Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
| (Mark One) |
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the fiscal year ended December 31, 2004 |
| |
|
or |
| |
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the transition period
from to . |
Commission File No. 1-10317
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
| |
|
|
|
Delaware
|
|
94-2712976 |
(State or other jurisdiction of
incorporation or organization) |
|
(IRS Employer
Identification No.) |
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(408) 433-8000
Securities registered pursuant to Section 12(b) of the
Act:
| |
|
|
| Title of each class |
|
Name of each Exchange on which registered |
| |
|
|
|
Common Stock, $0.01 par value
|
|
New York Stock Exchange |
|
Preferred Share Purchase Rights
|
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
NONE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrant’s knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the Registrant, based upon the
closing price of the Common Stock on July 2, 2004, as
reported on the New York Stock Exchange, was approximately
$2,707,056,534. Shares of Common Stock held by each executive
officer and director and by each person who owns more than 5% of
the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 11, 2005, the Registrant had 387,760,836 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference
into Part III of this Form 10-K Report: Proxy
Statement for Registrant’s 2005 Annual Meeting of
Stockholders to be held on May 12, 2005.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a
result of a number of risks and uncertainties, including the
risk factors set forth below and elsewhere in this Report. See
“Risk Factors” in Part I, Item 1. Statements
made herein are as of the date of the filing of this
Form 10-K with the Securities and Exchange Commission and
should not be relied upon as of any subsequent date. We
expressly disclaim any obligation to update information
presented herein, except as may otherwise be required by law.
PART I
General
LSI Logic Corporation (together with its subsidiaries
collectively referred to as “LSI Logic,”
“LSI,” or the “Company” and referred to as
“we,” “us,” and “our”) designs,
develops, manufactures and markets complex, high-performance
integrated circuits and storage systems. We are focused on four
markets: communications, consumer products, storage components
and storage systems. Our integrated circuits are used in a wide
range of communication devices, including devices used for
wireless and broadband data networking applications. We also
provide other types of integrated circuit products and
board-level products for use in consumer applications,
communications, high-performance storage controllers and systems
for storage area networks.
We operate in two segments — the Semiconductor segment
and the Storage Systems segment — in which we offer
products and services for a variety of electronic systems
applications. Our products are marketed primarily to original
equipment manufacturers (“OEMs”) that sell products
targeted for applications in our major markets.
For the year ended December 31, 2004, revenues from the
Semiconductor segment were $1,249 million (73% of total
consolidated revenues) and the loss from operations was
$450 million. In the Semiconductor segment, we use advanced
process technologies and comprehensive design methodologies to
design, develop, manufacture and market highly complex
integrated circuits (“ICs”). These system-on-a-chip
solutions include both application specific integrated circuits,
commonly referred to as ASICs, and standard products.
Semiconductor segment product offerings also include host bus
adapters, RAID adapters (“redundant array of independent
disks”) and related products and services. ASICs are
designed for a specific application defined by the customer,
whereas standard products are for market applications that we
define. See also “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in
Item 7 of Part II.
Leveraging key competencies into fast time-to-market platform
ASIC capability, we have developed methods of designing
integrated circuits based on a library of building blocks of
industry-standard electronic functions, interfaces and
protocols. Among these is our CoreWare® design methodology.
Our advanced deep sub-micron manufacturing process technologies
allow our customers to combine one or more CoreWare library
elements with memory and their own proprietary logic to
integrate a highly complex, system-level solution on a single
chip. We have developed and use complementary metal oxide
semiconductor (“CMOS”) process technologies to
manufacture our integrated circuits.
For the year ended December 31, 2004, revenues from the
Storage Systems segment were $452 million (27% of total
consolidated revenues) and the income from operations was
$13 million. In the Storage Systems segment, our enterprise
storage systems are designed, manufactured and sold by our
majority-owned subsidiary — Engenio Information
Technologies, Inc. (“Engenio” or “Storage Systems
segment”). On May 6, 2004, LSI Logic announced that it
had changed the name of LSI Logic Storage Systems, Inc. to
Engenio. Our high-performance, highly scalable open storage area
network systems and storage solutions are available through
leading OEMs and a specialized network of resellers. Products
and solutions distributed
2
through these channels may exclude Engenio’s brand
identification. When included, Engenio’s brand identity may
appear alone or in tandem with OEM brand identification.
