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
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
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
</TABLE>
See accompanying notes to unaudited consolidated condensed
financial statements.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
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
</TABLE>
See accompanying notes to unaudited consolidated condensed
financial statements.
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
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.</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
Per- Per-
Share Share
Income* Shares^ Amount Income* Shares^ Amount
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
*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.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
Per- Per-
Share Share
Income Shares^ Amount Income Shares^ Amount
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
*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):
<TABLE>
<CAPTION>
June 30, December 31
1998 1997
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash Paid for:
Income taxes $22,111 $13,200
Interest $1,588 $6,700
</TABLE>
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:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Comprehensive Income $15,599 $61,260 $46,702 $83,541
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
Votes For Votes
Withheld
<S> <C> <C>
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
</TABLE>
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
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