SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended April 2, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File Number: 0-11674 LSI LOGIC CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2712976 (State of Incorporation) (I.R.S. Employer Identification Number) 1551 McCarthy Boulevard Milpitas, California 95 035 (Address of principal ex ecutive offices) (408) 433-8000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO As of May 1, 1995 there were 60,839,465 shares of registrant's Common Stock, $.01 par value, outstanding. LSI LOGIC CORPORATION Form 10-Q FOR THE QUARTER ENDED APRIL 2, 1995 INDEX Page No. PART I Financial Information Item 1 Financial Statements Consolidated Condensed Balance Sheets - March 31, 1995 and December 31, 1994 3 Consolidated Condensed Statements of Operations - Three-Month Periods Ended March 31, 1995 and 1994 4 Consolidated Condensed Statements of Cash Flows - Three-Month Periods Ended March 31, 1995 and 1994 5 Notes to Consolidated Condensed Financial Statements6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 10 PART II Other Information Item 1 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 15 Item 6 Exhibits and Reports on Form 8-K 15 PART I Item 1. Financial Statements LSI LOGIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) March 31, December 31, 1995 1994 ASSETS Cash and cash equivalents $ 299,611 $ 224,503 Short-term investments 188,615 204,008 Accounts receivable, less allowance for doubtful accounts of $4,850 and $4,044 161,008 152,244 Inventories 119,416 107,824 Prepaid expenses and other current assets 44,484 42,275 Total current assets 813,134 730,854 Property and equipment, net 630,052 495,549 Other assets 61,959 43,971 Total assets $1,505,145 $1,270,374 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 199,991 $ 165,612 Accrued salaries, wages and benefits 27,636 29,251 Accrued restructuring costs 25,277 19,800 Other accrued liabilities 33,419 30,192 Income taxes payable 52,183 38,916 Current portion of long-term debt, capital lease obligations and short- term borrowings 44,013 24,167 Total current liabilities 382,519 307,938 Long-term debt, capital lease obligations and other long-term liabilities 295,806 288,496 Deferred income taxes 6,951 6,861 Minority interest in subsidiaries 29,009 122,173 Commitments and contingencies - - Stockholders' equity: Preferred shares; 2,000 shares authorized - - Common stock; $.01 par value; 73,500 shares authorized; 60,703 and 57,144 shares outstanding 607 571 Additional paid-in capital 565,437 401,840 Retained earnings 112,329 67,070 Cumulative translation adjustment 112,487 75,425 Total stockholders' equity 790,860 544,906 Total liabilities and stockholders' equity $1,505,145 $1,270,374 See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended March 31, 1995 1994 Revenues $280,158 $193,812 Costs and expenses: Cost of revenues 153,399 115,387 Research and development 24,378 23,141 Selling, general and administrative 39,335 29,457 Total costs and expenses 217,112 167,985 Income from operations 63,046 25,827 Interest expense (4,183) (3,788) Interest income and other 5,481 4,798 Income before income taxes and minority interest 64,344 26,837 Provision for income taxes 18,016 7,514 Income before minority interest 46,328 19,323 Minority interest in net income (loss) of subsidiaries 1,068 (32) Net income $ 45,260 $ 19,355 Net income per share: Primary $ .37 $ .19 Fully diluted $ .35 $ .18 Common share and common share equivalents used in computing per share amounts: Primary 120,770 103,262 Fully diluted 132,640 115,164 See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended March 31, 1995 1994 Operating activities: Net income $ 45,260 $ 19,355 Adjustments: Depreciation and amortization 30,750 24,278 Minority interest in net income (loss) of subsidiaries 1,068 (32) Change in: Accounts receivable (2,809) (13,794) Inventories (4,378) (12,379) Prepaid and other assets (6,278) (14,065) Accounts payable 21,749 35,184 Accrued and other liabilities 5,681 10,872 Accrued restructuring costs (334) (1,872) Net cash provided by operating activities 90,709 47,547 Investing activities: Purchases of debt and equity securities available-for-sale (56,139) (25,089) Maturities and sales of debt and equity securities available-for-sale 71,750 19,884 Purchase of restricted equity securities (13,966) - Change in other short-term investments - 2,157 Purchases of property and equipment, net of retirements (71,598) (24,102) Acquisition of stock from minority interest holders (129,134) (5,350) Net cash used for investing activities (199,087) (32,500) Financing activities: Issuance of Convertible Subordinated Notes - 143,750 Proceeds from borrowings 16,608 - Repayment of debt obligations (4,186) (10,687) Issuance of common stock 163,633 3,736 Tax benefit from employee stock plans - 1,400 Net cash provided by financing activities 176,055 138,199 Effect of exchange rate changes on cash and cash equivalents 7,431 (1,457) Increase in cash and cash equivalents 75,108 151,789 Cash and cash equivalents at beginning of period 224,503 121,319 Cash and cash equivalents at end of period $ 299,611 $273,108 See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1- In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended January 1, 1995. For financial reporting purposes, the Company reports on a 13 or 14 week quarter and a 52 or 53 week year ending on the Sunday closest to December 31. For presentation purposes, the consolidated financial statements refer to the quarter's calendar month end for convenience. The results of