In November 2003, the Company announced its intention to
separate the Storage Systems segment and create an independent
storage systems company. On February 19, 2004, Engenio
filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the initial public
offering of its common stock. On July 29, 2004, the Company
announced that it had decided to postpone the initial public
offering of Engenio’s common stock due to then present
market conditions.
LSI Logic Corporation was incorporated in California on
November 6, 1980, and was reincorporated in Delaware on
June 11, 1987. Our principal offices are located at 1621
Barber Lane, Milpitas, California 95035, and our telephone
number at that location is (408) 433-8000. Our home page on
the Internet is www.lsilogic.com. The contents of this
website are not incorporated in or otherwise to be regarded as
part of this annual report on Form 10-K. Copies of this and
other annual reports, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to these
reports are available free of charge on our website as soon as
reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission
(“SEC”). Any materials that the Company files with the
SEC can be read at the SEC’s website on the Internet at
http://www.sec.gov or read and copied at the SEC’s
Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC
at (800) 732-0330.
Business Strategy
|
|
|
Semiconductor Business Strategy |
Our objective is to continue our industry leadership in the
design, development, manufacture and marketing of highly
integrated, complex integrated circuits and other electronic
components and system-level products that provide our customers
with silicon-based system-level solutions. To achieve this
objective, our business strategy includes the following key
elements:
|
|
|
| |
• |
Target Growth Markets and Selected Customers. We
concentrate our sales and marketing efforts on leading OEM
customers in targeted growth markets, including communications,
consumer products and storage components applications. Our
engineering expertise is focused on developing technologies that
will meet the needs of leading-edge customers in order to
succeed in these market areas. |
| |
| |
• |
Emphasize CoreWare Methodology and System-on-a-Chip
Capability. Our CoreWare® design methodology enables
the integration of one or more pre-designed circuit elements
with customer-specified elements and memory to create system
capabilities on a single chip. This results in higher product
functionality, higher performance, greater differentiation and
faster time to market. We also have used this design methodology
to develop proprietary standard products. |
We leverage our in-depth system-level expertise, extensive
CoreWare IP library, innovative technology, understanding of
customer requirements and philosophy of providing predictable
Right First Time, On
Timetm
silicon solutions to serve customers with highly specific needs
in the communications, consumer and storage markets worldwide.
We have expanded our technology product offerings to include the
RapidChip® product. The RapidChip platform ASIC fills the
void between the field programmable gate arrays
(“FPGAs”) and standard-cell ASIC products.
|
|
|
| |
• |
Promote Highly Integrated Design and Manufacturing
Technology. We use proprietary and leading third-party
electronic design automation, or EDA, software design tools. Our
design tool environment is highly integrated with our
manufacturing process requirements so that it will accurately
simulate product performance. This integration reduces design
time and project cost. We continually evaluate and, as
appropriate, develop expertise with third-party EDA tools from
leading and emerging suppliers of such products. |
3
|
|
|
| |
• |
Provide Flexibility in Design Engineering. We engage with
customers of our semiconductor products under various
arrangements whereby the extent of the engineering support we
provide will be determined in accordance with the
customer’s requirements. For example, a customer may
primarily use its own engineers for substantial development of
its product design and retain our support for silicon-specific
engineering work. We also enter into engineering design
projects, including those on a “turn-key” basis. |
| |
| |
• |
Maintain High-Quality and Cost-Effective Manufacturing.
Our wafer manufacturing strategy is a combination of our own
manufacturing facilities and outsourcing arrangements with
third-party foundries. We perform substantially all of our
packaging, assembly and final test operations through
subcontractors in Asia. |
| |
| |
• |
Leverage Alliances with Key Partners. We are continually
seeking to establish relationships with key partners in a
diverse range of semiconductor technologies to promote new
products, services, operating standards and manufacturing
capabilities and to avail ourselves of cost efficiencies that
may be obtained through collaborative development. |
| |
| |
• |
Forge Successful Partnerships with Leading Distribution
Partners. Our partner program is designed to effectively
market the Company’s host bus adapter product families and
integrated circuit products utilizing distribution and reseller
partnerships. Such partnerships enable us to provide an extended
population of customers with the full range of product
offerings, services and support needed to enable their success. |
| |
| |
• |
Develop and Drive Industry Standards to Achieve Market
Advantage. We are a leader in developing and promoting
important industry standard architectures, functions, protocols
and interfaces. We believe that this strategy will enable us to
quickly launch new standard-based products, allowing our
customers to achieve time-to-market and other competitive
advantages. |
| |
| |
• |
Operate Worldwide. We market our products and engage with
our customers on a worldwide basis through direct sales,
marketing and field technical staff and through independent
sales representatives and distributors. Our network of design
centers located in major markets allows us to provide customers
with highly experienced engineers, to interact with customer
engineering management and system architects, to develop designs
for new products and to provide continuing after-sale customer
support. |
|
|
|
Storage Systems Business Strategy |
Our objective is to be the leading provider to server and
storage OEMs of modular disk storage systems and sub-assemblies.
