UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 28, 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) Delaware 94-2712976 (State of Incorporation) (I.R.S. EmployerIdentification 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 November 1, 1997 there were 141,601,731 shares of registrant's Common Stock, $.01 par value, outstanding. LSI LOGIC CORPORATION Form 10-Q FOR THE QUARTER ENDED SEPTEMBER 28, 1997 INDEX Page No. PART I Financial Information Item 1 Financial Statements Consolidated Condensed Balance Sheets - September 30, 1997 		and December 31, 1996 	3 Consolidated Condensed Statements of Operations - 		Three-Month and Nine-Month Periods Ended 		September 30, 1997 and 1996 			4 Consolidated Condensed Statements of Cash Flows - 		Nine-Month Periods Ended September 30, 1997 and 1996 5 Notes to Consolidated Condensed Financial Statements	 	6 Item 2 Management's Discussion and Analysis of Results of 	Operations and Financial Condition 10 PART II Other Information Item 1 Legal Proceedings 	 	14 Item 6 Exhibits and Reports on Form 8-K 	 	14 PART I Item 1. Financial Statements LSI LOGIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amount) (Unaudited) September 30, December 31, 1997 1996 	 	 ASSETS Cash and cash equivalents $ 136,813 $147,059 136,813 147,059 Short-term investments 507,732 570,223 Accounts receivable, less allowance for doubtful 218,075 184,977 accounts of $3,749 and $3,116 Inventories 100,894 90,410 Other current assets 78,094 58,385 Total current assets 1,041,608 1,051,054 Property and equipment, net 1,024,050 811,659 Other assets 118,878 90,001 Total assets $2,184,536 $1,952,714 LIABILITIES AND STOCKHOLDERS= EQUITY Accounts payable $199,124 $104,109 199,124 104,109 Accrued salaries, wages and benefits 49,341 26,000 Other accrued liabilities 57,986 67,921 Income taxes payable 113,662 77,696 Current portion of long-term obligations and short-term borrowings 42,105 69,612 Total current liabilities 462,218 345,338 Long-term obligations 125,149 281,136 Deferred income taxes 8,398 4,907 Minority interest in subsidiaries 5,428 5,114 Commitments and contingencies - - Stockholders's equity: Preferred shares; 2,000 shares authorized - - Common stock; $.01 par value; 450,000 shares authorized; 1,417 1,290 141,673 and 129,006 shares outstanding Additional paid-in capital 992,577 837,151 Retained earnings 580,898 452,374 Cumulative translation adjustment 8,451 25,404 Total stockholders' equity 1,583,343 1,316,219 Total liabilities and stockholders' $2,184,536 $1,952,714 	equity See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 	 Revenues $326,847 $300,195 $967,239 $936,906 Costs and expenses: Cost of revenues 163,729 175,074 496,848 528,377 Research and development 57,746 48,472 166,198 134,276 Sales, general and 49,036 40,827 143,368 124,022 administrative Acquired in-process research 2,850 - 2,850 - and development Total costs and expenses 273,361 264,373 809,264 786,675 Income from operations 53,486 35,822 157,975 150,231 Interest expense - (3,647) (1,497) (10,241) Interest income and other 8,139 6,379 22,219 22,002 Income before income taxes 61,625 38,554 178,697 161,992 Provision for income taxes 17,307 10,811 50,173 45,469 Net income $44,318 $27,743 $128,524 $116,523 Net income per share: Primary $0.31 $0.21 $0.91 $0.89 Fully diluted $0.31 $0.21 $0.90 $0.85 Common share and common share equivalents used in computing per share amounts: Primary 144,432 130,224 140,883 131,523 Fully diluted 144,506 142,100 144,543 143,259 See accompanying notes to unaudited consolidated condensed financial statements. LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 1997 1996 Operating activities: Net income $128,524 $116,523 Adjustments: Depreciation and amortization 122,240 110,251 Minority interest in net income of 566 398 	subsidiaries Write-off of acquired in-process research 2,850 - 	and development Changes in: Accounts receivable (36,241) (9,923) Inventories (12,339) 27,725 Other assets (37,098) 8,539 Accounts payable 96,536 (15,449) Accrued and other liabilities 54,996 54,473 Net cash provided by operating activities 320,034 292,537 Investing activities: Purchases of debt and equity securities (933,252) (935,681) Maturities and sales of debt and equity 996,775 960,045 	securities Purchase of restricted equity securities (6,681) (6,252) Purchases of property and equipment, net 	of retirements and refinancings (348,321) (296,608) Acquisition of Mint Technology, net of (6,863) - 	cash acquired Acquisition of stock from minority 	interest holders - (688) Net cash used for investing activities (298,342) (279,184) Financing activities: Proceeds from borrowings 34,193 133,921 Repayment of debt obligations (67,260) (51,125) Issuance of common stock 15,254 10,886 Repurchase of common stock (12,693) (46,838) Net cash used for financing activities (30,506) 46,844 Effect of exchange rate changes on cash and cash equivalents (1,432) (5,332) Decrease in cash and cash equivalents (10,246) 54,865 Cash and cash equivalents at beginning of period 147,059 172,780 Cash and cash equivalents at end of period $136,813 $227,645 See accompanying notes to unaudited consolidated condensed financial state ments. LSI LOGIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1-In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 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 quarter ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. On October 27, 1997, the Company changed the accounting period from a 52-53 week year to a year ending December 31. This change will be reflected for the period ending December 31, 1997. One customer represented 23% and 22% of the Company's consolidated revenue during the third quarter and first nine months of 1997. Note 2 - Cash equivalents and short-term investments at September 30, 1997, consisted primarily of U.S. and foreign corporate debt securities, commercial paper, auction rate preferred stock, U.S. and foreign government and agency securities and time deposits. Cash equivalents and short-term investments held at September 30, 1997 and at December 31, 1996 approximate fair market value and it is the Company=s intention to hold these investments for one year or less. As of September 30, 1997, contractual maturities of available-for-sale securities were $521 million maturing within one year and $45 million maturing between one to six years. 