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 July 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 95035 (Address of principal executive offices) (408) 433-8000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO As of August 7, 1995 there were 128,033,825 shares of registrant's Common Stock, $.01 par value, outstanding. LSI LOGIC CORPORATION Form 10-Q FOR THE QUARTER ENDED JULY 2, 1995 INDEX Page No. PART I Financial Information Item 1 Financial Statements Consolidated Condensed Balance Sheets - June 30, 1995 and December 31, 1994 3 Consolidated Condensed Statements of Operations - Three-Month and Six-Month Periods Ended June 30, 1995 and 1994 4 Consolidated Condensed Statements of Cash Flows - Six-Month Periods Ended June 30, 1995 and 1994 5 Notes to Consolidated Condensed Financial Statements 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II Other Information Item 1 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 Item 6 Exhibits and Reports on Form 8-K 18 PART I Item 1. Financial Statements LSI LOGIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) June 30, December 31, 1995 1994 ASSETS Cash and cash equivalents $ 278,420 $ 224,503 Short-term investments 203,078 204,008 Accounts receivable, less allowance for doubtful accounts of $4,674 and $4,044 181,426 152,244 Inventories 130,042 107,824 Prepaid expenses and other current assets 62,008 42,275 Total current assets 854,974 730,854 Property and equipment, net 653,082 495,549 Other assets 50,750 43,971 Total assets $1,558,806 $1,270,374 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 168,663 $ 165,612 Accrued salaries, wages and benefits 32,719 29,251 Accrued restructuring costs 23,255 19,800 Other accrued liabilities 36,399 30,192 Income taxes payable 60,291 38,916 Current portion of long-term debt, capital lease obligations and short-term borrowings 46,058 24,167 Total current liabilities 367,385 307,938 Long-term debt, capital lease obligations and other long-term liabilities 292,144 288,496 Deferred income taxes 6,989 6,861 Minority interest in subsidiaries 28,881 122,173 Commitments and contingencies - - Stockholders' equity: Preferred shares; 2,000 shares authorized - - Common stock; $.01 par value; 250,000 shares authorized; 122,156 and 114,287 shares outstanding 1,222 1,143 Additional paid-in capital 568,255 401,268 Retained earnings 168,075 67,070 Cumulative translation adjustment 125,855 75,425 Total stockholders' equity 863,407 544,906 Total liabilities and stockholders' equity $1,558,806 $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 Six Months Ended June 30, June 30, 1995 1994 1995 1994 Revenues $307,066 $212,106 $587,224 $405,918 Costs and expenses: Cost of revenues 162,305 123,337 315,704 238,724 Research and development 27,983 22,467 52,361 45,608 Selling, general and administrative 40,143 31,102 79,478 60,559 Total costs and expenses 230,431 176,906 447,543 344,891 Income from operations 76,635 35,200 139,681 61,027 Interest expense (4,117) (5,665) (8,300) (9,453) Interest income and other 7,240 4,127 12,721 8,925 Income before income taxes and minority interest 79,758 33,662 144,102 60,499 Provision for income taxes 22,333 9,425 40,349 16,939 Income before minority interest 57,425 24,237 103,753 43,560 Minority interest in net income of subsidiaries 1,680 799 2,748 767 Net income $55,745 $ 23,438 $101,005 $ 42,793 Net income per share: Primary $ 0.44 $ 0.22 $ 0.82 $ 0.41 Fully diluted $ 0.42 $ 0.20 $ 0.77 $ 0.39 Common share and common share equivalents used in computing per share amounts: Primary 125,855 106,224 123,313 103,898 Fully diluted 137,939 128,102 135,689 120,689 See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 1995 1994 Operating activities: Net income $ 101,005 $ 42,793 Adjustments: Depreciation and amortization 71,037 49,964 Minority interest in net income of subsidiaries 1,680 767 Change in: Accounts receivable (20,881) (21,805) Inventories (13,180) (20,610) Prepaid and other assets (14,389) (4,643) Accounts payable (11,957) 22,626 Accrued and other liabilities 19,654 6,708 Accrued restructuring costs 509 (3,418) Net cash provided by operating activities 133,478 72,382 Investing activities: Purchases of debt and equity securities, net of maturities and sales 758 (73,053) Purchase of restricted equity securities (13,966) - Change in other short-term investments - 8,123 Purchases of property and equipment, net of retirements and refinancings (110,344) (53,765) Acquisition of stock from minority interest holders (133,704) (10,051) Net cash used for investing activities (257,256) (128,746) Financing activities: Issuance of Convertible Subordinated Notes - 143,750 Proceeds from borrowings 16,726 - Repayment of debt obligations (13,628) (16,302) Issuance of common stock 167,062 8,995 Tax benefit from employee stock plans - 1,400 Net cash provided by financing activities 170,160 137,843 Effect of exchange rate changes on cash and cash equivalents 7,535 2,706 Increase in cash and cash equivalents 53,917 84,185 Cash and cash equivalents at beginning of period 224,503 121,319 Cash and cash equivalents at end of period $ 278,420 $ 205,504 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 six month period ended June 30, 