We intend to enhance our market position by:
|
|
|
| |
• |
Continuing to innovate and extend our product offering.
We intend to lead the market in adopting and implementing new
storage system technologies, interfaces, features and customer
requirements. In addition, we intend to define, design and
develop products that enable our channel customers to offer a
broad storage system product line, which incorporates their own
intellectual property, to address multiple markets. In this
manner, we intend to continue to expand our product offerings
further into the entry-level, mid-range and high-end markets. |
| |
| |
• |
Adding feature functionality to meet expanding enterprise
requirements. Implementation and management of storage
systems within the enterprise is increasingly complex. To
address this increasing complexity, we plan to develop
additional premium software management and hardware system
features to enhance reliability, data availability and
serviceability of our products. We also intend to expand our
Engenio Solutions program implementation guides, which are
designed to help our customers rapidly implement our products
for specific business applications. |
| |
| |
• |
Enhancing interoperability among our products, our
customers’ products and other leading enterprise
products. We provide significant value to our channel
customers and enterprises by testing and certifying our products
with the products of other leading enterprise information
technology vendors to |
4
|
|
|
| |
|
ensure broad interoperability and compatibility. We intend to
work closely with our channel customers and enterprises to
extend and enhance the capabilities of our storage
sub-assemblies and storage management software. We also seek to
enhance our position in the storage industry by actively
participating in a variety of organizations focused on
developing standards for emerging technologies and facilitating
industry-wide interoperability. |
| |
| |
• |
Obtaining new channel customers. Our channel customers
sell storage solutions based on or incorporating our products
and technology through their direct sales forces and other
channels. We will continue to seek new customers in domestic and
international markets in order to expand the total marketing and
sales resources that are focused on our products. In this
manner, we intend to increase the market addressable by our
products. |
| |
| |
• |
Expanding our joint marketing and sales efforts with existing
and new channel customers. We seek to add value to our
customers’ sales, marketing and support initiatives through
the provision of extensive training, customized go-to-market
campaigns, product positioning, marketing materials, competitive
analysis and product support infrastructure. We maintain 15
Experience Centers worldwide, which allow our channel
customers to demonstrate to enterprise users the performance and
benefits of storage deployments incorporating our products. We
plan to open additional centers to reach a broader customer base
in the future. |
| |
| |
• |
Promoting our brand. We believe that a strong association
of our brand with innovation and integrity is valuable in
achieving increased scale, market leadership and OEM acceptance
within our industry. Furthermore, we believe that brand
recognition and reputation will become more important as OEMs
increasingly outsource their storage system offerings and their
customers focus on the performance and reliability of the
storage systems or sub-assemblies integrated into OEM storage
solutions. We intend to continue to promote our brand and build
brand equity to establish and bolster our position in the disk
storage systems and related storage management software markets. |
Technology, Products and Services
We have been continuously supplying ASIC products for over
20 years. We leverage our system level expertise and
technology providing silicon solutions primarily in
communications, consumer and storage markets worldwide.
Our CoreWare design methodology offers a comprehensive design
approach for creating a system-on-a-chip efficiently,
predictably and rapidly. Our CoreWare libraries include
high-level intellectual property building blocks created around
industry standards. Our CoreWare cells are connected
electronically with other memory and logic elements to form an
entire system on a single chip.
Our ASIC product offerings now consist of our cell-based product
for complex, high volume, high performance, system level designs
and our RapidChip platform product.
Our RapidChip platform products address a growing market need
for a flexible, cost-effective and fast time-to-market solution
with performance comparable to cell-based ASICs and at a cost
significantly lower than FPGAs. Products based on the RapidChip
methodology are innovative semiconductor platforms set to
reshape the way complex chips are designed and manufactured. A
key feature of the RapidChip methodology is the
customer-friendly interface that dramatically simplifies the
underlying complexity of the design tools and flows associated
with system-on-a-chip design. Rule sets automatically manage
architectural design, verification and physical design. As a
result, design schedules for high-performance chips can be more
predictable.