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 September 30, 1997 and 1996. 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 foreign currency exchange rates and interest 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 third- party transactions and net asset and liability positions denominated in non-functional currencies. The Company does not hold derivative financial instruments for trading purposes. As of September 30, 1997, the Company had several interest rate swap contracts outstanding which convert the interest associated with 17.0 billion yen ($141 million) of borrowings by the Company=s Japanese manufacturing subsidiary from adjustable to fixed rates (ranging from 2.62% to 2.86%). 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 hedges its foreign exchange exposures using forward exchange and currency option contracts. The contracts hedging third quarter net asset and liability positions denominated in non-functional currencies expired on the last day of the third quarter. Premiums associated with 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 (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. Foreign currency amounts are translated at rates current at the reporting date. September 30, December 31, Buy/(Sell): 1997 1996 				 	 Japanese Yen $ - $ 7,337 U.S. Dollar - (7,398) Currency swap contracts outstanding 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 gains and losses were not material at September 30, 1997 and December 31, 1996. Note 4 - Balance sheet and cash flow information (in thousands): September 30, December 31, 1997 1996 Inventories: Raw materials $ 20,794 $ 19,540 Work-in-process 60,044 53,785 Finished Goods 20,056 17,085 Total $ 100,894 $ 90,410 September 30, September 30, 1997 1996 Cash Paid for: Income taxes $ 15,133 $ 28,600 Interest 7,971 14,300 During the nine-month period ended September 30, 1997, the Company capitalized $22.7 million related to the preproduction engineering costs for its Gresham, Oregon manufacturing facility. Additionally, during the nine-month period ended September 30, 1997, the Company capitalized $14.3 million for development and implementation of software for internal use which are included in other noncurrent assets. Note 5 - Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share (EPS)", was issued in February 1997. Under FAS 128, the Company is required to disclose basic EPS and diluted EPS for all periods for which an income statement is presented. This will replace the disclosure currently being made for primary EPS and fully-diluted EPS. FAS 128 requires adoption for fiscal periods ending after December 15, 1997. Pro forma disclosure of basic EPS and diluted EPS for the current reporting and comparable period in the prior year is as follows: Three months ended Nine months ended September 30, September 30, Earnings Per Share 1997 1996 1997 1996 Basic $0.31 $ 0.22 $0.93 $ 0.90 Diluted $0.31 $ 0.21 $0.90 $ 0.85 In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131 (FAS 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 FAS 130, the Company is required to report comprehensive income in the financial statements, in addition to net income, including foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities, as applicable. The Company expects that the effect of adoption of FAS 130 on the financial statements will be primarily from foreign currency translation adjustments. FAS 131 requires that the Company report separately, in the financial statements, certain financial and descriptive information about operating segments. This includes a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. Additionally, the Company is required to report information about the revenues derived from its products and services groups, about geographic areas in which the Company earns revenues and holds assets, and about major customers. The adoption of FAS 131 will not have an impact on the Companyss financial statements. Note 6 - During the first nine months of 1997, the Company's Japanese sales affiliate sold approximately $136.2 million of its accounts receivables through non-recourse financing programs with two Japanese banks. These receivables were discounted at short-term Yen borrowing rates (averaging approximately 0.3%) and related fees were not material. Note 7 - A discussion of certain pending legal proceedings is included in Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (1996 10-K). As indicated therein, Texas Instruments (TI) filed an appeal in the United States Court of Appeals for the Federal Circuit (CAFC) challenging the United States District Court that the Company's encapsulation process did not infringe the TI patents. In July, 1996, the CAFC issued its decision affirming the U.S. District Court's holding in favor of the Company. In September, 1996, the CAFC denied TI's motion for reconsideration en banc. In December, 1996, TI petitioned the U.S. Supreme Court for a writ of certiorari, seeking further review of the case. The petition was denied in May, 1997. The information provided in the Company's 1996 10-K regarding other matters remains unchanged. The Company continues to believe that the final outcome of such matters discussed will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that