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. Cash equivalents and short-term investments at June 30, 1995, consisted primarily of U.S. and foreign corporate debt securities, overnight deposits, auction rate preferred stock, commercial paper, time deposits, bank notes, and U.S. government and agency securities. Cash equivalents and short-term investments held at June 30, 1995 and at December 31, 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 three and six month periods ended June 30, 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 June 30, 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 intercompany transactions. The Company does not speculate in these financial instruments for profit on exchange rate price fluctuations. As of June 30, 1995, outstanding forward exchange and currency swap contracts, settling July 1995 through September 1996, hedge various intercompany loans and purchase obligations to the Company's Japanese manufacturing subsidiary in excess of sales obligations to the Company's Japanese sales subsidiary. 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. June 30, December 31, Buy/(Sell): 1995 1994 Japanese Yen $ 54,372 $(10,351) Japanese Yen (276) - U.S. Dollar (63,123) (3,200) U.S. Dollar 250 - Pound Sterling 9,456 9,447 Deutschemark (10,291) (9,312) Canadian Dollar 1,680 13,836 Singapore Dollar 6,199 - 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 approximately $1.5 million and $1.3 million, respectively, at June 30, 1995, and were not material at December 31, 1994. Note 4 - Balance sheet and cash flow information (in thousands): June 30, December 31, 1995 1994 Inventories: Raw materials $ 22,791 $ 14,275 Work-in-process 66,739 58,303 Finished goods 40,512 35,246 Total $ 130,042 $ 107,824 June 30, June 30, 1995 1994 Cash Paid for: Income taxes $ 17,636 $ 8,847 Interest 8,642 4,748 Note 5 - During the first half of 1995, the Company's Japanese sales affiliate sold approximately $16.3 million of its accounts receivables through non-recourse financing programs with two Japanese banks. These receivables were discounted at short-term Yen borrowing rates (approximately 1.8%)and related fees were not material. Note 6 - During the first half of 1995, $1,045,000 was charged against the restructuring reserves. These charges were for the continued phase-down of its U.S. manufacturing facilities, including the write-off and disposition of equipment ($536,000), the write-off of inventory ($267,000) and the severance of employees ($265,000), and ongoing maintenance costs of its vacant German facility ($239,000), offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark ($262,000). In response to changing economic conditions, the Company modified its original restructuring plan in the second quarter of 1995 and determined it would continue operation of its Milpitas, California wafer manufacturing facility. The Company also substantially completed the phase-down of its U.S. assembly and test operation. These actions resulted in excess reserves of approximately $12 million which were used to offset increases in the reserves for legal and other corporate matters, which include reserves for the jury verdict against the Company during the second quarter of 1995 in the Texas Instruments litigation (see Note 11 to the Unaudited Consolidated Condensed Financial Statements). Remaining reserves at June 30, 1995 include approximately $2.7 million for remaining costs related to the phase-down of the California manufacturing facilities, $2.6 million for continued maintenance of the vacant Braunschweig facility and $19 million for legal and other corporate matters. These reserves are accounted for as components of fixed assets, inventories and current liabilities at June 30, 1995 and December 31, 1994. Management believes that the total reserves established are adequate to cover uncertainties in connection with these matters. See further discussion in Management's Discussion and Analysis of Results of Operations and Financial Condition, 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 and is being amortized over the estimated useful life of those assets of approximately nine years. In June 1995, the Company made an offer to acquire the approximately 12.2 million common shares (including outstanding options) that it does not already own of its publicly traded Canadian subsidiary, LSI Logic Corporation of Canada, Inc. (LSI Canada), for $4.00 Canadian Dollars (CD) per share. In July 1995, the Company borrowed $40.7 million CD (U.S. $29.5 million) under a $50 million CD revolving credit line to purchase approximately 10.2 million shares increasing its ownership to approximately 93%. The borrowing bears interest at Canadian prime rate (8.25% as of July 31, 1995) and matures in approximately six months. The Company is currently evaluating its investment and expects to capitalize a majority of the excess purchase price over the net assets acquired as goodwill, which it expects to amortize over seven years. The minority interest liability of LSI Canada approximated $18.6 million at June 30, 1995. The Company intends to acquire the remaining shares in a transaction which may result in the remaining shareholders having the right to dissent from the transaction and be entitled to appraisal rights. During the first half of 1995, the Company acquired approximately 1.2 million common shares of its Japanese sales affiliate from its minority interest shareholders for approximately $7.8 million. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the assets acquired ($1.7 million) was allocated to goodwill and is being amortized over seven years. The Company owned approximately 87% of the Japanese affiliate at June 30, 1995. Note 8 - The Company's effective tax rate differs from the statutory rate due to the Company's ability to utilize prior loss carryovers and due to the mix of expected earnings in its foreign subsidiaries. Note 9 - The Board of Directors approved an increase in the number of common shares authorized for issuance to 250,000,000 during February 1995 which was approved by the stockholders at the Company's annual meeting in May 1995. During February 1995, the Company completed an offering of 3,162,500 shares of common stock, netting proceeds of approximately $157.6 million. On May 12, 1995, the Company's Board of Directors approved a two-for-one stock split in the form of a stock dividend for stockholders of record on May 23, 1995. The payment date was on June 21, 1995. Share information for all periods presented has been retroactively adjusted to reflect this stock dividend. In July 1995, the Company completed an offering of 5,750,000 shares of common stock, netting proceeds of approximately $247 million. These shares will have a dilutive effect on earnings per share in the third quarter of 1995. 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 10 - 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. The leasing companies are funded by affiliated Japanese banks. The Company has guaranteed the performance of its Japanese subsidiary. 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. As of June 30, 1995, the Company had utilized 6.2 billion Yen ($73.8 million) under these agreements to refinance equipment owned by its Japanese manufacturing subsidiary. There were no significant gains or losses from these transactions. These leases are accounted for as operating leases by the Company. Note 11 - The Company is one of three defendants in a patent infringement suit brought by Texas Instruments ("TI"). This suit resulted in a May 1995 jury verdict against the Company holding the patents valid and finding wilful infringement. Damages against the Company were set by the jury at $14.6 million, for which the Company has adequate reserves. Because both of the patents involved in the litigation have expired, the verdict will have no effect upon the manufacture or sale of the Company's present or future products. The Company has filed various post-trial motions which, if granted, could reduce the jury award or set aside the jury verdict entirely. TI has requested treble damages, pre-judgment interest in the amount of $7.5 million from the Company and attorneys' fees that total $3.8 million from all three defendants. The Company believes that the jury verdict was in error and intends to appeal. The Company continues to believe that the final outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that this matter will be resolved without the payment of damages and other costs or that damages will not be increased to an amount in excess of the Company's reserves, thereby having an adverse effect on the Company. 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 June 30, 1995, the Company had various forward exchange and currency swap contracts outstanding (see Note 3 to the Unaudited Consolidated Condensed Financial Statements). These contracts hedge intercompany loans and a substantial portion of the Company's Yen related exposures for the third and fourth quarters of 1995 and the first quarter of 1996. 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 both the second quarter and first half of 1995 increased 45% to $307.1 million and $587.2 million, respectively, as compared to the second quarter and first half of 1994. The composition of revenues by major element was as follows: Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Component products 94% 86% 94% 86% Design and services 6% 14% 6% 14% 100% 100% 100% 100% Total component revenues grew 54% to $287.8 million and 57% to $550.3 million in the second quarter and first half of 1995, respectively, as compared to the same periods a year ago. The increase in revenue dollars and the increase in component revenues as a percentage of total revenues were primarily due to increased customer demand and volume production of the Company's higher technology products. Volume production grew as the Company continued to increase manufacturing capacity at its Japanese and U.S. manufacturing facilities. Design and services decreased to $19.2 million and $36.9 million in the second quarter and the first half of 1995 from $30.5 million and $56.5 million, respectively, compared to the same periods a year ago. The decrease is primarily attributed to a decline in nonrecurring engineering (NRE) revenue as the Company refocused its engineering efforts on large volume production opportunities and more complex CoreWare designs. The decrease is also attributed to the recognition of a one-time $7 million sale involving certain products and marketing rights during the second quarter of 1994. One customer accounted for 12% percent of revenues during the first half of 1995. Key elements of the statements of operations, expressed as a percentage of revenues, were as follows: Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Gross margin 47.1% 41.9% 46.2% 41.2% Research and development expenses 9.1% 10.6% 8.9% 11.2% Selling, general and administrative expenses 13.1% 14.7% 13.5% 14.9% Income from operations 25.0% 16.6% 23.8% 15.0% Gross margin continued to improve in the second quarter and first half of 1995 compared to the same periods a year ago. The improvements were primarily the result of greater factory and capacity utilization, improving yields and other plant efficiencies at the Company's Japanese wafer manufacturing facility. Changes in product mix and an increase in the use of low cost assembly and test subcontractors also contributed favorably to gross margins. 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 currency exchange rate fluctuations. Accordingly, gross profit margins for the second quarter and first half of 1995 may not be indicative of expected results for the remainder of the fiscal year. Volume production capability is expected to increase significantly throughout 1995 and during the first quarter of 1996 due to an increase in manufacturing capacity resulting primarily from the installation of additional production equipment in the Company's Japanese wafer manufacturing facilities and improving manufacturing yields. If demand for the Company's products does not absorb this additional capacity at a sufficient rate, the Company's gross margins and operating results 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 average Yen exchange rate for the second quarter and first half of 1995 increased approximately 18% and 14% from the same periods in 1994, respectively, 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 majority of its remaining Yen exposures (see Note 3 to the Unaudited Consolidated Condensed Financial Statements). However, there is no assurance that future changes in the relative strength of the Yen will not have a material effect on gross margins or operating results. Research and development (R&D) expenses increased approximately $5.5 million and $6.8 million in the second quarter and first half of 1995, respectively, compared to the same periods in 1994. The increase in R&D expenses is primarily attributed to increased staffing levels as the Company continues to invest in the development of higher technology sub-micron products and the related manufacturing, packaging and design processes. As a percentage of revenue, R&D expenses declined to approximately 9% in the second quarter and first half of 1995 compared to the same period a year ago primarily due to partial utilization of the Company's R&D facility to increase production of its 0.5 micron products. The Company anticipates continuing its investment in R&D at a rate of 9 to 11% of revenues in future periods. Selling, general and administrative (SG&A) expenses increased $9.0 million and $18.9 million in the second quarter and first half of 1995 compared to the same periods in 1994. The increase in total SG&A expenses was primarily due to increased staffing levels, legal costs associated with the Texas Instruments lawsuit (see Part II, Item 1 of this Form 10-Q), other consulting costs, and costs in connection with the implementation of a new advertising campaign. SG&A expenses declined as a percentage of revenue to 13.1% in the second quarter of 1995 and to 13.5% in the first half of 1995 compared to 14.7% and 14.9%, respectively, for the same periods in 1994. The decline in SG&A expenses as a percentage of revenue was primarily the result of increased revenues and continued cost containment efforts. In summary, total operating costs and expenses for the second quarter and first half of 1995 increased to $68.1 million and $131.8 million from $53.6 million and $106.2 million, respectively, for the second quarter and first half of 1994. Operating income as a percentage of revenues during the second quarter and first half of 1995 increased to 25.0% and 23.8% compared to 16.6% and 15.0%, respectively, for the same periods during 1994. Interest expense for the second quarter and first half of 1995 decreased approximately $1.5 million and $1.2 million, respectively, as compared to the same periods in 1994. The decrease is primarily attributed to conversion of approximately $97 million of the Company's 6 1/4% Convertible Subordinated Debentures into common stock during the third quarter of 1994. Interest income and other for the second quarter and first half of 1995 increased $3.1 million and $3.8 million, respectively, as compared to the same periods in 1994. The majority of this increase is attributable to increased earnings as a result of higher average cash and investment balances and interest rates in the second quarter and first half of 1995, offset in part by a reduction in other income. The Company recorded a provision for income taxes for the second quarter and first half 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 the Company's ability to utilize prior loss carryovers and due to the mix of expected earnings in its foreign subsidiaries. 