operations for the three month periods ended March 31, 1995 are not necessarily indicative of the results to be expected for the full year. Note 2 - Effective January 3, 1994, the Company adopted the Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." The cumulative effect of adopting SFAS No. 115 in the first quarter of 1994 was not material. At March 31, 1995, the Company's cash equivalents and short-term investments consisted primarily of corporate debt securities, commercial paper, overnight deposits, auction rate preferred stock, time deposits, U.S. government and agency securities, and bank notes. Cash equivalents and short-term investments held at March 31, 1995 and 1994 approximate fair market value and mature in one year or less. The Company currently does not actively trade securities. Realized gains and losses are based on book value of specific securities sold and were not material during the quarters ended March 31, 1995 and 1994. In February 1995, the Company subscribed to purchase shares in Chartered Semiconductor Manufacturing Pte. Ltd. for approximately $20 million, of which approximately $14 million has been paid and approximately $6 million will be paid in March 1996. Transfer of the shares is restricted for five years. The Company recorded the investment as a long-term asset at cost, which approximates fair market value at March 31, 1995. Note 3 - 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 and currency swap contracts, to manage its exposure associated with firm and anticipated intercompany transactions. The Company does not speculate in these financial instruments for profit on exchange rate price fluctuations. As of March 31, 1995, outstanding foreign currency hedge instruments, settling April 1995 through September 1996, consisted of forward exchange and currency swap contracts to hedge various intercompany loans and Yen denominated purchases from the Company's Japanese manufacturing facility for the second and third quarters of 1995. Outstanding foreign currency hedge instruments at December 31, 1994 consisted of forward exchange and currency swap contracts to manage its exposure associated with various intercompany loans. Foreign currency amounts are translated at rates current at the reporting date. The following table summarizes by major currency the forward exchange and currency swap contracts outstanding (in thousands). The "buy" amounts represent the 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. March 31, December 31, Buy/(Sell): 1995 1994 Japanese Yen $ 55,994 $(10,351) Japanese Yen (11,943) - Pound Sterling 9,669 9,447 Deutschemark (10,393) (9,312) Canadian Dollar 12,194 13,836 U.S. Dollar (56,946) (3,200) These forward exchange and currency swap contracts are considered identifiable hedges. Realized and unrealized gains and losses are deferred until settlement of the underlying commitments and are recorded in income as part of the purchase or sale transaction when it is recognized, or as other gains or losses when a hedged transaction is no longer expected to occur. Deferred foreign exchange gains and losses were $1.5 million and $1.7 million, respectively, at March 31, 1995, and were not material at December 31, 1994. Subsequent to March 31, 1995, in order to hedge additional Yen denominated purchase commitments from the Company's Japanese manufacturing facility, the Company entered into forward exchange contracts to purchase 2.6 billion Yen for $31.3 million settling April through December 1995. The Company also entered into a forward exchange contract to purchase $8.7 million (Singapore Dollars) for approximately $6.5 million (U.S. Dollars) in order to hedge its remaining commitment under a stock subscription agreement (see Note 2). Note 4 - Balance sheet and cash flow detail (in thousands): March 31, December 31, 1995 1994 Inventories: Raw materials $ 26,897 $ 14,275 Work-in-process 46,326 58,303 Finished goods 46,193 35,246 Total $ 119,416 $ 107,824 Cash Paid for: Income taxes $ 4,400 $ 4,016 Interest 6,006 1,633 Note 5 - During the first quarter of 1995, the Company's Japanese affiliate sold $8.7 million of its accounts receivables to two financing companies in Japan. The receivables were sold without recourse and the related losses on the transactions were not material. Note 6 - During the first quarter of 1995, $26,000 was charged against the restructuring reserves. These charges were for the disposition of equipment as the Company continued phase-down of its U.S. manufacturing facilities ($258,000), and for ongoing maintenance costs of its vacant German facility ($93,000), offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark ($325,000). Remaining reserves at March 31, 1995 include approximately $14.6 million for the continued phase-down of the California manufacturing facilities, $2.7 million for continued maintenance of the vacant Braunschweig facility and $8 million for other corporate matters. The Company is currently operating the Milpitas facility and continues to evaluate either the feasibility of future operations at such facility or whether the facility should be phased out by the end of 1995. See further discussion in Management's Discussion and Analysis of Results of Operations and Financial Condition in Part I, Item 2 of this form 10-Q. Note 7 - During January 1995, the Company acquired all minority owned shares (a 45% interest) of its Japanese manufacturing subsidiary, Nihon Semiconductor, Inc. (NSI), from Kawasaki Steel Corporation (KSC) for a total of $175 million to be paid to KSC over eight years. The Company has defeased