these matters will be resolved without the Company becoming obligated to make payments or to pay other costs to the opposing parties, with the potential for having an adverse effect on the Company's financial position or its results of operations. Certain additional claims and litigation against the Company have also arisen in the normal course of business. The Company believes that it is unlikely that the outcome of these claims and lawsuits will have a materially adverse effect on the Company's consolidated financial position or results of operations. Note 8 - 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 arrays 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 700,000 shares of common stock with an intrinsic value of $11.3 million. The intrinsic value of the stock will be 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. Total goodwill recorded as part of the acquisition was $5.7 million and will be 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. Note 9 - On July 28, 1997, the Company announced that the Company's Board of Directors approved an action which authorizes management to acquire up to 5 million shares of its common stock in the open market from time to time at current market prices. During the third quarter of 1997, the Company repurchased 400,000 shares of its common stock from the open market for approximately $12.7 million. The transactions were recorded as a reduction to additional paid- in capital. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition General The Company believes that its future operating results are and will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of both the semiconductor industry and the markets addressed by the Company's products, the availability and extent of utilization of manufacturing capacity, fluctuations in manufacturing yields, price erosion, competitive factors, the timing of new product introductions, changes in product mix, product obsolescence and the ability to develop and implement new technologies. The Company's operating results could also be impacted by sudden fluctuations in customer requirements, currency exchange rate fluctuations and other economic conditions affecting customer demand and the cost of operations in one or more of the global markets in which the Company does business. As a participant in the semiconductor industry, the Company operates in a technologically advanced, rapidly changing and highly competitive environment. The Company predominantly sells custom products to customers operating in a similar environment. Accordingly, changes in the circumstances of the Company's customers may have a greater impact on the Company than if the Company offered standard products that could be sold to many purchasers. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. To the extent the Company's performance may not satisfy expectations published by external sources, public reaction could result in a sudden and significantly adverse impact on the market price of the Company's securities, particularly on a short-term basis. The Company currently has international subsidiaries which operate and sell the Company's products in various global markets. The Company purchases a substantial portion of its raw materials and equipment from foreign suppliers, and incurs labor and other operating costs, particularly at its Japanese manufacturing facility, in foreign currencies. As a result, the Company is exposed to international factors such as changes in foreign currency exchange rates or economic conditions of the respective countries in which the Company operates. The Company utilizes various instruments, primarily forward exchange, currency swap and currency option contracts, to manage exposure associated with firm intercompany and third party transactions and net asset and liability positions denominated in non-functional currencies. At September 28, 1997, the Company had no currency forward exchange and currency option contracts outstanding (see Note 3 to the Unaudited Consolidated Condensed Financial Statements). Despite its hedging activities, the Company continues to be exposed to the risks associated with fluctuation of foreign currency exchange rates, particularly the Japanese yen. There can be no assurance that such fluctuation will not cause a material adverse effect on the Company's financial position or results of operations. The Company's corporate headquarters and manufacturing facilities are located near major earthquake faults. As a result, in the event of a major earthquake the Company could suffer damages which could materially and adversely affect the operating results and financial condition of the Company. 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 1996 Annual Report on Form 10-K for the year ended December 31, 1996. Statements in this discussion and analysis contain forward looking information and involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. In addition to the factors discussed above, such factors may include, but may not necessarily be limited to fluctuations in customer demand, both in timing and volumes, and fluctuations in currency exchange rates. Also, the Company's ability to have available an appropriate amount of production capacity in a timely manner can significantly impact the Company=s financial performance. The timing of new technology and product introductions and the risk of early obsolescence are also important factors. Further, the Company operates in an industry sector where securities values are highly volatile and may be influenced by economic and other factors beyond the Company's control. (See additional discussion contained in "Risk Factors", set forth in Part 1 of the Company's report on Form 10-K for the year ended December 31, 1996.) Results of Operations Revenues for