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 matters and other costs. By the end of 1994, the Company had completed the phase-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 June 30, 1995 and December 31, 1994 (which are accounted for as components of fixed assets, inventories and current liabilities) and charges taken during the first half of 1995 (in thousands): Balance Balance 12/31/94 Utilized* Adjusted 6/30/95 Fixed asset related charges $11,100 $ (536) $(8,564) $ 2,000 Other provisions for phase-down and consolidation of manufacturing facilities 3,500 (244) (166) 3,090 Payments to employees for severance 1,500 (265) (1,070) 165 Relocation, lease terminations and other corporate matters 9,200 - 9,800 19,000 Total $25,300 $(1,045) $ - $24,255 * Net of cumulative currency translation adjustments. Cash charges totaled $855,000 during the first half of 1995. During the first half of 1995, $1,045,000 was charged against the restructuring reserves. These charges were for the continued phase-down of its U.S. manufacturing facilities, including the write-off and disposition of equipment ($536,000), the write-off of inventory ($267,000) and the severance of employees ($265,000), and ongoing maintenance costs of its vacant German facility ($239,000), offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark ($262,000). In response to changing economic conditions, the Company modified its original restructuring plan in the second quarter of 1995 and determined it would continue operation of its Milpitas, California wafer manufacturing facility. The Company also substantially completed the phase-down of its U.S. assembly and test operation. These actions resulted in excess reserves of approximately $12 million which were used to offset increases in the reserves for legal and other corporate matters, which include reserves for the jury verdict against the Company during the second quarter of 1995 in the Texas Instruments litigation (see Note 11 to the Unaudited Consolidated Condensed Financial Statements). Remaining reserves at June 30, 1995 include approximately $2.7 million for remaining costs related to the phase-down of the California manufacturing facilities, $2.6 million for continued maintenance of the vacant Braunschweig facility and $19 million for legal and other corporate matters. 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 $53.0 million during the first half of 1995 to $481.5 million from $428.5 at the end of 1994. The increase is primarily due to net proceeds from a stock offering of approximately $157.6 million and cash from operations of $133.5 million, partially offset by the acquisition of all minority owned stock in the Company's Japanese manufacturing subsidiary, Nihon Semiconductor, Inc. (NSI) for $125.9 million and net purchases of fixed assets of approximately $110.3 million. Working capital increased $64.7 million to $487.6 million at June 30, 1995 from $422.9 million at December 31, 1994. During the first half of 1995, the Company generated $133.5 million of cash and equivalents from its operating activities, compared to $72.4 million during the first half 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 amortization and an increase in accrued and other liabilities, offset in part by a decrease in accounts payable. Growing sales and increased manufacturing in response to rising customer demand contributed to increases in accounts receivable, inventories and accrued liabilities. In addition, the continued strengthening of the Yen added approximately $8.3 million to accounts receivable, $7.1 million to inventory and $17.3 million to accounts payable and accrued liabilities during the first half of 1995. Net property and equipment was $653.1 million at June 30, 1995, an increase of $157.6 million compared to $495.5 million at the end of 1994. The increase was primarily due to $110.3 million of fixed asset purchases (primarily equipment for the Company's Japanese and U.S. manufacturing facilities) net of retirements and $73.8 million of equipment refinanced through operating leases by its Japanese manufacturing subsidiary (see additional discussion at Note 10 of the Unaudited Consolidated Condensed Financial Statements), $73.5 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 $66.8 million of depreciation. Management expects net capital expenditures to approximate $200 to $250 million for 1995. In August 1995, the Company announced that it has selected Gresham, Oregon as the U.S. site for a new 8-inch wafer manufacturing facility and began construction. The initial phase is expected to require capital spending of approximately $600 to $800 million over the next 24 months and, when fully ramped, will have the capacity to run approximately 4,000 eight-inch wafers per week. Management estimates that the Company may spend as much as $4 billion in this site over the next 15 years. In February 1995, the Company subscribed to purchase shares in Chartered Semiconductor Manufacturing Pte. Ltd. (CSM) 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 CSM 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 June 30, 1995. The Company has