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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 DECEMBER 31, 1997
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)
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<S> <C>
DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 433-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $0.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 13,
1998 as reported on the New York Stock Exchange, was approximately
$3,139,233,330. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 13, 1998, registrant had 140,281,283 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts
I, II, III and IV of this Form 10-K Report: (1) Proxy Statement for registrant's
1998 Annual Meeting of Stockholders, and (2) registrant's 1997 Annual Report to
Stockholders.
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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") and application specific standard products
("ASSPs"). The Company uses advanced process technology and design methodology
to design, develop and manufacture highly complex circuits. The Company's
submicron process technologies, combined with its product libraries, including
CoreWare(R) libraries, provide the Company with the ability to integrate system
level solutions on a single chip.
The Company's product marketing approach is to focus primarily on original
equipment manufacturers in the consumer, communications and computer products
markets. The Company offers products and services for a variety of applications
in each of these markets, including digital video disc ("DVD"), digital
broadcasting, digital image processing and personal entertainment applications
for the consumer products market; networking, telecommunications and wireless
communication for the communications market; and personal computer, server,
storage solutions and office automation applications for the computer products
market. The Company targets its marketing and selling efforts toward
acknowledged industry leaders in these markets.
The Company has developed and uses complementary metal oxide semiconductor
("CMOS") process technologies to manufacture integrated circuits implementing
submicron processes. The Company's 0.25 micron(1) G10(TM) process, for example,
allows for up to 49,000,000 usable transistors on a single chip. The Company's
G11(TM) process technology, which is currently expected to begin volume
production in 1998, features a 0.18 micron gate length, allows for up to
64,000,000 usable transistors. During the first quarter of 1998, the Company
announced its 0.13 micron G12(TM) process technology. These advanced
technologies allow for greater density and increased functionality on a single
chip.
The Company's CoreWare design methodology and submicron process
technologies permit customers to combine microprocessor "engines", predefined
logic blocks (including industry standard functions), and memory along with a
customer's proprietary logic on a single chip. This allows the customer to
differentiate its product, optimize its application and shorten product
development cycles.
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" mean LSI Logic Corporation and its majority and wholly-owned
subsidiaries.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth below and
elsewhere in this Report. See "Risk Factors" below and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" which is
incorporated by reference to Item 7 of Part II hereof. Statements made herein
are as of the date of the filing of this Form 10-K with the Securities and
Exchange Commission, and should not be relied upon as of any subsequent date.
The Company expressly disclaims any obligation to update information presented
herein, except as may otherwise be required by law.
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(1) All references to gate length measurement reflect effective gate length
unless otherwise indicated.
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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:
- Emphasize CoreWare Methodology and System-on-a-Chip Capability. The
Company's design methodology makes use of its CoreWare product libraries
and its deep submicron process technologies to permit system level
integration of microprocessors, logic blocks (including industry standard
functions), memory and customer specific proprietary logic functions on a
single chip. 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. The Company has utilized its design methodology to
develop a line of targeted proprietary ASSPs that provide standard
off-the-shelf solutions in areas including DVD, digital camera, digital
video broadcasting and wireless communications.
- Target Growth Markets and Selected Customers. The Company directs its
marketing and selling efforts toward selected customers in the consumer,
communications and computer products markets. The Company targets high
growth end-markets 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.
- Promote Highly Integrated Design and Manufacturing Technology. The
Company uses a mix of internally developed proprietary software and third
party electronic design automation ("EDA") software which is highly
integrated with the Company's manufacturing process requirements and
designed to provide high predictability that the product's performance
will mirror the computer simulation of the chip. The Company's
sophisticated design tools and strategies, advanced process technology
and submicron manufacturing capability are intended to provide customers
with highly integrated solutions that work right the first time. The
Company's design environment includes expanded interface capabilities to
a range of third party EDA tools from leading vendors such as Cadence
Design Systems, Inc., Mentor Graphics Corporation, Synopsys, Inc., and
Ambit Design Systems, Inc. The Company continues to expand its expertise
in the areas of system architecture and system level design verification.
- Provide 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 implement
product specifications in a particular chip design through its own
engineers, on a "turn-key" basis using the Company's engineers, or
through a collaborative effort. The Company's extensive, worldwide
network of design and engineering professionals allows for effective
interaction with customer management and engineering staff throughout the
design process.
- Maintain High-Quality and Cost-Effective Manufacturing. The Company
believes that owning its wafer manufacturing facilities improves quality,
cost-effectiveness, responsiveness to customers, implementation of
leading-edge process technology and time-to-market advantages. 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. The Company's production operations
in the U.S. and Japan, as well as all of its assembly and test
subcontractors in the Far East, are ISO 9002 certified, 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 929 employees (including
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U.S. and subsidiaries in Europe, Canada, Japan and elsewhere in the Asia
Pacific region), as well as through independent sales representatives and
distributors. The Company operates 42 design centers throughout the world
to assist customers in product design activities. The Company's
extensive, worldwide network of design centers allows the Company to
provide customers with highly experienced engineers to interact with
customer engineering management and system architects to develop designs
for new products and to provide continuing after-sale customer support.
PRODUCTS AND SERVICES
Engineering
The Company's product marketing and sales strategy is to focus on original
equipment manufacturers ("OEMs") in the consumer, communications and computer
products markets. The Company seeks to engage with leaders in these markets with
the objective of providing technical support to customers early in their new
system product development process. In executing its engineering strategy, the
Company offers a wide variety of engineering design services, allowing the
customer to determine the level of participation which it 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.
In either case, the Company's design environment offers system level design
capability featuring hardware/software co-verification and includes an expanded
interface to various third party EDA vendors' design tools.
In 1997, the Company acquired Mint Technology, Inc. ("Mint Technology"), an
engineering services company headquartered near Boston, Massachusetts, which
offers design engineering and related consulting services and provides expertise
in the areas of system architecture and system level design simulation
verification and synthesis used in the development of complex integrated
circuits. The acquisition is intended to complement and expand the Company's
engineering design capabilities.
The Company makes available various library elements (including macrocells,
the basic silicon structures used in the design of logic circuits, and the
larger predefined functional building blocks, "megacells" and "megafunctions"),
technology databases and design automation software programs. The most complex
of the Company's library elements are called cores which are comprised of
predefined and pretested cells of generally recognized industry standard
functions, protocols and interfaces.
The Company's software design tool environment supports and automatically
performs key elements of the design process from circuit concept through
physical layout of the circuit design and preparation of pattern generation
tapes 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.
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 customer design will result in volume
production orders and, if so, the quantities included in any such orders, are
factors beyond the control of the Company. Insufficient orders could result in
underutilization of the Company's manufacturing facilities which could have an
adverse impact on the Company's operating results and financial condition.
Components
The Company's vertical market focus on the consumer, communications and
computer products markets permits it to dedicate engineering resources to
develop component products and systems expertise directed at particular markets.
This system level expertise and design methodology in conjunction with a wide
range of
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component product offerings, including the Company's CoreWare libraries and
ASSPs, offer customers the opportunity to realize rapid time to market
system-on-a-chip solutions.
The Company's CoreWare design methodology offers a complete design approach
for creating a system on a chip efficiently, predictably and rapidly to address
the performance, cost and time-to-market goals of the customer. CoreWare library
elements are complex, very large scale integration ("VLSI") or large system
level, predefined building blocks of integrated circuit logic functions which
are either developed by the Company or acquired under technology transfer or
licensing agreements. CoreWare elements are highly integrated for use with the
Company's proprietary and third party EDA design tool environment and those
advanced manufacturing processes to which individual cores are targeted.
The Company's CoreWare libraries are based upon functions, protocols and
interfaces generally recognized as industry standards and are positioned to be
useful in a wide variety of systems applications. The Company's CoreWare
libraries include implementations of functions targeted for a particular market,
such as switched Ethernet for networking and communications; fibre channel, IEEE
1394 and a PCI bus for computer products; and MPEG2 and Reed-Solomon
encoder/decoder functions for the consumer market. Others, such as the Company's
MiniRISC(R) family of MIPS-based RISC (reduced instruction set computing) CPU
(central processing unit) cores, the Gigablaze(TM) Serial Transceiver, the
ARM(R) CPU core and the OakDSPCore(R) digital signal processor, are useful in
more than one product market. The Company's CoreWare libraries can be coupled
with other CoreWare components, with memory and with customer proprietary logic
to realize system level applications on a single chip.
In addition, the Company offers a line of standard off-the-shelf, single
chip solutions that perform a variety of high-speed digital signal and image
processing operations and support a wide range of applications. The Company's
ASSP offerings include a DVD decoder solution, a programmable single chip GSM
baseband processor, an image processing solution for digital still camera and
printer products, and a transport demultiplexer for set-top box applications.
Standard products developed by the Company generally are implementations of
emerging industry standard functions and may also be targeted for inclusion in
its CoreWare library. The Company also offers a range of reference design
modules to aid in the development of customers' products, such as the
Scenario(TM) MPEG2/AC3 reference design module and the Integra(TM) SDP1100
platform for set top box applications, and hardware reference designs for DVD
and digital still camera applications.
The Company's CoreWare libraries are designed to be used with the
customer's proprietary logic in cell-based designs based upon the Company's
design methodology. The Company continues to emphasize engineering development
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 opportunities that utilize
the Company's CoreWare libraries and system-on-a-chip design capabilities. 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 design
environment on a timely basis. Similarly, the Company's selection of ASSP
offerings is based on its forecasts and assessments of emerging markets and
technologies, availability and quality of supporting software and opportunities
for customer differentiation. There can be no assurance that shifts in end-user
markets or the inability of customers to implement differentiating features will
not adversely affect market acceptance of the Company's ASSPs.
The Company's component product offerings are based primarily upon its
cell-based technology which allows the customer to combine standard cells,
memories (such as fully static random access memory (RAM), static multi-port RAM
and metal programmable read only memory (ROM)) and other dedicated 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. Cell based
technology offers customers higher density and enhanced performance as compared
to gate array technology. Gate array technology, in which a standard base matrix
of uncommitted transistors is customized only in the later stages of
manufacture, is a lower cost alternative offered by the Company in less
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advanced process technologies. The Company offers a wide variety of die sizes
and functionality configurations that are available in different feature sizes
and are based on different process technologies.
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 custom diffused wafers (for cell-based
ASICs) or uncommitted wafers (for gate array 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 Hong Kong. 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, although the Company's new facility in Gresham, Oregon, is currently
scheduled to begin production in 1998. Final assembly and test operations are
conducted by the Company's Hong Kong affiliate through independent
subcontractors, and at the Company's Fremont, California facility. Some of the
Company's assembly and test subcontractors are located in the Philippines,
Malaysia, Korea and Hong Kong. There can be no assurance that regional economic
problems and exchange rate fluctuations currently being experienced in Asia will
not affect the operations of those subcontractors or the prices they charge for
services. The inability of the Company to obtain a minimum level of qualified
assembly and test capacity would have a material adverse impact on the Company's
operating results and financial condition.
In July 1997, Hong Kong came under the complete control of the government
of the People's Republic of China ("PRC"). Although the PRC control has resulted
in no problems to date, there can be no assurance that the Company and its
affiliates will not experience a disruption in the flow of products in the
future which could result in a material adverse impact on the Company's
operations. In addition to the reversion of Hong Kong to PRC 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 and financial condition.
The Company utilizes various high performance CMOS process technologies in
the volume manufacture of its products. The Company's two facilities in Tsukuba,
Japan utilize advanced process technologies in conjunction with computer
integrated manufacturing to produce mainly 0.38 micron and G10 (0.25 micron)
products. The Company's new facility in Gresham, Oregon, is equipped for
production of eight-inch G10 and G11 (0.18 micron) products beginning in 1998.
Each of these facilities has a highly automated production line, providing
greater productivity, product quality and production management flexibility, and
offering customers a high-volume, reliable source for manufacturing.
The Company utilizes highly specialized chemical mechanical polishing
("CMP") equipment in its manufacturing facilities. CMP increases manufacturing
yields and allows for higher levels of chip customization. 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 that are manufactured to the Company's specifications.
The new Gresham, Oregon, site, located on approximately 325 acres near
Portland, is equipped for state-of-the-art manufacturing operations as well as
for other purposes. The site is planned to accommodate expansion requirements
the Company may have in the foreseeable future. The Company spent approximately
$317 million on the facility in 1997 and expects to spend an additional $123
million in the first three quarters of 1998 to bring the facility to operational
status. The level of capital expenditures necessary to enable the Company to
remain competitive results in a relatively high level of fixed costs. 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 result in a material adverse impact on the Company's operating
results
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and financial condition. The Greshman facility is a sophisticated, highly
complex, state-of-the-art factory whose production rates depend upon the
reliable operation and effective integration of a variety of hardware and
software components. There can be no assurance that all of these components will
be fully functional or successfully integrated within the currently projected
ramping schedule or that the facility will not fail to achieve the forecasted
yield targets. Failure of the facility to achieve an acceptable level of
production capacity during test phase and ramp-up or to maintain acceptable
levels during production could have a material adverse impact on the Company's
operating results and financial condition.
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. The
Company has benefited 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. The Fremont assembly line has been specially
equipped to support such high reliability packaging needs. The proportion of
ceramic packaging capable of being done by independent assembly plants continues
to increase and the Company subcontracts some ceramic packaging offshore.
The Company utilizes a high-density Flip Chip interconnect packaging
technology which essentially replaces wires that connect the edge of the die to
a package with solder bumps spread over the entire external surface of the die.
This technology enables the Company to reach exceptional performance and lead
count levels in packages required for process technologies of 0.18 micron and
below. The Company has also introduced a mini ball grid array package which
offers a smaller package size without sacrificing electrical and thermal
performance.
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 operations are currently conducted in close proximity to
the particular facility where assembly activities are performed. The Company
intends to continue its use of independent assembly plants to test its products.
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. The Company spent approximately $513 million
on capital additions in 1997, net of retirements, and expects to spend
approximately $400 million in 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 resources is an important 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.
Disruption of operations at any of the Company's primary manufacturing
facilities, or at any of its subcontractors for any reason, including work
stoppages, fire, earthquake, flooding or other natural disasters, would cause
delays in shipments of the Company's products. There can be no assurance that
alternate capacity would be available on a timely basis or at all, or that, if
available, it could be obtained on favorable terms, thereby potentially
resulting in a loss of customers. The disruption of operations for these and
other reasons could have a material adverse impact on the Company's operating
results and financial conditions. 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 that are manufactured to the Company's specifications.
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 various factors such as abrupt fluctuations
in product demand, production overcapacity and subsequent accelerated
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erosion of average selling prices, and in some cases have lasted for more than a
year. 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 impacted by a significant industry-wide downturn. The semiconductor
industry also has been characterized by periods of rapid expansion of production
capacity. Even if customers' aggregate demand might not decline, the
availability of additional capacity can adversely impact pricing levels, which
can also depress revenue levels. Also, during such periods, customers benefiting
from shorter lead times may delay some purchases into future periods.
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. The Company
continues to evaluate its worldwide manufacturing operations to effect
additional cost savings and technological improvements. Nevertheless, 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 and financial condition
may be adversely impacted.
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-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
many vendors of certain critical items, and shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry. Additionally, there can be no assurance that disruptions in these
vendors' ability to perform will not occur. Should the Company experience such
disruptions, the Company's operations could be materially and adversely
impacted, which could have a material adverse impact on its operating results
and financial condition. The Company's operations also depend upon a continuing
adequate supply of electricity, natural gas and water. To date, the Company has
experienced no significant difficulty in obtaining the necessary raw materials.
The Company 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 in its Japanese
manufacturing facilities, 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 also has borrowings and operating lease
obligations denominated in yen, which totaled approximately 29 billion yen
(approximately $224 million) at December 31, 1997. 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 utilizes
forward exchange, currency swap and option contracts to manage its exposure
associated with currency fluctuations on intercompany transactions and certain
foreign currency denominated commitments. There can be no assurance that such
hedging transactions will minimize exposure to currency rate fluctuations or
that fluctuations in currency exchange rates in the future will not have a
material adverse impact on the Company's operating results and financial
condition. In addition, there can be no assurance that inflation rates in
countries where the Company conducts operations will not have a material adverse
impact on the Company's operating results and/or financial condition in the
future.
Both manufacturing and sales of the Company's products may be adversely
impacted by political and economic conditions abroad. Protectionist trade
legislation in either the United States or foreign countries,
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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.
YEAR 2000
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in its
financial, product development, order management and manufacturing systems. The
inability of computer software programs to accurately recognize, interpret and
process date codes designating the year 2000 and beyond could cause systems to
yield inaccurate results or encounter operating problems, including interruption
of the business operations such systems control. The Company is in the process
of analyzing its internal computer-based systems to identify potential
vulnerabilities and implement corrections or changes that may be required. Based
on information currently available, the Company believes that its internal
systems currently are or, by such time as is necessary to avoid material adverse
impact on the Company, will be capable of functioning without year 2000
problems. Also based on information thus far available to the Company, the
Company does not believe it will incur expenditures in dealing with year 2000
issues that will have a material adverse impact on the Company's operating
results or financial condition.
The Company may also be exposed to risks from computer systems of parties
with whom the Company transacts business. Were problems to develop with such
other parties' systems, they could have a material adverse impact on the
Company. In response to this, the Company is taking steps, including contacting
its strategic suppliers and large customers, to determine the extent to which
the Company may be vulnerable to those parties' failure to remedy their own year
2000 issues and to ascertain what actions, if needed, may be taken by the
Company in response to such risks.
The Company has expended and will continue to expend appropriate resources
to address this issue on a timely basis. The analysis is not complete, however,
and there can be no assurances that unknown costs ultimately necessary to update
systems or address potential system interruptions will not have a material
adverse impact on the Company's business, financial condition or results of
operations. To date, the Company has not identified any loss contingencies
related to the year 2000 issues for products it has sold.
MARKETING AND CUSTOMERS
The Company has focused its marketing efforts primarily on the consumer,
communications and computer products industries. Within those markets, the
Company emphasizes digital broadcasting, personal entertainment, wireless
communication, networking, public telecommunications, storage, workstations,
personal computer and office automation applications. The Company's strategy is
to leverage its systems level ASIC strength to the benefit of acknowledged
leaders in those product markets. 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.
The Company markets its products and services through its worldwide direct
sales and marketing and field engineering organizations which consist of
approximately 929 employees at 42 locations throughout the world, and through
independent sales representatives and distributors. Each of the Company's
customer design centers also includes a direct sales office. See "Properties."
For information concerning foreign operations, see Note 10 of Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders, which is incorporated by reference herein. 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 1997, Sony Corporation accounted for approximately 22% of the Company's
revenues. In 1996 and 1995, Sony Corporation accounted for approximately 14% and
12%, respectively, of the Company's net revenues. Although the Company does not
currently foresee any reduction in volume of products ordered by Sony, there can
be no assurance that a significant decline in product orders, significant
changes in scheduled deliveries or a significant decrease in product price would
not have a material adverse impact on the Company's operating results and
financial condition.
9
<PAGE> 10
BACKLOG
Generally, the Company's customers are not subject to long-term contracts,
but instead use purchase orders that are subject to acceptance 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. Representative
examples include major diversified electronics companies such as Fujitsu
Corporation, Toshiba Corporation, NEC Corporation, SGS Thomson Microelectronics,
S.A., and a number of United States semiconductor manufacturers, including
Lucent Technologies, Inc., IBM Corporation and VLSI Technology, Inc. In
addition, the Company faces competition from some companies whose strategy is to
provide a portion of the products and services which the Company offers. For
example, these competitors may offer semiconductor design services, may license
design tools, and/or may provide support for obtaining products at an
independent foundry. 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 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. In addition, ASSP
offerings compete on quality of system integration, existence and accessibility
of differentiating features and quality and availability of supporting software.
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 on competitive terms. There can be no assurance,
however, that other custom design approaches or competing system level products
will not be developed by others which could have a material adverse impact on
the Company's operating results and financial condition.
The Company is increasingly emphasizing its CoreWare design methodology and
ASSP product offerings. This strategy may present new business opportunities for
which the Company believes it has a present competitive advantage. Although
there are other companies that offer similar types of products and related
services, the Company believes it currently offers different, and generally more
complete, capabilities than those companies. As the markets for the CoreWare
approach and ASSPs grow, the Company's competitors will increasingly offer
alternative solutions and competition will intensify. There can be no assurance
that the Company's CoreWare product approach and product offerings will continue
to receive market acceptance, that a competitor's approach will not achieve
greater acceptance or that as competition intensifies, the Company's future
operating results and financial condition 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, the ability
of a customer to customize and differentiate its product and the availability
and quality of software to support system-level integration. 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
10
<PAGE> 11
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, there will be a
material adverse impact on the Company's operating results and financial
condition.
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 1997, 1996 and 1995, the Company expended $226,219,000, $184,452,000 and
$123,892,000, respectively, on its research and development activities,
representing 18%, 15% and 10%, respectively, as a percentage of revenues. 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 of Financial Condition and Results of Operations" at
page 11 of the Company's 1997 Annual Report to Stockholders, incorporated herein
by reference.
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, trademark rights or other
intellectual property 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.
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 impact on the Company's future
operating results and financial condition. Litigation that arose with respect to
one such assertion was finally resolved in 1997 in favor of the Company. See
"Legal Proceedings".
The Company has also entered into certain cross 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. However, increasing public attention has been focused
on the environmental impact of electronics and semiconductor manufacturing
operations. While the Company to date has not experienced any materially adverse
impact 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
11
<PAGE> 12
revocations or as a consequence of the granting of injunctions requested by
governmental agencies or private parties.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries had approximately
4,443 employees, including approximately 611 in field engineering and sales,
approximately 318 in product marketing, approximately 1,116 in research and
development activities, approximately 1,966 in manufacturing and approximately
432 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 employees or the inability to
hire such employees when needed could have a material adverse impact 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.
RISK FACTORS
In addition to the following risk factors, reference is made to those risk
factors described elsewhere in this Form 10-K Report, as well as in the other
documents incorporated by reference in this Form 10-K Report.
Dependence on New Process Technologies and Products. The Company believes
that its future success depends, in part, on its ability to improve its existing
technologies and to develop and implement new process technologies in order to
continue to reduce semiconductor die size, improve device performance and
manufacturing yields, 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 achieve volume production of new products
at acceptable yields using new manufacturing processes, the Company's operating
results and financial condition will be adversely impacted. In addition, the
Company must continue to develop and introduce new products that compete
effectively on the basis of price and performance and that satisfy customer
requirements. New product development often requires long-term forecasting of
market trends, development and implementation of new processes and technologies
and a substantial capital commitment. The Company intends the CoreWare library
elements and ASSPs 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 Company continues to emphasize engineering
development and acquisition of CoreWare building blocks and integration of
CoreWare libraries into its design capabilities. There can be no assurance,
however, that the standard product offerings or cores selected for investment of
the Company's financial and engineering resources will be developed or acquired
in a timely manner or will enjoy market acceptance.
Manufacturing Risks. 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, flooding 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, it could be obtained on
favorable terms, thereby potentially resulting in a loss of customers. The
disruption of operations for those or other reasons could result in a material
adverse impact on the Company's operating results and financial condition. The
Company generally does not have long-term volume production contracts with its
customers. Whether any specific ASIC design or ASSP offering will result in
volume production orders and, if so, 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 and financial condition.
The Company's new wafer fabrication facility in Gresham, Oregon, is
currently scheduled to begin production in 1998. The Gresham facility is a
sophisticated, highly complex, state-of-the-art factory whose production rates
depend upon the reliable operation and effective integration of a variety of
hardware and
12
<PAGE> 13
software components. There can be no assurance that all of these components will
be fully functional or successfully integrated within the currently projected
ramping schedule or that the facility will not fail to achieve the forecasted
yield targets. Failure of the facility to achieve an acceptable level of
production capacity during test phase and ramp-up or to maintain acceptable
levels during production could have a material adverse impact on the Company's
operating results and financial condition.
Capital Needs. 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. The Company spent $513 million in 1997 on
capital additions and expects to spend approximately $400 million during 1998.
Significant capital expenditures are expected in subsequent years, as well. 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 resources is an important 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. In addition, the level of capital
expenditures necessary to enable the Company to remain competitive results in a
relatively high level of fixed costs. 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 could have a material
adverse impact on the Company's operating results and financial condition.
Fluctuations in 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, the
availability and extent of utilization of manufacturing capacity, price erosion,
competitive factors, the timing of new product introductions 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 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
meet 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.
Competition. The semiconductor industry in general and the markets in which
the Company competes in particular are intensely competitive, exhibiting both
rapid technological changes and continued price erosion. 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 smaller specialized and emerging companies attempting to
sell products in particular markets which are also targeted by the Company.
Several major diversified electronics companies offer ASIC products and/or other
products which are competitive to the product lines of the Company. In addition,
the Company faces competition from some companies whose strategy is to provide a
portion of the products and services which the Company offers. For example,
these competitors may offer semiconductor design services, may license design
tools, and/or may provide support for obtaining products at an independent
foundry. In addition, there is no assurance that certain large customers, some
of whom have licensed elements of the Company's process and product
technologies, will not develop internal design and production operations to
produce their own ASICs. There can be no assurance that the Company will be able
to continue to compete effectively with its existing or new competitors.
13
<PAGE> 14
The principal factors on which competition in the ASIC market is based
include design capabilities (including 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. In addition ASSP
offerings compete on quality of system integration, existence and accessibility
of differentiating features and quality and availability of supporting software.
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 on competitive terms. There can be no assurance,
however, that other custom logic design approaches and system-level products
will not be developed by others which could have a material adverse impact on
the Company's operating results and financial condition in the future.
Currency Risks. The Company 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 in its Japanese
manufacturing facilities, 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 also has borrowings and operating lease
obligations denominated in yen, which totaled approximately 29 billion yen
(approximately $224 million) at December 31, 1997. 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 utilizes
forward exchange, currency swap and option contracts to manage its exposure
associated with currency fluctuations on intercompany transactions and certain
foreign currency denominated commitments. There can be no assurance that such
hedging transactions will minimize exposure to currency rate fluctuations or
that fluctuations in currency exchange rates in the future will not have a
material adverse impact on the Company's operating results or financial
condition. In addition, there can be no assurance that inflation rates in
countries where the Company conducts operations will not have a material adverse
impact on the Company's operating results and/or financial condition in the
future.
Both manufacturing and sales of the Company's products may be adversely
impacted by political and economic conditions abroad. Protectionist trade
legislation in either the United States or foreign countries, such as a change
in the current tariff structures, export compliance laws or other trade
policies, could adversely impact the Company's ability to manufacture or sell in
foreign markets.
Customer Concentration. As a result of the Company's strategy to direct its
marketing and selling efforts toward selected customers, the Company expects
that it will become increasingly dependent on a limited number of customers for
a substantial portion of its net revenues. During 1997, approximately 56% of the
Company's net revenues were from sales to its top ten customers including Sony
Corporation, which accounted for 22% of net revenues. Loss of new product design
wins or cancellation of business from any of these major customers, significant
changes in scheduled deliveries to any of these customers or decreases in the
prices of products sold to any of these customers could have a material adverse
impact on the Company's operating results and financial condition.
Intellectual Property and Litigation. Although the Company believes that
the protection afforded by its patents, patent applications and trademarks has
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, trademark rights or other
intellectual property 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.
Based on industry practice, the Company believes that licenses or other rights,
if necessary, could be obtained on commercially reasonable terms for such
existing or future claims. 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
certain licenses or other rights or to obtain such licenses or
14
<PAGE> 15
rights on favorable terms, or litigation arising out of such other parties'
assertions, both existing and future, could have a material adverse impact on
the Company's operating results and financial condition.
Cyclical Nature of the Semiconductor Industry. The semiconductor industry
is characterized by rapid technological change, rapid product obsolescence and
price erosion, and 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 abrupt fluctuations in
product demand, production overcapacity and subsequent accelerated erosion of
average selling prices, and in some cases, have lasted for more than a year. 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 operating results and financial condition
could be materially and adversely impacted by a significant industry-wide
downturn. The semiconductor industry also has been characterized by periods of
rapid expansion of production capacity. Even if customers' aggregate demand were
not to decline, the availability of additional capacity can adversely impact
pricing levels, which can also depress revenue levels. Also, during such
periods, customers benefiting from shorter lead times may delay some purchases
into future periods. There can be no assurance the Company will not experience
such downturns in the future, which could have a material impact on the
Company's operating results and financial condition.
Acquisitions and Investment Alliances. The Company's strategy of providing
leading edge products and services requires a wide variety of technology and
capabilities and the ability quickly to adapt to emerging changes in technology.