this obligation through payment of $125.9 million to an unrelated party and has been legally released from the obligation by KSC. The acquisition was accounted for as a purchase. The excess of the total acquisition cost over the recorded value of assets acquired was allocated to property and equipment ($33.1 million) based on fair value. Note 8 - During February 1995, the Company completed a secondary stock offering of 3,162,500 shares of common stock. The net proceeds were approximately $157 million. Note 9 - The Company's effective tax rate differs from the statutory rate due to the Company's ability to partially utilize prior loss carryovers and due to the mix of expected earnings in its foreign subsidiaries. Note 10 - In February 1995, the Board of Directors approved an increase in the number of common shares authorized for issuance to 250,000,000. On May 12, 1995, the Company 's Board of Directors approved a stock dividend in the form of a two-for-one stock split which will be effective May 23, 1995. Share information for all periods presented has been retroactively adjusted to reflect this stock dividend. Primary income per common share and common equivalent share is computed using the weighted average number of common shares outstanding during the respective periods, including dilutive stock options, as applicable. Fully diluted income per common share and common equivalent share is computed by adjusting net income and primary shares outstanding for the potential effect of the conversion of the weighted average convertible subordinated debt outstanding during the period. Fully diluted earnings per share computations are based on the most advantageous conversion or exercise rights to the security holder that become effective within ten years following the period reported upon. Note 11 - On May 2, 1995, the Company announced plans to offer to acquire the approximately 11 million remaining shares it does not already own of its Canadian subsidiary. Under terms of the offer, the Company intends to pay $4.00 (Canadian dollars) per share to stockholders of LSI Logic Corporation of Canada, Inc. On May 10, 1995, the jury returned a verdict against the Company in an action brought by Texas Instruments (TI) alleging patent infringement in the United States District Court in Dallas, Texas. The jury found that the two patents in the suit were valid and that the Company had wilfully infringed the patents. The jury award is for $14.6 million for which the Company has adequate reserves. Because the patents involved in the litigation have both expired, the verdict will have no effect upon the manufacture or sale of the Company's present or future products. The Company anticipates making various post-trial motions, which, if granted, could reduce the jury award or set aside the jury verdict entirely. The jury finding of wilful infringement permits TI to ask the District Court that the jury award be trebled. The Company believes the verdict was in error and, pending rulings on post-trial motions, intends to appeal. The Company continues to believe that the final outcome of this matter will not result in a material adverse effect on the Company's consolidated financial position or results of operations. Certain additional claims and litigation against the Company have also arisen in the normal course of business. The Company believes that it is unlikely that the outcome of these claims and lawsuits will have a materially adverse effect on the Company's consolidated financial position or results of operations. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition General The Company believes that its future operating results are and will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of both the semiconductor industry and the markets addressed by the Company's products, price erosion, competitive factors, fluctuations in manufacturing yields, the timing of new product introductions, changes in product mix, the availability and extent of utilization of manufacturing capacity, product obsolescence and the ability to develop and implement new technologies. The Company's operating results could also be impacted by sudden fluctuations in customer requirements, currency exchange rate fluctuations and other economic conditions affecting customer demand and the cost of operations in one or more of the global markets in which the Company does business. As a participant in the semiconductor industry, the Company operates in a technologically advanced, rapidly changing and highly competitive environment. The Company predominately sells custom products to customers operating in a similar environment. Accordingly, changes in the circumstances of the Company's customers may have a greater impact on the Company than if the Company offered standard products that could be sold to many purchasers. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. To the extent the Company's performance may not satisfy expectations published by external sources, public reaction could result in a sudden and significantly adverse impact on the market price of the Company's securities, particularly on a short-term basis. The Company currently has international subsidiaries which operate and sell the Company's products in various global markets. The Company purchases a substantial portion of its raw materials and equipment from foreign suppliers, and incurs labor and other operating costs, particularly at its Japanese manufacturing facility, in foreign currencies. As a result, the Company is exposed to international factors such as changes in foreign currency exchange rates or weak economic conditions of the respective countries in which the Company operates. The Company utilizes various instruments, primarily forward exchange and currency swap contracts, to manage its exposure associated with currency fluctuation on intercompany transactions and certain foreign currency denominated commitments. At March 31, 1995, the Company had various forward exchange and currency swap contracts outstanding (see Note 3). These contracts hedge all significant intercompany loans, substantially all of the Company's Yen related exposures for the second quarter of 1995, and a significant portion of its Yen exposures for the third and fourth quarters of 1995. The Company's corporate headquarters and manufacturing facilities are located near major earthquake faults. As a result, in the event of a major earthquake the Company could suffer damages which could materially and adversely affect the operating results and financial condition of the Company. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information, management recommends that this discussion and analysis be read in conjunction with Management's Discussion and Analysis included in the Company's 1994 Annual Report on Form 10-K for the year ended January 1, 1995. Results of Operations Revenues for the first quarter of 1995 increased 45% to $280.2 million from first quarter of 1994 revenues of $193.8 million. The composition of revenues by major element was as follows: Three Months Ended March 31, 1995 1994 Component products 94% 87% Design and services 6% 13% 100% 100% Total component revenues grew 56% to $262.5 million in the first quarter of 1995 from $167.8 million in the first quarter of 1994. The increase in revenue dollars and the increase in component revenues as a percentage of total revenues were primarily due to the increased customer demand and volume production of the Company's application specific integrated circuit (ASIC) products. Volume production grew as the Company continued to increase manufacturing capacity at its Japanese and U.S. manufacturing facilities. Design and services decreased in total revenue dollars and as a percentage of revenue to approximately $17.7 million in the first quarter of 1995 compared to $26.0 million in the first quarter of 1994. The decrease is primarily attributed to a decline in nonrecurring engineering (NRE) revenue as the Company refocused its engineering efforts on large production volume opportunities and more complex CoreWare designs. Key elements of the statements of operations, expressed as a percentage of revenues, were as follows: Three Months Ended March 31, 1995 1994 Gross margin 45.2% 40.5% Research and development expenses 8.7% 11.9% Selling, general and administrative expenses 14.0% 15.2% Income from operations 22.5% 13.3% Gross margin continued to improve in the first quarter of 1995 compared to the same quarter a year ago primarily as a result of greater manufacturing utilization, improved plant efficiencies and a shift in the Company's product mix. The Company's operating environment combined with the resources required to operate in the semiconductor industry requires managing a wide variety of factors such as factory capacity and utilization, manufacturing yields, product mix, availability of certain raw materials, terms negotiated with third-party subcontractors and foreign exchange fluctuations. Volume production capability is expected to increase throughout 1995, thereby significantly increasing factory capacity by the end of 1995. In the event that demand for the Company's products does not absorb this additional capacity at a sufficient rate, the Company's gross margins could be negatively impacted 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 appreciated approximately 12% during the first quarter of 1995, the effect on gross margin was not significant as the Company's Yen denominated sales offset a substantial portion of Yen denominated costs during the quarter. Accordingly, gross profit margins for the first quarter of 1995 may not be indicative of expected results for the remainder of the fiscal year. Research and development (R&D) expenses for the first quarter of 1995 increased approximately $1.2 million compared to the same period in 1994. However, as a percentage of revenue, R&D expenses decreased in the first quarter of 1995 compared to the same period a year ago primarily due to increased utilization of the Company's R&D facility for volume production to meet customer demand. The Company anticipates continuing its investment in R&D at a rate between 8-10% of revenues in future periods. The Company's R&D investments are primarily for advanced product development, advanced manufacturing processes development, package development and enhancements of the Company's design automation software capability. Selling, general and administrative (SG&A) expenses increased $9.9 million to $39.3 million in the first quarter of 1995 compared to $29.4 million in the same quarter in 1994, and decreased as a percentage of revenues to 14.0% in the first quarter of 1995 compared to 15.2% for the same period in 1994. The increase in total SG&A expenses was primarily due to higher sales costs, the implementation of a new advertising campaign, and higher legal and consulting costs associated with the acquisition of the NSI minority interest shares, the planned acquisition of the Canadian minority interest shares, and legal costs in connection with the Texas Instruments lawsuit (see Part II, Item 1 of this Form 10-Q). The decline in SG&A