Typically, the ASIC design process involves participation by
both LSI Logic and customer engineers. We engage our customers
early in their new system product development process and accept
large design assignments where we share development costs with
the customer. We provide advice on the product design strategies
to optimize product performance and suitability for the targeted
application. In addition, our
5
capabilities include support in the areas of architecture,
system-level design simulation, verification and synthesis used
in the development of complex integrated circuits.
Our software design tool environment supports and automatically
performs key elements of the design process from circuit concept
to physical layout of the circuit design. The design tool
environment features a combination of internally developed
proprietary software and third-party tools that are highly
integrated with our manufacturing process requirements. The
design environment includes expanded interface capabilities with
a range of third-party tools from leading EDA vendors and
features hardware/ software co-verification capability. We
provide a suite of MIPS cores and ARM processors, in addition to
industry-standard interface cores such as USB, PCI-Express,
DDR1&2, QDR, SPI4, SFI, XAUI, XGXS and others.
After completion of the ASIC engineering design effort, we
produce and test prototype circuits for shipment to the
customer. We then begin volume production of integrated circuits
that have been developed through one or more of the arrangements
described above in accordance with the customer’s quantity
and delivery requirements.
In our semiconductor components business, we design, manufacture
and supply ASICs, standard products, host bus adapters and RAID
storage adapters and related software to customers competing in
global communications, consumer and storage markets.
ASICs are semiconductors that are designed for unique,
customer-specified applications. Standard products are developed
for market applications we define and are targeted to be sold to
multiple customers. Both ASIC and standard products are sold to
customers for incorporation into system-level products and may
incorporate our intellectual property building blocks. Our ASIC,
RapidChip and standard products are predominantly designed and
manufactured using our proprietary process technologies.
Storage Components. Our ASIC and standard product
solutions offered to customers in worldwide storage component
markets make possible data transmission and storage between a
host computer and peripheral devices such as magnetic and
optical disk drives, scanners, printers and disk and tape-based
storage systems. We offer Fibre Channel and SCSI standard
products, including host adapter ICs for motherboard and adapter
applications, SCSI expander ICs, storage adapter boards and our
own
Fusion-MPTtm
software drivers for these product families. We are also an
industry leader in the on-going development of new storage
interface standards and products, including Serial-Attached SCSI
(“SAS”).
In addition, we offer the industry’s widest spectrum of
direct-attach RAID solutions, spanning from integrated RAID in
our Fusion-MPT storage IC and adapter products and our IDEal
software-based RAID products to our MegaRAID® product
family. Our MegaRAID products include integrated single-chip
RAID on motherboard solutions and a broad family of PCI and PCI
Express RAID controller boards featuring ATA, Serial ATA
(“SATA”) and SCSI interfaces, along with fully
featured software and utilities for robust storage configuration
and management.
We also offer solutions using our ASIC and RapidChip technology
to customers who develop Fibre Channel storage area network
(“SAN”) switches and host adapters, storage systems,
hard disk drives and tape peripherals. Through leveraging our
extensive experience in providing solutions for these
applications, LSI Logic has developed a full portfolio of
high-speed interface CoreWare that is employed on the ASIC or
RapidChip platform providing a connection to the network, the
SAN, memory and host buses. Using these pre-verified interfaces,
our customers reduce development risk and achieve quicker time
to market. Our CoreWare offerings include the GigaBlaze®
high performance SerDes Core supporting Fibre Channel, SATA,
Gigabit Ethernet, Infiniband, SAS, Serial RapidIO and
PCI-Express industry standards and a family of high-performance
Fibre Channel, RapidIO, PCI-E, SAS and SATA protocol controllers.
Consumer Products. For the consumer market, we offer a
broad array of semiconductor products, including both standard
products and custom solutions.
6
Consumer standard products. We design, develop,
manufacture and market semiconductor devices, software and
reference designs for digital video and audio applications,
enabling new digital video and audio applications. We are
focused on providing solutions for high-growth applications such
as DVD recorders, flat panel displays, digital video recorders,
digital set-top boxes, as well as broadcast encoders and video
editing systems.
Consumer custom solutions. We also offer system-on-a-chip
solutions for consumer applications. We focus on consumer market
segments employing our intellectual property portfolio, design
methodology and turn-key product offerings (including
manufacturing, assembly and test) to provide a customized
solution. Our focus is in video game console, digital cameras
and camcorders, portable digital audio and video, and other
emerging multimedia applications where a standard product
solution is not available or our customers want customized
solutions for differentiation.