Although the Company invests significant resources in research and development
activities, the complexity and rapidity of changes make it difficult for the
Company to pursue development of all technological solutions on its own.
Acquisitions and investment alliances in complementary technology and
capabilities may enable the Company to act quickly to offer to its customers and
potential customers a full range of complete solutions that would be expected to
meet current and emerging technological standards. The ultimate success of the
acquisitions and investment alliances in achieving the purposes for which they
were undertaken depends on a variety of factors, some of which are beyond the
control of the Company, including the difficulties encountered in assimilating
the operations, technologies and products of the acquired company, the degree to
which management of both companies will become distracted from the normal
operations of the business during and after the acquisition process, the risk of
entering new markets with strong established competitors, the ability to retain
key management and talent of the acquired company, and the ability of the
acquiring company to manage the growth occasioned by the competition. In
addition, investments in emerging technology present risks of loss of value of
one or more of the investments due to failure of the technology to gain the
predicted market acceptance or failure of the investment partner to successfully
bring a product to market. There can be no assurances that failure to manage
growth effectively and to successfully integrate acquisitions made by the
Company would not have a material adverse impact on the Company's operating
results or financial condition.
15
<PAGE> 16
ITEM 2. PROPERTIES
The following table sets forth certain information concerning the Company's
principal facilities.
Principal Locations
<TABLE>
<CAPTION>
NO. OF LEASED/ TOTAL
BUILDINGS LOCATION OWNED SQ. FT. USE
- --------- -------- ------- ------- ---
<C> <S> <C> <C> <C>
7 Milpitas, CA Leased 609,410 Corporate Offices,
Administration,
Engineering
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 Logistics
3 Gresham, OR Owned 532,400 Executive Offices,
Engineering,
Manufacturing
1 Bracknell, United Kingdom Leased 70,000 Executive Offices,
Design Center, Sales
1 Tokyo, Japan Leased 24,263 Executive Offices,
Design Center, Sales
7 Tsukuba, Japan Owned 334,541 Executive Offices,
Manufacturing
1 Etobicoke, Canada Leased 14,005 Design Center, Sales
1 Tsuen Wan, Hong Kong Owned 26,000 Manufacturing Control,
Assembly & Test
</TABLE>
16
<PAGE> 17
The Company maintains leased regional office space for its field sales,
marketing and design center offices at the locations described below. In
addition, the Company maintains design centers at various distributor locations.
<TABLE>
<S> <C>
United States International
Atlanta, GA Etobicoke, Ontario, Canada
Austin, TX Kanata, Ontario, Canada
Beaverton, OR Montreal, Quebec, Canada
Bellevue, WA Ballerup, Denmark
Bethesda, MD Paris, France
Billerica, MA (Mint Technology) Munich, Germany
Boca Raton, FL Stuttgart, Germany
Boulder, CO Netanya, Israel
Bowling Green, KY Ramat Hasharon, Israel
Dallas, TX Milan, Italy
Edison, NJ Osaka, Japan
Houston, TX Tokyo, Japan
Irvine, CA Seoul, Korea
Milpitas, CA Singapore
Minneapolis, MN Madrid, Spain
Mountain View, CA Kista, Sweden
Raleigh, NC Taipei, Taiwan
Roseville, CA Bracknell, U.K.
Salt Lake City, UT
San Diego, CA
Santa Clara, CA (Mint Technology)
Schaumburg, IL
Victor, NY
Waltham, M
</TABLE>
Leased facilities described above are subject to operating leases which
expire in 1998 through 2022. See Note 11 of Notes to Consolidated Financial
Statements in the Company's 1997 Annual Report to Stockholders, incorporated
herein by reference.
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
During the third quarter of 1995, the Company acquired all the remaining
shares (45%) of its Canadian subsidiary LSI Logic Corporation of Canada, Inc.,
which it did not already own. Certain former shareholders, representing
approximately 800,000 shares, or 3% of the previously outstanding shares, have
exercised dissent and appraisal rights. An action is pending in the Court of
Queen's Bench of Alberta, Judicial District of Calgary, for the adjudication of
claims asserted by such former shareholders under the relevant provisions of the
Canada Business Corporations Act. In addition, a separate action was filed by
another former shareholder in the Court of Chancery of the State of Delaware in
and for New Castle County, seeking an order that the acquisition of shares by
the Company be enjoined, certification of a class and damages. Although the case
originally was dismissed pursuant to a motion filed by the Company, on appeal
the order of dismissal was reversed and the case was remanded to the Court of
Chancery. The Company's renewed motion to dismiss was granted in January 1998 by
the Court of Chancery, to which the plaintiff has filed a notice of intent to
appeal to the Delaware Supreme Court. While no assurances can be given regarding
either the ultimate determination of the Canadian court or the outcome of the
action filed in Delaware, the Company believes that the final
17
<PAGE> 18
outcome of the these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The action filed by Texas Instruments, Inc. ("TI") in 1990 against the
Company and other defendants alleging infringement of certain of TI's packaging
patents was finally resolved in favor of the Company in May 1997 without payment
of damages or other costs when the US Supreme Court denied TI's petition for a
writ of certiorari. The $15 million reserve which had been set up against a
contingency of liability in the case was reallocated in September 1996 (See Note
6 to the Consolidated Financial Statements contained in the Company's 1997
Annual Report to Stockholders.)
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 information required by this Item is incorporated by reference from the
chart under "Stock Information" on page 41 of the Company's 1997 Annual Report
to Stockholders. As of March 13, 1998, there were 3,863 stockholders of record
of the Company's common stock. The Company has never paid cash dividends on its
common stock. It is presently the Company's policy to reinvest its earnings in
the Company, and therefore the Company does not anticipate paying cash dividends
in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
table under the heading "Five Year Consolidated Summary" on page 37 of the
Company's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to the
section of the same name on pages 9 through 15 of the Company's 1997 Annual
Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is incorporated by reference to the
section entitled "Market Risk Disclosure" at page 15 of the Company's 1997
Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
financial statements and notes thereto listed in Item 14(a)(1) hereof, which
appear on the pages referenced therein, and to the table under the heading
"Interim Financial Information (Unaudited)" on page 38 of the Company's 1997
Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 19
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its Annual Meeting of Stockholders to be held May 12, 1998, and certain of
the information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to "ELECTION OF DIRECTORS -- Nominees" in the
Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:
<TABLE>
<CAPTION>
EMPLOYED
NAME AGE POSITION SINCE
---- --- -------- --------
<S> <C> <C> <C>
Wilfred J. Corrigan........ 60 Chairman and Chief Executive Officer 1981
Elias J. Antoun............ 41 Executive Vice President, Consumer Products 1991
John P. Daane.............. 34 Executive Vice President, Communications, Computer 1987
and ASIC Products
W. Richard Marz............ 54 Executive Vice President, Geographic Markets 1995
R. Douglas Norby........... 62 Executive Vice President and Chief Financial 1996
Officer
David E. Sanders........... 50 Vice President, General Counsel and Secretary 1986
Lewis C. Wallbridge........ 54 Vice President, Human Resources 1984
Joseph M. Zelayeta......... 51 Executive Vice President, Worldwide Operations 1981
</TABLE>
Except as set forth below, all of the officers have been associated with
the Company in their present position for more than the past five years.
Elias J. Antoun was named Executive Vice President, Consumer Products in
March 1998. Mr. Antoun joined the Company in 1991, and has served in senior
management and executive positions including General Manager of Finance and,
more recently, President of LSI Logic K.K.
John P. Daane was named Executive Vice President, Communications, Computer
and ASIC Products, in October 1997. A full-time employee of the Company since
1987, Mr. Daane has served in senior management positions with the Company since
1992, most recently as Vice President and General Manager of the Communication
Products Division.
W. Richard Marz was joined the Company in September 1995 as Senior Vice
President, North American Marketing and Sales and was named Executive Vice
President, Geographic Markets in May 1996. Before joining the Company, Mr. Marz
was a long-time senior sales and marketing executive at Advanced Micro Devices,
Inc., a semiconductor manufacturer.
Mr. Norby has served joined the Company as Executive Vice President and
Chief Financial Officer in November 1996. He has been a member of the Company's
Board of Directors since 1993. From September 1993 until November 1996, Mr.
Norby served as Senior Vice President and Chief Financial Officer of Mentor
Graphics Corporation, an EDA company. From July 1992 until September 1993, Mr.
Norby served as President and Chief Executive Officer of Pharmetrix Corporation,
a health care company located in Menlo Park, California. Mr. Norby serves on the
board of directors of Corvus International, Inc. a biopharmaceutical company.
Joseph M. Zelayeta was named Executive Vice President, Worldwide Operations
in September 1997. Employed with the Company since 1981, Mr. Zelayeta has held
executive positions in research and development and manufacturing operations
since 1986.
The information concerning Section 16(a) reporting is incorporated by
reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement.
19
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
"SECURITY OWNERSHIP" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Financial Statements. The following Consolidated Financial Statements of
LSI Logic Corporation and Report of Independent Accountants are incorporated by
reference to the Company's 1997 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT
-------------
<S> <C>
Consolidated Balance Sheets -- As of December 31, 1997 and
1996...................................................... 16
Consolidated Statements of Operations -- For the Three Years
Ended
December 31, 1997......................................... 17
Consolidated Statement of Stockholders' Equity -- For the
Three Years Ended December 31, 1997....................... 18
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1997................................... 19
Notes to Consolidated Financial Statements.................. 20-35
Report of Independent Accountants........................... 36
</TABLE>
Effective beginning 1990, the Company changed its fiscal year end from
December 31 to the 52 or 53 week period which ends on the Sunday closest to
December 31. Beginning in 1997, the Company reverted to a straight December 31
fiscal year end. For presentation purposes, the consolidated financial
statements, notes and financial statement schedules for fiscal years 1990
through 1996 refer to December 31 as the year end. Fiscal 1996 was a 52-week
year that ended on December 29, 1996; fiscal 1997 was a 53-week year.
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. Exhibits:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997.
3.1 Amended and Restated Certificate of Incorporation of
Registrant.(1)
3.2 By-laws of Registrant.(2)
4.3 Preferred Shares Rights Plan dated November 16, 1988.(3)
10.1 Lease dated March 26, 1981 for 1601 McCarthy Boulevard
between the Registrant and McCarthy Industrial Investors.(4)
</TABLE>
20
<PAGE> 21
<TABLE>
<C> <S>
10.1A First Amendment to Lease dated May 1, 1991 to Lease dated March 26, 1981 for 1601 McCarthy
Boulevard between the Registrant and McCarthy Industrial Investors.(5)
10.2 Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement.(6)*
10.3 Registrant's Employee Stock Purchase Plan, as amended, and form of Subscription Agreement.(1)*
10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the
Registrant and Bankamerica Realty Investors.(7)
10.24 Registrant's 1986 Directors' Stock Option Plan and forms of Stock Option Agreements.(8)*
10.29 Form of Indemnification Agreement entered and to be entered into between Registrant and its
officers, directors and certain key employees.(9)*
10.35 Amended and Restated LSI Logic Corporation 1991 Equity Incentive Plan.*
10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the
Registrant and the Prudential Insurance Company of America.(9)
10.37 Stock Purchase Agreement dated as of January 20, 1995; Promissory Note dated January 26, 1995; Note
Purchase Agreement dated as of January 26, 1995 in connection with the Company's purchase of the
minority interest in one of its Japanese subsidiaries.(11)
10.38 1995 Director Option Plan.(12)*
10.39 Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated as of December 27, 1995; Guaranty
dated as of December 27, 1995.(12)
10.39A First Amendment to Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated December 24,
1996; Amended and Restated Guaranty dated as of December 30, 1996.(13)
10.40 LSI Logic Corporation International Employee Stock Purchase Plan.(14)*
10.41 $300,000,000 Credit Agreement dated as of December 20, 1996 with ABN AMRO Bank, N.V.(13)
11.1 Statement Re: Computation of Earnings Per Share.(15)
13.1 Annual Report to Stockholders for the year ended December 31, 1997 (to be deemed filed only to the
extent required by the instructions for Reports on Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants (see page 24).
24.1 Power of Attorney (included on page 23).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-34285) which became effective
September 25, 1997.
(2) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1988.
(3) Incorporated by reference to exhibits filed with the Registrant's Form 8-A
filed on November 21, 1988.
(4) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 2-83035) which became effective May
13, 1983.
(5) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(6) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
(7) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1983.
21
<PAGE> 22
(8) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1986.
(9) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991.
(11) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(12) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(13) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(14) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-12887) which became effective
September 27, 1996.
(15) Incorporated by reference to the section entitled "Income per share"
contained in Note 1 at page 23 of Exhibit 13.1
* Denotes management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
During the fourth quarter ended December 31, 1997, the Company filed a
Current Report on Form 8-K on November 12, 1997, pursuant to Item 8 to report
the following event that occurred on October 27, 1997:
Change in fiscal year end, as described above in Item 14(a)(1).
(c) EXHIBITS.
See Item 14(a)(3), above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2), above.
TRADEMARK ACKNOWLEDGMENTS
- The LSI Logic logo, ATMizer, CoreWare and MiniRISC are registered
trademarks of the Company.
- TinyRISC, Scenario, Integra, G10, G11 and G12 are trademarks of the
Company.
- OakDSPCore(R) is a registered trademark of DSP Group, Inc., used under
license. ARM(R) is a registered trademark of Advanced RISC Machines
Limited, used under license.
- All other brand names or trademarks appearing in the Form 10-K are the
property of their respective owners.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LSI LOGIC CORPORATION
By: /s/ WILFRED J. CORRIGAN
------------------------------------
Wilfred J. Corrigan
Chairman and Chief Executive Officer
Dated: March 26, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wilfred J. Corrigan and David E. Sanders, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- --------------
<S> <C> <C>
/s/ WILFRED J. CORRIGAN Chairman of the Board and March 26, 1998
- -------------------------------------------------------- Chief Executive Officer
(Wilfred J. Corrigan) (Principal Executive
Officer)
/s/ R. DOUGLAS NORBY Executive Vice President March 26, 1998
- -------------------------------------------------------- and Chief Financial Officer
(R. Douglas Norby) (Principal Financial
Officer and Principal
Accounting Officer);
Director
/s/ T.Z. CHU Director March 26, 1998
- --------------------------------------------------------
(T.Z. Chu)
/s/ MALCOLM R. CURRIE Director March 26, 1998
- --------------------------------------------------------
(Malcolm R. Currie)
/s/ JAMES H. KEYES Director March 26, 1998
- --------------------------------------------------------
(James H. Keyes)
</TABLE>
23
<PAGE> 24
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 2-86474, No. 2-91907, No. 2-98732, No. 33-6188, No.
33-6203, No. 33-13265, No. 33-17720, No. 33-30385, No. 33-30386, No. 33-36249,
No. 33-41999, No. 33-42000, No. 33-53054, No. 33-66548, No. 33-66546, No.
33-55631, No. 33-55633, No. 33-55697, No. 33-59981, No. 33-59987, No. 333-12887,
No. 333-34285) of LSI Logic Corporation of our report dated January 22, 1998,
appearing on page 36 of the Annual Report to Stockholders, which is incorporated
by reference in this Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 25, 1998
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM
NO. DESCRIPTION
------ -----------
<C> <S>
2.1 Agreement and Plan of Merger between LSI Logic Corporation
and Mint Technology, Inc., dated July 22, 1997.
3.1 Amended and Restated Certificate of Incorporation of
Registrant.(1)
3.2 By-laws of Registrant.(2)
4.3 Preferred Shares Rights Plan dated November 16, 1988.(3)
10.1 Lease dated March 26, 1981 for 1601 McCarthy Boulevard
between the Registrant and McCarthy Industrial Investors.(4)
10.1A First Amendment to Lease dated May 1, 1991 to Lease dated
March 26, 1981 for 1601 McCarthy Boulevard between the
Registrant and McCarthy Industrial Investors.(5)
10.2 Registrant's 1982 Incentive Stock Option Plan, as amended,
and forms of Stock Option Agreement.(6)*
10.3 Registrant's Employee Stock Purchase Plan, as amended, and
form of Subscription Agreement.(1)*
10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road,
Fremont, California between the Registrant and Bankamerica
Realty Investors.(7)
10.24 Registrant's 1986 Directors' Stock Option Plan and forms of
Stock Option Agreements.(8)*
10.29 Form of Indemnification Agreement entered and to be entered
into between Registrant and its officers, directors and
certain key employees.(9)*
10.35 Amended and Restated LSI Logic Corporation 1991 Equity
Incentive Plan.*
10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore
Drive, Milpitas, California between the Registrant and the
Prudential Insurance Company of America.(9)
10.37 Stock Purchase Agreement dated as of January 20, 1995;
Promissory Note dated January 26, 1995; Note Purchase
Agreement dated as of January 26, 1995 in connection with
the Company's purchase of the minority interest in one of
its Japanese subsidiaries.(11)
10.38 1995 Director Option Plan.(12)*
10.39 Y25,000,000,000 Floating Rate Guaranteed Credit Facility
dated as of December 27, 1995; Guaranty dated as of December
27, 1995.(12)
10.39A First Amendment to Y25,000,000,000 Floating Rate Guaranteed
Credit Facility dated December 24, 1996; Amended and
Restated Guaranty dated as of December 30, 1996.(13)
10.40 LSI Logic Corporation International Employee Stock Purchase
Plan.(14)*
10.41 $300,000,000 Credit Agreement dated as of December 20, 1996
with ABN AMRO Bank, N.V.(13)
11.1 Statement Re: Computation of Earnings Per Share.
13.1 Annual Report to Stockholders for the year ended December
31, 1997 (to be deemed filed only to the extent required by
the instructions for Reports on Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants (see page 23).
24.1 Power of Attorney (included on page 22).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-34285) which became effective
September 25, 1997.
<PAGE> 26
(2) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1988.
(3) Incorporated by reference to exhibits filed with the Registrant's Form 8-A
filed on November 21, 1988.
(4) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 2-83035) which became effective May
13, 1983.
(5) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(6) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.
(7) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1983.
(8) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1986.
(9) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987.
(10) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991.
(11) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
(12) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(13) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(14) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-12887) which became effective
September 27, 1996.
* Denotes management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LSI LOGIC CORPORATION
LSI MERGER SUBSIDIARY, INC.
MINT TECHNOLOGY, INC.
AND
MARY ALBANESE
DATED AS OF JULY 27, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I - THE MERGER...........................................................................2
1.1 The Merger........................................................................2
1.2 Effective Time....................................................................2
1.3 Effect of the Merger..............................................................2
1.4 Articles of Incorporation; Bylaws.................................................2
1.5 Directors and Officers............................................................2
1.6 Capital Stock Contribution by Holder..............................................3
1.7 Escrow of Portion of Cash Consideration...........................................3
1.8 Effect on Capital Stock...........................................................3
1.9 No Further Ownership Rights in Mint Capital Stock.................................4
1.10 Conversion of Capital Stock of Merger Sub.........................................4
1.11 Taking of Necessary Action; Further Action........................................4
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF MINT AND HOLDER...................................5
2.1 Representations and Warranties of Mint and Holder.................................5
ARTICLE III -REPRESENTATIONS AND WARRANTIES OF THE HOLDER.......................................17
3.1 Additional Representations and Warranties of the Holder..........................17
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF LSI AND MERGER SUB...............................18
4.1 Representations and Warranties of LSI and Merger Sub.............................18
ARTICLE V - COVENANTS OF THE HOLDER AND MINT....................................................19
5.1 Operation of Business............................................................19
5.2 Preservation of Business.........................................................20
5.3 Satisfaction of Conditions; General..............................................20
5.4 Full Access......................................................................20
5.5 Notice of Developments...........................................................20
5.6 Exclusivity; Acquisition Proposals...............................................20
5.7 Confidentiality..................................................................21
5.8 Expenses.........................................................................21
5.9 Public Announcements.............................................................21
5.10 FIRPTA Certificates..............................................................21
5.11 Option Plan......................................................................21
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
5.12 Contribution to Capital..........................................................22
5.13 Exercise of Options..............................................................22
5.14 Grant of Options. ...............................................................22
5.15 Bonus Plan.......................................................................22
5.16 Tax Matters......................................................................22
5.17 S Status.........................................................................23
5.18 After Tax Earnings...............................................................23
5.19 Shareholder Consent..............................................................23
5.20 Cooperation......................................................................23
ARTICLE VI - COVENANTS OF LSI...................................................................23
6.1 Satisfaction of Conditions; General..............................................23
6.2 Confidentiality..................................................................24
6.3 Expenses.........................................................................24
6.4 Registration Statement on Form S-8...............................................24
6.5 Public Announcement..............................................................24
6.6 NYSE Listing.....................................................................24
6.7 Notice of Developments...........................................................24
ARTICLE VII - CONDITIONS PRECEDENT..............................................................25
7.1 Conditions to Each Party's Obligations to Effect the Acquisition.................25
7.2 Conditions to Obligations of LSI.................................................25
7.3 Conditions to Obligations of Mint and the Holder.................................26
ARTICLE VIII - INDEMNIFICATION..................................................................27
8.1 Survival of Representations, Warranties, Covenants and Agreements................27
8.2 Indemnification of LSI...........................................................27
8.3 Indemnification of Holder........................................................28
8.4 Indemnification Threshold and Limitations........................................28
8.5 Escrow Fund......................................................................28
8.6 Escrow Period....................................................................29
8.7 Procedures with Respect to Third-Party Claims....................................29
8.8 Procedure For Indemnification....................................................30
8.9 Objections to Claims.............................................................30
8.10 Resolution of Conflicts; Arbitration.............................................30
8.11 Order of Distribution of Funds...................................................31
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE IX - GENERAL PROVISIONS.................................................................31
9.1 Termination, Amendment and Waiver................................................31
9.2 Effect of Termination............................................................31
9.3 Amendment........................................................................32
9.4 Extension; Waiver; Delay or Omission.............................................32
9.5 Notices..........................................................................32
9.6 Counterparts.....................................................................33
9.7 Entire Agreement.................................................................33
9.8 No Transfer......................................................................33
9.9 Severability.....................................................................33
9.10 Other Remedies...................................................................34
9.11 Further Assurances...............................................................34
9.12 Absence of Third-Party Beneficiary Rights........................................34
9.13 Mutual Drafting..................................................................34
9.14 Governing Law....................................................................34
</TABLE>
-iii-
<PAGE> 5
INDEX OF SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------- -----------
<S> <C>
2.1 Exceptions to Representations and Warranties
of Mint
2.1(b) Capital Stock Ownership
2.1(d) Consents
2.1(i) Material Adverse Change
2.1(j) Liabilities of Mint
2.1(l) Benefit Plans
2.1(m) Major Contracts
2.1(p) Technology; Intellectual Property
2.1(q) Leases; Equipment
2.1(s) Insurance
2.1(u) Key Employees
4.1 Exceptions to Representations and Warranties
of LSI and Merger Sub
5.18 After Tax Earnings
</TABLE>
-iv-
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
PAGE
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
Exhibit A Escrow Agreement
Exhibit B Albanese Employment and Non-competition Agreement
Exhibit C Proprietary Information and Invention Agreement
Exhibit D Key Employees' Employment and Non-competition Agreement
Exhibit E Consent to Amendment of Option Agreement
</TABLE>
-v-
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of July ____, 1997 by and among LSI Logic Corporation, a Delaware
corporation ("LSI"); LSI Merger Subsidiary, Inc., a Massachusetts corporation
and a wholly-owned subsidiary of LSI ("Merger Sub"); Mint Technology, Inc., a
Massachusetts corporation ("Mint"); and Mary Albanese, the sole shareholder of
Mint and a signatory hereto (the "Holder").
RECITALS
A. The Boards of Directors of each of Mint, LSI and Merger Sub believe
it is in the best interests of each company and their respective shareholders
that LSI acquire Mint through the statutory merger of Merger Sub with and into
Mint (the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, Holder will contribute prior to the Closing
(as defined below) 381,818 shares of the issued and outstanding shares of
capital stock of Mint held by Holder to the capital of Mint ("Capital Stock
Contribution").
C. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, LSI will acquire all of the issued and
outstanding shares of capital stock of Mint ("Mint Capital Stock") for cash in
the amount of $7,000,000 (the "Cash Consideration") through a reverse subsidiary
merger of Merger Sub with and into Mint.
D. All outstanding options, warrants and other rights to acquire or
receive shares of Mint Capital Stock shall be converted into the right to
receive shares of Common Stock of LSI ("LSI Common Stock") in amounts determined
in accordance with the Exchange Ratio (as defined in Section 1.8(c)).
E. A portion of the Cash Consideration otherwise paid by LSI in
connection with the Merger shall be placed in escrow by LSI, the release of
which amount shall be contingent upon certain events and conditions, all as set
forth in this Agreement and the Escrow Agreement attached hereto as Exhibit A.
F. Mint, LSI, Merger Sub, and the Holder desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
<PAGE> 8
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Massachusetts General Laws ("Massachusetts Law"),
Merger Sub shall be merged with and into Mint, the separate corporate existence
of Merger Sub shall cease and Mint shall continue as the surviving corporation
and as a wholly-owned subsidiary of LSI. Mint as the surviving corporation after
the Merger is hereinafter sometimes referred to as the "Surviving Corporation".
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 9.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days, following
satisfaction or waiver of the conditions set forth in Article VII, at the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to by LSI and Mint. The date
upon which the Closing actually occurs is herein referred to as the "Closing
Date". On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing an Agreement of Merger (or like instrument) with the
Secretary of State of the Commonwealth of Massachusetts (the "Agreement of
Merger"), in accordance with the relevant provisions of applicable law (the time
of acceptance by the Secretary of State of the Commonwealth of Massachusetts of
such filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Massachusetts Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
Mint and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of Mint and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation. All parties to the
Agreement intend that this transaction shall be treated as a taxable purchase of
Mint stock by LSI for cash through a reverse subsidiary merger.
1.4 Articles of Organization; Bylaws.
(a) Unless otherwise determined by LSI prior to the Effective
Time, at the Effective Time, the Articles of Organization of Mint shall be the
Articles of Organization of the Surviving Corporation until thereafter amended
as provided by law and such Articles of Organization.
(b) The Bylaws of Mint, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Articles of Organization
and Bylaws of the Surviving Corporation. The officers of Merger Sub immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation, each to hold office in accordance with the Bylaws of the Surviving
Corporation.
-2-
<PAGE> 9
1.6 Capital Stock Contribution by Holder. Prior to the Closing Date,
Holder shall make the Capital Stock Contribution and shall own 318,182 shares of
the Common Stock of Mint following such capital contribution and at the Closing
Date, which shall constitute all of the outstanding shares of Mint at the
Closing Date.
1.7 Escrow of Portion of Cash Consideration. Ten percent (10%) of the
Cash Consideration (i.e. $700,000) shall be held in escrow, pursuant to the
Escrow Agreement, for a period of 12 months following the Closing Date to
indemnify LSI for all Damages covered by the indemnities provided in Section 8.2
hereof.
1.8 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, as of the Effective Time, by virtue of the Merger and without any
action on the part of Merger Sub, Mint or the Holder, the following shall occur:
(a) Conversion of Mint Capital Stock. Each share of Mint Capital
Stock issued and outstanding immediately prior to the Effective Time (other than
any shares of Mint Capital Stock to be cancelled pursuant to the Capital Stock
Contribution) shall be converted into the right to receive $22.00 per share (the
"Purchase Price"), with 10% of such per share amount (an aggregate of $700,000)
being deposited pursuant to and subject to the Escrow Agreement (as defined
herein) pursuant to Article VIII below (the "Cash Escrow Fund"). The foregoing
Purchase Price shall be adjusted to reflect fully the effect of any stock split,
reverse stock split, stock dividend, reorganization, recapitalization or other
like change with respect to Mint Capital Stock occurring after the date hereof
and prior to the Effective Time.
(b) Stock Options. LSI acknowledges that Mint has granted or will
grant prior to Closing to Holder a nonqualified stock option to purchase 424,242
shares of the Common Stock of Mint at an exercise price of $5.50 per share (the
"Albanese Option"). The Albanese Option vests in equal portions over three
years, with one-third vesting on each of the first, second and third
anniversaries of the Closing Date; provided however, that if Holder is
involuntarily terminated by LSI as an employee of LSI without Cause (as defined
in the Albanese Employment and Non-Competition Agreement attached hereto as
Exhibit B) or due to Death or Disability (as defined in that agreement), the
Albanese Option shall fully vest and become exercisable immediately. At the
Effective Time, all options (including the Albanese Option and the options
issued pursuant to Section 5.14 hereof) to purchase Mint Common Stock (each a
"Mint Option") then outstanding under Mint's 1996 Stock Option Plan as amended
(the "Option Plan"), or otherwise, shall be assumed by LSI in accordance with
provisions described below.
