Accounts receivable (27,325) (21,232) Inventories (2,302) (3,168) Other assets (29,178) (24,612) Accounts payable (33,944) 90,953 Accrued and other liabilities 6,195 32,893 Net cash provided by operating activities 66,685 238,978 Investing activities: Purchases of debt and equity (253,249) (692,099) securities Maturities and sales of debt and 361,267 703,526 equity securities Purchase of restricted equity (6,866) (6,681) securities Purchases of property and equipment, net of retirements and refinancings (148,025) (194,440) Net cash used for investing activities (46,873) (189,694) Financing activities: Proceeds from borrowings - 34,193 Repayment of debt obligations (81) (66,509) Issuance of common stock 12,002 13,520 Net cash provided by (used for) financing activities 11,921 (18,796) Effect of exchange rate changes on cash and cash equivalents (5,185) (512) Increase in cash and cash equivalents 26,548 29,976 Cash and cash equivalents at beginning of period 104,571 147,059 Cash and cash equivalents at end of period $131,119 $177,035 See accompanying notes to unaudited consolidated condensed financial statements.
LSI LOGIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1 - In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. Actual results could differ from those estimates. For financial reporting purposes, the Company reports on a 13 or 14 week quarter with a year ending December 31. For presentation purposes, the consolidated financial statements refer to the quarter's calendar month end for convenience. The results of operations for the quarter ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. One customer represented 11% and 14% of the Company's consolidated revenue during the second quarter and first half of 1998, respectively. Note 2 - Cash equivalents and short-term investments at June 30, 1998, consisted primarily of U.S. and foreign corporate debt securities, commercial paper, auction rate preferred stock, U.S. and foreign government and agency securities and time deposits. Cash equivalents and short-term investments held at June 30, 1998 and at December 31, 1997 approximate fair market value and it is the Company's intention to hold these investments for one year or less. As of June 30, 1998, contractual maturities of available-for-sale securities were $278.1 million maturing within one year. The Company currently does not actively trade securities. Realized gains and losses are based on book value of specific securities sold and were not material during the quarters ended June 30, 1998 and 1997. Note 3 - The Company has fo reign subsidiaries which operate and sell the Company's products in various global markets. As a result, the Company is exposed to changes in foreign currency exchange rates and interest rates. The Company utilizes various hedge instruments, primarily forward contract, currency swap, interest rate swap and currency option contracts, to manage its exposure associated with firm intercompany and third-party transactions and net asset and liability positions denominated in non-functional currencies. The Company does not hold derivative financial instruments for speculative or trading purposes. As of June 30, 1998, the Company had several interest rate swap contracts outstanding which convert the interest associated with 14.187 billion yen ($100.4 million) of borrowings by the Company's Japanese manufacturing subsidiary from adjustable to fixed rates (ranging from 1.75% to 2.46%). The interest rate swaps cover payments to be made under term borrowings through 2001. Current period gains and losses associated with the interest rate swaps are included in interest expense, or as other gains and losses at such time as related borrowings are terminated. The Company enters into forward contracts, currency swaps and currency option contracts to hedge firm commitments, intercompany transactions and third party exposures. The forward and currency swap contracts hedging firm intercompany asset and liability positions denominated in non-functional currencies expired on the last day of the second quarter ended June 30, 1998 and year ended December 31, 1997. Currency swap contracts outstanding during the quarter are considered identifiable hedges and realized and unrealized gains and losses are deferred until settlement of the underlying commitments. They are recorded as other gains or losses when a hedged transaction is no longer expected to occur. Deferred foreign gains and losses were not material at June 30, 1998 and December 31, 1997. Foreign currency transaction gains and losses included in interest income and other were immaterial for second quarters ended June 30, 1998 and 1997, respectively. At June 30, 1998, the Company had several purchased currency options which expire quarterly through June 1999 with an aggregate contract value of $280 million. These currency options were treated as hedges of third-party yen revenue exposures. A significant portion of the options qualify for hedge accounting treatment. The realized and unrealized gains and option premiums are deferred until the option is exercised or expires. The deferred premiums on all outstanding options were $8.9 million as of