At the center of our strategy is our industry leading
DoMiNo® architecture. Products based on this flexible
architecture provide software programmable, cost effective
solutions to our customers in our target markets.
Communications. LSI Logic offers highly integrated,
high-performance, system-on-a-chip silicon solutions for use in
the design of communications equipment. We focus on delivering
custom semiconductor solutions to customers who develop systems
for the Enterprise, Metropolitan and Wide Area Network sectors.
Our standard-cell ASIC and RapidChip programs constitute two
distinct paths for realizing custom silicon, providing a good
fit – regardless of whether schedule, performance, power or
price is the driving consideration. Our cell-based program
continues to deliver LSI Logic’s wide portfolio of
communications-related intellectual property in compact,
high-performance solutions, while our RapidChip program delivers
the same intellectual property with lower initial cost and
faster time to market.
Leading edge switches and routers require tera-bit throughput
capability. LSI Logic’s HyperPHY® SerDes
(Serializer-Deserializer) technology enables chip-to-chip and
back-plane connectivity at speeds in excess of 6 Gbits/second.
We also provide our customers with CoreWare intellectual
property in support of key industry standard interconnect
technologies, including RapidIO, HyperTransport, SPI-4, SPI-5,
SFI-4, SFI-5, NPSI, PCI Express and 10/100/1G/10G Ethernet, as
well as a wide range of proprietary interfaces. In addition to
the above, our solutions incorporate a variety of embedded
processors: ARM, MIPS, and ZSP® processors (LSI
Logic’s widely-adopted digital signal processor) with all
the sub-system collateral for communications applications.
We offer a broad line of open, modular storage products
comprised of complete systems and sub-assemblies configured from
modular components, such as our storage controller modules, disk
drive enclosure modules and related management software. The
modularity of our products provides channel customers with the
flexibility to either integrate our sub-assemblies with
third-party components, such as disk drives, or software to form
their own storage system products. Our modular product approach
allows channel customers to create highly customized storage
systems, which can then be integrated with value-added software
and services and delivered as a complete, differentiated data
storage solution to enterprises.
We design and develop storage systems, sub-assemblies and
management software that operate within all major open operating
systems, including Windows, UNIX and UNIX variants and Linux
environments. We test and certify our products, both
independently and jointly with our customers, with those of
other hardware, networking and software storage vendors to
ensure a high level of interoperability and performance. Our
products are targeted at a wide variety of data storage
applications, including Internet-based applications such as
online transaction processing and e-commerce, data warehousing,
video editing and post-production and high-performance computing.
7
Marketing and Distribution
|
|
|
Semiconductor Marketing and Distribution |
The highly competitive semiconductor industry is characterized
by rapidly changing technology, short product cycles and
emerging standards. Our marketing strategy requires that we
accurately forecast trends in the evolution of product and
technology development. We must then act upon this knowledge in
a timely manner to develop competitively priced products
offering superior performance. As part of this strategy, we are
active in the formulation and adoption of critical industry
standards that influence the design specifications of our
products. Offering products with superior price and performance
characteristics is essential to satisfy the rapidly changing
needs of our customers in the dynamic communications, consumer
and storage markets.
Our semiconductor products and design services are primarily
sold through our network of direct sales and marketing and field
engineering offices located in North America, Europe, Japan and
elsewhere in Asia. Our sites are interconnected by means of
advanced computer networking systems that allow for the
continuous, uninterrupted exchange of information that is vital
for the proper execution of our sales and marketing activities.
International sales are subject to risks common to export
activities, including governmental regulations, geopolitical
risks, tariff increases and other trade barriers, and currency
fluctuations.
We rely primarily on direct sales and marketing, but we also
work with independent component and commercial distributors and
manufacturers’ representatives or other channel partners in
North America, Europe, Japan and elsewhere in Asia. Some of our
distributors possess engineering capabilities, and design and
purchase both ASICs and standard products from us for resale to
their customers. Other distributors focus solely on the sale of
standard products. Our agreements with distributors generally
grant limited rights to return standard product inventory and we
defer revenue for such inventory until the distributor sells the
product to a third party.
|
|
|
Storage Systems Marketing and Distribution |
Our products are sold worldwide through our channel customers
and, to a smaller degree, to a limited installed base of
end-users. We closely develop and manage our channel customer
relationships to meet the diverse needs and requirements of
enterprises. By selling products through our channel customers,
we are able to address more markets, reach a greater number of
enterprises, and reduce our overall sales and marketing
expenditures.