(1) Each Mint Option so assumed by LSI under this
Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Option Plan and/or as provided in the respective
option agreements governing such Mint Option immediately prior to the Effective
Time, except that (A) such Mint Option shall be exercisable for that number of
whole shares of LSI Common Stock equal to the product of the number of shares of
Mint Common Stock that were issuable upon exercise of such Mint Option
immediately prior to the Effective Time multiplied by the Exchange Ratio (as
defined below), rounded down to the nearest whole number of
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shares of LSI Common Stock and (B) the per share exercise price for the shares
of LSI Common Stock issuable upon exercise of such assumed Mint Option shall be
equal to the quotient determined by dividing the exercise price per share at
which such Mint Option was exercisable immediately prior to the Effective Time
by the Exchange Ratio, rounded to the nearest whole cent.
(2) The "Exchange Ratio" shall be 0.6286.
(3) It is the intention of the parties that the Mint
Options (other than the Albanese Options) assumed by LSI qualify following the
Effective Time as incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to the extent the Mint
Options were granted as incentive stock options and qualified as incentive stock
options immediately prior to the Effective Time.
(4) Promptly following the Effective Time, LSI will issue
to each holder of an outstanding Mint Option a document evidencing the foregoing
assumption of such Mint Option by LSI.
(5) At the Effective Time, Mint shall assign to LSI any
and all rights of repurchase pertaining to shares of Mint Capital Stock, if any,
issued upon exercise of stock options, pursuant to stock purchase agreements, or
otherwise.
1.9 No Further Ownership Rights in Mint Capital Stock. All Cash
Consideration, stock options of LSI, and other consideration issued upon the
surrender or exchange of shares of Mint Capital Stock or options to purchase
Mint Capital Stock in accordance with the terms hereof shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of Mint
Capital Stock.
1.10 Conversion of Capital Stock of Merger Sub. At and as of the
Effective Time, all of the shares of outstanding stock of Merger Sub shall be
converted into one share of Common Stock of the Surviving Corporation.
1.11 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of Mint and Merger Sub, the officers and directors of Mint
and Merger Sub are hereby fully authorized in the names of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF MINT AND HOLDER
2.1 Representations and Warranties of Mint and Holder. Except as
disclosed in Schedule 2.1 or in the other schedules referred to below and
delivered to LSI, Mint and Holder hereby represent and warrant to LSI that:
(a) Organization, Standing and Power. Mint is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, and has all requisite power and authority to
own, operate and lease its properties and to carry on its business as now being
conducted. Mint is duly qualified as a foreign corporation and is in good
standing in each jurisdiction in which the failure to so qualify would have an
Adverse Business Effect on Mint. For purposes of this Agreement, an "Adverse
Business Effect" shall mean a material adverse effect on the business, financial
condition, results of operations, assets and prospects of Mint considered as a
whole. Mint has delivered to LSI complete and correct copies of its Articles of
Organization and Bylaws, as amended to the date hereof; and has delivered or
made available minutes of all of Mint's directors' and shareholders' meetings,
and stock certificate books correctly setting forth the record ownership of all
outstanding shares of Mint capital stock.
(b) Capital Structure. The authorized capital stock of Mint
consists of:
(1) Common Stock. 1,200,000 shares of Common Stock, $0.01
par value ("Mint Common Stock"), of which 700,000 shares are issued and
outstanding and owned, beneficially and of record, as set forth in Schedule
2.1(b) (all but 318,182 of which will be contributed to capital pursuant to the
Capital Stock Contribution prior to Closing);
(2) Options. Except for a total of 1,100,00 shares of
Common Stock reserved for issuance pursuant to Mint's Option Plan of which
735,742 shares are presently subject to outstanding options as set forth in
Schedule 2.1(b), and 364,258 of which remain available for future issuance under
the Option Plan as set forth in this Agreement, there are no outstanding
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from Mint of any shares of its
capital stock. Schedule 2.1(b) sets forth for each outstanding Mint Option the
name of the holder of such option, the domicile address of such holder, the
number of shares of Common Stock subject to such option, the exercise price and
the vesting schedule of such option, including the extent vested to date. Except
as described in Schedule 2.1(b), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which Mint is a
party or by which it is bound obligating Mint to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Mint. Except as described in
Schedule 2.1(b) or in Sections 1.8(c), 5.11 and 5.14 hereof, there are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which Mint is a party or by which it is bound obligating
Mint to grant, extend, accelerate the vesting of, change the price of, otherwise
amend or enter into any such option, warrant, call, right, commitment or
agreement. The holders of Mint options or any other options or rights set forth
in Schedule 2.1(b) have been or will be given, or shall have properly waived,
any
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required notice prior to the Merger and any right to exercise option shares not
previously vested in the event of and after consummation of the Merger. As a
result of the Merger, all Mint Capital Stock will be canceled and extinguished.
Mint is not a party or subject to any agreement or understanding, and, to Mint's
knowledge, there is no agreement or understanding between any persons and/or
entities, which affects or relates to the voting or giving of written consents
with respect to any security of Mint or by a director of Mint; and
(3) Preemptive Rights. All outstanding shares of Mint
Common Stock are duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights created by statute, the Articles of
Organization or Bylaws of Mint or any agreement to which Mint is a party or by
which it is bound.
(c) Subsidiaries. Mint has no subsidiaries or any direct or
indirect interest in any corporation, partnership, trust or other business
association or entity.
(d) Authority.
(1) Mint has all requisite power and authority to enter
into this Agreement and to perform its respective obligations hereunder, and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Mint and the performance by Mint of its obligations hereunder,
and the consummation of the transactions contemplated hereby, have been preceded
by all corporate action necessary to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Mint and Holder and is the legal, valid and
binding obligation of each of Mint and Holder and is enforceable against each
such party in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally and by general principles of
equity.
(2) Other than as set forth in the Schedule 2.1(d), the
execution and delivery of this Agreement by Mint does not, and, as of the
Effective Time, the consummation of the transactions contemplated hereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the Articles
of Organization or Bylaws of Mint or (ii) any material mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Mint or to which Mint is a party or to which it is bound or to
which any of its properties or assets is subject. No consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other federal, state, county,
local or foreign governmental authority, instrumentality, agency or commission
("Governmental Entity") or any third party (so as not to trigger any Conflict),
is required by or with respect to Mint in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Certificates of Merger and Agreement of
Merger with the Secretaries of State of the Commonwealth of Massachusetts and
the State of Delaware, (ii) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be
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required under applicable federal and state securities laws and (iii) such other
consents, waivers, authorizations, filings, approvals and registrations which
are set forth on Schedule 2.1(d).
(e) Financial Statements. Mint has furnished or made available to
LSI audited financial statements of Mint for each of the fiscal years ended on
December 31, 1994, December 31, 1995 and December 31, 1996 (consisting of
balance sheets, statements of income and retained earnings, statements of cash
flows and notes related thereto) (collectively, "Mint Audited Financial
Statements"), the related management letters, and its unaudited balance sheet as
of May 31, 1997 ("Mint Unaudited Balance Sheet") and the related unaudited
statements of income and retained earnings and statement of cash flow for the
five months ended May 31, 1997 (together with the Mint Unaudited Balance Sheet,
the "Mint Unaudited Financial Statements"). The Mint Audited Financial
Statements and the Mint Unaudited Financial Statements (collectively, "Mint
Financial Statements") have been prepared in accordance with generally accepted
U.S. accounting principles ("GAAP") consistently applied and fairly present the
financial condition and operating results of Mint as at the dates thereof and
the results of its operations and cash flows for the periods then ended, except
that the Mint Unaudited Financial Statements have no notes and are subject to
normal year-end adjustments, which will not be material in amount or
significance. Mint has delivered or made available to LSI correct and complete
copies of all correspondence prepared by its counsel for Mint's independent
public accountants in connection with the completed audits of Mint's Financial
Statements and any such correspondence since the date of the last such audit.
(f) Compliance with Law. Mint is in compliance with, and has
conducted its business so as to comply with all laws, rules and regulations,
judgments, decrees or orders of any Governmental Entity applicable to its
operations or with respect to which compliance is a condition of engaging in the
business thereof, except to the extent that failure to comply would,
individually or in the aggregate, not have had and is not expected to have an
Adverse Business Effect. There are no material judgments or orders, injunctions,
decrees, stipulations or awards (whether rendered by a court or administrative
agency or by arbitration) against Mint or against any of Mint's properties or
assets.
(g) No Defaults. Mint is not and has not received notice that it
is or would be with the passage of time, (a) in violation of any provision of
its Articles of Organization or Bylaws or other charter documents, as
applicable, or (b) in default or violation of any term, condition or provision
of (i) any judgment, decree, order, injunction or stipulation applicable to Mint
or (ii) any agreement, note, mortgage, indenture, contract, lease or instrument,
permit, concession, franchise or license to which Mint is a party or by which
Mint or its properties or assets may be bound, which violation or default would,
individually or in the aggregate, have an Adverse Business Effect.
(h) Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending or, to Mint's knowledge, threatened against
Mint or Holder which would be reasonably likely to, individually or in the
aggregate, have an Adverse Business Effect or which in any manner challenges or
seeks to prevent, enjoin, alter or materially delay any of the transactions
contemplated hereby as the case may be. Neither Mint nor Holder is the plaintiff
or petitioner in any litigation or proceeding relating to the business of Mint
which could, individually or in the aggregate, have an Adverse Business Effect.
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(i) No Material Adverse Change. Except as set forth on Schedule
2.1(i), since May 31, 1997, the date of the Mint Unaudited Financial Statements,
Mint has conducted business in the ordinary course and, except as contemplated
herein, there has not occurred:
(1) Any material adverse change in the business condition
of Mint;
(2) Any transaction by Mint except in the ordinary course
of business as conducted on that date and consistent with past practices;
(3) Any amendments or changes in the Articles of
Organization or Bylaws of Mint;
(4) Any damage, destruction or loss, whether covered by
insurance or not, after giving effect to any insurance proceeds received as a
result of such loss, materially and adversely affecting any of the properties or
assets of Mint;
(5) Except for the Capital Stock Contribution and as
contemplated by Section 5.14 hereof and the Albanese Option referred to in
Section 1.8(c) hereof and except for option grants in connection with newly
hired employees in the ordinary course of business, any issuance, redemption,
repurchase or other acquisition of shares of capital stock of Mint, or any
options, warrants or rights to acquire capital stock of Mint, or except for the
distribution contemplated by Section 5.19, any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the capital stock of Mint;
(6) Any increase in or modification of the compensation or
benefits payable or to become payable by Mint to any of its directors, officers
or employees, except in the ordinary course of business consistent with past
practice;
(7) Any increase in or modification of any bonus, pension,
insurance or other employee benefit plan, payment or arrangement (including, but
not limited to, the granting of stock options, restricted stock awards or stock
appreciation rights) made to, for or with any of Mint's employees, except for
the Albanese Option or pursuant to Section 5.14 hereof except for the
distribution contemplated by Section 5.19 and option grants in connection with
any newly hired employees or in the ordinary course of business consistent with
past practice;
(8) Any sale of the property or assets of Mint
individually in excess of $20,000 or in the aggregate in excess of $50,000,
except in the ordinary course of business;
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(9) Any alteration in any term of any outstanding security
of Mint (excluding for such purpose the amendment to the Option Plan and related
agreements required by Section 5.11);
(10) Any (A) incurrence, assumption or guarantee by Mint
of any debt for borrowed money, (B) issuance or sale of any securities
convertible into or exchangeable for debt securities of Mint; or (C) issuance or
sale of options or other rights to acquire from Mint directly or indirectly,
debt securities of Mint or any securities convertible into or exchangeable for
any such debt securities;
(11) Any creation or assumption by Mint of any mortgage,
pledge, security interest or lien or other encumbrance on any asset (other than
liens arising under existing lease financing arrangements, liens arising by
operation of law, liens arising in the ordinary course of Mint's businesses
which in the aggregate are not material and liens for taxes not yet due and
delinquent);
(12) Any making of any loan, advance or capital
contribution to, or investment in, any person in an aggregate amount which
exceeds $30,000 outstanding at any time;
(13) Any entry into, amendment of, relinquishment,
termination or non-renewal by Mint of any contract, lease transaction,
commitment or other right or obligation other than in the ordinary course of
business;
(14) Any transfer or grant of a right under the Mint
Intellectual Property Rights (as defined in Section 2.1(p) hereof) other than
those transferred or granted in the ordinary course of business;
(15) Any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or representative
thereof to organize any employees of Mint;
(16) Any violation of or conflict with any applicable
laws, statutes, orders, rules and regulations promulgated or judgment entered by
any Governmental Entity which, individually or in the aggregate would have an
Adverse Business Effect; or
(17) event or condition of any character that has or
reasonably would be expected to have an Adverse Business Effect on Mint; or
(18) agreement by Mint or any officer or employees thereof
to do any of the things described in the preceding clauses (1) through (17)
(other than negotiations with LSI and its representatives regarding the
transactions contemplated by this Agreement).
(j) Absence of Undisclosed Liabilities. Except as set forth in
Schedule 2.1(j) or as to matters encompassed by other representations and
warranties and in the schedules thereto, the Company does not have any
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or otherwise
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required to be reflected in financial statements in accordance with GAAP, except
for (i) liabilities reflected in the Mint Unaudited Balance Sheet and/or (ii)
liabilities which have arisen in the ordinary course of Mint's business since
May 31, 1997 consistent in nature and amount with past practices.
(k) Certain Agreements. Except as contemplated by this Agreement,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (a) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute,
bonus, acceleration of vesting of opition shares or otherwise) becoming due to
any director, officer or employee of Mint under any Plan (as defined in Section
2.1(k) hereof) or otherwise, (b) materially increase any benefits otherwise
payable under any Plan, or (c) result in the acceleration of the time of payment
or vesting of any such benefits.
(l) Plans. Schedule 2.1(l) lists all employee benefit plans,
programs, policies, commitments or other arrangements (whether or not set forth
in a written document) covering any active, former or retired employee or
consultant of Mint (the "Plans"). To the extent applicable, to Mint's knowledge,
the Plans materially comply with the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code
of 1986, as amended (the "Code"), and any Plan intended to be qualified under
Section 401(a) of the Code has either obtained a favorable determination letter
as to its qualified status from the Internal Revenue Service or still has a
remaining period of time under applicable Treasury Regulations or Internal
Revenue Service pronouncements in which to apply for such determination letter
and to make any amendments necessary to obtain a favorable determination. To the
extent any Plan with an existing determination letter from the Internal Revenue
Service must be amended to comply with the applicable requirements of the Tax
Reform Act of 1986 and subsequent legislation, the time period for effecting
such amendments will not expire prior to the Effective Time. The Holders have
caused Mint to furnish or make available to LSI copies of the most recent
Internal Revenue Service letters and Forms 5500 with respect to any such Plan.
No Plan is covered by Title IV of ERISA or Section 412 of the Code. Neither Mint
nor any officer or director of Mint has incurred any material liability or
penalty under Sections 4975 through 4980 of the Code or Title I of ERISA. Each
Plan has been maintained and administered in all material respects in compliance
with its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations, including but not limited to ERISA and the Code,
which are applicable to such Plans. No suit, action or other litigation
(excluding claims for benefits incurred in the ordinary course of Plan
activities) has been brought, or to the knowledge of Mint is threatened, against
or with respect to any such Plan. All contributions, reserves or premium
payments required to be made or accrued as of the date hereof to the Plans have
been made or accrued.
(m) Major Contracts. Except as disclosed in Schedule 2.1(m) or as
contemplated herein, Mint is not a party to:
(1) Any union contract or any employment or consulting
contract or arrangement providing for future compensation, written or oral, with
any officer, consultant, director or employee which is not terminable by Mint
(both under the terms of the contract and under the laws of the territory to
which the contract relates) on thirty (30) days' notice or less without penalty
or obligation to make payments related to such termination;
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(2) Any plan, contract or arrangement, whether written or
oral, providing for bonuses, pensions, deferred compensation, severance pay or
benefits, retirement payments, profit-sharing, or the like;
(3) Any joint venture contract or arrangement or any other
agreement which has involved or is expected to involve a sharing of profits with
other persons;
(4) Any individual customer purchase order for the sale of
goods or services in excess of $50,000;
(5) Any lease for real or personal property in which the
amount of payments which Mint are required to make on an annual basis exceeds
$10,000;
(6) Except for trade indebtedness and employee expense
reimbursements incurred in the ordinary course of business, any instrument
evidencing or related in any way to indebtedness incurred in the acquisition of
companies or other entities or indebtedness for borrowed money by way of direct
loan, sale of debt securities, purchase money obligation, conditional sale,
guarantee, leasehold obligations or otherwise;
(7) Any material license agreement, either as licensor or
licensee (excluding nonexclusive software licenses granted to customers or
end-users in the ordinary course of business), excluding for such purposes,
licenses granted by Governmental Entities;
(8) Any insurance policy or fidelity or surety bond
requiring the payment of a premium by Mint in excess of $10,000 per year;
(9) Any agreement of indemnification (other than in
purchase orders or sales agreements relating to sales of Mint's products);
(10) Any agreement, contract or commitment involving
payments individually in excess of $25,000;
(11) Any other agreement, contract or commitment of Mint
which is material to Mint.
Each agreement, contract, mortgage, indenture, plan,
lease, instrument, permit, concession, franchise, arrangement, license and
commitment listed on Schedule 2.1(m) pursuant to this Section 2.1(m) is valid
and binding on Mint, and is in full force and effect, and neither Mint, nor to
the knowledge of Mint, any other party thereto, has materially breached, nor
does Mint have any knowledge of any facts which would lead it to believe that it
has breached, any provision of, or is in material default under the terms of,
any such agreement, contract, mortgage, indenture, plan, lease, instrument,
permit, concession, franchise, arrangement, license or commitment. To the
knowledge of Mint, no such agreement, contract or commitment contains any
material liquidated damages, penalty or similar provision. Mint has not received
notice from any of the other parties to any such
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<PAGE> 18
contract, agreement or instrument stating that such party intends to cancel,
withdraw, modify or amend such contract, agreement or arrangement.
(n) Taxes.
(1) For purposes of this Agreement, "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Taxing Authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person.
(2) All Tax returns, statements, reports and forms
(including estimated Tax returns and reports and information returns and
reports) required to be filed with any Taxing Authority with respect to any
Taxable period ending on or before the Closing, by or on behalf of Mint
(collectively, the "Mint Returns"), have been or will be filed when due
(including any extensions of such due date), and all amounts shown due thereon
on or before the Effective Time have been or will be paid on or before such
date. The Mint Unaudited Balance Sheet (i) fully accrues all actual and
contingent liabilities for Taxes (or for dividend distributions in respect of
Taxes) with respect to all periods through May 31, 1997 and Mint will not incur
any Tax liability in excess of the amount reflected on the Mint Unaudited
Balance Sheet with respect to such periods, and (ii) properly accrues in
accordance with GAAP all liabilities for Taxes (or for dividend distributions in
respect of Taxes) payable with respect to all transactions and events occurring
on or prior to such date.
(3) No material Tax liability since May 31, 1997 has been
incurred other than in the ordinary course of business and adequate provision
has been made for all Taxes (or dividend distributions in respect of Taxes)
since that date in accordance with GAAP on at least a quarterly basis. Mint has
withheld and paid to the applicable financial institution or Taxing Authority
all amounts required to be withheld. No Mint Return is currently under audit or
examination by any Tax Authority. Mint has not agreed to any extension or waiver
of any statute of limitation or applicable period of assessment for any Mint
Return. Mint has not granted any extension or waiver of the limitation period
applicable to any Mint Returns.
(4) There is no material claim, audit, action, suit,
proceeding, or investigation now pending or, to the knowledge of Mint,
threatened against or with respect to Mint in respect of any Tax or assessment.
No notice of deficiency or similar document of any Tax Authority has been
received by Mint, and there are no liabilities for Taxes (including liabilities
for interest, additions to tax and penalties thereon and related expenses) with
respect to the issues that have been raised (and are currently pending) by any
Tax Authority that would, if determined adversely to Mint, have an Adverse
Business Effect. Neither Mint nor any other person on behalf of
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Mint, has entered into nor will enter into any agreement or consent pursuant to
Section 341(f) of the Code. There are no liens for Taxes upon the assets of
Mint. Except as may be required as a result of the transactions contemplated by
this Agreement, Mint has not been and will not be required to include any
material adjustment in Taxable income for any Tax period (or portion thereof)
pursuant to Section 481 or 263A of the Code or any comparable provision under
state or foreign Tax laws as a result of transactions, events or accounting
methods employed prior to the Closing.
(5) There is no contract, agreement, plan or arrangement,
including but not limited to the provisions of this Agreement and agreements
entered into in connection herewith, covering any employee or independent
contractor or former employee or independent contractor of Mint that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Section 280G or Section 162 of the Code.
Other than pursuant to this Agreement, Mint is not a party to or bound by (and
prior to the Effective Time will not become a party to or be bound by) any tax
indemnity, tax sharing or tax allocation agreement (whether written, unwritten
or arising under operation of federal law as a result of being a member of a
group filing consolidated tax returns, under operation of certain state laws as
a result of being a member of a unitary group, or under comparable laws of other
states or foreign jurisdictions) which includes a party other than Mint. Mint
has heretofore provided or made available to LSI true and correct copies of all
material Tax Returns of Mint, and, as reasonably requested by LSI prior to or
following the date hereof, information statements, reports, work papers, Tax
opinions and memoranda and other Tax data and documents.
(6) S Status. Mint has been an S Corporation within the
meaning of Section 1361 of the Code since its formation.
(o) Interests of Officers. None of Mint's officers or directors
has any interest in any property, real or personal, tangible or intangible, used
in or pertaining to Mint's business, including any interest in the Intellectual
Property Rights, except for rights as a shareholder, and except for rights under
any Plan.
(p) Technology.
(1) Mint owns, or is licensed or otherwise entitled to
exercise, all rights under or with respect to all material patent rights,
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, formulae, processes, designs, schematics, compositions,
ideas, technology, know-how and tangible or intangible proprietary information,
trade secrets or material that is necessary to conduct the business of Mint as
currently conducted (the "Intellectual Property Rights"). Schedule 2.1(p) lists
all patents, trademarks, registered and unregistered copyrights, trade names and
service marks, and any applications therefor included in the Intellectual
Property Rights and specifies the jurisdictions in which each such Intellectual
Property Right has been issued or registered or in which an application for such
issuance and registration has been filed, including the respective registration
or application numbers. Schedule 2.1(p) also lists all material licenses,
sublicenses and other agreements as to which Mint is a party and pursuant to
which Mint or any other person owns or is licensed or is otherwise authorized or
obligated with respect to any Intellectual Property Right and includes the
identity of all parties thereto. Mint is not, and as a result
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of the execution and delivery of this Agreement or the performance of the
Holder's or Mint's obligations hereunder will not be, in violation of any
license, sublicense or other agreement applicable to it, whether or not
described in Schedule 2.1(p). Except to the extent disclosed in Schedule 2.1(p),
Mint is the sole and exclusive owner or licensee of, with the right, title and
interest in and to (free and clear of any liens or encumbrances), the
Intellectual Property Rights described in Schedule 2.1(p), and has sole and
exclusive rights and is not contractually obligated to pay any compensation to
any third party in respect thereof. To the knowledge of Mint, no employee of
Mint is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employees' best efforts to promote the interests of Mint or that
would conflict with the business of Mint as now conducted. Mint does not now,
and does not currently believe it will in the future be necessary to utilize any
inventions of any of its employees made prior to their employment or consulting
which have not previously been assigned to Mint.
(2) No claims with respect to the Intellectual Property
Rights have been asserted or, to the knowledge of Mint after reasonable
investigation, have been threatened by any person, nor does Mint know of any
grounds for any claims now or in the future (i) to the effect that any business
of Mint as currently conducted infringes on or misappropriates any Intellectual
Property Rights in which a third party has any rights, or (ii) challenging the
ownership, validity or effectiveness of any of the Intellectual Property Rights.
To Mint's knowledge all Intellectual Property Rights are valid and subsisting
and there is no material unauthorized use, infringement or misappropriation of
any of the Intellectual Property Rights by any third party, including any
employee or former employee of Mint. Mint has not been sued or charged in
writing as a defendant in any claim, suit, action or proceeding that involves a
claim of infringement or misappropriation that has not been finally terminated
prior to the date hereof. Mint has no knowledge of any infringement liability
with respect to, or infringement or misappropriation by, Mint of any patent,
trademark, service mark or copyright of another. No Intellectual Property Right
is subject to any outstanding order, judgment, decree, stipulation or agreement
restricting in any manner the licensing or exploitation thereof by Mint. Mint
has not entered into any agreement to indemnify any other person against any
charge of infringement relating to any Intellectual Property Right. To Mint's
knowledge, no employee of Mint is in violation of any term of any employment
contract (whether written or verbal), patent disclosure agreement or any other
contract or agreement relating to the relationship of any such employee with
Mint or any other party (including prior employers) because of the nature of the
business conducted or proposed to be conducted by Mint.
(q) Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment.
(1) Mint does not own real property, and Schedule 2.1(q)
lists all material real estate leases and, with respect to real estate leases,
the aggregate annual rental or other recurring fees payable, the length of all
real estate leases and the number of extensions available.
(2) Mint has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used in its business, free and
clear of any liens (other than liens for taxes that are not yet delinquent),
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charges, pledges, security interests or other encumbrances, except as reflected
in the Mint Financial Statements and except for such imperfections of title and
encumbrances, if any, which are not substantial in character, amount or extent,
and which do not materially detract from the value to Mint, or interfere with
the present use by Mint, of the property subject thereto or affected thereby.
(3) The equipment owned or leased by Mint (the
"Equipment") is, (i) adequate for the conduct of the business of Mint consistent
with their past practices, (ii) suitable for the uses to which it is currently
employed, (iii) in good operating condition, subject to normal wear and tear,
(iv) regularly and properly maintained, (v) not obsolete or in need of renewal
or replacement, except for renewal or replacement in the ordinary course of
business, and (vi) free from any defects, except, with respect to clauses (iii)
through (vi) of this Section 2.1(q)(3), as would not have an Adverse Business
Effect.
(r) Environmental Matters.
(1) Mint has received no notice that it is liable for any
cost to undertake remedial measures or investigate, and is not aware of any
violation with respect to any substance that is regulated by any Governmental
Entity or that has been designated by any Governmental Entity to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment (a
"Hazardous Material"), with respect to, or that is present in, on or under any
property that Mint has at any time owned, operated, occupied or leased.
(2) Mint has not transported, stored, used, manufactured,
released or exposed its employees or any other person to any Hazardous Material
in violation of any applicable statute, rule, regulation, order or law, except
where such violation would not have an Adverse Business Effect.
(3) Mint has obtained all permits, consents, waivers,
exemptions, licenses, approvals and other authorizations ("Environmental
Permits") required to be obtained by it under the laws of any Governmental
Entity relating to land use, public and employee health and safety, pollution or
protection of the environment (collectively, "Environmental Laws"), except where
the failure to obtain such Environmental Permit would not have an Adverse
Business Effect. Mint (i) is in compliance in all material respects with all
terms and conditions of the Environmental Permits and (ii) is in compliance in
all material respects with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in the Environmental Laws or contained in any regulation, code, plan,
order, decree, judgment, notice or demand letter issued, entered, promulgated or
approved thereunder. Mint has not received any notice nor is it aware of any
past or present condition or practice of the businesses conducted by Mint which
forms or is reasonably likely to form the basis of any material claim, action,
suit, proceeding, hearing or investigation against Mint under the Environmental
Laws arising out of the manufacture, processing, distribution, use, treatment,
storage, spill, disposal, transport, or handling, or the emission, discharge,
release or threatened release into the environment, of any Hazardous Material by
Mint.
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(s) Insurance. Schedule 2.1(s): (i) lists and summarizes all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of Mint; (ii) sets
forth the amounts of coverage under each such policy and bond of Mint; and (iii)
lists any claim by Mint under any such policy (or predecessor policy) during the
last three (3) years in an amount exceeding $10,000. Within the last four (4)
years, Mint has not been refused any requested coverage or denied renewal of any
then existing policy or bond. There is no claim by Mint pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums payable
under all such policies and bonds have been paid and Mint is in material
compliance with the terms of such policies and bonds (or other policies and
bonds providing substantially similar insurance coverage). Such policies of
insurance and bonds are of the type and in amounts customarily carried by
persons conducting businesses similar to those of Mint. Mint has not received
any notice or threat of termination of, or of a material premium increase with
respect to, any of such policies.