the third quarter and first nine months of 1997 increased 8.9% and 3.2% to $326.8 million and $967.2 million, respectively, as compared to the same periods in 1996. The increase in revenues was primarily due to increased demand for the Company's products for consumer applications, partially offset by lower average selling prices when expressed in dollars. One customer represented 23% and 22% of the Company's consolidated revenues during the third quarter and first nine months of 1997. Key elements of the statements of operations, expressed as a percentage of revenues, were as follows: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Gross margin 49.9% 41.7% 48.6% 43.6% Research and development expenses 17.7% 16.1% 17.2% 14.3% Selling, general and 15.0% 13.6% 14.8% 13.2% administrative expenses Income from operations 16.4% 11.9% 16.3% 16.0% Gross margin increased to 49.9% and 48.6% during the third quarter and first nine months of 1997, respectively, from 41.7% and 43.6% in the same periods a year ago. 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. Although the average yen exchange rate for the first nine months of 1997 weakened by approximately 11% from the same period in 1996, the effect on gross margin and net income was not material due to the Company's yen denominated sales offsetting a substantial portion of its yen denominated costs and the Company's hedging a portion of its remaining yen exposures during these periods. However, there can be no assurance that future changes in the relative strength of the yen or mix of foreign denominated revenues, as well as expenses, will not have a material effect on gross margin or operating results. The Company's operating environment, combined with the resources required to operate in the semiconductor industry, requires managing a wide variety of factors such as factory and capacity utilization, manufacturing yields, product mix, availability of certain raw materials, terms negotiated with third-party subcontractors and foreign currency exchange rate fluctuations. Gross margin for the first three quarters of 1997 may not be indicative of expected results for the remainder of the fiscal year. The Company is currently constructing a new manufacturing facility in Gresham, Oregon. This new facility is expected to become operational during the third quarter of 1998 to accommodate anticipated future capacity requirements. If demand does not absorb the Company's available capacity at a sufficient rate, or if achieved, such demand is not sustained, the Company's gross margin and operating results could be negatively impacted in future periods. Research and development (R&D) expenses increased $9.3 million and $31.9 million, respectively, in the third quarter and first nine months of 1997 compared to the same periods in 1996. The increase in R&D expenses is 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 processes, packaging and design processes. As a percentage of revenue, R&D expenses increased to 17.7% and 17.2%, respectively, in the third quarter and first nine months of 1997 compared to 16.1% and 14.3% during the same periods a year ago. As the Company continues its commitment to technological leadership in the high performance semiconductor market, it anticipates to continue with an investment rate in R&D of approximately 17% to 19% of revenues through the fourth quarter of 1997. Selling, general and administrative (SG&A) expenses increased $8.2 million and $19.3 million, respectively, in the third quarter and first nine months of 1997 compared to the same periods in 1996. SG&A expenses increased as a percentage of revenues to 15.0% and 14.8%, respectively, in the third quarter and first nine months of 1997 compared to 13.6% and 13.2% for the same periods in 1996. The increase in total SG&A expenses was primarily due to increased compensation levels and information technology costs relating 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. Interest expense for the third quarter and first nine months of 1997 decreased $3.6 million and $8.7 million, respectively, as compared to the same periods in 1996. The decrease is primarily attributable to the conversion of all of the Company's $144 million, 5 1/2% Convertible Subordinated Notes to common stock on March 24, 1997 and the capitalization of interest as part of the construction at the new manufacturing facility in Gresham, Oregon. Interest income and other increased $1.8 million during the third quarter of 1997 as compared to the third quarter of 1996. The increase is primarily related to foreign exchange gains and proceeds from an insurance settlement offset in part by losses on fixed asset disposals during the period. Interest income and other decreased $0.2 million during the first nine months of 1997 as compared to the same period in 1996. The decrease is primarily attributable to fixed asset disposals. The Company recorded a provision for income taxes for the first nine months of 1997 and 1996 with an effective rate of 28%. The Company's effective tax rate is lower than the U.S. statutory rate primarily due to the Company's expected earnings mix in its foreign subsidiaries which are taxed at lower rates and anticipated utilization of available tax credits. Financial Condition and Liquidity The Company's cash, cash equivalents and short-term investments decreased $72.8 million during the first nine months of 1997 to $644.5 million from $717.3 million at the end of 1996. The decrease is primarily due to purchases of property and equipment and repayment of debt obligations, net of borrowings, offset in part by an increase in cash from operations and repurchases of common stock which were lower than repurchases in 1996. Working capital decreased $126.3 million to $579.4 million at September 30, 1997 from $705.7 million at December 