Our marketing efforts are designed to support our channel
customers with programs targeted at developing differentiated
go-to-market strategies and increasing sales effectiveness.
Depending on the nature of our channel customer engagement, our
marketing teams offer various levels of assistance in assessing
and analyzing the competitive landscape, defining product
strategy and roadmap, developing product positioning and
pricing, creating product launch support materials and assisting
in closing the sales process. These marketing teams carefully
coordinate joint product development and marketing efforts
between our customers and us to ensure that we address and
effectively target enterprise requirements. We maintain sales
and marketing organizations at our headquarters in Milpitas, and
also in regional offices in Dallas, Texas; Chicago, Illinois;
Houston, Texas; Los Angeles and Irvine, California; New York,
New York; Parsippany, New Jersey; Reston, Virginia; and Wichita,
Kansas. We also market our products internationally in China,
France, Germany, Japan, Sweden and the United Kingdom.
Customers
In 2004, IBM accounted for approximately 16% of our consolidated
revenues. No other customer accounted for greater than 10% of
consolidated revenues. We currently have a highly concentrated
customer base; we are therefore dependent on a limited number of
customers for a substantial portion of our revenues as a result
of this strategy to focus our marketing and sales efforts on
select, large-volume customers. The loss of any of our
significant customers, any substantial decline in sales to these
customers, or any significant change in the timing or volume of
purchases by our customers, could result in lower revenues and
could harm our business, financial condition or results of
operations.
8
We seek to leverage our expertise in the fields of
communications, consumer and storage components by marketing our
products and services predominately to market leaders. Our
current strategic account focus is on large, well-known
companies that produce high-volume products incorporating our
semiconductors. We recognize that this strategy may result in
increased dependence on a limited number of customers for a
substantial portion of our revenues. It is possible that we will
not achieve anticipated sales volumes from one or more of the
customers we focus on. While this could result in lower
revenues, we believe this strategy provides us with an
opportunity to drive further growth in sales and unit volumes.
With the introduction of our RapidChip methodology, we have not
only created new opportunities with our existing accounts, but
also created opportunities within the broader industrial,
medical and military/aerospace markets as well as smaller
accounts in the communications, consumer and storage segments.
|
|
|
Storage Systems Customers |
Our customers can be characterized into two major go-to-market
categories:
|
|
|
| |
• |
OEM Partners. These channel customers independently
resell or distribute OEM-branded or Engenio co-branded products,
which may be integrated with value-added services, hardware and
software and delivered as differentiated complete storage
solutions to enterprises. OEM Partners receive basic training
services to enhance their abilities to sell and support our
products. After receiving our basic training services, OEM
Partners independently market, sell and support our products,
requiring limited ongoing product support from us. |
| |
| |
• |
OEM+ Partners. In addition to providing our OEM+ Partners
with products and basic services as described above, we also
assist our OEM+ Partners with additional resources that may
provide tailored, account-specific education, training and sales
and marketing assistance, allowing our OEM+ Partners to leverage
our storage products and industry expertise. |
Manufacturing
|
|
|
Semiconductor Manufacturing |
Our semiconductor manufacturing operations convert a product
design from the development stage into an integrated circuit.
Manufacturing begins with wafer fabrication, where the design is
transferred to silicon wafers through a series of processes,
including photolithography, ion implantation, deposition of
numerous films and the etching of these various films and
layers. Each circuit on the wafer is tested in the wafer sort
operation. The good circuits are identified and the wafer is
then separated into individual die. Each good die is then
assembled into a package using different standards and advanced
assembly technologies. This package encapsulates the circuit for
protection and allows for electrical connection to the printed
circuit board. The final step in the manufacturing process is
final test, where the finished devices undergo stringent and
comprehensive testing using computer systems.
The wafer fabrication operation is very complex and costly, and
the industry trend has been towards outsourcing all or a portion
of this operation to silicon foundries located throughout the
world. The Company’s strategy is a combination of internal
and external fabrication. In 2004, the majority of the
Company’s wafers were fabricated internally, however, in
the future we expect to increase our reliance on external
sources for wafer fabrication.
We currently outsource portions of our wafer fabrication to a
variety of wafer foundries in Taiwan, Japan, China and Malaysia.
For the more advanced deep sub-micron technologies, we use a
combination of standard foundry process technologies and process
technologies jointly developed with our foundry partners. These
joint development agreements provide us access to leading edge
technology and additional wafer capacity.