(t) Labor Matters. Mint is in compliance in all material respects
with all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment and wages and
hours and occupational safety and health and employment practices, and is not
engaged in any unfair labor practice. Mint has not received any notice from any
Governmental Entity, and to the knowledge of Mint there has not been asserted
before any Governmental Entity, any claim, action or proceeding to which Mint is
a party or involving Mint, and there is neither pending nor to the knowledge of
Mint threatened, any investigation or hearing concerning Mint arising out of or
based upon any such laws, regulations or practices.
(u) Key Employees. Schedule 2.1(u) is a list identifying all key
employees of Mint, including all officers of Mint (the "Key Employees"), and
setting forth the job title of each such employee, total compensation paid to
each such employee during the fiscal year ended December 31, 1996, and the first
five (5) months of the current fiscal year. None of such Key Employees has
delivered notice to Mint indicating a present intention to resign or retire.
(v) Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), judgment, injunction, order or decree to which Mint
is a party or otherwise binding upon Mint which has or reasonably would be
expected to have the effect of prohibiting or impairing any business practice of
Mint, any acquisition of property (tangible or intangible) by Mint or the
conduct of business by Mint. Without limiting the foregoing, Mint has not
entered into any agreement under which Mint is restricted from selling,
licensing or otherwise distributing any of its products or services to any class
of customers, in any geographic area, during any period of time or in any
segment of the market.
(w) Disclosure. No representation or warranty made by Mint or
Holder in this Agreement contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact necessary to make
the statements or facts contained herein or therein not misleading in light of
the circumstances under which they were made.
(x) Brokers or Finders. No agent, broker, investment banker or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in
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connection with any of the transactions contemplated by this Agreement except
for fees of Adams, Harkness & Hill which are to be paid by Mint pursuant to
Section 5.8 and 5.18 hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE HOLDER
3.1 Additional Representations and Warranties of the Holder. The Holder
hereby individually represents and warrants as follows:
(a) Title. Holder has and at the Closing will have good,
marketable and valid title to all of the outstanding shares of capital stock of
Mint.
(b) Authority. Holder has all requisite capacity, power and
authority to enter into this Agreement and to perform her obligations hereunder,
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Holder and the performance by Holder of her
obligations hereunder, and the consummation of the transactions contemplated
hereby, have been preceded by all action necessary to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. This Agreement
is the legal, valid and binding obligation of the Holder and is enforceable
against Holder in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally and by general principles of
equity.
(c) No Default. The consummation by Holder of the transaction
contemplated herein and the fulfillment by Holder of the terms hereof do not and
will not result in a breach of or violation of any of the terms and provisions
of, or constitute a default under, any indenture, mortgage, deed of trust or
other agreement or instrument to which Holder is a party.
(d) Governmental Consents. Other than as stated in this Section
3.1(d), in Section 2.1 or the Schedules hereto or thereto, no consent, approval,
order or authorization of, or registration, qualification, designation,
declaration or filing with, any Governmental Entity on the part of the Holder is
required in connection with the valid execution, delivery or performance of this
Agreement, or agreements or documents evidenced as exhibits hereto.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LSI AND MERGER SUB
4.1 Representations and Warranties of LSI and Merger Sub. Except as
disclosed in Schedule 4.1 referring specifically to the representations and
warranties in this Agreement and delivered to the Holder, LSI and Merger Sub
represent and warrant to the Holder and Mint that:
(a) Organization; Standing and Power. LSI is a corporation
validly existing and in good standing under the laws of Delaware and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its businesses as now being conducted. Merger Sub is a
corporation validly existing and in good standing under the laws of
Massachusetts and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
(b) Authority.
(1) LSI and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to perform their obligations
hereunder, and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by LSI and Merger Sub and the performance of
their obligations hereunder, and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of LSI and Merger Sub. This Agreement has been duly executed and
delivered by each of Mint and Holder and is the legal, valid and binding
obligation of each of LSI and Merger Sub and is enforceable against each of such
parties in accordance with its terms, except to the extent that such enforcement
may be limited by applicable bankruptcy, insolvency and other similar laws
affecting creditors' rights generally and by general principles of equity.
(2) Other than as set forth in Schedule 4.1, the execution
and delivery of this Agreement by LSI and Merger Sub does not, and, as of the
Effective Time, the consummation of the transactions contemplated hereby will
not result in a Conflict under (i) any provision of the Articles of
Incorporation or Organization or Bylaws of LSI or Merger Sub or (ii) any
material mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to which LSI or Merger Sub is a party
by which either is bound or to which any of their properties or assets are
subject. Other than as set forth in Schedule 4.1, no consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to LSI or Merger Sub in
connection with the execution and delivery of this Agreement by LSI and Merger
Sub or the consummation by LSI and Merger Sub of the transactions contemplated
hereby, except for (i) the filing of the Certificates of Merger and the
Agreement of Merger with the Secretaries of State of the Commonwealth of
Massachusetts and the State of Delaware, which will be effected as set forth in
Section 1.2 hereof, (ii) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state securities laws and (iii) filings with the New York
Stock Exchange.
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(c) Purchase Entirely for Own Account. LSI hereby confirms that
the capital stock to be received by LSI will be acquired for investment for
LSI's own account, not as a nominee or agent, and not with a view to the resale
or distribution of any part thereof, and that LSI has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, LSI and Merger Sub further represent that LSI and
Merger Sub do not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to such person or to any
third person, with respect to any of the capital stock.
(d) Brokers or Finders. No agent, broker, investment banker or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
(e) SEC Documents; LSI Financial Statements. LSI has furnished or
made available to Mint and Holder true and complete copies of all reports filed
by it with the U.S. Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act") for all periods subsequent
to December 31, 1995, all in the form so filed (all of the foregoing being
collectively referred to as the "SEC Documents"). As of their respective filing
dates, the SEC Documents complied in all material respects with the requirements
of the Exchange Act, and none of the SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a document subsequently filed with the SEC. The financial
statements of LSI, including the notes thereto, included in the SEC Documents
(the "LSI Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes thereto) and
present fairly the consolidated financial position of LSI at the dates thereof
and of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal audit adjustments). There has been no
change in LSI accounting policies except as described in the notes to the LSI
Financial Statements. Since the last filing with the SEC by LSI, there has been
no material adverse change in the business or financial condition of LSI.
ARTICLE V
COVENANTS OF THE HOLDER AND MINT
5.1 Operation of Business. During the period from the date hereof and
continuing until the earlier of the termination of this Agreement or the
Effective Time, without the prior written consent of LSI, neither the Holder nor
Mint will engage in any practice, take any action or enter into any transaction
outside the ordinary course of business except for the transactions contemplated
by this Agreement. Without limiting the generality of the foregoing, neither the
Holder nor Mint will, nor cause Mint to (a) declare, set aside or pay any
dividend or make any distribution with respect to its capital stock or redeem,
purchase or otherwise acquire any of its capital stock or the capital stock of
Mint (other than dividends in respect of taxes and as contemplated in this
Agreement), (b) sell,
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transfer or otherwise dispose of any material amount of its inventory, supplies
or personal property outside of the ordinary course of business (except for
sales of obsolete assets at fair market value), or (c) otherwise engage in any
practice, take any action or enter into any transaction of the type described in
Section 2.1(i) (other than as contemplated in this Agreement). Mint shall not
agree to any material audit assessment by any Tax Authority, make any material
Tax election or file any material Tax return without first allowing LSI
reasonable opportunity to review and comment on same.
5.2 Preservation of Business. Holder and Mint will use reasonable
efforts to keep the business and properties of Mint substantially intact,
including Mint's present operations, physical facilities, working conditions,
and goodwill and relationships with lessors, licensors, suppliers, customers and
employees.
5.3 Satisfaction of Conditions; General. Subject to Sections 7.1 and 7.3
hereof, Holder and Mint will use all reasonable efforts (a) to fulfill the
conditions set forth in Sections 7.1 and 7.2 of this Agreement and (b) to take
all actions and to do all things necessary, proper or advisable in order to
consummate the transactions contemplated by this Agreement, including (i) giving
any notices to third parties, (ii) using all reasonable efforts to obtain any
third-party consents, (iii) giving any notices to, making any filings with and
using all reasonable efforts to obtain any required authorizations, consents and
approvals of Government Entities and (iv) removing any injunctions or other
impediments or delays, legal or otherwise.
5.4 Full Access. The Holder and Mint will permit representatives of LSI
to have full access at all reasonable times, and in a manner so as not to
interfere with the normal business operations of Mint, to all premises,
properties, personnel, books, records (including Tax records), contracts and
documents of Mint. The Holder and Mint will promptly furnish to LSI such
information in the possession of the Holder or Mint concerning the operations of
Mint as LSI may reasonably request.
5.5 Notice of Developments. Mint and Holder will give prompt written
notice to LSI of any adverse development causing a material breach of any of the
representations and warranties in Article II or Article III, respectively. No
notice of any adverse development shall be deemed to waive any condition to the
Closing under Article VII.
5.6 Exclusivity; Acquisition Proposals. Unless and until this Agreement
shall have been terminated by either party pursuant to Section 9.1 hereof,
neither the Holder nor Mint shall, directly or indirectly, through any officer,
director, agent or otherwise, (a) solicit, initiate or encourage submission of
proposals or offers from any person relating to (1) any acquisition or purchase
of all or substantially all of the assets of, or any equity interest in, Mint or
any merger, consolidation, business combination or similar transaction with
Mint, or (2) any other material transaction incompatible with this Agreement
(including, without limitation, a joint venture or other similar transaction),
or (b) participate in any discussions or negotiations regarding, furnish to any
other person any confidential information with respect to, or otherwise
cooperate in any way with, or participate in, facilitate or encourage, any
effort or attempt by any other person to do or seek any of the foregoing. In the
event the Holder or Mint prior to termination of this Agreement receive from
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any third party any offer or indication of interest regarding any of the
transactions referred to in the foregoing sentence, or any request for
information about Mint with respect to any of the foregoing, then such
indication of interest, or request, including the identity of the third party,
shall be communicated promptly to LSI.
5.7 Confidentiality. Holder, Mint and its accountants, attorneys,
employees, and other agents each agrees to treat and protect as such all of the
LSI Confidential Information (as defined below) in the same manner in which it
treats and protects its own confidential information, to refrain from using any
of the LSI Confidential Information except in connection with this Agreement and
the transactions contemplated hereby and to deliver promptly to LSI or to
destroy, at LSI's option and request, all tangible embodiments (and all copies)
of the LSI Confidential Information which are in its possession in the event
that this Agreement is terminated and the transactions contemplated hereby are
not consummated. For the purposes of this Agreement, "LSI Confidential
Information" means any written or oral information concerning (a) the business
and affairs of LSI or any of its affiliates or (b) the negotiation of this
Agreement and the transactions relating to this Agreement, which, in any case,
is not already generally available to the public. This Section 5.7 shall survive
indefinitely, whether or not the transactions contemplated by this Agreement are
consummated.
5.8 Expenses. All costs and expenses incurred by the Holder or Mint in
connection with this Agreement and the transactions contemplated hereby shall be
paid by Mint or Holder.
5.9 Public Announcements. Mint and Holder will consult in advance with
LSI concerning the timing and content of any announcements, press releases and
public statements concerning the transactions contemplated by this Agreement and
will not make any such announcement, release or statement without LSI's consent;
provided, however, that Holder or Mint may make any public statement concerning
the transactions contemplated by this Agreement without the consent of LSI if,
in the reasonable opinion of counsel for Holder or Mint, such statement or
announcement is required to comply with applicable law.
5.10 FIRPTA Certificates. At the Closing, Mint agrees to deliver to LSI
a statement executed on its behalf by its chief executive officer or president
in such form as reasonably requested by counsel for LSI conforming to the
requirements of Treasury Regulation Section 1.897-2(h)(1)(i). Mint further
agrees to provide in a timely manner such notification to the Internal Revenue
Service pursuant to Treasury Regulation Section 1.897-2(h)(2), if any, as may be
requested by LSI.
5.11 Option Plan. Prior to the Closing, Mint shall amend the Option Plan
and shall obtain the written consent to such amendment from the Holder as well
as substantially all persons holding options granted under such Option Plan, to
provide that the vesting of the options granted thereunder shall not be
accelerated by virtue of the Merger and the closing of the transactions
contemplated hereby. In addition, the Option Plan shall be amended (and the
approval of the Board of Directors of Mint and the shareholders of Mint shall be
obtained) to reserve an additional number of shares sufficient to allow for the
grant of options to Holder and the other Mint employees in accordance with
Section 5.14 below.
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5.12 Contribution to Capital. Prior to the Closing, Holder shall make
the Capital Stock Contribution.
5.13 Exercise of Options. Mint shall not permit any optionee or
warrantholder to exercise any outstanding option between the date of the Term
Sheet and the Closing Date. As of the Closing Date, there shall be outstanding
318,182 shares of Mint Common Stock and options to purchase no more than an
aggregate of 311,500 shares of Mint Common Stock (excluding the options granted
pursuant to Section 5.14 below, the Albanese Option and options granted in
connection with new hires in the ordinary course of business).
5.14 Grant of Options. Immediately prior to the Closing, Mint shall
grant options to purchase Mint Common Stock pursuant to the Option Plan to the
employees of Mint, contingent upon and effective immediately prior to the
Closing (the "Contingent Options"), in such numbers, on such terms and to such
persons as reasonably agreed by the management of Mint and LSI, so that upon
multiplication of the total numbers of shares subject to such grants by the
Exchange Ratio, the total number of shares of LSI Common Stock purchasable on
exercise of such options would be equal to 200,500 shares of LSI Common Stock,
with an exercise price equal to the fair market value of LSI Common Stock
immediately prior to the Closing Date (after dividing the exercise price of the
Contingent Options by the Exchange Ratio), such options to be assumed by LSI in
the Merger.
5.15 Bonus Plan. Prior to the Closing, Mint shall establish a bonus
plan, on terms reasonably acceptable to LSI, which shall provide for the payment
of cash bonuses in the aggregate amount of $2,500,000 to be awarded to the
employees of Mint in individual amounts determined by management of Mint, with
the approval of LSI. Such bonuses will be payable over three years after the
Closing Date. One quarter will be payable on the next regular payday following
the Closing Date, with one quarter becoming payable on each of the next three
anniversaries of the Closing Date, provided that the employee remains an
employee of the Surviving Corporation, LSI or any of LSI's affiliates on and as
of each such payment date.
5.16 Tax Matters.
(a) Tax Returns. The Holder and Mint shall be responsible for
timely filing all federal and state income tax returns of Mint for taxable
periods ending on or prior to the Closing Date and shall have paid or will pay
all income taxes attributable to the income of Mint for such periods. Such
returns will be prepared and filed in accordance with applicable law and in a
manner consistent with past practices and shall be subject to review and
approval LSI. After the Closing Date, LSI and the Surviving Corporation, on the
one hand, and the Holder, on the other hand, will make available to the other,
as reasonably requested, all information, records or documents relating to the
liability for Taxes of Mint for all periods ending on or prior to the Closing
Date and will preserve such information, records or documents until the
expiration of any applicable statute of limitations or extensions thereof.
(b) Election Under Section 338(h)(10). Holder shall join with LSI
in making a joint election on Form 8023-A for Mint under Section 338(h)(10) of
the Code, under Treasury Regulation Section 1.338(h)(10)-1(d) and under any
applicable similar provisions of state law with
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respect to the purchase of the Shares ("Section 338 Election"), if LSI chooses
to make such election. LSI shall timely prepare IRS Form 8023-A (and any
required attachments) and any similar state and local tax forms (and any
required attachments) required to make the Section 338 Election.
(c) Liability for Taxes. Holder shall bear any and all tax
liabilities (of whatever nature) of Mint occurring prior to and up to and
including the close of the transaction. Holder and the respective option holders
shall each individually bear their own income and capital gains tax consequences
as a result of this transaction. Mint, Holder and LSI will cooperate to minimize
tax consequences of the parties hereto in the aggregate to the greatest extent
allowable.
5.17 S Status. The Holder and Mint shall maintain Mint's tax status as
an S Corporation up to the Closing Date, and the Holder and Mint shall not
revoke or otherwise terminate the election of Mint to be treated as an S
Corporation.
5.18 After Tax Earnings. All after tax earnings of Mint as of June 30,
1997, as set forth in the attached Schedule 5.18, on an accrual basis (the
"After Tax Earnings"), shall be paid to Holder prior to the Closing Date without
taking into account any gain arising from the sale of assets. Brokers' fees,
accountant's fees and fees of counsel to Mint related to this transaction shall
be paid by Mint and shall be deducted from the After Tax Earnings before being
paid to Holder.
5.19 Shareholder Consent. By signing this Agreement, Holder, as sole
shareholder of Mint, consents to the Merger as contemplated by this Agreement
and the related agreements, consents to the Escrow as set forth in the Escrow
Agreement, and consents to all other transactions contemplated by this Agreement
and necessary to effect the Merger.
5.20 Cooperation. From time to time on or before the first anniversary
of the Effective Time, Holder shall cooperate with LSI and Mint by providing
information reasonably requested by LSI or Mint regarding certain issues arising
out of the conduct of the business of Mint which are identified prior to the
first anniversary of the Effective Time but which, by their nature, will not be
resolvable prior to the first anniversary of the Effective Time, to mitigate the
adverse impact of such issues on LSI, Merger Sub or Mint. Holder agrees that
failure to cooperate reasonably in providing such information to mitigate such
issues will result in damage to LSI, Merger Sub and Mint compensable in
accordance with Section 8.2 hereof to the extent of the estimated potential
liability resulting from such issues as determined by an independent certified
public accountant.
ARTICLE VI
COVENANTS OF LSI
6.1 Satisfaction of Conditions; General. Subject to Sections 7.1 and 7.2
hereof, LSI will use all reasonable efforts (a) to fulfill the conditions set
forth in Article VII of this Agreement and (b) to take all action and to do all
things necessary, proper or advisable in order to consummate and make effective
the transactions contemplated by this Agreement, including (i) giving any
notices to third parties, (ii) using all reasonable efforts to obtain any third
party consents and (iii) giving any
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notice to, making any filings with and using all reasonable efforts to obtain
any authorizations, consents and approvals of Government Entities.
6.2 Confidentiality. LSI and its accountants, attorneys, employees and
other agents agree to treat and protect as such all of Mint's Confidential
Information (as defined below) in the same manner in which it treats and
protects its own confidential information, to refrain from using any of Mint's
Confidential Information except in connection with this Agreement and the
transactions contemplated hereby and to deliver promptly to Mint or to destroy,
at Mint's option and request, all tangible embodiments (and all copies) of
Mint's Confidential Information which are in its possession in the event that
this Agreement is terminated and the transactions contemplated hereby are not
consummated. For the purposes of this Agreement, "Mint's Confidential
Information" means any written or oral information concerning (a) the business
and affairs of Mint or (b) the negotiation of this Agreement, which, in any
case, is not already generally available to the public. This Section 6.2 will
survive indefinitely, whether or not the transactions contemplated by this
Agreement are consummated.
6.3 Expenses. All costs and expenses incurred by LSI in connection with
this Agreement and the transactions contemplated hereby shall be paid by LSI.
6.4 Registration Statement on Form S-8. Following the Closing but in no
event later than sixty (60) days thereafter, LSI shall take all such actions as
shall be necessary to register the LSI shares of Common Stock issuable on
exercise of the Mint Options under the Securities Act of 1933, as amended.
6.5 Public Announcement. LSI will consult in advance with Mint
concerning the timing and content of any announcements, press releases and
public statements concerning the transactions contemplated by this Agreement and
will not make any such announcement, release or statement without Mint's
consent, which shall not unreasonably be withheld; provided, however, that LSI
may make any public statement concerning the transactions contemplated by this
Agreement without the consent of the Holder or Mint if, in the reasonable
opinion of counsel for LSI, such statement or announcement is required to comply
with applicable law.
6.6 NYSE Listing. LSI shall authorize for listing on the New York Stock
Exchange the shares of LSI Common Stock issuable upon exercise of the Mint
Options assumed in the Merger, upon official notice of issuance.
6.7 Notice of Developments. LSI will give prompt written notice to Mint
Holder of any adverse developments causing a material breach of any of the
representations and warranties in Article IV. No notice of any adverse
development shall be deemed to waive any condition to the Closing under Article
VII.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligations to Effect the Acquisition.
The respective obligations of each party to effect the transactions contemplated
by this Agreement shall be, at the election of either party (except where the
fulfillment of a condition is exclusively within the control of one party in
which case only the noncontrolling party's obligation at its election, shall
be), subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) Orders. No order shall have been entered, and not vacated, by
a court or administrative agency of competent jurisdiction, in any action or
proceeding which enjoins, restrains or prohibits consummation of the Agreement
or the transactions contemplated hereby.
(b) Securities and Antitrust Laws. Except for the Certificates of
Merger and Agreement of Merger and all related documents required to be filed
with the Secretaries of State of the Commonwealth of Massachusetts and the State
of Delaware, LSI, Merger Sub, Mint and the Holder shall have received any and
all permits, authorizations, approvals, consents and orders required to be
obtained by such parties under all applicable state and foreign securities laws,
antitrust laws, statutes, codes, ordinances, rules and regulations in order to
consummate the transactions contemplated by this Agreement, and all such
filings, registrations, permits, authorizations, consents and approvals shall be
in full force and effect at the Closing.
(c) Proceedings. There shall be no litigation pending or
threatened by any regulatory body or private party in which (i) an injunction is
or may be sought against the transactions contemplated hereby, or (ii) relief is
or may be sought against any party hereto as a result of this Agreement, and in
which, in the good faith judgment of the Board of Directors of either LSI or
Mint (relying on the advice of their respective legal counsel), such regulatory
body or private party has a reasonable possibility of prevailing and such relief
would have a material adverse effect upon either party.
7.2 Conditions to Obligations of LSI. The obligation of LSI to effect
the transactions contemplated by this Agreement shall be, at the election of LSI
(except where the fulfillment of a condition is exclusively within the control
of such party), subject to the fulfillment at or prior to the Closing of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Mint and the Holder contained in Article II and in Article III as
modified by the applicable schedules shall be true in all material respects on
and as of the Closing.
(b) Performance. Mint and the Holder shall have performed and
complied in all material respects with all agreements, obligations, covenants
and conditions contained in this Agreement that are required to be performed or
complied with by it on or before the Closing.
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(c) Compliance Certificate. Mint and Holder shall cause to be
delivered to LSI at the Closing a certificate certifying that the conditions
specified in Sections 7.2(a) and 7.2(b) have been fulfilled.
(d) Consents. Mint shall have procured all of the third party
consents material to the business or operations of Mint that are necessary,
proper or advisable in order to consummate the transactions contemplated by this
Agreement, including the consents of any Governmental Entity listed in Schedule
2.1, or an opinion that no such consents are required.
(e) Opinion of Counsel. LSI shall have received from Ropes &
Gray, counsel for the Holder and Mint, an opinion, dated as of the Closing, in
form and substance reasonably satisfactory to LSI.
(f) Proprietary Information and Invention Agreement. Each
employee of Mint shall have executed a Proprietary Information and Invention
Agreement in substantially the form attached hereto as Exhibit C.
(g) Employment Agreements. On or prior to the Closing, Holder and
each of the Key Employees shall have entered into employment and non-competition
agreements, in substantially the forms attached hereto as Exhibit B and Exhibit
D respectively; and Holder and all Key Employees shall have thereby committed to
remain with LSI.
(h) Employment Commitments. On or prior to the Closing, at least
90% of the employees of Mint who are not Key Employees shall have committed in a
manner reasonably acceptable to LSI to remain with LSI and Merger Sub as of the
Closing Date.
(i) Option Amendment. On or prior to the Closing, all of the
employees of Mint at the Closing Date who have been granted options shall have
consented to amendment of their option agreement letter in substantially the
form attached hereto as Exhibit E.
(j) Escrow Agreement. On or prior to the Closing, the Holder
shall have entered into the Escrow Agreement in substantially the form attached
hereto as Exhibit A (the "Escrow Agreement").
(k) Mint Stock Certificate. On or prior to the Closing, the
Holder shall have transferred to LSI all stock certificates evidencing
outstanding shares of Mint Capital Stock, duly endorsed for transfer, for the
purpose of cancellation.
7.3 Conditions to Obligations of Mint and the Holder. The obligation of
Mint and the Holder to effect the transactions contemplated by this Agreement
shall be, at the election of the Holder (except where the fulfillment of a
condition is exclusively within the control of such party), subject to the
fulfillment at or prior to the Closing of the following conditions:
(a) Representations and Warranties. The representations and
warranties of LSI contained in Article IV shall be true in all material respects
on and as of the Effective Time.
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(b) Performance. LSI shall have performed and complied in all
material respects with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before the Closing.
(c) Payment of Purchase Price. LSI shall have delivered with
respect to the Mint Common Stock, the Cash Consideration, net of the Cash Escrow
Fund, to the Holder in cash or by check, and deposited the Cash Escrow Funds
with the Escrow Agent under the Escrow Agreement.
(d) Compliance Certificate. LSI shall cause to be delivered to
Mint and Holder at the Closing a certificate certifying that the conditions
specified in Sections 7.3(a) and 7.3(b) have been fulfilled.
(e) Opinion of Wilson Sonsini Goodrich & Rosati. Mint shall have
received from Wilson Sonsini Goodrich & Rosati, counsel for LSI, an opinion,
dated as of the Closing, in form and substance reasonably satisfactory to Mint
and Holder.
(f) Escrow Agreement. On or prior to the Closing, LSI and Merger
Sub shall have entered into the Escrow Agreement in substantially the form
attached hereto as Exhibit A.
(g) Employment Agreements. On or prior to the Closing, Holder and
each of the Key Employees shall have entered into employment and non-competition
agreements in substantially the forms attached hereto as Exhibit B and Exhibit D
respectively.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations, Warranties, Covenants and Agreements.
(a) Notwithstanding any investigation conducted at any time with
regard thereto by or on behalf of any party, and except as otherwise provided
herein, all representations, warranties, covenants, and agreements in this
Agreement or in any instruments delivered pursuant to this Agreement, shall be
conditions of the transactions contemplated hereby and survive the execution,
delivery, and performance of this Agreement, and the transactions consummated
hereby, until the first anniversary of the Effective Time. All representations
and warranties set forth in this Agreement shall be deemed to have been made
again at and as of the Closing.
(b) As used in this Article VIII, except as otherwise indicated
in this Article VIII, any reference to a representation, warranty, agreement, or
covenant contained in any section of this Agreement shall include the schedule
relating to such section.
8.2 Indemnification of LSI. Holder hereby agrees to indemnify and hold
harmless LSI and its affiliates against any and all losses, liabilities,
damages, demands, claims, suits, actions, judgments, causes of action,
assessments, costs, and expenses, including, without limitation,
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attorneys' fees, any and all expenses incurred in investigating, preparing, and
defending against any litigation, commenced or threatened, and any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation which settlement was either (i) approved in writing in advance by
Holder, or (ii) if such settlement is not agreed upon by the parties, then in
accordance with the decision of the arbitrator pursuant to Section 8.10 hereof
(including any award of fees and expenses pursuant to such Section)
(collectively, "Damages"), asserted against, resulting from, imposed upon, or
incurred or suffered by LSI or its affiliates, or by Mint, directly or
indirectly, as a result of or arising from any inaccuracy in or breach or
nonfulfillment of any of the representations, warranties, covenants, or
agreements made by Mint or Holder contained herein or from any Tax liability of
the Holder or Mint arising from the transactions contemplated in this Agreement
or any Employment Agreement entered into with Holder or Key Employees pursuant
to this Agreement; any inaccuracy in or breach or nonfulfillment of any
certificate, instrument, schedule, exhibit or document delivered by Mint or
Holder in connection with this Agreement or the Merger; or any inaccuracy in or
breach or nonfulfillment of any of the representations and warranties, covenants
or agreements made by such Holder in Article III of this Agreement, or any facts
or circumstances constituting such an inaccuracy, breach, or nonfulfillment (all
of which shall be referred to as "Indemnifiable Claims").