never borrowed under the credit facility. In addition, the Company's Japanese manufacturing subsidiary, NSI, entered into a 15 billion Yen operating lease arrangement during June 1995, of which 6.2 billion Yen ($73.8 million) had been utilized by the end of the quarter. The Company anticipates using the remaining lease line throughout 1995 and during the first quarter of 1996. Each of the Company's significant foreign affiliates have lines of credit available for local currency borrowings. These foreign bank lines of credit were not material as of June 30, 1995. The increase in debt and other long-term liabilities was primarily attributable to $25.5 million associated with the strengthening Yen. In July 1995, the Company completed an offering of 5,750,000 shares of common stock, netting proceeds of approximately $247 million. These shares will have a dilutive effect on earnings per share in the third quarter of 1995. 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 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 financing 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 10-K 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 for the patent infringement suit brought by Texas Instruments ("TI"). This suit resulted in a May 1995 jury verdict against the Company holding the patents valid and finding wilful infringement. Damages against the Company were set by the jury at $14.6 million, for which the Company has adequate reserves. Because both of the patents involved in the litigation have expired, the verdict will have no effect upon the manufacture or sale of the Company's present or future products. The Company has filed various post-trial motions which, if granted, could reduce the jury award or set aside the jury verdict entirely. TI has requested treble damages, pre-judgement interest in the amount of $7.5 million from the Company and attorneys' fees that total $3.8 million from all three defendants. The Company believes that the jury verdict was in error and intends to appeal. The Company continues to believe that the final outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that this matter will be resolved without the payment of damages and other costs or that damages will not be increased to an amount in excess of the Company's reserves, thereby having an adverse effect on the Company. Item 4 Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of LSI Logic Corporation was held on May 12, 1995 in Milpitas, California. Of the total 60,513,725 shares outstanding as of the record date, 53,390,773 were present or represented by proxies at the meeting. The table below presents the results of the election of the Company's board of directors: Votes Votes For Withheld Wilfred J. Corrigan 53,305,626 85,147 Malcom R. Currie 53,304,671 86,102 T. Z. Chu 53,307,551 83,222 James H. Keyes 53,307,452 83,321 R. Douglas Norby 53,306,314 84,459 The stockholders approved an amendment to the Employee Stock Purchase Plan, which increased the number of shares of common stock reserved for issuance thereunder by 750,000 shares. The proposal received 46,762,630 affirmative votes, 1,961,336 negative votes, 86,969 abstentions, and 4,579,838 non-votes. The stockholders approved an amendment to the 1991 Equity Incentive Plan, which increased the number of shares of common stock reserved for issuance thereunder by 3,000,000 shares. The proposal received 38,955,416 affirmative votes, 9,776,967 negative votes, 78,552 abstentions, and 4,579,838 non-votes. The stockholders approved an amendment to the 1991 Equity Incentive Plan which placed limits on the number of stock options that may be granted to any employee in a particular year to 750,000 shares. The proposal received 51,651,038 affirmative votes, 1,285,677 negative votes, 72,950 abstentions, and 381,108 non-votes. The stockholders approved the 1995 Director Option Plan, which reserved 250,000 shares for issuance thereunder. The proposal received 36,793,574 affirmative votes, 11,916,721 negative votes, 100,641 abstentions, and 4,579,837 non-votes. The stockholders approved an amendment to the Restated Certificate of Incorporation, which increased the number of common shares authorized for issuance by 176,500,000 shares to a total of 250,000,000 shares. The proposal received 36,991,619 affirmative votes, 11,361,829 negative votes, 76,379 abstentions, and 4,960,946 non-votes. The stockholders ratified the appointment of Price Waterhouse LLP as the Company's independent accountants for the fiscal year ended December 31, 1995. The proposal received 53,308,687 affirmative votes, 31,987 negative votes, 50,099 abstentions, and zero non-votes. 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 Report on Form 8-K filed May 16, 1995 announcing the declaration of 100% stock dividend in the form of a two-for-one-stock split. Report on Form 8-K filed May 4, 1995 giving public notice of the Company's offer to acquire for cash the approximately 11,000,000 shares of LSI Logic Corporation of Canada, Inc. which it did not already own. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LSI LOGIC CORPORATION (Registrant) Date: August 16, 1995 By /s/ Albert A. Pimentel Albert A. Pimentel Senior Vice President Finance & Chief Financial Officer