Our final assembly and test operations are performed by
independent subcontractors in South Korea, Taiwan, the
Philippines, Malaysia, Thailand and China. The Company has a
long history of outsourcing these
9
operations and therefore can offer a wide range of high
performance packaging solutions for system-on-a-chip designs,
including flip chip technology.
Development of advanced manufacturing technologies in the
semiconductor industry frequently requires that critical
selections be made as to those vendors from which essential
equipment (including future enhancements) and after-sales
service and support will be purchased. Some of our equipment
selections require that we procure specific types of materials
or components specifically designed to our specifications.
Therefore, when we implement these technology choices, we may
become dependent upon certain sole source vendors. Accordingly,
our capability to switch to other technologies and vendors may
be substantially restricted and a switch may involve significant
expense and could delay our technology advancements and decrease
manufacturing capabilities.
|
|
|
Storage Systems Manufacturing |
We use third-party suppliers for standard components, such as
disk drives and standard computer processors, which are designed
and incorporated into our products. Additionally, we outsource
the manufacturing of the majority of our product components,
such as printed circuit boards, in order to take advantage of
quality and cost benefits afforded by using third-party
manufacturing services. We believe that using outsourced
manufacturing services allows us to focus on product development
and increases operational flexibility, both in terms of
adjusting manufacturing capacity in response to customer demand
and rapidly introducing new products.
The assembly of our storage system products involves integrating
supplied components and manufactured sub-assemblies into final
products, which are configured and rigorously tested before
being delivered to our customers. The highly modularized nature
of our storage system products allows for flexible assembly and
delivery models, which include build-to-order,
configure-to-order, direct shipment, bulk shipment and local
fulfillment services. We have implemented these models in an
effort to reduce requisite lead times for delivery of our
products and to provide channel customers with multiple
manufacturing and delivery alternatives that best complement
their operations.
|
|
|
| |
• |
United States Assembly. Our wholly-owned United States
manufacturing facility in Wichita, Kansas, assembles and tests
complete storage systems and sub-assemblies configured from
modular components, such as our storage controller modules and
disk drive enclosure modules. ISO-9001 certification at our
Kansas manufacturing facility has been maintained since April
1992. This facility has been certified as ISO-9001:2000
compliant since October of 2001. Product quality is achieved
through extensive employee training, exhaustive and automated
testing, and sample auditing. Quality control and measurement is
extended through the subcomponent supplier and component
manufacturer base with continuous reporting and ongoing
qualification programs. |
| |
| |
• |
European Assembly. We outsource manufacturing in Cork,
Ireland, to a Flextronics International Ltd. facility.
ISO-9001:2000 certification at the Cork assembly facility has
been maintained since December 2001. This facility is capable of
the assembly and testing of complete storage systems and
sub-assemblies configured from modular components, such as our
storage controller modules and disk drive enclosure modules. The
site in Ireland was established to provide operational
flexibility in meeting surges in demand, address growing
European demand and to serve as a backup site in the event of
natural or human-made disasters that could disrupt the
operations of our Wichita facility. |
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between the
commencement of design work and the receipt of a purchase order
for the units of a developed
10
product. Also, customers may from time to time revise delivery
quantities or delivery schedules to reflect their changing
needs. For these reasons, our backlog as of any particular date
may not be a meaningful indicator of future annual sales.
Due to the nature of our business, we maintain relatively low
levels of backlog in the Storage Systems segment. Consequently,
we believe that backlog is not a good indicator of future sales,
and our quarterly revenues depend largely on orders booked and
shipped in that quarter. Because lead times for delivery of our
products are relatively short, we must build in advance of
orders. This subjects us to certain risks, most notably the
possibility that expected sales will not materialize, leading to
excess inventory, which we may be unable to sell to our
customers.
Competition
|
|
|
Semiconductor Competitors |
The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources. Some of these are
also customers who have internal semiconductor design and
manufacturing capacity. We also compete with smaller and
emerging companies whose strategy is to sell products into
specialized markets or to provide only a portion of the products
and services that we offer.
Our major competitors in the Semiconductor segment include large
companies such as Agere Systems, Inc., International Business
Machines Corporation, Philips Electronics, N.V.,
STMicroelectronics, Texas Instruments, Inc., and Toshiba
Corporation. Other competitors in strategic markets include
Adaptec, Inc., ATI Technologies, Inc., Broadcom Corporation,
Cirrus Logic, Inc., ESS Technology, Inc., Genesis Microchip,
Inc., Marvell Technology Group, Ltd., MediaTek Incorporated, NEC
Corporation, Pixelworks, Inc., Trident Microsystems, Inc. and
Zoran Corporation.