June 30, 1998 and included in other current assets. Net unrealized gains and losses on the option contracts not qualifying for hedge accounting treatment were not material as of June 30, 1998. Amortization expense of such option premiums was immaterial for the three months ended June 30, 1998. The premiums on such option contracts are amortized over the life of the contract. The options not qualifying for hedge accounting treatment were subsequently closed in July, 1998. The Company does not plan on entering into such options in the future. In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Upon adoption of SFAS 133, the Company will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. While the Company believes the adoption of this statement will not have a material effect on the Company's results of operations as most derivative instruments are closed on the last day of each fiscal quarter, the impact of the adoption of SFAS 133 as of the effective date cannot be reasonably estimated at this time. Note 4 - The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations as required by Statement of Accounting Standards No. 128, "Earnings Per Share (EPS)." (In thousands, except per share data)
Three Months Ended June 30, 1998 1997 Per- Per- Share Share Income* Shares^ Amount Income* Shares^ Amount Basic EPS Net income available to $32,034 140,837 $0.23 $45,799 141,733 $0.32 common stockholders Effect of Dilutive Securities Common stock 1,456 3,265 equivalents Diluted EPS Net income available to $32,034 142,293 $0.23 $45,799 144,998 $0.32 common stockholders
*Numerator ^Denominator Options to purchase approximately 7,409,773 and 638,964 which were outstanding at June 30, 1998 and 1997 respectively, were not included in the calculation because the exercise prices were greater than the average market price of common shares in each respective quarter. The exercise price ranges of these options were $25.31 to $58.13 and $41.88 to $58.13 at June 30, 1998 and 1997, respectively.
Six Months Ended June 30, 1998 1997 Per- Per- Share Share Income Shares^ Amount Income Shares^ Amount Basic EPS Net income available to $62,477 140,540 $0.44 $84,206 135,896 $0.62 common stockholders Effect of Dilutive Securities Common stock 1,409 3,071 equivalents 5-1/2% convertible subordinated notes 1,279 5,480 Diluted EPS Net income available to $62,477 141,949 $0.44 $85,485 144,447 $0.59 common stockholders
*Numerator ^Denominator Options to purchase approximately 7,142,400 and 386,286 which were outstanding at June 30, 1998 and 1997 respectively, were not included in the calculation because the exercise prices were greater than the average market price of common shares in each respective quarter. The exercise price ranges of these options were $25.31 to $58.13 and $41.88 to $58.13 at June 30, 1998 and 1997, respectively. Note 5 - Balance sheet and cash flow information (in thousands):
June 30, December 31 1998 1997 Inventories: Raw materials $27,886 $19,892 Work-in-process 44,652 58,621 Finished Goods 28,841 23,754 Total $101,379 $102,267
Six Months Ended June 30, 1998 1997 Cash Paid for: Income taxes $22,111 $13,200 Interest $1,588 $6,700
During the six month period ended June 30, 1998, the Company capitalized $34.7 million related to the preproduction engineering costs for its Gresham, Oregon manufacturing facility. The unamortized preproduction balance at June 30, 1998 is $69.2 million. In April 1998, The Accounting Standards Executive Committee (AcSEC) released Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-up Activities." The new SOP is effective for fiscal years beginning after December 15, 1998 and requires companies to expense all costs incurred or unamortized in connection with start-up activities. Accordingly, the Company will expense the unamortized preproduction balance as of January 1, 1999 and present it as a cumulative effect of a change in accounting principle in accordance with SOP 98-5. Note 6 - During the first half of 1998, the Company's Japanese sales affiliate sold approximately $45.5 million of its accounts receivables through non-recourse financing programs with two Japanese banks. These receivables were discounted at short-term Yen borrowing rates (averaging approximately 0.44%) and related fees were not material. Note 7 - In January 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income and comprehensive income, for the Company, is due to foreign currency translation adjustments and gains and losses on a long-term intercompany loan with the Company's Japanese affiliate. Comprehensive income for the second quarter and first half of 1998 and comparable periods in the prior year is as follows:
(In thousands) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Comprehensive Income $15,599 $61,260 $46,702 $83,541