8.3 Indemnification of Holder. LSI hereby agrees to indemnify and hold
harmless the Holder against any and all losses, liabilities, damages, demands,
claims, suits, actions, judgments, causes of action, assessments, costs, and
expenses, including, without limitation, attorneys' fees, any and all expenses
incurred in investigating, preparing, and defending against any litigation,
commenced or threatened, and any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation which settlement was either (i)
approved in writing in advance by LSI, or (ii) if such settlement is not agreed
upon by the parties, then in accordance with the decision of the arbitrator
pursuant to Section 8.10 (including any award of fees and expenses pursuant to
such Section) (collectively, also "Damages"), asserted against, resulting from,
imposed upon, or incurred or suffered by any of the Holder directly or
indirectly, as a result of or arising from any inaccuracy in or breach or
nonfulfillment of any of the representations, warranties, covenants, or
agreements made by LSI in this Agreement or from any Tax liability of LSI or any
of its affiliates arising from the transactions contemplated in this Agreement
(all of which shall also be referred to as "Indemnifiable Claims").
8.4 Indemnification Threshold and Limitations. All Indemnifiable Claims
must be asserted prior to or upon the termination of the Cash Escrow Period (as
hereinafter defined). Notwithstanding Section 8.2 hereof, the Holder shall have
no liability under this Article VIII unless and until the aggregate amount of
Damages exceeds $25,000, in which event the Holder shall be liable for the full
amount of the Damages.
8.5 Escrow Fund. Upon compliance with the terms hereof, LSI shall be
entitled to obtain (and shall be required first to seek) indemnity from the Cash
Escrow Fund (as hereinafter defined) for all Damages covered by the indemnity
provided for in Section 8.2. As security for such indemnity, LSI shall retain
and deposit $700,000 with Marshall & Ilsley Trust Company (or other institution
selected by LSI with the reasonable consent of the Holder), as escrow agent (the
"Escrow Agent"), and thereby establish an escrow fund (the "Cash Escrow Fund")
to be governed by the terms set forth herein and in the Escrow Agreement.
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8.6 Escrow Period. The escrow period for the cash deposited in the Cash
Escrow Fund shall terminate on the first anniversary of the Effective Time (the
"Cash Escrow Period").
8.7 Procedures with Respect to Third-Party Claims.
(a) If LSI or any of its affiliates determines to seek
indemnification under this Article VIII with respect to Indemnifiable Claims
resulting from the assertion of liability by third parties, LSI shall promptly
give written notice to the Holder within ten (10) days of receipt of actual
notice of such third party claim; the notice shall set forth such material
information with respect thereto as is then reasonably available to LSI. In case
any such liability is asserted against LSI or its affiliates, and LSI notifies
the Holder thereof, the Holder will be entitled, if such Holder so elects by
written notice delivered to LSI within thirty (30) days after receiving LSI's
notice, to assume the defense thereof with counsel satisfactory to LSI.
Notwithstanding the foregoing, (i) LSI or its affiliates shall also have the
right to employ their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of LSI unless (A) LSI and Holder shall have
mutually agreed to the retention of such counsel, (B) the named parties to any
such proceeding (including any impleaded parties) include LSI and Holder and LSI
reasonably determines that representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them and (C) LSI reasonably determines that there is or may be legal defenses
available to LSI different from or in addition to those available to the Holder
in each case the fees and expenses of such counsel will be paid out of the Cash
Escrow Fund as additional Damages, (ii) LSI shall have no obligation to give any
notice of any assertion of liability by a third party unless such assertion is
in writing (provided that LSI may not collect any sum from the Cash Escrow Fund
without giving written notice to the Holder), and (iii) the rights of LSI or any
of its affiliates to be indemnified hereunder in respect of Indemnifiable Claims
resulting from the assertion of liability by third parties shall not be
adversely affected by their failure to promptly give notice pursuant to the
foregoing unless, and, if so, only to the extent that Holder is materially
prejudiced by the delay in giving such notice. With respect to any assertion of
liability by a third party that results in an Indemnifiable Claim, the parties
hereto shall make available to each other all relevant information in their
possession material to any such assertion. Notwithstanding anything to the
contrary herein, it is understood that Holder shall not, in connection with any
proceeding or related proceedings, be liable for the reasonable fees and
expenses of more than one separate counsel for LSI.
(b) In the event that the Holder, within thirty (30) days after
receipt of the aforesaid notice of an Indemnifiable Claim fails to assume the
defense of LSI or any of its affiliates against such Indemnifiable Claim, LSI or
any of its affiliates shall have the right to undertake the defense, compromise,
or settlement of such action on behalf of and for the account, expense, and risk
of Holder.
(c) Notwithstanding anything in this Article VIII to the
contrary, if there is a reasonable probability that an Indemnifiable Claim may
materially adversely affect LSI or any of its affiliates, LSI, or any of its
affiliates shall have the right to participate, at their expense, in such
defense, compromise, or settlement and Holder shall not, without LSI's written
consent (which consent shall not be unreasonably withheld), settle or compromise
any Indemnifiable Claim or
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consent to entry of any judgment in respect thereof unless such settlement,
compromise, or consent includes as an unconditional term thereof the giving by
the claimant or the plaintiff to LSI a release from all liability in respect of
such Indemnifiable Claim.
8.8 Procedure For Indemnification. In the event that LSI asserts the
existence of a claim giving rise to Damages, it shall give written notice to the
Holder and the Escrow Agent on or before the last day of the Escrow Period (1)
stating that LSI has paid, or properly accrued Damages in an aggregate stated
amount in respect of which LSI is entitled to indemnity pursuant to this
Agreement, and (2) specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was paid, or
properly accrued, the nature of the misrepresentation, breach of the
representation, warranty or covenant to which such item is related. Such written
notice shall state that it is being given pursuant to this Section 8.8, specify
the nature and amount of the claim asserted and indicate the date on which such
assertion shall be deemed accepted and the amount of the claim which shall be
deemed a valid claim if not disputed as described below (such date to be
established in accordance with the next sentence). If the Holder, within 30 days
after the mailing of notice by LSI, shall not give written notice to LSI and the
Escrow Agent announcing its intent to contest such assertion of LSI, such
assertion shall be deemed accepted and the amount of claim shall be deemed a
valid claim. The Escrow Agent shall deliver to LSI out of the Cash Escrow Fund,
as promptly as practicable following such thirty-day period, cash held in the
Cash Escrow Fund having a value equal to such Damages.
8.9 Objections to Claims. In the event, however, that the Holder
contests the assertion of a claim by giving written notice to LSI and the Escrow
Agent within said period, then the parties shall act in good faith to reach
agreement regarding such claim. If the parties hereto, acting in good faith,
cannot reach agreement with respect to such claim within twenty (20) days after
notice thereof, such claim will be submitted to and settled by arbitration
pursuant to Section 8.10 hereof.
8.10 Resolution of Conflicts; Arbitration.
(a) In case the Holder shall object in writing to the indemnity
of LSI in respect of any claim or claims made in accordance with this Article
VIII, the Holder and LSI shall attempt in good faith to agree upon the rights of
the respective parties with respect to each of such claims. If the Holder and
LSI should so agree, a memorandum setting forth such agreement shall be prepared
and signed by both parties.
(b) If no such agreement can be reached after good faith
negotiation, either LSI or the Holder may demand arbitration of the matter
unless the amount of the Damages is at issue in pending litigation with a third
party, in which event arbitration shall not be commenced until such amount is
ascertained or both parties agree to arbitration; and in either such event the
matter shall be settled by arbitration conducted by one arbitrator to be
selected by the mutual agreement of LSI and the Holder. The decision of the
arbitrator so selected as to the validity and amount of any claim made pursuant
to this Article VIII shall be binding and conclusive upon the parties to this
Agreement.
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(c) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held
under the commercial rules then in effect of the American Arbitration
Association. The fees of each arbitrator and the administrative fees of the
American Arbitration Association shall be paid out of the Cash Escrow Fund only
if LSI wins the judgment, otherwise such fees shall be paid by LSI. The
arbitrator shall have discretion to allocate payment of all other expenses,
including but not limited to reasonable attorney's fees, between the parties.
8.11 Order of Distribution of Funds. Funds from the Cash Escrow Fund
shall be distributed in the following order of priority until such funds are
fully distributed:
(a) First, from the Cash Escrow Fund by instruction of the
arbitrator, in payment of the arbitrator's fees and the administrative fees of
the American Arbitration Association if permitted by Section 8.10(c) hereof;
(b) Second, in payment of (i) all claims for Damages by LSI in
uncontested notices; (ii) all claims for Damages by LSI accepted by written
agreement of LSI and the Holder; and (iii) all claims for Damages by LSI awarded
and as instructed by the arbitrator;
(c) Third, in payment of all expenses and fees of the Holder;
and
(d) Fourth, in payment to the Holder.
ARTICLE IX
GENERAL PROVISIONS
9.1 Termination, Amendment and Waiver. This Agreement may be terminated
at any time prior to the Effective Time:
(a) by mutual agreement of LSI, Mint and the Holder;
(b) by LSI, Mint or the Holder if (i) the Effective Time shall
not have occurred on or prior to August 31, 1997; (ii) there shall be a
nonappealable order of a federal or state court in effect preventing
consummation of the transactions contemplated by this Agreement, or (iii) there
shall be any non-appealable action taken, or any statute, rule, regulation or
order enacted, promulgated or issued or deemed applicable to the transactions
contemplated by this Agreement by any Governmental Entity that would make
consummation of the transactions contemplated by this Agreement illegal.
9.2 Effect of Termination. In the event of termination of this Agreement
by either LSI, Mint or the Holder pursuant to Section 9.1, this Agreement shall
(except for the provisions of Sections 2.1(x), 4.1(d), 5.7, 5.9, 6.2 and 6.5)
forthwith become void.
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9.3 Amendment. This Agreement may not be amended except by an instrument
in writing signed by LSI, Mint and the Holder.
9.4 Extension; Waiver; Delay or Omission. At any time prior to the
Effective Time, the parties hereto may (i) extend the time for the performance
of any of the obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto, and (iii) waive compliance with any of
the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party. It is agreed that no delay
or omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of another party under this Agreement shall
impair any such right, power or remedy, nor shall it be construed to be a waiver
of or acquiescence in any such breach or default or any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring.
9.5 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (i) delivered personally, upon delivery, or
(ii) if mailed by registered or certified mail (return receipt requested)
postage prepaid, upon the date that is seven (7) days after deposit, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to LSI, to:
LSI Logic Corporation
1551 McCarthy Boulevard
Milpitas, CA 95035
Telephone No.: (408) 433-8000
Attn: Elissa Wellikson
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Telephone No.: (415) 493-9300
Attn: Judith M. O'Brien
(b) if to the Holder to:
Mary Albanese
336 Beacon Street
Boston, MA 02116
Telephone No.: (617) 267-5032
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with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attn: David Walek, Esq.
Telephone No.: (617) 951-7000
(c) if to Mint to:
Mint Technology, Inc.
6 Fortune Drive
Billerica, MA 01821
Attn: Mary Albanese
Telephone No.: (508) 663-0225
with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
Attn: David Walek
Telephone No.: (617) 951-7000
9.6 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
9.7 Entire Agreement. This Agreement and the documents and instruments
and other agreements among the parties delivered pursuant hereto constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof and are not intended to
confer upon any other person any rights or remedies hereunder except as
otherwise expressly provided herein.
9.8 No Transfer; Binding Effect. This Agreement and the rights and
obligations set forth herein may not be transferred or assigned by operation of
law or otherwise without the consent of each party hereto. This Agreement is
binding upon and will inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
9.9 Severability. If any provision of this Agreement, or the application
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
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unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
9.10 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law or equity on
such party, and the exercise of any one remedy will not preclude the exercise of
any other; provided that Article VIII sets forth LSI's, Mint's and the Holder's
exclusive remedy for damages arising from Indemnifiable Claims.
9.11 Further. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and to
give such further written assurances as may be reasonably requested by any other
party to evidence and reflect the transactions described herein and contemplated
hereby and to carry into effect the intents and purposes of this Agreement.
9.12 Absence of Third-Party Beneficiary Rights. No provision of this
Agreement is intended, nor will be interpreted, to provide to create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, employee, partner or any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
9.13 Mutual Drafting. This Agreement is the joint product of LSI, Mint
and the Holder and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of LSI, Mint and the Holder and shall
not be construed for or against any party hereto.
9.14 Governing Law. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
California (without giving effect to its choice of law principles).
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IN WITNESS WHEREOF, LSI, Merger Sub, Mint and Holder have caused this
Agreement to be signed, respectively, by an officer thereunto duly authorized,
and Holder has signed this Agreement, all as of the date first written above.
LSI LOGIC CORPORATION
a Delaware corporation
By
----------------------------------------
Its
---------------------------------------
LSI MERGER SUBSIDIARY
a Massachusetts corporation
By
----------------------------------------
Its
---------------------------------------
MINT TECHNOLOGY, INC.,
a Massachusetts corporation
By
----------------------------------------
Its
---------------------------------------
HOLDER
------------------------------------------
Mary Albanese
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EXHIBIT 10.35
LSI LOGIC CORPORATION
1991 EQUITY INCENTIVE PLAN
AMENDED AND RESTATED
1. Purpose of the Plan. The purpose of the LSI Logic Corporation 1991
Equity Incentive Plan (the "Plan") is to enable LSI Logic Corporation (the
"Company") to provide an incentive to eligible employees, including officers,
and consultants whose present and potential contributions are important to the
continued success of the Company, to afford them an opportunity to acquire a
proprietary interest in the Company, and to enable the Company to enlist and
retain in its employ the best available talent for the successful conduct of its
business. It is intended that this purpose will be effected through the granting
of stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Award" means any Option granted.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee or Committees referred to in
Section 5 of the Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by the
Board.
(e) "Common Stock" means the Common Stock, $0.01 par value (as
adjusted from time to time), of the Company.
(f) "Company" means LSI Logic Corporation, a corporation
organized under the laws of the state of Delaware, or any successor corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services for its
benefit and is compensated for such services, provided the term Consultant shall
not include directors who are not compensated for their services or are paid
only a director's fee by the Company.
(h) "Director" means a member of the Board.
(i) "Disability" means a disability, whether temporary or
permanent, partial or total, as defined in Section 22(e)(3) of the Code.
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(j) "Employee" means any person, including officers and
directors, employed by the Company or any Subsidiary, provided the term Employee
shall not include non-employee directors and the payment of directors' fees by
the Company shall not be sufficient to constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) if such Common Stock shall then be listed on a
national securities exchange, the closing sales price (or the
closing bid, if no sales were reported) as quoted on the
principal national securities exchange on which the Common Stock
is listed or admitted to trading, or
(ii) the closing sales price (or the closing bid, if no
sales were reported) as quoted on the NASDAQ National Market
System, or
(iii) if such Common Stock shall not be quoted on such
National Market System nor listed or admitted to trading on a
national securities exchange, then the average of the closing bid
and asked prices, as reported by The Wall Street Journal for the
over-the-counter market, or
(iv) if none of the foregoing is applicable, then the Fair
Market Value of a share of Common Stock shall be determined by
the Board of Directors of the Company in its discretion.
(m) "Incentive Stock Option" means an Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(n) "Nonstatutory Stock Option" means any Option that is not an
Incentive Stock Option.
(o) "Option" means any option to purchase shares of Common Stock
granted pursuant to Section 7 below.
(p) "Optionee" means any holder of an Option.
(q) "Outside Director" means a Director who is not an Employee of
the Company.
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<PAGE> 3
(r) "Plan" means this 1991 Equity Incentive Plan, as hereinafter
amended from time to time.
(s) "Senior Management Employees" means Employees who are
executive officers or vice presidents of the Company.
(t) "Subsidiary" means a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or by a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or by a Subsidiary.
In addition, the terms "Tax Date" and "Insiders" shall have meanings set
forth in Section 8.
3. Eligible Participants. Any Employee or Consultant of the Company or
of a Subsidiary whom the Committee deems to have the potential to contribute to
the future success of the Company shall be eligible to receive Awards under the
Plan; provided, however, that any Options intended to qualify as Incentive Stock
Options shall be granted only to Employees of the Company or its Subsidiaries.
4. Stock Subject to the Plan. Subject to Sections 9 and 10, the total
number of shares of Common Stock reserved and available for distribution
pursuant to the Plan shall be 18,000,000 shares. Subject to Sections 9 and 10
below, if any shares of Common Stock that have been optioned under an Option
cease to be subject to such Option Award granted hereunder are forfeited or
repurchased or any such award otherwise terminates without a payment being made
to the participant in the form of Common Stock, such shares shall again be
available for distribution in connection with future Awards under the Plan.
5. Administration.
(a) Procedure. The Plan shall be administered by the Board or a
Committee designated by the Board to administer the Plan, which Committee shall
be constituted to permit the Plan to comply with Rule 16b-3 promulgated under
the Exchange Act, or any successor rule thereto ("Rule 16b-3"). If permitted by
Rule 16b-3, the Plan may be administered by different bodies with respect to
Employees who are Directors, Senior Management Employees, or Employees who are
neither directors nor officers and Consultants.
Once appointed, a Committee shall continue to serve until
otherwise directed by the Board. From time to time the Board may change the size
of a Committee, appoint additional members thereof, remove members (with or
without cause), appoint new members in substitution therefor, fill vacancies,
however caused
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and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by Rule 16b-3. As used herein, except in
Sections 10, 12 and 17, reference to Committee shall mean such Committee or the
Board, whichever is then acting with respect to the Plan.
(b) Authority. Subject to the general purposes, terms, and
conditions of the Plan, and to the direction of the Board, the Committee, if
there be one, shall have full power to implement and carry out the Plan
including, but not limited to, the following:
(i) to select the Employees and Consultants of the Company
and/or its Subsidiaries to whom Options may from time to time be granted
hereunder;
(ii) to determine whether and to what extent Options are
to be granted hereunder;
(iii) to determine the number of shares of Common Stock to
be covered by each such Award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture
restrictions regarding any Option and/or the shares of Common Stock
relating thereto, based in each case on such factors as the Committee
shall determine, in its sole discretion);
(vi) to determine whether and under what circumstances an
Option may be settled in cash instead of Common Stock;
(vii) to determine the form of payment that will be
acceptable consideration for exercise of an Option granted under the
Plan;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an
Award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount (if any) of any deemed earnings on any deferred amount during any
deferral period);
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Shareholder approval shall required to reduce the exercise price
of any Option. For grants of Incentive Stock Options only, any other material
amendments to the Plan shall require shareholder approval. The Committee shall
have the authority to construe and interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan.
6. Duration of the Plan. The Plan shall remain in effect until
terminated by the Board under the terms of the Plan, provided that in no event
may Incentive Stock Options be granted under the Plan later than March 8, 2001,
10 years from the date the Plan was adopted by the Board.
7. Stock Options. The Committee, in its discretion, may grant Options to
eligible participants and shall determine whether such Options shall be
Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be
evidenced by a written Option agreement which shall expressly identify the
Option as an Incentive Stock Option or as a Nonstatutory Stock Option, and shall
be in such form and contain such provisions as the Committee shall from time to
time deem appropriate. Option agreements shall contain the following terms and
conditions:
(a) Option Price; Number of Shares. The Option price, which shall
be approved by the Committee, may not be less than the Fair Market Value of the
Common Stock at the time the Option is granted.
The Option agreement shall specify the number of shares of Common
Stock to which it pertains.
(b) Waiting Period until Option Vesting and Exercise Dates. At
the time an Option is granted, the Committee will determine the terms and
conditions to be satisfied before shares may be purchased, including the dates
on which the right to purchase shares subject to the Option will vest and such
shares may first be purchased. The Committee may specify that an Option may not
be exercised until the completion of the waiting period specified at the time of
grant. (Any such period is referred to herein as the "Initial Vesting Period.")
At the time an Option is granted, the Committee shall fix the period within
which such Option may be exercised, which shall not be less than the Initial
Vesting Period, if any, nor, in the case of an Incentive Stock Option, more than
10 years from the date of grant.
(c) Form of Payment. The consideration to be paid for the shares
of Common Stock to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Committee (and, in the case of an Incentive
Stock Option, shall be determined at the time of grant) and may consist entirely
of (i) cash,
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<PAGE> 6
(ii) check, (iii) promissory note, (iv) other shares of Common Stock which (x)
either have been owned by the Optionee for more than six months on the date of
surrender or were not acquired, directly or indirectly, from the Company, and
(y) have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the shares as to which said Option shall be exercised, (v)
delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds required to pay the exercise price, (vi) delivery of an
irrevocable subscription agreement for the shares which obligates the option
holder to take and pay for the shares not more than 12 months after the date of
delivery of the subscription agreement, (vii) any combination of the foregoing
methods of payment, or (viii) such other consideration and method of payment for
the issuance of shares to the extent permitted under the Delaware General
Corporation Law.
(d) Effect of Termination of Employment or Death or Disability
of Employee Participants.
(i) Termination of Employment in General. In the event
that an Optionee during his or her lifetime ceases to be an Employee of the
Company or of any Subsidiary for any reason, other than misconduct of the
Optionee, including retirement, any Option, including any unexercised portion
thereof, which was otherwise exercisable on the date of termination of
employment, shall expire in accordance with the following provisions:
(A) Non-statutory Options shall expire unless
exercised within such time period as is determined by the Committee; which shall
be ninety (90) days from the date the Optionee ceases to be an Employee unless
the Committee has specified another time period prior to the expiration of such
ninety (90) day period; and
(B) Incentive Stock Options shall expire unless
exercised within a period of ninety (90) days from the date on which the
Optionee ceased to be an Employee (or such lesser period as is set out in Option
agreement),
Notwithstanding the foregoing, the period of
exercisability provided for above, as applicable shall in no event continue
after the expiration of the term of such Option as set forth in the Option
agreement.
(ii) Misconduct: If in any case the Committee shall
determine that an Employee or Consultant shall have been discharged due to the
Employee's or Consultant's misconduct (as defined below) such Employee or
Consultant, as the case may be, shall not thereafter have any rights under the
Plan or any Option that shall have been granted to him or her under the Plan.
For purposes of the Plan, "misconduct" means conduct for which the Company's
determines to terminate the employment of an Employee or to terminate any
Consultant's arrangements with the
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<PAGE> 7
Company that constitutes (i) willful breach or neglect of duty; (ii) failure or
refusal to work or to comply with the Company's rules, policies, and practices;
(iii) dishonesty; (iv) insubordination; (v) being under the influence of drugs
(except to the extent medically prescribed) or alcohol while on duty or on
Company premises; (vi) conduct endangering, or likely to endanger, the health or
safety of another Employee, any other person or the property of the Company; or
(vii) conviction of a felony.
(iii) Termination of Employment due to Disability or
Death. In the event of the death or permanent, total Disability of an Optionee
during the period of employment, that portion of the Option which had become
exercisable as of the date of death or permanent, total Disability shall be
exercisable by the employee or his or her personal representatives, heirs, or
legatees within 12 months of the date of death or permanent, total Disability or
such time period as is determined by the Committee (but in the case of an
Incentive Stock Option, in no event no more than 12 months after the date of
death or permanent, total Disability or after the expiration of the term of such
Option as set forth in the Option agreement.) In the event of the death of an
Optionee within three months after termination of employment, that portion of
the Option which had become exercisable as of the date of termination shall be
exercisable by his or her personal representatives, heirs, or legatees within
six months of the date of death or such time period as is determined by the
Committee (but in the case of an Incentive Stock Option, in no event after the
expiration of the term of such Option as set forth in the Option agreement.) In
the event that an Optionee ceases to be an Employee of the Company or of any
Subsidiary for any reason, including death, Disability or retirement, prior to
the lapse of the Initial Vesting Period, if any, his or her Option shall
terminate and be null and void to the extent the requirement for such Initial
Vesting Period has not been satisfied.
(e) Leave of Absence. The employment relationship shall not be
considered interrupted in the case of: (i) sick leave, military leave or any
other leave of absence approved by the Board; provided that any such leave is
for a period of not more than 90 days, unless reemployment upon the expiration
of such leave is guaranteed by contract, statute or pursuant to formal policy
adopted from time to time by the Company and issued and promulgated to Employees
in writing, or (ii) in the case of transfer between locations of the Company or
between the Company, its Subsidiaries or its successor. In the case of any
Employee on an approved leave of absence, the Committee may make such provisions
respecting suspension of vesting of the Option while on leave from the employ of
the Company or a Subsidiary as it may deem appropriate, if any, except that in
no event shall an Option be exercised after the expiration of the term set forth
in the Option agreement.
(f) Acceleration of Vesting or Initial Vesting Period. The
Committee may accelerate the earliest date on which outstanding Options (or any
installments thereof) are exercisable.
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<PAGE> 8
(g) Special Incentive Stock Option Provisions. In addition to the
foregoing, Options granted to Employees under the Plan which are intended to be
Incentive Stock Options under Section 422 of the Code shall be subject to the
following terms and conditions:
(i) Dollar Limitation. To the extent that the aggregate
Fair Market Value of the shares of Common Stock with respect to which
Options designated as Incentive Stock Options become exercisable for the
first time by any individual during any calendar year (under all plans
of the Company) exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options. For purposes of the preceding sentence, (i)
Options shall be taken into account in the order in which they were
granted and (ii) the Fair Market Value of the shares shall be determined
as of the time the Option with respect to such shares was granted.
(ii) 10% Stockholder. If any person to whom an Incentive
Stock Option is to be granted pursuant to the provisions of the Plan is,
on the date of grant, the owner of Common Stock (as determined under
Section 425(d) of the Code) possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of any
Subsidiary, then the following special provisions shall be applicable to
the Option granted to such individual:
(A) The Option price per share of the Common
Stock subject to such Incentive Stock Option shall not be less
than 110% of the Fair Market Value of the Common Stock on the
date of grant; and
(B) The Option shall not have a term in
excess of five years from the date of grant.
Except as modified by the preceding provisions of this Subsection 7(g) and
except as otherwise required by Section 422 of the Code, all of the provisions
of the Plan shall be applicable to the Incentive Stock Options granted
hereunder.
(h) Other Provisions. Each Option granted under the Plan may
contain such other terms, provisions, and conditions not inconsistent with the
Plan as may be determined by the Committee.
(i) Options to Consultants. Except as set forth in Section
7(d)(ii), Options granted to Consultants shall not be subject to Section 7(d) of
the Plan, but shall have such terms and conditions pertaining to the Initial
Vesting Period (if any), exercise date, and effect of termination of the
consulting relationship as the Committee shall determine in each case. Unless
otherwise stated, termination of the consulting
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<PAGE> 9
relationship shall be deemed to have occurred at the completion of the
consulting project for which Consultant was engaged at the time of the grant or
termination of the Consulting Agreement, if earlier.
(j) Buyout Provisions. The Committee may at any time offer to buy
out for a payment in cash or Common Stock, an Option previously granted, based
on such terms and conditions as the Committee shall establish and communicate to
the Optionee at the time that such offer is made.
(k) Rule 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall be deemed to
contain such additional conditions or restrictions as may be required thereunder
to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
(l) Limits. The following limitations shall apply to grants of Options
to employees:
(i) No employee shall be granted, in any fiscal year of
the Company, Options to purchase more than 750,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the
Company's capitalization or organization as described in
Sections 9 and 10.
(iii) If an Option grant made under the Plan is canceled
in the same fiscal year of the Company in which it was
granted (other than in connection with a transaction
described in Section 9 or Section 10), the canceled Option
grant will be counted against the limit set forth in
Section 7(l)(i), above. For this purpose, if the exercise
price of an Option grant is reduced, the transaction will
be treated as a cancellation of the Option grant and the
grant of a new Option.
8. Withholding Taxes; Stock Withholding to Satisfy Withholding Tax
Obligations. Whenever, under the Plan, shares are to be issued in satisfaction
of Options granted hereunder, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy federal,
state, and local withholding tax requirements prior to the delivery of any
certificate or certificates for such shares. Whenever, under the Plan, payments
are to be made in cash, such payment shall be net of an amount sufficient to
satisfy federal, state, and local withholding tax requirements.
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<PAGE> 10
When a participant incurs tax liability in connection with the exercise
or vesting of any Option, which tax liability is subject to tax withholding
under applicable tax laws, and the participant is obligated to pay the Company
an amount required to be withheld under applicable tax laws, the participant may
satisfy the withholding tax obligation by electing to have the Company withhold
from the shares to be issued that number of shares having a Fair Market Value
equal to the amount required to be withheld determined on the date that the
amount of tax to be withheld is to be determined (the "Tax Date").
All elections by participant to have shares withheld for this
purpose shall be made in writing in a form acceptable to the Committee and shall
be subject to the following restrictions:
(i) the election must be made on or prior to the
applicable Tax Date;
(ii) once made, the election shall be irrevocable as to
the particular shares as to which the election is made;
(iii) all elections shall be subject to the disapproval of
the Committee; and
(iv) if the participant is an officer or Director of the
Company or other person whose transactions in Common Stock
are subject to Section 16(b) of the Exchange Act
(collectively "Insiders"), the election may not be made
during such time or times, if any, as are restricted by
Rule 16b-3 or any successor provision.