expenses as a percentage of revenue was primarily the result of increased revenues. In summary, total operating costs and expenses for the first quarter of 1995 were $217.1 million, a $49.1 million increase over $168.0 million for the same quarter in 1994. However, operating income as a percentage of revenues increased to 22.5% in the first quarter of 1995 from 13.3% for the comparable quarter in 1994. Interest expense for the first quarter of 1995 and 1994 remained flat at approximately $4 million. Interest income and other for the first quarter of 1995 increased $.7 million as compared to the same quarter in 1994. The majority of this increase is attributable to increased interest earnings due to higher cash and investment balances and interest rates in the first quarter of 1995 and a decrease in net foreign currency exchange gains as a result of increased hedging activity (see Note 3) and continued devaluation of the dollar against the Yen, the Deutschemark and other European currencies. The Company recorded a provision for income taxes for the first quarter of 1995 and 1994 with an effective rate of 28%. The Company's effective tax rate was lower than the U.S. statutory rate primarily due to reductions in the valuation allowance provided under SFAS 109 and other credits. 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. Specifically, it involved the shutdown of the Braunschweig, Germany test and assembly facility, the planned phase-out of the Milpitas, California wafer fabrication facility, the consolidation of certain U.S. manufacturing operations, the downsizing of the chipset operation of its former subsidiary, Headland Technology Inc., and severance costs for approximately 500 employees worldwide. The $101.8 million restructuring charge included: the write-down and write-off of manufacturing facilities, equipment and improvements; the estimated operating costs attributable to the phase-out, closure and consolidation of these manufacturing facilities; the write-down of commodity chipset product inventories; the severance of manufacturing and other personnel; the consolidation of certain U.S. and foreign sales offices, design centers and administrative organizations; and certain legal and other costs. By the end of 1994, the Company had completed phased-out of the German test and assembly operation and written off the facility, discontinued the chipset business, completed partial phased-down of its Milpitas wafer manufacturing facility and certain U.S. assembly and test operations, and completed consolidation of certain U.S. sales offices and design centers. These actions included termination of approximately 350 employees. The following table sets forth the remaining 1992 restructuring reserves at March 31, 1995 and December 31, 1994 (which are accounted for as components of fixed assets, inventories and current liabilities) and charges taken during the first quarter of 1995 (in thousands): Balance Balance 12/31/94 Utilized* 3/31/95 Fixed asset related charges $ 11,100 $ (258) $ 10,842 Other provisions for phase-down and consolidation of manu- facturing facilities 3,500 232 3,732 Payments to employees for severance 1,500 - 1,500 Relocation, lease terminations and other 9,200 - 9,200 Total $25,300 $ ( 26) $25,274 * Net of cumulative currency translation adjustments. All charges were cash charged during the first quarter of 1995. During the first quarter of 1995, $26,000 was charged against the restructuring reserves. These charges were for the disposition of equipment as the Company continued phase-down of its U.S. manufacturing facilities ($258,000), and for ongoing maintenance costs of its vacant German facility ($93,000), offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark ($325,000). Remaining reserves at March 31, 1995 include approximately $14.6 million for the continued phase-down of the California manufacturing facilities, $2.7 million for continued maintenance of the vacant Braunschweig facility and $8 million for other corporate matters. The Company is currently operating the Milpitas facility and continues to evaluate either the feasibility of future operations at such facility or whether the facility should be phased out by the end of 1995. Management believes that the total reserves established are adequate to cover uncertainties in connection with these matters. Financial Condition The Company's cash, cash equivalents and short-term investments increased $59.7 million during the first quarter of 1995 to $488.2 million from $428.5 at the end of 1994. The increase is primarily due to net proceeds from a secondary stock offering of approximately $157.6 million and cash from operations of $90.7 million, partially offset by the acquisition of all minority owned stock in NSI for $125.9 million and the purchase of fixed assets of approximately $71.6 million. Working capital increased $7.7 million to $430.6 million at March 31, 1995 from $422.9 million at December 31, 1994. During the first quarter of 1995, the Company generated $90.7 million of cash and equivalents from its operating activities, compared to $47.5 million during the first quarter of 1994. The increased net cash provided from operations as compared to the comparable 1994 period was primarily attributable to an increase in net income before depreciation and an increase in accounts payable. Growing sales and increased manufacturing in response to rising customer demand contributed to increases in accounts receivable, inventories, accounts payable and accrued liabilities. In addition, the continued strengthening of the