Note 8 - On June 28, 1998, the Company entered into an agreement with Hyundai Electronics Industries Co. Ltd, a corporation incorporated under the laws of the Republic of Korea ("HEI"), and Hyundai Electronic of America, a California corporation ("HEA") and a subsidiary of HEI, to acquire all of the outstanding capital stock of Symbios, Inc. ("Symbios"), a Delaware corporation and a wholly owned subsidiary of HEA. The Company agreed to acquire all of the outstanding stock of Symbios from HEA for $760 million in cash, including assumed liabilities and subject to adjustment in certain circumstances. In addition, the Company will assume the stock options outstanding under the Symbios' employee stock option plan. The transaction will be accounted for as a purchase. The Company has started the evaluation of the allocation of purchase price to assets acquired and liabilities assumed. The allocation will include an in-process research and development charge. The Company expects to fund the purchase price through a combination of cash reserves and debt financing. Upon completion of the transaction, Symbios will be a wholly-owned subsidiary of the Company. On July 21, 1998, the Company was advised that its' request for early termination of the waiting period provided by Section 7A(b)(1) of the Clayton Act and Section 803.10(b) of the pre-merger notification rules under the Hart-Scott-Rodino Antitrust Improvements Act of 1978 with respect to the proposed acquisition of Symbios had been granted effective as of that date. Completion of this transaction is subject to customary closing conditions. Note 9 - A discussion of certain pending legal proceedings is included in Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The information provided therein remains unchanged. The Company continues to believe that the final outcome of such matters discussed will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that these matters will be resolved without the Company becoming obligated to make payments or to pay other costs to the opposing parties, with the potential for having an adverse effect on the Company's financial position or its results of operations. Certain additional claims and litigation against the Company have also arisen in the normal course of business. The Company believes that it is unlikely that the outcome of these claims and lawsuits will have a materially adverse effect on the Company's consolidated financial position or results of operations. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition General The Company believes that its future operating results are and 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, the availability and extent of utilization of manufacturing capacity, fluctuations in manufacturing yields, price erosion, competitive factors, the timing of new product introductions, changes in product mix, 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 circumstances of the Company's customers may have a greater impact on the Company than if the Company predominantly 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 satisfy expectations published by external sources, public reaction 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 and other operating 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 economic conditions of the respective countries in which the Company operates. The Company utilizes various instruments, primarily forward exchange, currency swap and currency option contracts to manage its exposure associated with currency fluctuations on intercompany, certain foreign currency denominated commitments and anticipated third party sales (see Note 3 to the Unaudited Consolidated Condensed Financial Statements). Despite its hedging activities, the Company continues to be exposed to the risks associated with fluctuation of foreign currency exchange rates, particularly the Japanese yen. There can be no assurance that such fluctuation will not cause a material adverse effect on the Company's financial position or results of operations. 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. There have been no significant changes in the year 2000 issue or in the market risk disclosures during the first half of 1998 as compared to the discussion in the Company's 1997 Annual Report on Form 10-K for the year ended December 31, 1997. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information, management recommends that this discussion and analysis be read in conjunction with Management's Discussion and Analysis included in the Company's 1997 Annual Report on Form 10-K for the year ended December 31, 1997. Statements in this discussion and analysis contain forward looking information and involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. In addition to the factors discussed above, such factors may include, but may not necessarily be limited to fluctuations in customer demand, both in timing and volumes, and fluctuations in currency exchange rates. Also, the Company's ability to have available an appropriate amount of production capacity in a timely manner can significantly impact the Company's financial performance. The timing of new technology and product introductions and the risk of early obsolescence are also important factors. Further, the Company operates in an industry sector where securities values are highly volatile and may be influenced by economic and other factors beyond the Company's control. (See additional discussion contained in "Risk Factors", set forth in Part 1 of the Company's report on Form 10-K for the year ended December 