9. Recapitalization. In the event that dividends are payable in Common
Stock or in the event there are splits, subdivisions, or combinations of shares
of Common Stock, the number of shares available under the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares of Common Stock deliverable in connection with any Option theretofore
granted shall be increased or decreased proportionately, as the case may be,
without change in the aggregate purchase price (where applicable).
10. Reorganization. In case the Company is merged or consolidated with
another corporation and the Company is not the surviving corporation, or in case
the property or stock of the Company is acquired by another corporation, or in
case of separation, reorganization, or liquidation of the Company, then the
Board, or the board of directors of any corporation assuming the obligations of
the Company hereunder, shall, as to outstanding Options either (a) make
appropriate provision for the protection of any such outstanding Options by the
assumption or substitution on an equitable
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<PAGE> 11
basis of appropriate stock of the Company or of the merged, consolidated, or
otherwise reorganized corporation which will be issuable in respect to the
shares of Common Stock, provided that in the case of Incentive Stock Options,
such assumption or substitution comply with Section 424 of the Code, or (b) upon
written notice to the participant, provide that the Option must be exercised
within 30 days of the date of such notice or it will be terminated. In any such
case, the Board or the Committee may, in its discretion, advance the lapse of
vesting periods, Initial Vesting Periods, and exercise dates.
11. Employment Relationship. Nothing in the Plan or any Award made
hereunder shall be construed as a contract for employment or consulting for any
period or shall interfere with or limit in any way the right of the Company or
of any Subsidiary to terminate any recipient's employment or consulting
relationship at any time, with or without cause, nor confer upon any recipient
any right to continue in the employ or service of the Company or any Subsidiary.
12. General Restriction. Each Award shall be subject to the requirement
that, if, at any time, the Board shall determine, in its discretion, that the
listing, registration, or qualification of the shares subject to such Award upon
any securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, such Award or the issue or purchase of
shares thereunder, such Award may not be exercised in whole or in part unless
such listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Board.
13. Rights as a Stockholder. The holder of an Option shall have no
rights as a stockholder with respect to any shares covered by the Option until
the date of exercise. Once an Option is exercised by the holder thereof, the
participant shall have the rights equivalent to those of a stockholder, and
shall be a stockholder when his or her holding is entered upon the records of
the duly authorized transfer agent of the Company. Except as otherwise expressly
provided in the Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
14. Nonassignability of Awards. Awards made hereunder shall not be
assignable or transferable by the recipient in accordance with their terms,
except to the extent permitted by the tax and securities laws, including by will
or by the laws of descent and distribution, and as otherwise consistent with the
specific Plan provisions relating thereto.
15. Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board, the submission of the Plan to the stockholders of the Company for
approval, nor any provision of the Plan shall be construed as creating any
limitations on the power of the
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<PAGE> 12
Board to adopt such additional compensation arrangements as it may deem
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
16. Amendment, Suspension, or Termination of the Plan. The Board may at
any time amend, alter, suspend, or discontinue the Plan, but no amendment,
alteration, suspension, or discontinuation shall be made which would impair the
rights of any participant in the Plan without his or her consent. In addition,
to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act or under Section 423 of the Code (or any other applicable law or
regulation), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
17. Effective Date of the Plan. The Amended and Restated Plan is
effective upon adoption by the Board and shall be subject to stockholder
approval within 12 months of adoption by the Board. Options may be granted and
exercised under the Plan only after there has been compliance with all
applicable federal and state securities laws.
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EXHIBIT 13.1
1997 Financial Data
Contents
9 Management's discussion and analysis of financial condition and results
of operations
16 Consolidated financial statements
20 Notes to consolidated financial statements
36 Report of independent accountants
37 Five year consolidated summary
38 Interim financial information
39 Corporate information
40 Corporate directory
41 Stock information
CHART DESCRIPTORS:
Revenues
Net Income
Net Income Per
Diluted Share
Gross Profit
Margin
SG&A Expenses
R&D Funding
Operating
Profit Margin
Debt-to-Equity Ratio
Total Assets
Stockholders'
Equity
<PAGE> 2
The System on a Chip Company(R)1997 Annual Report
<PAGE> 3
CORPORATE PROFILE
LSI Logic Corporation, The System on a Chip Company, is a leading provider of
high-performance semiconductor solutions. The Company enables customers in the
consumer, communications and computer markets to increase the performance, lower
the cost and accelerate the time to market of their system products. LSI Logic
is headquartered in Milpitas, California. The Company's stock is traded on the
New York Stock Exchange under the symbol LSI.
<PAGE> 4
EXECUTIVE LETTER
TO OUR SHAREHOLDERS
In a year during which the global semiconductor industry began a slow recovery
from a mild yet protracted downturn, LSI Logic's revenues increased in line with
the industry's modest growth rate. We made significant investments in research
and development programs and introduced key new products and processes that
increased our penetration of consumer, communications and computer markets. We
also invested in our manufacturing operations to ensure we have leading-edge
capacity available to meet increased customer requests in the future. We believe
these activities place LSI Logic in a position of strength in a marketplace that
industry observers believe is poised to resume its historical growth rates.
For the year ended December 31, 1997, LSI Logic reported record revenues of
$1.29 billion, a 4% increase compared to revenues of $1.24 billion in 1996. Net
income for the year was $159 million, or $1.11 per share, up from net income of
$147 million, or $1.07 per share in the previous year. LSI Logic grew profitably
in 1997, recording an after-tax net income of 12% and maintaining gross margins
of 48%. The Company ended the year with a solid balance sheet, highlighted by a
cash and short-term investment balance of $491 million.
The year also marked the first time in LSI Logic's history that international
sales represented more than 50% of revenues. Equally significant, revenue levels
derived from our three principal vertical markets--consumer electronics,
communications and computer products--were evenly balanced, reflecting the
success of our long-term strategy to diversify across a wider range of
high-growth markets in the worldwide electronics industry. For 1997, consumer
electronics represented 33% of LSI's revenues, communications increased to 32%
and computer market revenues accounted for 31%, with the remaining 4% derived
from other market categories.
<PAGE> 5
INVESTING IN THE FUTURE
LSI Logic's results were noteworthy in light of the fact that, during a slow
growth period in the industry, we invested in our future by increasing our
research and development expenditures. R&D spending of $226 million in 1997
represented 18% of revenues, compared to corresponding expenditures of $184
million--or 15% of revenues--in 1996. Our R&D efforts directly led to the
introduction of a number of important new system-on-a-chip products in 1997,
including single-chip solutions for digital video disc (DVD) players and
computer applications, digital still cameras and GSM-based wireless
communications devices.
On the technology front, LSI Logic invested in advanced process technology to
support the Company's system-on-a-chip strategy. We introduced our 0.18-micron
G11(TM) process technology, enabling us to deliver products with substantially
higher integration and performance, at lower power consumption levels. We also
invested in a new state-of-the-art eight-inch wafer fabrication plant in
Gresham, Oregon, which is scheduled to begin production in 1998. The first phase
of this manufacturing facility will utilize LSI's G10(TM) and G11 deep submicron
process technologies.
During 1997, we extended LSI Logic's system design capabilities by acquiring
Mint Technology, Inc., an engineering services company with expertise in the
areas of system architecture and system-level design verification used in the
development of complex integrated circuits. This acquisition marks an important
step forward in LSI's ongoing efforts to respond to customer needs by enhancing
the service aspects of our business.
<PAGE> 6
EXPANDING OUR PRODUCT PORTFOLIO
In 1997, LSI Logic introduced new products that target high-growth areas within
our major markets. The first of these areas, consumer electronics, is a rapidly
expanding market for the Company. Adding to our strong position in the video
game arena, we announced a system-on-a-chip image processing solution--the
DCAM(TM)-101--that will improve the picture quality and reduce the cost of
next-generation digital still cameras. In another emerging market that industry
research firms forecast will grow rapidly over the next several years, LSI Logic
introduced a DVD decoding engine for use in digital video disc players and
computer applications. Both the DCAM-101 and DVD chips are expected to enter
volume production in 1998.
We also rounded out our offerings for satellite and cable television set-top
boxes during 1997 by entering into an agreement with the British Broadcasting
Corporation (BBC) to develop a single-chip demodulator for digital terrestrial
television (DTT) applications. This chip is a key component for DTT set-top
boxes, and paves the way for LSI's participation in the emerging digital
television market.
The Company's accomplishments in the consumer market were matched by a number of
important advances in communications, LSI Logic's fastest growing target market
in 1997. We have a strong position in networking, where LSI is the marketshare
leader in supplying switched Ethernet system-on-a-chip cores and ASIC
(application-specific integrated circuit) solutions. We're supplying Cisco
Systems with seven custom ASICs for its next-generation router, and we're
providing custom and standard products to help Compaq Computer expand into the
networking arena. We extended our telecommunications presence by delivering the
world's first single-chip GSM baseband processor--a unique solution that
integrates a microprocessor, digital signal processing, and mixed-signal
capabilities on a chip to meet the needs of a range of cellular and wireless
communications applications.
<PAGE> 7
In the computer marketplace, LSI expanded beyond the workstation and server
markets that have traditionally been areas of focus for the Company with
strategic initiatives targeted at high-end storage devices and printer
applications. Our GigaBlaze(TM) high-speed data transfer technology today leads
the way in providing Fibre Channel products to the industry, and during 1997 we
strengthened our storage presence by announcing a high-performance core
optimized for PCI bus applications. In the printer market, LSI's CoreWare(R)
library of high-performance MIPS processor, Ethernet, USB and PCI cores are
being offered to provide system-on-a-chip printer solutions.
LOOKING AHEAD
While 1997 was a relatively low-growth year for LSI Logic, it was a period of
significant accomplishments in strengthening the Company for the future. We
increased penetration of our target markets, introduced new products that are
expected to fuel growth in 1998, and moved ahead with plans to add
state-of-the-art manufacturing capacity. There will be challenges, of course,
but we're confident that LSI Logic enters 1998 well-positioned to take advantage
of the industry's projected return to its historical growth rates for the
balance of the decade. On behalf of everyone at the Company, I look forward to
these challenges, and I thank all of our shareholders, customers and partners
for their support.
Wilfred J. Corrigan
Chairman and Chief Executive Officer
Wilfred J. Corrigan Chairman and CEO
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Revenues for LSI Logic increased 4% to $1.29 billion in 1997 from $1.24 billion
in 1996. Income from operations increased 1.5% to $195 million in 1997 compared
to $192 million in 1996. Net income for 1997 was $159 million, an 8% increase
over the $147 million of net income in 1996. Diluted earnings per share
increased to $1.11 per share in 1997 from $1.07 per share in 1996. Net income in
1997 would have been $1.4 million or $0.01 per share higher on a diluted basis
but for the cumulative effect of the change in accounting principle during 1997.
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 remainder of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. On
October 27, 1997, the Company changed its fiscal year from a 52-53 week year to
a year ending December 31. In 1996 and 1995, the year ended on the Sunday
closest to December 31. Fiscal year 1997 was a 53-week year. Fiscal years 1996
and 1995 were 52-week years.
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. See additional discussion contained in
- -Risk Factors,' set forth in Part I of the Company's Annual Report on Form 10-K.
Results of Operations
Revenue--The Company operates in one industry segment in which it designs,
develops, manufactures and markets integrated circuits, including
application-specific integrated circuits (ASICs), application-specific standard
products (ASSPs) and related products and services. Design and service revenues
include engineering design services, licensing of LSI Logic's advanced design
tools software, and technology transfer and support services. LSI Logic's
customers use 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 describes revenues from component products and
design and services as a percentage of total revenues:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Component products 95% 94% 94%
Design and services 5% 6% 6%
--- --- ---
100% 100% 100%
</TABLE>
Total revenues increased to $1.29 billion in 1997 from $1.24 billion in 1996.
The increase in revenues during 1997 primarily reflects an increase in demand
for the Company's component products utilized in consumer and communication
applications, offset in part by declines in demand for the Company's component
products utilized in computer applications and lower average selling prices
during 1997 when expressed in dollars as
<PAGE> 9
compared to 1996. Design and service revenues remained relatively consistent as
compared to 1996. During 1997, one customer represented 22% of the Company's
consolidated revenues. Total revenues declined to $1.24 billion in 1996 from
$1.27 billion in 1995. The decrease in revenues for 1996 was primarily
attributable to a slowdown in new orders for the Company's component products
utilized in computer applications and was partially offset by increases in
demand for its products utilized in consumer and communication applications. The
Company's average selling prices for component products did not fluctuate
significantly during 1996 compared to 1995. Design and service revenues during
1996 were consistent with 1995. During 1996 and 1995, one customer represented
14% and 12% of the Company's consolidated revenues, respectively.
Operating costs and expenses--Key elements of the consolidated statements of
operations, expressed as a percentage of revenues, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross profit margin 48% 44% 47%
Research and development expense 18% 15% 10%
Selling, general and administrative expense 15% 13% 13%
Income from operations 15% 16% 25%
</TABLE>
Gross margin--The gross margin percentage for 1997 increased to 48% of revenues,
compared with 44% in 1996. The increase was primarily related to increased
manufacturing yields, largely attributable to the installation of chemical
mechanical polishing equipment by the Company during the fourth quarter of 1996
and improvement in capacity utilization during 1997 as compared to 1996,
partially offset by lower average selling prices.
The gross margin percentage for 1996 declined to 44% of revenues, compared with
47% in 1995. The decline was primarily attributable to lower factory utilization
during 1996 which was compounded by the Company's increase in its production
capacity throughout 1995, resulting primarily from the expansion of its Japanese
wafer manufacturing. The impact of lower factory utilization on gross margin was
offset in part by improvements in manufacturing yields and favorable pricing
negotiations with assembly and test subcontractors. Additionally, the gross
margin was favorably impacted in the fourth quarter of 1996 by the effects of
the shutdown of the Company's Milpitas, California manufacturing facility during
the second quarter of 1996.
The Company's operating environment combined with the resources required to
operate in the semiconductor industry requires managing a variety of factors
such as product mix, factory capacity and utilization, manufacturing yields,
availability of certain raw materials, terms negotiated with third-party
subcontractors and foreign currency fluctuations. Accordingly, there can be no
assurance that such or other factors will not have a material effect on the
Company's gross margin in future periods. 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. Although the yen weakened (the average yen exchange rate
for 1997 decreased 11% from 1996), the effect on gross margin and net income was
not material as the Company's yen denominated sales offset a substantial portion
of its yen denominated costs during those periods, and the Company hedged a
portion of its remaining yen exposure (see Note 3 of Notes to Consolidated
Financial Statements). However, there can be no assurance
<PAGE> 10
that future changes in the relative strength of the yen or mix of foreign
denominated revenues and costs will not have a material effect on gross margins
or operating results. Research and development--Total research and development
(R&D) expenses increased $42 million and $61 million in 1997 and 1996,
respectively, from previous years' R&D spending. As a percentage of revenues,
R&D expenses increased to 18% in 1997 from 15% and 10% in 1996 and 1995,
respectively. The increases in 1997 and 1996 are primarily attributed to
increased compensation and staffing levels and expansions of the Company's
product development centers as the Company continues to develop higher
technology sub-micron products and the related manufacturing, packaging and
design processes. The Company continues to be committed to technological
leadership in the high-performance semiconductor market and anticipates
maintaining its investment in R&D at a rate of approximately 18-19% of revenues
in 1998. This investment is expected to be primarily for development of new
advanced products, development of advanced manufacturing processes and
enhancements of the Company's electronic design automation software capability.
Selling, general and administrative--Selling, general and administrative (SG&A)
expenses increased $24 million and $7 million in 1997 and 1996, respectively,
from previous years' SG&A spending. SG&A expenses as a percentage of revenue
increased to 15% in 1997 from 13% in 1996 and 1995, respectively. The increases
during 1997 and 1996 are primarily attributable to increased information
technology costs related to upgrading the Company's business systems and
infrastructure. The Company expects that SG&A expenses will continue to increase
in absolute dollars, although such expenses may fluctuate as a percentage of
revenue on a quarterly basis.
Acquired in-process research and development--In July 1997, the Company acquired
all issued and outstanding shares of the common stock of Mint Technology, Inc.
(Mint) for $9.5 million in cash and options to purchase approximately 681,726
shares of common stock with an intrinsic value of $11.3 million. The acquisition
was accounted for as a purchase (see Note 5 of Notes to the Consolidated
Financial Statements). Approximately $2.9 million of the purchase price was
allocated to in-process research and development and was expensed in the third
quarter of 1997.
Interest expense--Interest expense decreased to $1.5 million in 1997 compared to
$14 million and $16 million in 1996 and 1995, respectively. The decrease is
primarily attributable to the conversion of all of the Company's $144 million,
51/2% Convertible Subordinated Notes to common stock on March 24, 1997 (see Note
7 of Notes to the Consolidated Financial Statements) and the capitalization of
interest as part of the construction at the new manufacturing facility in
Gresham, Oregon.
Interest and other income--Interest and other income increased $4 million in
1997 compared to 1996. The increase is primarily attributable to a decrease in
foreign exchange losses from $7 million in 1996 to $2 million in 1997, which
related primarily to reduced foreign exchange exposure at the Company's European
sales affiliate. In addition, the Company received other income from insurance
settlement proceeds, the disposal of land owned by a European affiliate and
other miscellaneous gains. These gains were offset in part by losses on the
final sale of equipment from the Company's Milpitas wafer manufacturing facility
(see Note 4 of Notes to Consolidated Financial Statements), additional Milpitas
reserves for operating expenses and other miscellaneous losses.
Interest and other income decreased $6 million in 1996 compared with 1995. The
decrease is primarily attributable to foreign currency exchange losses totaling
approximately $7 million during 1996, which related primarily to U.S. dollars
held by the Company's European sales affiliate.
<PAGE> 11
Provision for income taxes--In 1997, 1996 and 1995, the Company's effective tax
rate was 28%. The tax rate was lower than the U.S. statutory rate primarily due
to earnings of the Company's foreign subsidiaries taxed at lower rates and the
utilization of prior loss carryovers and other tax credits.
Minority interest--The changes in minority interest in 1997 and 1996 were
primarily attributable to the composition of earnings and losses among
certain of the Company's international affiliates for each of the respective
years. The changes in minority interest in 1996 and 1995 were primarily
attributable to the purchase of minority held shares of LSI Logic Japan
Semiconductor, Inc. (JSI), formerly known as Nihon Semiconductor, Inc., LSI
Logic Corporation of Canada, Inc., LSI Logic K.K. and LSI Logic Europe, Ltd.
(formerly known as LSI Logic Europe, PLC) in 1996 and 1995 (see Notes 5 and 11
of Notes to Consolidated Financial Statements).
Cumulative effect of change in accounting principle--On
November 21, 1997, the Emerging Issues Task Force issued EITF 97-13 -Accounting
for costs incurred in connection with a consulting contract or an internal
project that combines business process re-engineering and information technology
transformation." EITF 97-13 required that the Company expense, in the fourth
quarter of 1997, all costs previously capitalized in connection with business
process re-engineering activities as defined by the statement. The Company
recorded a charge of $1.4 million, net of related tax of $0.6 million, during
the fourth quarter of 1997 (see Note 1 of Notes to Consolidated Financial
Statements).
Restructuring--The Company implemented a restructuring plan in the
third quarter of 1992 revising its global manufacturing strategy, streamlining
operations, discontinuing certain commodity products and focusing its product
strategy on high-end technology solutions. By the end of 1996, all reserves
established under the restructuring plan had been utilized. As a result of a
favorable appellate court decision in September 1996 in connection with the
Texas Instruments litigation (see Note 11 of Notes to Consolidated Financial
Statements), $15 million of restructuring reserves became available for the
write-down of the Milpitas wafer manufacturing equipment (see Note 4 of Notes to
Consolidated Financial Statements). The following table sets forth the Company's
1992 restructuring expense and charges taken from the date the restructuring
commenced through December 31, 1997.
<TABLE>
<CAPTION>
1992
Restructuring Balance Balance Balance
(In thousands) Expense Utilized* Adjusted 12/31/96 12/31/97
- -------------- ------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Write-down of
manufacturing facility (a) $ 14,700 $ (28,700) $ 14,000 $ -- $ --
Other fixed asset
related charges (b) 35,500 (38,700) 3,200 -- --
phase-down and
consolidation of
manufacturing facilities (b) 13,500 (13,500) -- -- --
Payments to employees
for severance (c) 8,000 (7,200) (800) -- --
Write-down of
inventories (a) 10,900 (8,800) (2,100) -- --
Relocation, lease
terminations and
other (b) 19,200 (4,900) (14,300) -- --
Total $ 101,800 $(101,800) $ -- $ -- $ --
</TABLE>
* Net of cumulative currency translation adjustments.
(a) Amounts utilized represent non-cash charges.
(b) Amounts utilized represent both cash and non-cash charges. Cumulative cash
charges totaled $17 million.
(c) Amounts utilized represent cash payments related to the severance of
approximately 550 employees.
<PAGE> 12
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, the availability and extent of utilization of
manufacturing capacity, price erosion, competitive factors, the timing of new
product introductions, changes in product mix, fluctuations in manufacturing
yields, 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
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. To the
extent the Company's performance may not meet expectations published by external
sources, public reaction could result in a sudden and significantly adverse
impact on the market price of the Company's securities, particularly on a
short-term basis.
The Company 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 facilities, 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
forward exchange, currency swap and option contracts to manage its exposure
associated with currency fluctuations on intercompany transactions and certain
foreign currency denominated commitments. There were no foreign currency hedge
contracts outstanding as of December 31, 1997 as the contracts were closed out
on the last day of the month (see Note 3 of Notes to Consolidated Financial
Statements). At December 31, 1996, the Company had currency swap and option
contracts outstanding. These contracts hedged intercompany loans, a portion of
the Company's yen denominated commitments and net asset and liability exposure
in nonfunctional currencies at certain of the Company's affiliates for the first
quarter of 1997.
The Company's corporate headquarters and some of its 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.
Year 2000 disclosure
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in its
financial, product development, order management and manufacturing systems. The
inability of computer software programs to accurately recognize, interpret and
process date codes designating the year 2000 and beyond could cause systems to
yield inaccurate results or encounter operating problems, including interruption
of the business operations such systems control. The Company is in the process
of analyzing its internal computer-based systems to identify potential
vulnerabilities and implement corrections or changes that may be required. Based
on information currently available, the Company believes that its internal
systems currently are or, by such time as is necessary to avoid a material
adverse effect upon the Company, will be capable of functioning without year
2000 problems. Also based on information thus far available to the Company, the
Company does not
<PAGE> 13
believe it will incur expenditures in dealing with year 2000 issues that will
have a material adverse effect on the financial condition of the Company.
The Company also may be exposed to risks from computer systems of parties with
which the Company transacts business. Were problems to develop with such other
parties' systems, they could have a material adverse effect on the Company. In
response to this, the Company is taking steps, including contacting its
strategic suppliers and large customers, to determine the extent to which the
Company may be vulnerable to those parties' failure to remedy their own year
2000 issues and to ascertain what actions, if needed, may be taken by the
Company in response to such risks.
The Company has expended and will continue to expend appropriate resources to
address this issue on a timely basis. The analysis is not complete, however, and
no estimate of the expected total cost of this effort can be made at this time.
Furthermore, there can be no assurances that unknown costs ultimately necessary
to update systems or address potential system interruptions will not have a
material adverse effect on the Company's business, financial condition or
results of operations. To date the Company has not identified any loss
contingencies related to the year 2000 issues for products it has sold.
Financial Condition and Liquidity
Cash, cash equivalents and short-term investments decreased $226 million in 1997
to $491 million from $717 million at December 31, 1996. The decrease is
primarily attributable to capital additions, increases in the repayment of debt
obligations, net of borrowings, and repurchases of the Company's common stock,
offset in part by an increase in cash from operations and proceeds received from
employee stock transactions.
During 1997, the Company generated $399 million of cash and cash equivalents
from its operating activities, compared to $352 million during 1996. The
increase in cash and cash equivalents provided from operations as compared to
1996 was primarily attributable to increases in accounts payable and net income
before depreciation and amortization, partially offset by increases in
inventories, prepaids and other assets and accounts receivable. Increased sales
and manufacturing activities in response to higher customer demand contributed
to increases in accounts receivable, accounts payable and inventories.
Cash and cash equivalents used in investing activities were $346 million during
1997 compared to $433 million in 1996. The primary investing activities, other
than short-term investment in available-for-sale debt and equity securities,
included purchases of property and equipment, acquisition of Mint Technology,
Inc. (see Note 5 of Notes to Consolidated Financial Statements) and additional
investment in non-marketable shares of other technology companies. During 1996,
primary investing activities included purchases of property and equipment and
increased investment in debt and equity securities. 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 $513 million and $362 million,
net of retirements and refinancings during 1997 and 1996, respectively. The
additions were primarily for costs related to construction of the new eight-inch
wafer manufacturing facility in Gresham, Oregon. The Company expects to spend
approximately $123 million during the first three quarters of 1998 to bring this
facility to operational status.
Cash and cash equivalents used in financing activities totaled $91 million. This
is attributable to the repayment of debt obligations totaling $55 million, net
of borrowings, and $60 million used to repurchase shares of the Company's stock,
partially offset by proceeds received from employee stock transactions of $24
million (see Note 8 of Notes to Consolidated Financial Statements). In February
1997, the Company called for redemption of its $144 million, 51/2% Convertible
Subordinated Notes (Notes). The holders of the Notes elected to convert the
Notes to common stock at a conversion price of $12.25 per share. The conversion
<PAGE> 14
resulted in the issuance of 11.7 million shares of common stock (see Note 7 of
Notes to Consolidated Financial Statements).
In December 1996, the Company entered into a $300 million revolving line of
credit with several banks (see Note 7 of Notes to Consolidated Financial
Statements). As of December 31, 1997, there were no borrowings outstanding under
this credit agreement. Additionally, the Company's Japanese manufacturing
subsidiary has a credit facility with adjustable interest rates. As of December
31, 1997, the Company had 14 billion yen ($109 million) outstanding under the
facility (see Note 7 of Notes to Consolidated Financial Statements). Each of the
Company's significant foreign affiliates has lines of credit available for local
currency borrowings. These other foreign bank lines of credit were not material
as of December 31, 1997. 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. The
Company believes that existing liquid resources and funds generated from
operations combined with funds from such financing and its ability to borrow
funds will be adequate to meet its operating and capital requirements and
obligations through the foreseeable future. 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.
Market Risk Disclosure
The Company has foreign subsidiaries which operate and sell the Company's
products in various global markets. As a result, the Company's cash flow and
earnings are exposed to fluctuations in interest rates and foreign currency
exchange rates. The Company attempts to limit these exposures through
operational strategies and financial market instruments. The Company utilizes
various hedge instruments, primarily forward contracts (with maturities of six
months or less), currency swaps and currency option contracts, to manage its
exposure associated with firm intercompany and third-party transactions and net
asset and liability positions denominated in nonfunctional currencies. The
Company also utilizes interest rate swap contracts to manage its interest rate
risk on yen denominated debt obligations (see Note 3 of Notes to Consolidated
Financial Statements). The Company does not purchase or hold derivative
financial instruments for trading purposes.
Interest rate sensitivity--The Company is subject to interest rate risk on its
investment portfolio, outstanding debt and interest rate swap contracts.
A 57 basis point move in interest rates (10% of the Company's weighted average
investment yield), affecting the Company's interest sensitive investments, would
have an immaterial effect on the Company's financial position, results of
operations and cash flows over the next fiscal year.
The Company manages interest rate risk on yen denominated debt obligations by
entering into interest rate swap contracts. Any fluctuations in the underlying
interest rate have an equal and opposite effect on the yen debt obligations and
the interest rate swaps hedging the obligations. An 8 basis point move in
interest rates (10% of the underlying yen LIBOR rate) on the yen denominated
debt and/or interest rate swap contracts would have an immaterial effect on the
Company's financial position, results of operations and cash flows over the next
fiscal year.
Foreign currency exchange risk--Based on the Company's overall currency rate
exposure at December 31, 1997, including derivative financial instruments and
nonfunctional currency denominated receivables and payables, a near-term 10%
appreciation or depreciation of the U.S. dollar would have an immaterial effect
on the Company's financial position, results of operations and cash flows over
the next fiscal year.