31, 1996. The decrease is primarily attributable to an increase in current liabilities during the first nine months of 1997. During the first nine months of 1997, the Company generated $320.0 million of cash and cash equivalents from its operating activities compared with $292.5 million during the first nine months of 1996. Cash and cash equivalents used for investing activities during the first nine months of 1997 were $298.3 million compared to $279.2 million during the same period in 1996. The increase was primarily attributable to $51.7 million of property and equipment purchases, net of retirements and refinancings during the period and the acquisition of Mint Technology, net of cash acquired, for $6.9 million offset in part by $39.2 million increase in the net activity of short-term investments in the first nine months of 1997. Cash and cash equivalents used for financing activities during the first nine months of 1997 were $30.5 million compared to $46.8 million provided in the first nine months of 1996. The decrease is primarily attributed to $115.9 million repayment of debt obligations net of borrowings in the first nine months of 1997 and the Company=s repurchase of 400,000 shares of its common stock for $12.7 million during the third quarter. This compares to proceeds of $82.8 million from net borrowing in the first nine months of 1996 which was partially offset by the Company's repurchase of two million shares of common stock for $46.8 million. Net property and equipment was $1.02 billion at September 30, 1997, an increase of $212.3 million compared to $811.7 million at the end of 1996. The increase was primarily due to a $321.7 million increase in fixed assets, (primarily equipment purchases related to a new facility in Gresham, Oregon) net of retirements. The increase was partially offset by $88.5 million of depreciation and $20.8 million due to the effect of translation. Management expects net capital additions (excluding operating leases) to approximate $500 million for 1997. In December 1996, the Company entered into a credit arrangement with several banks for a $300 million revolving line of credit expiring in December 1999. The agreement allows for borrowings at an adjustable interest rate. Interest payments are due quarterly. The agreement includes financial covenants relating to senior debt ratio, quick ratio, debt service ratio, subordinated debt and tangible net worth. At September 30, 1997, the Company did not have any borrowings outstanding under this credit agreement. In addition, the Company's Japanese manufacturing subsidiary has a 25 billion yen credit line arrangement with adjustable interest rates and covenants relating to profitability, tangible net worth, working capital, senior and total debt leverage and subordinated indebtedness. Borrowings under the line of credit are for a term of five years with principle payments due semiannually beginning in July 1997. All borrowings under this credit line have been converted to fixed rates through the use of interest rate swaps (see Note 3 of Notes to Unaudited Consolidated Condensed Financial Statements). As of September 30, 1997, the Company had 17.0 billion yen ($141 million) outstanding under the facility and the Company was in compliance with the covenants. 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 September 30, 1997. In February 1997, the Company called its $144 million of 52% Convertible Subordinated Notes (Convertible Notes). The holders of the Convertible Notes elected to convert the Convertible Notes to common stock at a conversion price of $12.25 per share. The conversion resulted in the issuance of 11.7 million shares of common stock. The Company believes that existing liquid resources and funds generated from operations combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. The Company believes that its level of financial resources is an important competitive factor in its industry. Accordingly, the Company may, from time to time, seek additional equity or debt financing. However, there can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financing will decrease existing stockholders' percentage equity ownership and may, depending on the price at which the equity is sold, result in dilution. Part II Item 1 Legal Proceedings Reference is made to Item 3, Legal Proceedings, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 for a discussion of certain pending legal proceedings. As indicated therein, Texas Instruments (TI) filed an appeal in the United States Court of Appeals for the Federal Circuit (CAFC) challenging the United States District Court that the Company's encapsulation process did not infringe the TI patents. In July, 1996, the CAFC issued its decision affirming the U.S. District Court's holding in favor of the Company. In September, 1996, the CAFC denied TI's motion for reconsideration en banc. In December, 1996, TI petitioned the U.S. Supreme Court for a writ of certiorari, seeking further review of the case. The petition was denied in May, 1997. The information provided at such reference regarding other matters remains unchanged. The Company continues to believe that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that these matters will be resolved without the Company becoming obligated to make payments or to pay other costs to the opposing parties, with the potential for having an adverse effect on the Company's financial position or its results of operations. Item 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 Registrant reported the change in its fiscal year on a current report on Form 8-K filed concurrently with the from 10Q. 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: November 10, 1997 By /s/ R. Douglas Norby 					 R. Douglas Norby 			 	Executive Vice President Finance & Chief Financial Officer