31, 1997.) Results of Operations Revenues for the second quarter of 1998 decreased 0.6% as compared to the second quarter of 1997. The decrease was primarily attributable to lower average selling prices as well as unfavorable effect of foreign exchange most notably for the Company's products for consumer applications, decreased demand for the Company's products for computer applications, offset in part by increased demand for the Company's products for communications applications. Revenues for the first half of 1998 increased 2.3% compared to the same period in 1997. The increase was primarily attributable to increased demand for the Company's products for communications applications, partially offset by decreased demand for the Company's products for consumer and computer applications and overall lower average selling prices and unfavorable effect of foreign exchange. One customer represented 11% and 14% of the Company's consolidated revenues during the second quarter and first half of 1998. Key elements of the statements of operations, expressed as a percentage of revenues, were as follows:
Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Gross margin 46.7% 49.1% 45.2% 48.0% Research and development 19.6% 17.5% 19.6% 16.9% expenses Selling, general and 15.3% 14.8% 14.4% 14.7% administrative expenses Income from operations 11.8% 16.8% 11.1% 16.3%
Gross margin as a percentage of revenues decreased to 46.7% and 45.2% during the second quarter and first half of 1998, respectively, from 49.1% and 48.0% in the same periods in 1997. The decrease was primarily related to the combination of a change in product mix yielding lower margins and overall lower average selling prices when expressed in dollars, offset partially by improved capacity utilization. Although the average yen exchange rate for the second quarter and the first half of 1998 weakened by approximately 12.9% and 9.4%, respectively, from the same periods in 1997, the effect on gross margin and net income was not material due to the Company's yen denominated sales offsetting a substantial portion of its yen denominated costs and the Company's hedging of a portion of its remaining yen exposures during these periods. However, there can be no assurance that future changes in the relative strength of the yen, or the mix of foreign denominated revenues and expenses, will not have a material effect on gross margin or operating results. The Company's operating environment, combined with the resources required to operate in the semiconductor industry, requires managing a wide variety of factors such as factory and capacity utilization, manufacturing yields, product mix, availability of certain raw materials, terms negotiated with third-party subcontractors and foreign currency exchange rate fluctuations. The gross margin in the first two quarters of 1998 may not be indicative of expected results for the remainder of the fiscal year. The Company is currently constructing a new manufacturing facility in Gresham, Oregon. This new facility is expected to become operational during the fourth quarter of 1998 to accommodate anticipated future capacity requirements. If demand does not absorb the Company's available capacity at a sufficient rate, or if achieved, such demand is not sustained, the Company's gross margin and operating results could be negatively impacted in future periods. Research and development (R&D) expenses increased $6.8 million, and $20.2 million, respectively, to $64.8 million and $128.7 million during the second quarter and first half of 1998 compared to the same periods in 1997. The increase in R&D expenses is primarily attributable to the Company's continued development of advanced technology sub-micron products and the related manufacturing, packaging and design processes. As a percentage of revenues, R&D expenses increased to 19.6% in the second quarter and first half of 1998 compared to 17.5% and 16.9%, respectively, during the same periods in 1997. As the Company continues its commitment to technological leadership in the high performance semiconductor market, it anticipates continuing with an investment of 19% to 20% of revenues during the second half of 1998. Selling, general and administrative (SG&A) expenses increased $1.3 million and $.01 million, to $50.6 million and $94.34 million, respectively, in the second quarter and first half of 1998 compared to the same periods in 1997. The increase is primarily attributable to costs of setting up new sales offices in Asia Pacific and the U.S during the first half of 1998, coupled with additional expenses from increased compensation and staffing levels and increased information technology costs relating to upgrading the Company's business systems and infrastructure. As a percentage of revenues, SG&A expenses increased to 15.3% in the second quarter of 1998, and decreased to 14.4% in the first half of 1998, compared to 14.8% and 14.7%, respectively, during the same periods in 1997. The Company expects that SG&A expense as a percentage of revenue will not be significantly different throughout the second half of 1998. Interest expense for the first half of 1998 decreased $1.5 million as compared to the