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31st
(In thousands, except per-share amounts) 1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $ -104,571 $ -147,059
Short-term investments 386,369 570,223
Accounts receivable, less allowance for
doubtful accounts of $2,597 and $3,116 210,141 184,977
Inventories 102,267 90,410
Prepaid expenses and other current assets 67,113 58,385
Total current assets 870,461 1,051,054
Property and equipment, net 1,123,909 811,659
Other assets 132,542 90,001
Total assets $ 2,126,912 $ 1,952,714
Liabilities and Stockholders' Equity
Accounts payable $ 211,135 $ 104,109
Accrued salaries, wages and benefits 38,422 26,000
Other accrued liabilities 56,802 67,921
Income taxes payable 87,257 77,696
Current portion of long-term obligations 44,615 69,612
Total current liabilities 438,231 345,338
Long-term obligations and deferred income taxes 117,511 286,043
Minority interest in subsidiaries 5,197 5,114
Commitments and contingencies -- --
Stockholders' equity:
Preferred shares; $.01 par value;
2,000 shares authorized -- --
Common stock; $.01 par value;
450,000 shares authorized; 140,161
and 129,006 shares outstanding 1,401 1,290
Additional paid-in capital 965,422 837,151
Retained earnings 611,622 452,374
Cumulative translation adjustment (12,472) 25,404
Total stockholders' equity 1,565,973 1,316,219
Total liabilities and
stockholders' equity $ 2,126,912 $ 1,952,714
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31st
-------------------------------------------------
1997 1996 1995
----------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues $ 1,290,275 $ 1,238,694 $ 1,267,657
Costs and expenses:
Cost of revenues 675,153 695,002 665,673
Research and development 226,219 184,452 123,892
Selling, general and administrative 190,680 166,823 159,393
Acquired in-process research
and development 2,850 -- --
Total costs and expenses 1,094,902 1,046,277 948,958
Income from operations 195,373 192,417 318,699
Interest expense (1,497) (13,610) (16,349)
Interest income and other 30,287 26,308 32,593
Income before income taxes, minority interest
and cumulative effect of change in
accounting principle 224,163 205,115 334,943
Provision for income taxes 62,748 57,432 93,781
Income before minority interest and cumulative
effect of change in accounting principle 161,415 147,683 241,162
Minority interest in net income of subsidiaries 727 499 3,042
Income before cumulative effect of
change in accounting principle 160,688 147,184 238,120
Cumulative effect of change in accounting principle (1,440) -- --
Net income $ 159,248 $ 147,184 $ 238,120
Basic earnings per share:
Income before cumulative effect of change in
accounting principle $ 1.16 $ 1.14 $ 1.92
Cumulative effect of change in
accounting principle $ (0.01) $ -- $ --
Net income $ 1.15 $ 1.14 $ 1.92
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ 1.12 $ 1.07 $ 1.75
Cumulative effect of change in
accounting principle $ (0.01) $ -- $ --
Net income $ 1.11 $ 1.07 $ 1.75
Shares used in computing per share amounts:
Basic 138,576 128,899 123,960
Dilutive 144,027 142,983 139,768
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 17
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment Total
------- ---------- ----------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 114,287 $ 1,143 $ 401,268 $ 67,070 $ 75,425 $ 544,906
Issuance of common stock under public offerings 12,075 121 404,745 404,866
Issuance to employees under stock
option and purchase plans 2,941 29 18,625 18,654
Tax benefit of employee stock transactions 28,900 28,900
Aggregate adjustment from translation of
financial statements into U.S. dollars (19,200) (19,200)
Net Income 238,120 238,120
Balances at December 31, 1995 129,303 1,293 853,538 305,190 56,225 1,216,246
Purchase of common stock under
stock repurchase program (2,077) (21) (46,817) (46,838)
Issuance to employees under stock
option and purchase plans 1,780 18 19,680 19,698
Tax benefit of employee stock transactions 10,750 10,750
Aggregate adjustment from translation of
financial statements into U.S. dollars (30,821) (30,821)
Net Income 147,184 147,184
Balances at December 31, 1996 129,006 1,290 837,151 452,374 25,404 1,316,219
Purchase of common stock under
stock repurchase program (2,400) (24) (59,857) (59,881)
Issuance to employees under stock
option and purchase plans 1,820 18 24,054 24,072
Tax benefit of employee stock transactions 11,200 11,200
Issuance of stock from conversion of
Convertible Subordinated Notes,
net of deferred offering costs 11,735 117 141,591 141,708
Intrinsic value of options issued in conjunction
with the acquisition of Mint Technology, Inc. 11,283 11,283
Aggregate adjustment from translation of financial
statements into U.S. dollars (37,876) (37,876)
Net Income 159,248 159,248
Balances at
December 31, 1997 140,161 $ 1,401 $ 965,422 $ 611,622 $ (12,472) $1,565,973
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31st
-------------------------------------------------
1997 1996 1995
----------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 159,248 $ 147,184 $ 238,120
Adjustments:
Depreciation and amortization 166,396 147,465 135,197
Minority interest in net income
of subsidiaries 727 499 3,042
Write-off of acquired in-process
research and development 2,850 -- --
Changes in:
Accounts receivable (32,014) 42,268 (81,343)
Inventories (16,714) 46,675 (31,164)
Prepaid expenses and other assets (30,528) 8,494 (45,226)
Accounts payable 111,310 (55,255) 3,054
Accrued and other liabilities 38,128 18,472 81,190
Accrued restructuring costs -- (3,873) (8,376)
Net cash provided by operating activities 399,403 351,929 294,494
Investing activities:
Purchase of debt and equity securities
available-for-sale (1,134,838) (1,117,885) (613,703)
Maturities and sales of debt and
equity securities available-for-sale 1,319,823 1,055,183
302,060
Purchase of non-marketable
equity securities (10,704) (6,252) (13,966)
Purchases of property and equipment,
net of retirements (513,298) (361,776) (232,723)
Acquisition of Mint Technology, Inc.,
net of cash acquired (6,863) -- --
Acquisition of stock from
minority interest holders (2,757) (171,843)
Net cash used in investing activities (345,880) (433,487) (730,175)
Financing activities:
Proceeds from borrowings 34,193 142,832 83,294
Repayment of debt obligations (89,362) (54,185) (110,126)
Purchase of common stock
under repurchase program (59,881) (46,838) --
Issuance of common stock, net 24,077 19,698 423,520
Net cash (used in)/provided by
financing activities (90,973) 61,507 396,688
Effect of exchange rate changes on
cash and cash equivalents (5,038) (5,670) (12,730)
Decrease in cash and cash equivalents (42,488) (25,721) (51,723)
Cash and cash equivalents at beginning of period 147,059 172,780 224,503
Cash and cash equivalents at end of period $ 104,571 $ 147,059 $ 172,780
Schedule of non-cash transactions:
Conversion of subordinated debentures
to common stock $ 141,708 $ -- $ --
Tax benefit of employee stock transactions $ 11,200 $ 10,750 $ 28,900
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Nature of business--LSI Logic Corporation (the Company) designs, develops and
manufactures high-performance integrated circuits, including
application-specific integrated circuits (ASICs), application-specific standard
products (ASSPs) and related products and services, which it markets primarily
to original equipment manufacturers in the electronic data processing, consumer
electronics, telecommunications and certain office automation industries
worldwide.
Basis of presentation--The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. Assets and liabilities of
certain foreign operations are translated to U.S. dollars at current rates of
exchange, and revenues and expenses are translated using weighted average rates.
Accounts denominated in foreign currencies have been remeasured into functional
currencies before translation into U.S. dollars. Foreign currency transaction
gains and losses are included as a component of interest income and other. Gains
and losses from foreign currency translation are included as a separate
component of stockholders' equity. 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 purchases of such shares may 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
On October 27, 1997, the Company changed its fiscal year from a 52-53 week year
to a year ending December 31. In 1996 and 1995, the year ended on the Sunday
closest to December 31. For presentation purposes, the consolidated financial
statements and notes refer to December 31 as year end. Fiscal year 1997 was a
53-week year. Fiscal years 1996 and 1995 were 52-week years.
Cash equivalents and short-term investments--All highly liquid investments
purchased with an original maturity of ninety days or less are considered to be
cash equivalents and are classified as held-to-maturity. Marketable short-term
investments are accounted for as available-for-sale. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reassesses the classification at each reporting date. Investments in debt
and equity securities classified as held-to-maturity are reported at amortized
cost 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. Unrealized gains and losses at December 31,
1997 and 1996 were not material. Realized gains and losses are based on the book
value of specific securities at the time of sale. Realized gains and losses are
included in interest income and other and were immaterial during 1997, 1996 and
1995.
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
<PAGE> 20
equivalents and short-term investments are maintained with high quality
institutions, the composition and maturities of which are regularly monitored by
management. A majority of the Company's trade receivables are derived from sales
to large multinational computer, communication and consumer electronics
manufacturers, with the remainder distributed across other industries. Amounts
due from the Company's largest customer accounted for 26% and 16% of trade
receivables at December 31, 1997 and 1996, respectively. During 1997 and 1996,
the Company sold approximately $177 million and $41 million (discounted at
short-term yen borrowing rates, averaging 0.4% and 0.5%), respectively, of its
Japanese sales affiliate's accounts receivable through financing programs with
certain Japanese banks. Related transaction costs were not material.
Concentrations of credit risk with respect to all other trade receivables are
considered to be limited due to the quantity of customers comprising the
Company's customer base, and their dispersion across industries and geographies.
The Company performs ongoing credit evaluations of its customers' financial
condition and requires collateral as considered necessary. Write-offs of
uncollectible amounts have not been material.
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 fair value of financial instruments at December 31, 1997 and 1996
was not materially different from the values presented in the consolidated
balance sheets. At December 31, 1996, the estimated fair value ~of the Company's
long-term debt was $511 million. 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. Depreciation and
amortization are calculated based on the straight-line method. Depreciation of
equipment and buildings, in general, is computed using the assets' estimated
useful lives as presented below:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements 20-40 years
Equipment 2-5 years
Furniture and fixtures 3-6 years
</TABLE>
Amortization of leasehold improvements is computed using the shorter of the
remaining term of the Company's facility leases or the estimated useful lives of
the improvements. Depreciation for income tax purposes is computed using
accelerated methods.
Preproduction engineering costs--Incremental costs incurred in connection with
developing major production capabilities at new manufacturing plants, including
facility carrying costs and costs to qualify production processes, are
capitalized and amortized over the expected useful lives of the manufacturing
processes utilized in the plants, generally four years. Amortization commences
when the manufacturing plant is capable of volume production, which is generally
characterized by meeting certain reliability, defect density and service cycle
time criteria defined by management. Note that while the current accounting
treatment is representative of generally accepted accounting principles, the
Accounting Standards Executive Committee (AcSEC) has
<PAGE> 21
released for exposure a proposed Statement of Position (SOP) which covers the
reporting on costs of start-up activities. If the proposed SOP is issued in its
current form, all costs incurred or unamortized in connection with start-up
activities will be expensed as incurred.
Software--The Company capitalizes substantially all external costs related to
the purchase and implementation of software projects used for business
operations and engineering design activities. Capitalized software costs
primarily include purchased software and consulting fees. Capitalized software
projects are amortized over the estimated useful life of the project, typically
a two to five year period. The Company had $47 million and $34 million of
capitalized software costs, net of amortization, included in other assets at
December 31, 1997 and 1996, respectively.
Software amortization totaling $15 million, $16 million and $9 million was
included in the Company's results of operations during 1997, 1996 and 1995,
respectively. On November 21, 1997, the Emerging Issues Task Force issued EITF
97-13 -Accounting for costs incurred in connection with a consulting contract or
an internal project that combines business process re-engineering and
information technology transformation." EITF 97-13 required that the Company
change its accounting policy to expense, in the fourth quarter of 1997, all
costs previously capitalized in connection with business process re-engineering
activities as defined by the statement. The Company recorded a charge of $1.4
million, net of related tax of $0.6 million, during the fourth quarter of 1997.
The charge reduced basic and diluted earnings per share by one cent for the
quarter and year ended December 31, 1997.
Other assets--Goodwill of approximately $35 million and $29 million, and related
accumulated amortization of $14 million and $9 million, are included in other
assets at December 31, 1997 and 1996, respectively, and was generated from the
acquisition of Mint Technology, Inc. and the purchase of common stock from
minority stockholders (see Note 5). The acquisitions were accounted for as
purchases, and the excess of the purchase price over the fair value of assets
acquired was allocated to goodwill which is being amortized over four to seven
years. Goodwill is evaluated for impairment based on estimated undiscounted cash
flows of the acquired entity.
At December 31, 1997 and 1996, the Company had $20 million invested in
restricted shares of Chartered Semiconductor Manufacturing Pte. Ltd. (CSM).
Transfer of the shares is restricted for five years or until the listing of CSM
stock upon a recognized stock exchange, whichever occurs sooner. The Company
invested an additional $11 million in a number of other non-public technology
companies in 1997. All the investments are recorded as long-term assets at cost
and the Company believes that the fair value of the instruments is greater than
the carrying value at December 31, 1997 and 1996.
Revenue recognition--Revenue from component products is recognized upon
shipment. Revenue from the licensing of the Company's design and manufacturing
technology is recognized when the significant contractual obligations have been
fulfilled. Royalty revenue is recognized upon the sale of products subject to
royalties. The Company uses the percentage-of-completion method for recognizing
revenues on fixed-fee design arrangements. One customer accounted for 22%, 14%
and 12% of consolidated revenues in 1997, 1996 and 1995, respectively.
Stock-based compensation--The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, -Accounting for Stock Issued to Employees," and related
Interpretations. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company's policy is to grant options with
an exercise price equal to the quoted market price of the Company's stock on the
grant date. Accordingly, no compensation cost has been recognized in the
Company's statements of operations with the exception of $0.6 million related to
<PAGE> 22
options issued to the stockholders of Mint Technology, Inc. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standard (SFAS) No. 123, -Accounting for Stock-Based Compensation"
(see Note 8).
Income per share--The Company adopted Statement of Accounting
Standard (SFAS) No. 128, -Earnings Per Share (EPS),+ which was issued in
February 1997, which requires presentation of both basic and diluted EPS on the
face of the income statement for all periods presented. Basic EPS is computed by
dividing net income available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Diluted EPS is computed using the weighted-average number of common and
potential common shares outstanding during the period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options. All prior
years' data in this report have been restated to reflect the requirements of
SFAS No. 128. SFAS No. 128 requires a reconciliation of the numerators and
denominators of the basic and diluted per share computations as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31st
----------------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- --------
Per-Share Per-Share Per-Share
Income* Shares Amount Income* Shares Amount Income* Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income before cumulative
effect of change in
accounting principle $ 160,688 138,576 $ 1.16 $147,184 128,899 $ 1.14 $238,120 123,960 $1.92
Cumulative effect of change in
accounting principle (1,440) 138,576 $(0.01) -- -- --
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income available to
common stockholders 159,248 138,576 $ 1.15 147,184 128,899 $ 1.14 238,120 123,960 $1.92
Effect of dilutive securities
Stock options 2,701 2,349 4,073
51/2% Convertible Subordinated Notes 1,279 2,750 6,166 11,735 6,166 11,735
Diluted EPS:
Net income before cumulative effect
of change in accounting principle
(adjusted for assumed conversion
of debt) 161,967 144,027 $ 1.12 153,350 142,983 $ 1.07 244,286 139,768 $1.75
Cumulative effect of change in
accounting principle (1,440) 144,027 $(0.01) -- -- -- --
Net income available to common
stockholders $ 160,527 144,027 $ 1.11 $ 153,350 142,983 $ 1.07 $ 244,286 139,768 $1.75
</TABLE>
*Numerator-- Denominator
Options to purchase approximately 3,156,000, 2,160,000 and 1,100,000 were
outstanding at December 31, 1997, 1996 and 1995 respectively, but not included
in the computation because the exercise prices were greater than the average
market price of common shares in each respective year. The exercise price ranges
of these options were $32.00 to $58.13, $30.50 to $58.13, and $43.00 to $58.13
at December 31, 1997, 1996 and 1995, respectively.
<PAGE> 24
New accounting pronouncements--In June, 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130,
- -Reporting Comprehensive Income," and Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The adoption of both standards is required for fiscal
years beginning after December 15, 1997. Under SFAS 130, the Company is required
to report comprehensive income in the financial statements, in addition to net
income. For the Company, the primary difference between net income and
comprehensive income will be from foreign currency translation adjustments. SFAS
131 requires that the Company report separately, in the financial statements,
certain financial and descriptive information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is in the process of
evaluating whether the requirements of SFAS 131 will have an impact to the
Company's financial statements.
Note 2 - Cash and Investments
Cash and cash equivalents and short-term investments included the following debt
and equity securities at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Cash and cash equivalents
Overnight deposits $ -30,724 $-40,513
Commercial paper 11,955 61,123
Corporate debt securities 10,384 --
Time deposits 5,409 13,483
Other 8,319 10,941
Total held-to-maturity 66,791 126,060
Cash 37,780 20,999
Total cash and cash equivalents $104,571 $147,059
Short-term investments
Corporate debt securities $138,143 $273,912
Time deposits 102,165 36,182
U.S. government and
agency securities 69,294 91,716
Commercial paper 44,735 34,554
Bank notes 18,207 51,689
Auction rate preferred 13,825 82,170
Total available-for-sale $386,369 $570,223
</TABLE>
Cash and cash equivalents and short-term investments held at December 31, 1997
and 1996 approximate fair market value. As of December 31, 1997, contractual
maturities of available-for-sale securities are within one year.
Note 3 - Financial Instruments
The Company has foreign subsidiaries which operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in interest rates and foreign currency exchange rates. The Company
utilizes various hedge instruments, primarily forward exchange, currency swap,
interest rate swap and currency option contracts, to manage its exposure
associated with firm intercompany and
<PAGE> 25
third-party transactions and net asset and liability positions denominated in
nonfunctional currencies. The Company does not hold derivative financial
instruments for trading purposes.
As of December 31, 1997, the Company had several interest rate swap contracts
outstanding which convert the interest associated with 14 billion yen ($109
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
options to hedge firm commitment, intercompany and third-party exposures. There
were no foreign exchange related hedge contracts outstanding as of December 31,
1997. As of December 31, 1996, currency swap contracts, expiring January 1997,
were held to hedge firm obligations to the Company's Japanese manufacturing
subsidiary. Premiums associated with the Company's option contracts are
amortized over the life of the contracts.
The following table summarizes by major currency the forward exchange and
currency swap contracts outstanding. The "buy" amounts represent U.S. dollar
equivalent of commitments to purchase foreign currencies, and the "sell" amounts
represent the U.S. dollar equivalent of commitments to sell foreign currencies.
Foreign currency amounts are translated at rates current at the reporting date.
<TABLE>
<CAPTION>
December 31st
--------------------
1997 1996
------ -------
(In thousands)
<S> <C> <C>
Buy/(Sell):
Japanese yen $ -- $ 7,337
U.S. dollar -- (7,398)
$ -- $ (61)
</TABLE>
These forward exchange and currency swap contracts 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. At December 31,
1996, the Company had a purchased currency option which expired in March of
1997. The option had a nominal value of $20 million and was purchased to hedge
net dollar balance sheet exposure at a European affiliate. Deferred foreign
exchange gains and losses were not material at December 31, 1997 and 1996.
Foreign currency transaction losses included in interest income and other were
$2 million and $7 million in 1997 and 1996, respectively; foreign currency
transaction gains and losses were not material in 1995.
<PAGE> 26
Note 4 - Balance Sheet Detail
<TABLE>
<CAPTION>
December 31st
------------------------------
1997 1996
---------- -----------
(In thousands)
<S> <C> <C>
Inventories:
Raw materials $ 19,892 $ 19,540
Work-in-process 58,621 53,785
Finished goods 23,754 17,085
$ 102,267 $ 90,410
Property and equipment:
Land $ 39,885 $ 42,861
Buildings and improvements 145,297 166,862
Equipment 856,745 817,144
Leasehold improvements 46,839 54,573
Preproduction engineering 58,972 27,222
Furniture and fixtures 35,460 32,512
Construction in progress 557,350 208,203
1,740,548 1,349,377
Accumulated depreciation and
amortization (616,639) (537,718)
$1,123,909 $ 811,659
</TABLE>
The Company had $34 million and $1 million of unamortized preproduction
engineering costs at December 31, 1997 and 1996, respectively, associated with
the construction of a new manufacturing facility in Gresham, Oregon. This new
facility is expected to become operational during the third quarter of 1998, at
which time capitalized preproduction will be amortized over the expected useful
life of the manufacturing technology of approximately four years.
Accumulated amortization for preproduction engineering was $25 million and $20
million at December 31, 1997 and 1996, respectively. Capitalized interest
included within property and equipment totaled $17 million and $12 million at
December 31, 1997 and 1996, respectively. Accumulated amortization of
capitalized interest was $7 million and $5 million at December 31, 1997 and
1996, respectively. During 1996, the Company completed the shutdown of its
Milpitas wafer manufacturing facility and determined that the majority of the
equipment for that facility was no longer needed for current or future capacity
requirements. Accordingly, the equipment was made available for sale and was
written down by $15 million to its estimated net realizable value. The Company
utilized $15 million of its restructuring reserves, which became available as a
result of a favorable court decision (see Notes 6 and 11), and therefore, the
writedown did not necessitate a charge to the income statement.
During 1997, the Company dispositioned assets held for sale with a carrying
amount of $15 million that were associated with the 1996 shutdown of the
Milpitas wafer manufacturing facility. In August 1997, approximately $5.6
million of the Milpitas equipment held for sale was transferred to another
facility within the Company as it was determined that the equipment could be
used to meet current capacity requirements. In October 1997, approximately $9.4
million of the Milpitas equipment held for sale was sold for $6.7 million. The
loss on the sale of $2.7 million was included in other expense.
Assets held for sale at December 31, 1997 are fully reserved. Assets held for
sale were $15.6 million at December 31, 1996.
<PAGE> 27
Note 5 - Acquisitions
In July 1997, the Company acquired all issued and outstanding shares of common
stock of Mint Technology, Inc. (Mint). Mint provides engineering services on a
contract basis to help customers ensure timely and cost-effective completion of
their design programs. Mint's consulting services specialize in the
architectural specification, implementation and test of complex
application-specific integrated circuits and field programmable gate array based
system designs. The acquisition was accounted for as a purchase. The acquisition
price consisted of $9.5 million in cash and options to purchase approximately
681,726 shares of common stock with an intrinsic value of $11.3 million. The
intrinsic value of the stock is being expensed over the vesting period of the
options. Approximately $2.9 million of the purchase price was allocated to
in-process research and development and was expensed in the third quarter of
1997. Total goodwill recorded as part of the acquisition was $5.7 million and is
being amortized over four years. Pro forma results of operations have not been
presented as the amounts would not significantly differ from the Company's
historical results.
During 1996, the Company acquired 117,000 common shares of its Japanese sales
affiliate from its minority interest shareholders for approximately $0.7
million. In December 1996, the Company acquired the remaining minority shares
outstanding of its European sales affiliate, LSI Logic Europe, Ltd. (formerly
LSI Logic Europe, PLC) for $2 million. These acquisitions were accounted for as
purchases and the excess of the purchase price over the fair value of the assets
acquired of $2 million was allocated to goodwill and is being amortized over
seven years. As of December 31, 1997 and 1996, the Company owned approximately
92% of the Japanese affiliate and 100% of the U.K. affiliate. There were no
minority interest purchases during 1997.
Note 6 - Restructuring
The Company implemented a restructuring plan in the third quarter of 1992
revising its global manufacturing strategy, streamlining operations,
discontinuing certain commodity products and focusing its product strategy on
high-end technology solutions. By the end of 1996, all reserves established
under the restructuring plan had been utilized. As a result of a favorable
appellate court decision in September 1996 in connection with the Texas
Instruments litigation (see Note 11), $15 million of restructuring reserves
became available for the write-down of the Milpitas wafer manufacturing
equipment (see Note 4). The following table sets forth the Company's 1992
restructuring expense and charges taken from the date the restructuring
commenced through December 31, 1997.
<TABLE>
<CAPTION>
1992
Restructuring Balance Balance
Expense Utilized* Adjusted 12/31/96 12/31/97
-------------- ----------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Write-down of
manufacturing facility (a) $ -14,700 $ (28,700) $ 14,000 $ -- $ --
Other fixed asset
related charges (b) 35,500 (38,700) 3,200 -- --
Other provisions for
phase-down and consolidation
of manufacturing
facilities (b) 13,500 (13,500) -- -- --
Payments to employees
for severance (c) 8,000 (7,200) (800) -- --
Write-down of
inventories (a) 10,900 (8,800) (2,100) -- --
Relocation, lease
terminations
and other (b) 19,200 (4,900) (14,300) -- --
Total $ 101,800 $(101,800) $ -- $ --% $ --
</TABLE>
* Net of cumulative currency translation adjustments.
(a) Amounts utilized represent non-cash charges.
(b) Amounts utilized represent both cash and non-cash charges. Cumulative cash
charges totaled $17 million.
(c) Amounts utilized represent cash payments related to the severance of
approximately 550 employees.
<PAGE> 28
Note 7 - Debt
<TABLE>
<CAPTION>
December 31st
---------------------------
1997 1996
--------- ----------
(In thousands)
<S> <C> <C>
Senior:
Notes payable to banks $ 111,242 $ 183,531
Capital lease obligations 673 605
Subordinated:
5 1/2% Convertible
Subordinated Notes,
(redeemed in 1997) -- 143,750
111,915 327,886
Current portion of long-term
debt, capital lease obligations
and short-term borrowings (44,615) (69,612)
Long-term debt and capital
lease obligations $ 67,300 $ 258,274
</TABLE>
In February 1997, the Company called for redemption of its $144 million, 5 1/2%
Convertible Subordinated Notes (Notes) which were outstanding at December 31,
1996. In March of 1997, the Notes were converted at a price of $12.25 per share
resulting in the issuance of 11,735,000 shares of common stock. The redeemed
value of the Notes of $142 million, net of deferred offering costs, was recorded
as part of stockholders' equity.
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 rate. Interest payments are due
quarterly. The agreement calls for financial covenants relating to senior debt
ratio, quick ratio, debt service ratio, subordinated debt and tangible net
worth. At December 31, 1997, the Company was in compliance with these covenants
and had no borrowings outstanding under this credit agreement.
In December 1995, the Company's Japanese manufacturing subsidiary, JSI, entered
into a 25 billion yen credit facility with adjustable interest rates. The
availability under the facility expired December 31, 1996 as the Company elected
not to extend the availability period. Borrowings outstanding under the credit
facility are for a term of five years with principal payments due semiannually
beginning in 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 December 31, 1997, the Company
was in compliance with these covenants. As of December 31, 1997 JSI had 14
billion yen ($109 million) outstanding under the facility. Additionally, the
Company has entered into several five year interest rate swap agreements to
convert the adjustable interest rate per the credit arrangement to fixed rates
(ranging from 1.75% to 2.46%). JSI also had borrowings outstanding of
approximately 225 million yen ($1.7 million) at December 31, 1997.
Aggregate principal payments required on outstanding debt and capital lease
obligations are $45 million, $43 million and $24 million for 1998, 1999 and
2000, respectively, and none thereafter. The Company paid $9 million, $17
million and $18 million in interest during 1997, 1996 and 1995, respectively.
<PAGE> 29
Note 8 - Common Stock
The following summarizes all shares of common stock reserved for issuance as of
December 31, 1997:
<TABLE>
<CAPTION>
Number of Shares
----------------
(In thousands)
<S> <C>
Issuable upon:
Exercise of stock options, including options
available for grant 15,825
Purchase under Employee Stock Purchase Plan 1,623
17,448
</TABLE>
The Company's Board of Directors approved an action which authorizes management
to acquire up to 5 million and 4 million shares of its own stock in the open
market at current market prices in August 1997 and February 1996, respectively.
Accordingly, the Company repurchased 2.4 million and 2.0 million shares of its
common stock from the open market for approximately $60 million and $47 million
in 1997 and 1996, respectively. The transactions were recorded as reductions to
common stock and additional paid-in capital.
Stock option plans--The Company's 1982 Incentive Stock Option Plan (1982 Option
Plan) is administered by the Board of Directors. Terms of the 1982 Option Plan
required that the exercise price of options be no less than the fair value at
the date of grant and required that options be granted only to employees or
consultants of the Company. Generally, options granted vest in annual increments
of 25% per year commencing one year from the date of grant and have a term of
ten years. During 1992, the 1982 Option Plan expired by its terms. Accordingly,
no further options may be granted thereunder. Certain options previously granted
under the 1982 Option Plan remained outstanding at December 31, 1997.