Yen added approximately $12 million to accounts receivable and inventory and $18 million to accounts payable and accrued liabilities during the first quarter of 1995. Net property and equipment was $630 million at March 31, 1995, an increase of $134.5 million compared to $495.5 million at the end of 1994. The increase was primarily due to $71.6 million of net purchases of equipment for the Company's Japanese and U.S. manufacturing facilities, $53 million associated with the strengthening of the Yen and a $33.1 million step-up of property and equipment as a result of the acquisition of the minority owned stock of NSI, partially offset by $28.8 million of depreciation. Management expects net capital expenditures to approximate $200 to $250 million for 1995. In February 1995, the Company subscribed to purchase shares in Chartered Semiconductor Manufacturing Pte. Ltd. (CMS) for approximately $20 million, of which approximately $14 million has been paid and approximately $6 million will be paid in March 1996. Transfer of the shares is restricted for five years. The Company also entered into an agreement with CMS which guarantees specific capacity in connection with 0.6 micron wafer manufacturing technology. The Company expects to begin receiving output from this facility in the second half of 1995. During 1994, the Company entered into a credit agreement with a group of banks which provide for an unsecured $60 million revolving credit facility. The agreement includes certain financial and non-financial covenants, with which the Company was in compliance at March 31, 1995. The Company has never borrowed under the credit facility. Each of the Company's significant foreign affiliates have lines of credit available for local currency borrowings. Foreign bank lines of credit as of March 31, 1995 were not significant. The increase in debt and other long-term liabilities was primarily attributable to $18 million associated with the strengthening Yen and $12.6 million of net borrowings by the Company's Japanese manufacturing subsidiary. On May 10, 1995, the jury returned a verdict against the Company in an action brought by Texas Instruments (TI) alleging patent infringement in the United States District Court in Dallas, Texas. The jury found that the two patents in the suit were valid and that the Company had wilfully infringed the patents. The jury award is for $14.6 million for which the Company has adequate reserves. See additional discussion at Note 11. The Company believes that its level of financial resources is an important competitive factor in its industry. Accordingly, the Company may, from time to time, seek additional equity or debt financings. The Company believes that existing liquid resources and funds generated from operations combined with funds from such financing and its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations for the next 12 months. There can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financings will decrease existing stockholders' percentage equity ownership and may, depending on the price at which the equity is sold, result in dilution. Part II Item 1 Legal Proceedings Reference is made to Item 3, Legal Proceedings, of the Company's Annual Report on Form 10K for the fiscal year ended January 1, 1995 for a discussion of certain pending legal proceedings. The information provided at such reference remains unchanged except as follows. On May 10, 1995, the jury returned a verdict against the Company in an action brought by Texas Instruments (TI) alleging patent infringement in the United States District Court in Dallas, Texas. The jury found that the two patents in the suit were valid and that the Company had wilfully infringed the patents. The jury award is for $14.6 million for which the Company has adequate reserves. Because the patents involved in the litigation have both expired, the verdict will have no effect upon the manufacture or sale of the Company's present or future products. The Company anticipates making various post-trial motions, which, if granted, could reduce the jury award or set aside the jury verdict entirely. The jury finding of wilful infringement permits TI to ask the District Court that the jury award be trebled. The Company believes the verdict was in error and, pending rulings on post-trial motions, intends to appeal. The Company continues to believe that the final outcome of this matter will not result in a material adverse effect on the Company's consolidated financial position or results of operations. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Calculation of Earnings Per Share 27.1 Financial Data Schedule (b) Reports on Form 8-K On January 26, 1995, the Company filed a Current Report on Form 8-K reporting its purchase of the 45% minority interest in its Japanese subsidiary. On May 3, 1995, the Company filed a Current Report on Form 8-K reporting the public notice of its intent to acquire all outstanding shares of its subsidiary, LSI Logic Corporation of Canada, Inc. which it does not already own. On May 15, 1995, the Company filed a Current Report on Form 8-K reporting the public notice of a 100% stock dividend in the form of a two-for-one stock split. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSI LOGIC CORPORATION (Registrant) Date: May 12, 1995 By /s/ Albert A. Pimentel Albert A. Pimentel Senior Vice President Finance & Chief Financial Officer Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSI LOGIC CORPORATION (Registrant) Date: May 12, 1995 By Albert A. Pimentel Senior Vice President Finance & Chief Financial Officer