same period in 1997. The decrease is primarily attributable to the conversion of all of the Company's $144 million, 5 1/2% Convertible Subordinated Notes to common stock on March 24, 1997 and capitalization of interest as part of the construction at the new manufacturing facility in Gresham, Oregon. Interest income and other decreased $4.1 million and $3.7 million in the second quarter and first half of 1998 to $3.9 million and $10.4 million, respectively, as compared to the same periods in 1997. The decrease primarily relates to a reduction of interest income generated from the Company's lower average balance of cash, cash equivalents and short-term investments during the second quarter and first half of 1998 as compared to the same periods in 1997, offset in part by gains from sale of a building owned by a European affiliate in the second quarter of 1998. The Company recorded a provision for income taxes for the first half of 1998 and 1997 with an effective rate of 25% and 28%, respectively. The reduction in rate is a result of a change in earnings mix in its foreign subsidiaries which are taxed at lower rates. The Company's effective tax rate is lower than the U.S. statutory rate primarily due to the Company's anticipated utilization of available tax credits and the expected earnings mix in its foreign subsidiaries. Financial Condition and Liquidity The Company's cash, cash equivalents and short-term investments decreased $81.7 million during the first half of 1998 to $409.2 million from $490.9 million at the end of 1997. The decrease is primarily due to additional purchases of property and equipment and higher amounts of cash used in the Company's operations. Working capital decreased $6.9 million to $425.3 million at June 30, 1998 from $432.2 million at December 31, 1997. During the first half of 1998, the Company generated approximately $66.7 million of cash and cash equivalents from its operating activities compared with $239.0 million during the same period in 1997. The decrease in cash and cash equivalents provided from operations during the first half of 1998 as compared to the same period a year ago is primarily attributable to decreases in net income before depreciation and amortization and decreases in accounts payable and accrued and other liabilities. The decrease in accounts payable reflects a combination of factors primarily related to the timing of invoice receipt and payment compared to the previous period, and a reduction of capital expenditures in the first half of 1998 relative to the same period in prior year for the Company's manufacturing facility in Gresham, Oregon as it approaches completion. The decrease in accrued and other liabilities is primarily attributable to lower income tax accruals resulting primarily from lower taxable income and a lower effective income tax rate during the first half of 1998 as compared to the same period in 1997. Cash and cash equivalents used for investing activities during the first half of 1998 were $46.9 million compared to $189.7 million during the same period in 1997. The primary investing activities during the first half of 1998, other than short-term investments in available for sale debt and equity securities, included purchases of property and equipment and additional investments in non-marketable shares of other technology companies. The decrease in cash used for investing activities from the first half of 1998 as compared to the same period in 1997 is primarily attributable to a decrease in purchases of property and equipment, net of retirements and refinancings. The Company believes that maintaining technological leadership in the highly competitive worldwide semiconductor industry requires substantial ongoing investment in advanced manufacturing capacity. Capital additions were $148.0 million and $194.4 million, net of retirements and refinancings, during the first half of 1998 and 1997, respectively. The additions were primarily for costs related to the new eight-inch wafer manufacturing facility in Gresham, Oregon. The Company expects to spend approximately $82 million during the remainder of 1998 to bring this facility to operational status. Cash and cash equivalents provided by financing activities during the first half of 1998 totaled approximately $11.9 million, compared to $18.8 million of cash used in the same period of 1997. The primary financing activities during the first half of 1998 are attributable to the issuance of common stock associated with the employee stock purchase plan and employee stock option exercises. In the first half of 1997, the primary activities from financing activities included repayments of debt obligations offset in part by the issuance of common stock associated with the employee stock purchase plan and employee stock option exercises. There were no repurchases of common stock by the Company during the first half of 1998 and its comparable period in 1997. In December 1996, the Company entered into a credit arrangement with several banks for a $300 million revolving line of credit expiring in December 1999. The agreement allows for borrowings at an adjustable interest rate. Interest payments are due quarterly. The