The 1991 Equity Incentive Plan, as amended July 30, 1997, enables the Company to
grant stock options to its officers, employees or consultants. Stock options may
be granted with an exercise price no less than the fair value of the stock on
the date of grant. The term of each option is determined by the Board of
Directors and is generally ten years. Options generally vest in annual
increments of 25% per year commencing one year from the date of grant. A total
of 18 million shares have been reserved for issuance under this plan, including
3 million shares approved by the Company's Board of Directors and stockholders
in 1997.
In May 1995, the stockholders approved the 1995 Director Option Plan (Director
Plan), which replaced the 1986 Directors' Stock Option Plan, and reserved
500,000 shares for issuance thereunder. Terms of the Director Plan provide for
an initial option grant to new directors and subsequent automatic option grants
each year thereafter. The option grants generally have a ten year term and vest
in equal increments over four years. The exercise price of options granted is
the fair market value of the stock on the date of grant. In connection with the
acquisition of Mint Technology, Inc. (Mint) (see Note 5), each outstanding stock
option under Mint's Stock Option Plan (Mint Plan) was converted to an option for
the Company's common stock at a ratio of .6286. As a result, outstanding options
to purchase 681,726 shares were assumed. No further options may be granted under
the Mint Plan as a result of the acquisition.
At December 31, 1997 shares available for grant under all stock option plans
were 2,100,000.
<PAGE> 30
The following table summarizes the Company's stock option share activity and
related weighted average exercise price within each category for each of the
years ended December 31, 1997, 1996 and 1995 (share amounts in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
Shares Price Shares Price Shares Price
------ ------- ------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 10,812 $ 20.77 9,065 $ 20.26 7,354 $ -7.28
Options assumed 682 16.71
Options canceled (1,120) (26.66) (4,402) (34.46) (397) (13.59)
Options granted 4,506 30.87 7,263 27.71 4,354 33.64
Options exercised (1,155) (9.36) (1,114) (7.73) (2,246) (4.90)
Options outstanding at
December 31 13,725 $ 24.36 10,812 $ 20.77 9,065 $ 20.26
Options exercisable at
December 31 4,249 $ 17.72 2,840 $ 11.29 2,001 $ 12.51
</TABLE>
On August 16, 1996 the Company canceled options to purchase 2,853,000 shares of
common stock with exercise prices ranging from $32.13 to $58.13, previously
granted to employees, excluding certain executive officers, and reissued all
such options at an exercise price of $22.38, the fair market value of the stock
on August 16, 1996. The reissued options have a ten year term and vest in equal
increments over four years from the date of reissuance.
Significant option groups outstanding at December 31, 1997 and related weighted
average exercise price and contractual life information is as follows (share
amounts in thousands):
<TABLE>
<CAPTION>
ptions with exercise
prices ranging from: Outstanding Exercisable Remaining
- -------------------- ---------------------------- ---------------------
Shares Price Shares Price Life (years)
----- ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
$2.75 to $10.00 1,902 $-6.01 1,494 $ -5.37 5.5
$10.01 to $20.00 518 12.52 353 12.59 6.1
$20.01 to $30.00 6,706 23.41 1,881 23.87 8.4
$30.01 to $40.00 3,717 32.39 458 31.11 9.1
greater than $40.00 882 44.18 63 57.95 9.1
13,725 $24.36 4,249 $17.72
</TABLE>
All options were granted at an exercise price equal to the market value of the
Company's common stock at the date of grant with the exception of $0.6 million
related to options issued to the stockholders of Mint Technology, Inc. The
weighted average estimated grant date fair value, as defined by SFAS 123, for
options granted during 1997, 1996 and 1995 was $14.94, $16.86 and $17.66 per
option, respectively. The estimated grant date fair value disclosed by the
Company is calculated using the Black-Scholes model. The Black-Scholes model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date
<PAGE> 31
fair value. The following weighted average assumptions are included in the
estimated grant date fair value calculations for the Company's stock option
awards:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Expected life (years) 4.57 5.25 5.25
Risk-free interest rate 5.99% 6.10% 6.60%
Volatility 56% 55% 51%
Dividend yield 0% 0% 0%
</TABLE>
Stock purchase plan--Since 1983, the Company has offered an Employee Stock
Purchase Plan (Employee Plan) under which rights are granted to purchase shares
of common stock at 85% of the lesser of the fair market value of such shares at
the beginning of a 24-month offering period or the end of each six-month segment
within such offering period. Sales under the Employee Plan in 1997, 1996 and
1995 were 666,000, 666,000 and 695,000 shares of common stock at an average
price of $19.71, $17.33 and $12.95 per share, respectively. During 1997, the
Company's Board of Directors approved an amendment to the Company's Employee
Plan to increase the number of shares reserved for issuance by 500,000 shares.
Additionally in 1997, the stockholders approved an amendment to the Company's
Employee Plan to increase the number of shares of common stock reserved for
issuance pursuant to the Employee Plan on the first day of each fiscal year,
beginning fiscal 1998 by 1.15% of the shares of the Company's common stock
issued and outstanding on the last day of the immediately preceding fiscal year,
less the number of shares available for future option grants under the Employee
Plan on the last day of the preceding fiscal year. Shares available for future
purchase under the Employee Plan were 1,623,000 at December 31, 1997.
Compensation cost (included in pro forma net income and net income per share
amounts) for the grant date fair value of the purchase rights granted under the
Employee Plan was calculated using the Black-Scholes model. The following
weighted average assumptions are included in the estimated grant date fair value
calculations for rights to purchase stock under the Company's Employee Plan:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 1.25 1.25 1.25
Risk-free interest rate 5.82% 5.70% 6.20%
Volatility 58% 54% 32%
Dividend yield 0% 0% 0%
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS 123, of
rights to purchase stock under the Employee Plan granted in 1997, 1996 and 1995
were $12.99, $10.84 and $12.59 per share, respectively.
Stock purchase rights--In November 1988, the Company implemented a plan to
protect stockholders' rights in the event of a proposed takeover of the Company.
Under the plan, each share of the Company's outstanding common stock carries one
Preferred Share Purchase Right (Right). Each Right entitles the holder, under
certain circumstances, to purchase one-thousandth of a share of Preferred Stock
of the Company or its acquiror at a discounted price. The Rights are redeemable
by the Company and expire in 1998.
Pro forma net income and net income per share--Had the Company recorded
compensation costs based on the estimated grant date fair value, as defined by
SFAS 123, for awards granted under its stock option
<PAGE> 32
plans and stock purchase plan, the Company's net income and earnings per share
would have been reduced to the pro forma amounts below for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
Pro forma net income
<S> <C> <C> <C>
Basic $129,728 $128,069 $233,031
Diluted $131,007 $132,508 $237,470
Pro forma net income per share
Basic $---0.94 $---0.99 $---1.88
Diluted $---0.93 $---0.94 $---1.71
</TABLE>
The pro forma effect on net income and net income per share for 1997, 1996 and
1995 is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
Note 9 - Income Taxes
The provision for taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 12,626 $ 29,111 $ 35,181
State 4,172 6,969 12,893
Foreign 43,106 19,398 43,836
Total 59,904 55,478 91,910
Deferred liability (benefit):
Federal 7,164 (2,437) 6,663
State 1,575 (6,635) 1,460
Foreign (5,895) 11,026 (6,252)
Total 2,844 1,954 1,871
Total $ 62,748 $ 57,432 $ 93,781
</TABLE>
The domestic and foreign components of income before income taxes, minority
interest and cumulative effect of change in accounting principle were as
follows.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Domestic $-65,250 $ 82,882 $129,085
Foreign 158,913 122,233 205,858
Income before income
taxes, minority interest
and cumulative effect of
change in accounting
principle $224,163 $205,115 $334,943
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries for which no U.S.
income taxes have been provided aggregate to approximately $385 million at
December 31, 1997. Undistributed earnings of the
<PAGE> 33
Company's foreign subsidiaries, which reflect full provision for foreign income
taxes, are indefinitely reinvested in foreign operations or will be remitted
substantially free of additional tax. Accordingly, no material provision has
been made for taxes that might be payable upon remittance of such earnings, nor
is it practicable to determine the amount of this liability. At December 31,
1997 and 1996 management believed that realization of deferred assets is more
likely than not due to carryback capacity.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 656 $ 2,473
Tax credit carryovers 2,380 2,380
Nondeductible reserves and other 45,745 55,359
Total deferred tax assets 48,781 60,212
Deferred tax liabilities - depreciation
and amortization (37,659) (46,246)
Total net deferred tax assets $ 11,122 $ 13,966
</TABLE>
Differences between the Company's effective tax rate and the federal statutory
rate were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ -------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $ 78,457 35% $ 71,790 35% $ 117,230 35%
State taxes, net of federal benefit 3,937 2% 6,517 3% 12,190 4%
Difference between U.S. and
foreign tax rates (22,453) (10%) (12,358) (6%) (32,772)
(10%)
Nondeductible expenses 2,847 1% 4,693 2% 17,529 5%
Foreign tax credits (1,195) (1%) (11,260) (5%) -- --
Research and development
tax credit (4,500) (2%) (4,243) (2%) -- --
Change in valuation allowance -- -- (3,400) (2%) (15,964)
(5%)
Other 5,655 3% 5,693 3% (4,432) (1%)
Effective tax rate $ 62,748 28% $ 57,432 28% $ 93,781 28%
</TABLE>
The Company paid $31 million, $53 million and $31 million for income taxes in
1997, 1996 and 1995, respectively.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1991, 1992, 1993 and 1994. The Company received a notice of
proposed tax deficiency for the years 1991 and 1992 and filed a tax protest
letter with the IRS in response to the notice. Final proposed adjustments have
not been received for these years. Management believes sufficient taxes have
been provided in prior years and that the ultimate outcome of the IRS audits
will not have a material adverse impact on the Company's financial position or
results of operations.
Note 10 - Segment Reporting and Foreign Operations
The Company operates in one industry segment in which it designs, develops,
manufactures and markets application-specific integrated circuits,
application-specific standard products and related products and services.
<PAGE> 34
Revenues from affiliates, which are eliminated in consolidation, consist of
sales between geographic areas. Such sales are primarily recorded at amounts
which are in excess of cost and consistent with rules and regulations of
governing tax authorities. General corporate expenses include certain
administrative expenses. Corporate assets include all cash, short-term
investments and prepaid income taxes.
During 1995, the Company significantly expanded its manufacturing operations in
the Pacific Rim. Pacific Rim revenues are primarily derived from transactions
with the Company and its other subsidiaries which are eliminated in
consolidation. The Company's other significant operations outside the United
States include manufacturing facilities, design centers and sales offices in
Japan, Europe and Canada.
The following is a summary of operations by entities located within the
indicated geographic areas for 1997, 1996 and 1995. United States revenues
include export sales.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Revenues:
United States $ 1,176,710 $ 1,201,674 $ 1,005,351
Pacific Rim 1,107,172 996,429 720,372
Japan 632,318 537,504 532,421
Europe 266,051 225,071 204,385
Canada 8,985 54,345 60,589
Revenues from affiliates (1,900,961) (1,776,329) (1,255,461)
Consolidated $ 1,290,275 $ 1,238,694 $ 1,267,657
Revenues from affiliates:
United States $ (559,358) $ (539,845) $ (313,507)
Pacific Rim (1,042,867) (946,787) (659,180)
Japan (265,810) (273,188) (282,774)
Europe (25,802) (12,661) --
Canada (7,124) (3,848) --
Consolidated $(1,900,961) $(1,776,329) $(1,255,461)
Operating income (loss):
United States $ 43,351 $ 65,612 $ 116,917
Pacific Rim 105,983 84,773 150,378
Japan 33,669 29,762 23,652
Europe 12,846 9,365 22,501
Canada 3,083 7,373 6,822
General corporate
expenses (3,559) (4,468) (1,571)
Consolidated $ 195,373 $ 192,417 $ 318,699
Identifiable assets:
United States $ 963,900 $ 521,326 $ 418,776
Pacific Rim 99,934 234,994 90,253
Japan 453,909 529,383 523,847
Europe 73,163 52,484 59,208
Canada 13,174 15,434 44,811
General corporate 522,832 599,093 712,692
Consolidated $ 2,126,912 $ 1,952,714 $ 1,849,587
</TABLE>
<PAGE> 35
Note 11 - Commitments and Contingencies
The Company leases the majority of its facilities and certain equipment under
non-cancelable operating leases which expire in 1998 through 2022. The
facilities lease agreements typically provide for base rental rates which are
increased at various times during the terms of the leases and for renewal
options at the fair market rental value.
In June 1995, the Company, through its Japanese subsidiary, entered into a
master lease agreement and a master purchase agreement with a group of leasing
companies (Lessor) for up to 15 billion yen ($145 million). Each Lease
Supplement pursuant to the transaction will have a lease term of one year with
four consecutive annual renewal options. The Company may at the end of any lease
term return or purchase at a stated amount all the equipment. Upon return of the
equipment, the Company must pay the Lessor a terminal adjustment amount. The
Lessor also has entered into a remarketing agreement with a third party to
remarket and sell any equipment returned pursuant to which the third party is
obligated to reimburse the Company a guaranteed residual value. The lease line
was fully utilized as of December 31, 1997. There were no significant gains or
losses from these leasing transactions. Minimum rental payments under these
operating leases, including option periods are $21 million for each of the years
1998 and 1999 and $14 million for 2000. The terminal adjustment which the
Company would be required to pay upon cancellation of all leases and return of
the equipment would be as follows: 1998 - $55 million; 1999 - $38 million; 2000
- - $20 million; or 2001 - $2 million.
Future minimum payments under other lease agreements are as follows: 1998 - $31
million; 1999 - $27 million; 2000 - $21 million; 2001 - $17 million; 2002 - $13
million; 2003 and thereafter - $36 million. Total rental expense, including
month-to-month rentals was $58 million, $62 million and $44 million in 1997,
1996 and 1995, respectively.
An action fled by Texas Instruments, Inc. (-TI+) in 1990 against the Company and
other defendants alleging infringement of certain TI packaging patents was
finally resolved in favor of the Company in May 1997 without payment by the
Company of damages or other costs when the United States Supreme Court denied
TI's petition for a writ of certiorari. The $15 million reserve which had been
set up against a contingency of liability in the case was reallocated in
September 1996 (see Note 6).
During the third quarter of 1995, the Company acquired all the remaining shares
(45%) of its Canadian subsidiary LSI Logic Corporation of Canada, Inc., which it
did not already own. Certain former shareholders, representing approximately
800,000 shares, or 3% of the previously outstanding shares, have exercised
dissent and appraisal rights. An action is pending in the Court of Queen's Bench
of Alberta, Judicial District of Calgary, for the adjudication of claims
asserted by such former shareholders under the relevant provisions of the Canada
Business Corporations Act. In addition, a separate action was fled by another
former shareholder in the Court of Chancery of the State of Delaware in and for
New Castle County, seeking an order that the acquisition of shares by the
Company be enjoined, certification of a class and damages. Although that case
originally was dismissed pursuant to a motion fled by the Company, on appeal to
the Supreme Court of Delaware the order of dismissal was reversed and the case
was remanded to the Court of Chancery. The Company's renewed motion to dismiss
was granted in January 1998 by the Court of Chancery, to which the plaintiff has
filed a notice of intent to appeal to the Delaware Supreme Court. While no
assurances can be given regarding either the ultimate determination of the
Canadian court or the outcome of the action fled in Delaware, the Company
believes that the final outcome of the matters will not have a material effect
on the Company's consolidated financial position or results of operations. The
Company is a party to other litigation matters and claims which are normal in
the course of its operations, and while the results of such litigations and
claims cannot be predicted with certainty, the 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.
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of LSI Logic Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, 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.
San Jose, California January 22, 1998
<PAGE> 37
FIVE YEAR CONSOLIDATED SUMMARY
<TABLE>
<CAPTION>
Year Ended December 31st
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 1,290,275 $ 1,238,694 $ 1,267,657 $- 901,830 $- 718,812
Costs and expenses
Cost of revenues 675,153 695,002 665,673 520,150 438,523
Research and
development 226,219 184,452 123,892 98,978 78,995
Selling, general
and administrative 190,680 166,823 159,393 124,936 117,452
Acquired in-process research
and development 2,850 -- -- -- --
Total costs and expenses 1,094,902 1,046,277 948,958 744,064 634,970
Income from
operations 195,373 192,417 318,699 157,766 83,842
Interest expense (1,497) (13,610) (16,349) (18,455) (9,621)
Interest income
and other 30,287 26,308 32,593 16,858 6,500
Income before income taxes,
minority interest and
cumulative effect
of change in
accounting principle 224,163 205,115 334,943 156,169 80,721
Provision for
income taxes 62,748 57,432 93,781 43,679 24,221
Income before minority
interest and cumulative
effect of change in
accounting principle 161,415 147,683 241,162 112,490 56,500
Minority interest in
net income of subsidiaries 727 499 3,042 3,747 2,750
Income before cumulative
effect of change in
accounting principle 160,688 147,184 238,120 108,743 53,750
Cumulative effect of
change in accounting
principle (1,440) -- -- -- --
Net income $ 159,248 $ 147,184 $ 238,120 $ 108,743 $ 53,750
Basic earnings per share:
Income before cumulative
effect of change in
accounting principle $ -1.16 $ -1.14 $ -1.92 $ -1.02 $ -0.56
Cumulative effect of
change in accounting
principle $ -(0.01) -- -- -- --
Net income $ 1.15 $ 1.14 $ 1.92 $ 1.02 $ 0.56
Diluted earnings per share:
Income before cumulative
effect of change in
accounting principle $ 1.12 $ 1.07 $ 1.75 $ 0.93 $ 0.53
Cumulative effect of change
in accounting principle $ (0.01) -- -- -- --
Net income $ 1.11 $ 1.07 $ 1.75 $ 0.93 $ 0.53
Year-end status:
Total assets $ 2,126,912 $ 1,952,714 $ 1,849,587 $ 1,270,374 $ 859,010
Long-term debt $ 67,300 $ 258,274 $ 199,543 $ 262,730 $ 220,005
Stockholders' equity $ 1,565,973 $ 1,316,219 $ 1,216,246 $*-544,906 $ 292,434
</TABLE>
The Company's fiscal years ended on December 31 in 1997, and the Sunday closest
to December 31 in 1996, 1995, 1994 and 1993. For presentation purposes, the
Consolidated Financial Statements refer to December 31 as year end.
<PAGE> 38
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31, 1997
Quarter
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Revenues $308,388 $332,004 $326,847 $ 323,036
Gross profit 144,268 163,005 163,118 144,731
Income before cumulative
effect of change
in accounting principle 38,407 45,799 44,318 32,164
Cumulative effect of change
in accounting principle -- -- -- (1,440)
Net income 38,407 45,799 44,318 30,724
Basic earnings per share:
Income before cumulative
effect of change in
accounting principle $ .30 $ .32 $ .31 $ .23
Cumulative effect of
change in accounting principle -- -- -- $ (.01)
Net income $ .30 $ .32 $ .31 $ .22
Diluted earnings per share:
Income before cumulative
effect of change in accounting
principle $ .28 $ .32 $ .31 $ .23
Cumulative effect of change
in accounting principle -- -- -- $ (.01)
Net income $ .28 $ .32 $ .31 $ .22
YEAR ENDED DECEMBER 31, 1996
Revenues $311,352 $325,359 $300,195 $ 301,788
Gross profit 134,503 148,905 125,121 135,163
Net income 42,284 46,496 27,743 30,661
Basic net income per share $ .33 $ .36 $ .22 $ .24
Diluted net income per share $ .31 $ .34 $ .21 $ .23
</TABLE>
The Company's fiscal years ended on December 31 in 1997 and the Sunday closest
to December 31 in 1996. For presentation purposes, the Consolidated Financial
Statements refer to December 31 as year end.
<PAGE> 39
CORPORATE INFORMATION
Headquarters Address
LSI Logic Corporation
1551 McCarthy Blvd
Milpitas CA 95035
Registrar & Transfer Agent
Bank of Boston
c/o Boston EquiServe, LP
Investor Relations Department
Mail Stop 45.02.09
PO Box 644
Boston MA 02102.0644
1.800.730.6001
www.equiserve.com
Independent Accountants
Price Waterhouse LLP
150 Almaden Blvd
San Jose CA 95113
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto CA 94304
Financial literature
Publications of interest to current and potential investors, including copies of
the Company's current 10-K fled with the Securities and Exchange Commission, are
available without charge by calling 1.800.574.4286. Outside the U.S. and Canada,
phone 408.433.7700 or call 32.11.300351 within Europe for multilingual
operators.
Financial information is also available over the World Wide Web at
http://www.lsilogic.com and by fax at 1.800.457.4286.
Stockholder Inquiries
To notify LSI Logic of address changes, lost certificates or transfers of stock,
stockholders of record should contact the Company's Registrar and Transfer
Agent, Bank of Boston. Stockholders of record who receive more than one copy of
this annual report can contact the Bank of Boston to arrange to have their
accounts consolidated. Stockholders who own LSI Logic stock through a brokerage
can contact their broker to request consolidation of their accounts. Inquiries
concerning the company.
Questions regarding LSI Logic's operations, historical performance or recent
results may be directed to: LSI Logic Corporation Investor Relations Department
1551 McCarthy Blvd Milpitas CA 95035 408.954.4710
LSI Logic logo design, The System on a Chip Company, CoreWare, SeriaLink and
MiniRISC are registered trademarks; and G10, G11, DCAM, GigaBlaze and Merlin are
trademarks of LSI Logic Corporation. All other brand and product names may be
trademarks of their respective companies.
We gratefully acknowledge and thank Bosch, Brocade Communications, Canon
Information Systems Research Australia (CISRA), Cisco Systems, Inc., Quantum
Corporation, and Sun Microsystems, Inc. for granting permission to include
photographs of their products in this annual report.
(C)1998, LSI Logic Corporation Printed in U.S.A.
<PAGE> 40
CORPORATE DIRECTORY
Board of Directors
Wilfred J. Corrigan
Chairman
Chief Executive Officer
R. Douglas Norby
Executive Vice President
Chief Financial Officer
T.Z. Chu
Retired President
Hoefer Pharmacia Biotech, Inc.
Dr. Malcolm R. Currie
President
Chief Executive Officer
Currie Technologies, Inc.
James H. Keyes
Chairman
Chief Executive Officer
Johnson Controls, Inc.
Executive Officers
Wilfred J. Corrigan
Chairman
Chief Executive Officer
John P. Daane
Executive Vice President Communications,
Computer and ASIC Products
Moshe N. Gavrielov
Executive Vice President
Consumer Products
W. Richard Marz
Executive Vice President
Geographic Markets
R. Douglas Norby
Executive Vice President
Chief Financial Officer
David E. Sanders
Vice President
General Counsel & Secretary
Lewis C. Wallbridge
Vice President
Human Resources
Joseph M. Zelayeta
Executive Vice President
Worldwide Operations
Vice Presidents
Maniam B. Alagaratnam
Package Development
Mary E. Albanese
President, Mint Technology, Inc.
Elias J. Antoun
President
LSI Logic K.K.
Norman L. Armour
<PAGE> 41
General Manager
Gresham Operations
Thomas Daniel
ASIC Technology
John J. D'Errico
General Manager
Pan Asia
Simon P. Dolan
Consumer Products Marketing
W. Hugh Durdan
General Manager
Computer Products Division
Bruce L. Entin
Worldwide Customer Marketing
Geographic Markets
Donald J. Esses
U.S. Manufacturing
Amnon Fisher
Consumer Technology Engineering
Jeffrey L. Hilbert
Methodology and Customer Engineering
James W. Hively
Memory & Mixed Signal Engineering
Dan King
Quality & Reliability
Charles E. Laughlin
General Manager
LSI Logic Japan Semiconductor, Inc.
Theodore Leno
Assembly and Test Operations
Bryon Look
Corporate Development & Strategic Planning
R. Gregory Miller
Corporate Controller
Marlon R. Murzello
MIPS Engineering
Pierre Nadeau
General Manager
LSI Logic Europe, Ltd.
Willsie H. Nelson
Worldwide Logistics
King F. Pang
Digital Video Engineering
Ranko L. Scepanovic
Advanced Development Labs
Richard D. Schinella
Wafer Process R&D and Santa Clara Operations
Giuseppe Staffaroni
General Manager
Communication Products Division
Chiaki Terada
Industrial Engineering
Frank Tornaghi
North America Sales
<PAGE> 42
Lam H. Truong
Information Technology & Chief Information Officer
Dean J. Westman
Operations, Consumer Products
<PAGE> 43
STOCK INFORMATION
Symbol: LSI
Where traded: NYSE
Actual shares outstanding at 12/31/97: 140,161,431
Average daily volume for 1997: 2,297,881
Stock Price Range
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
First Quarter $25.88-38.25 $22.50-38.88
Second Quarter $32.00-46.88 $24.50-39.63
Third Quarter $28.38-36.75 $17.00-27.00
Fourth Quarter $18.63-32.69 $21.38-33.88
Year $18.63-46.88 $17.00-39.63
</TABLE>
At December 31, 1997, there were approximately 3,755 owners of record of the
Company's common stock. The Company has never paid cash dividends on its common
stock. It is presently LSI Logic's policy to reinvest its earnings in the
Company and therefore LSI Logic does not anticipate paying any dividends for the
foreseeable future.
Stock Price Movement-Chart
Trading Volume-Chart
<PAGE> 44
LSI logic Europe, Ltd.
Greenwood House
London Road
Bracknell
Berkshire RG12 20B
United Kingdom
Tel: 441.344.426544
Fax: 441.344.481039
LSI logic K.K.
4-1-8 Konan
Minato-Ku
Tokyo 108
Japan
Tel: 81.3.5463.7811
Fax: 81.3.5463.7825
LSI logic corporation
of Canada, inc.
401 The West Mall
Suite 1110
Etobicoke Ontario M9C 5J5
Canada
Tel: 416.620.7400
Fax: 416.620.5005
LSI logic Japan
semiconductor, inc.
10 Kitahara Tsukuba-shi
Ibaraki-ken 300-32
Japan
Tel: 81.298.64.7229
Fax: 81.298.64.3362
LSI logic Hong Kong, Limited
7/F Southeast Industrial Building
611-619 Castle Peak Road
Tsuen Wan
Hong Kong
Tel: 852.2405.8600
Fax: 852.2412.7820
LSI logic corporation
1551 McCarthy Blvd
Milpitas CA 95035
United States
Tel: 408.433.8000
Fax: 408.954.3220
<PAGE> 1
Exhibit 21.1
LIST OF SUBSIDIARIES
LSI Logic Leasing Company (Nevada)
LSI Logic Asia, Inc. (Delaware)
LSI Logic International Services, Inc. (California)
LSI Logic Netherlands, B.V. (The Netherlands)
LSI Logic Export Sales Corporation (U.S. Virgin Islands)
Mint Technology, Inc. (Delaware)
LSI Logic Japan Semiconductor, Inc. (Japan)
LSI Logic Corporation of Korea (Korea)
LSI Logic Europe Ltd. (UK)
LSI Logic Netherlands Antilles, B.V. (The Netherlands)
LSI Logic HK Holdings (Cayman)
LSI Logic Hong Kong Ltd. (Hong Kong)
LSI Logic KK (Japan)
LSI Logic Corporation of Canada, Inc. (Canada)
LSI Logic Singapore PTE, Ltd. (Singapore)
LSI Logic Export Ltd. (UK)
LSI Logic Israel Ltd. (Israel)
LSI Logic GmbH (Germany)
LSI Logic S.A. (France)
LSI Logic S.P.A. (Italy)
LSI Logic A.P. (Sweden)
LSI Logic S.A. (Spain)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 104,571
<SECURITIES> 386,369
<RECEIVABLES> 210,141
<ALLOWANCES> 2,597
<INVENTORY> 102,267
<CURRENT-ASSETS> 870,461
<PP&E> 1,740,548
<DEPRECIATION> 616,639
<TOTAL-ASSETS> 2,126,912
<CURRENT-LIABILITIES> 438,231
<BONDS> 0
0
0
<COMMON> 1,401
<OTHER-SE> 1,564,572
<TOTAL-LIABILITY-AND-EQUITY> 2,126,912
<SALES> 1,290,275
<TOTAL-REVENUES> 1,290,275
<CGS> 675,153
<TOTAL-COSTS> 675,153
<OTHER-EXPENSES> 419,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,497
<INCOME-PRETAX> 223,436
<INCOME-TAX> 62,748
<INCOME-CONTINUING> 160,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,440
<NET-INCOME> 159,248
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.11
</TABLE>