agreement includes financial covenants relating to senior debt ratio, quick ratio, debt service ratio, subordinated debt and tangible net worth. At June 30, 1998, the Company did not have any borrowings outstanding under this credit agreement. In addition, the Company's Japanese manufacturing subsidiary, JSI, has a credit facility with adjustable interest rates. Borrowings outstanding under the credit facility are for a term of five years with principal payments due semiannually beginning July 1997. The Company must comply with certain financial covenants relating to profitability, tangible net worth, working capital, senior and total debt leverage and subordinated indebtedness. At June 30, 1998, the Company was in compliance with these covenants. As of June 30, 1998, JSI had 14.187 billion yen ($100.4 million) outstanding under the facility. Each of the Company's significant foreign affiliates have lines of credit available for local currency borrowings. These foreign bank lines of credit were not material as of June 30, 1998. The Company believes that existing liquid resources and funds generated from operations combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. 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 financing. However, 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 financing will decrease existing stockholders' percentage equity ownership and may, depending on the price at which the equity is sold, result in dilution. Recent Accounting Pronouncements In April 1998, the Accounting Standards Executive Committee (AcSEC) released Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-up Activities". The new SOP is effective for fiscal years beginning after December 15, 1998 and requires companies to expense all costs incurred or unamortized in connection with start-up activities. The Company will expense the unamortized preproduction balance as of January 1, 1999 and present it as a cumulative effect of a change in accounting principle in accordance with SOP 98-5. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Upon adoption of SFAS 133, the Company will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. While the Company believes the adoption of this statement will not have a material effect on the Company's results of operations as most derivative instruments are closed on the last day of each fiscal quarter, the impact of the adoption of SFAS 133 as of the effective date cannot be reasonably estimated at this time. Part II Item 1 Legal Proceedings Reference is made to Item 3, Legal Proceedings, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 for a discussion of certain pending legal proceedings. The information provided at such reference regarding other matters remains unchanged. The Company continues to believe that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that these matters will be resolved without the Company becoming obligated to make payments or to pay other costs to the opposing parties, with the potential for having an adverse effect on the Company's financial position or its results of operations. Item 4 Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of LSI Logic Corporation was held on May 12, 1998 in New York, New York. Of the total 140,279,8331 shares outstanding as of the record date, 128,028,912 shares (91.3%) were present or represented by proxy at the meeting. The table below presents the voting results of election of the Company's Board of Directors:
Votes For Votes Withheld Wilfred J. Corrigan 126,345,250 1,683,662 T.Z. Chu 126,320,763 1,708,149 Malcolm R. Currie 126,284,496 1,744,416 James H. Keyes 126,336,329 1,692,583 R. Douglas Norby 126,338,551 1,690,361
The stockholders approved an amendment to the 1991 Equity Incentive Plan to increase the number of shares reserved for issuance thereunder by 7,000,000. The proposal received 114,740,482 affirmative votes, 12,435,870 negative votes, 850,560 abstentions, and 0 non-votes. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 27.1Financial Data Schedule (b) Reports on Form 8-K Registrant reported Other Events - the agreement to acquire all of the outstanding capital stock of Symbios, Inc., on a Current Report on Form 8-K filed on July 2, 1998. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSI LOGIC CORPORATION (Registrant) Date: August 5, 1998 By /s/ R. Douglas Norby R. Douglas Norby Executive Vice President Finance & Chief Financial Officer Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSI LOGIC CORPORATION (Registrant) Date: August 5, 1998 By R. Douglas Norby Executive Vice President Finance & Chief Financial Officer EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JUN-30-1998 131,119 278,111 234,009 2,548 101,379 824,202 1,766,754 601,548 2,132,072 398,851 0 1,409 0 0 1,615,082 2,132,072 654,951 654,951 358,951 358,951 223,030 0 0 83,355 20,878 62,477 0 0 0 62,477 0.44 0.44 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 177,035 558,946 210,391 3,154 94,106 1,108,395 1,516,531 595,068 2,133,031 440,093 0 1,419 0 0 1,553,098 2,133,031 640,392 640,392 333,119 333,119 202,784 0 0 117,072 32,866 84,206 0 0 0 84,206 0.62 0.59 -----END PRIVACY-ENHANCED MESSAGE-----