The principal competitive factors in the semiconductor industry
include:
|
|
|
| |
• |
design capabilities; |
| |
| |
• |
differentiating product features; |
| |
| |
• |
product performance characteristics; |
| |
| |
• |
time to market; |
| |
| |
• |
price; |
| |
| |
• |
manufacturing processes; and |
| |
| |
• |
utilization of emerging industry standards. |
It is possible that our competitors will develop other design
solutions that could have a material adverse impact on our
competitive position. Our competitors may also decide from time
to time to aggressively lower prices of products that compete
with our products in order to sell related products or achieve
strategic goals. Due to their customized nature, ASICs are not
as susceptible to price fluctuations as standard products.
However, strategic pricing by competitors can place strong
pricing pressure on our products in certain transactions,
resulting in lower selling prices and lower gross profit margins
for those transactions.
The markets into which we sell our semiconductor products are
subject to severe price competition. We expect to continue to
experience declines in the selling prices of our semiconductor
products over the life cycle of each product. In order to offset
or partially offset declines in the selling prices of our
products, we continue to reduce the costs of products through
product design changes, manufacturing process changes, yield
improvements and procurement of wafers from outsourced
manufacturing partners.
11
We emphasize our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that continue
to be important to the success of this strategy include:
|
|
|
| |
• |
selection, quantity and quality of our CoreWare library elements; |
| |
| |
• |
our ability to offer our customers system-level
expertise; and |
| |
| |
• |
quality of software to support system-level integration. |
Competition in this area is increasing, and there is no
assurance that our CoreWare methodology approach and product
offerings will continue to receive market acceptance. Customers
in our targeted markets frequently require system-level
solutions. Our ability to deliver complete solutions may also
require that we succeed in obtaining licenses to necessary
software and integrating this software with our semiconductors.
|
|
|
Storage Systems Competitors |
The market for our storage system products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from large well-capitalized storage system
companies such as EMC Corporation, Hitachi Data Systems and
Network Appliance, Inc., as well as with other storage system
and component providers, such as Adaptec, Inc., Dot Hill Systems
Corporation, Infortrend Technology Inc., XIOtech Corporation,
Xyratex Group Limited and the internal storage divisions of
existing and potential channel customers. We also compete with
internally developed products and, indirectly, through our
channel customers, with third-party products being sold by major
server vendors such as Dell Inc., Hewlett-Packard Company,
International Business Machines Corporation and Sun
Microsystems, Inc. The competitive factors affecting the market
for our storage system products include:
|
|
|
| |
• |
features and functionality; |
| |
| |
• |
product performance and price; |
| |
| |
• |
reliability, scalability and data availability; |
| |
| |
• |
interoperability with other networking devices; |
| |
| |
• |
support for emerging industry and customer standards; |
| |
| |
• |
levels of training, marketing and customer support; |
| |
| |
• |
level of easily customizable features; |
| |
| |
• |
quality and availability of supporting software; |
| |
| |
• |
quality of system integration; and |
| |
| |
• |
technical services and support. |
Our ability to remain competitive will depend to a great extent
upon our ongoing performance in the areas of product development
and customer support. To be successful in the future, we believe
that we must respond promptly and effectively to the challenges
of technological change and our competitors’ innovations by
continually enhancing our product offerings. We must also
continue to aggressively recruit and retain employees highly
qualified and technically experienced in hardware and software
development in order to achieve industry leadership in product
development and support.
Patents, Trademarks and Licenses
We maintain a patent program, and believe that our patents and
other intellectual property rights have value to our business.
We have filed a number of patent applications and currently hold
more than 3,000 issued United States (“U.S.”) patents
and additional issued foreign patents, expiring from 2005 to
2023, in both the Semiconductor and the Storage Systems segments
combined. In both segments, we also maintain trademarks for
certain of our products and services and claim copyright
protection for certain proprietary software and
12
documentation. Patents, trademarks and other forms of protection
for our intellectual property are important, but we believe our
future success principally depends upon the technical competence
and creative skills of our employees.
We continue to expand our portfolio of patents and trademarks.
We offer a staged incentive to employees to identify, document
and submit invention disclosures. We have developed an internal
review procedure to maintain a high level of disclosure quality
and to establish criteria, priorities and plans for filings both
in the United States and abroad. The review process is based
solely on engineering, business, legal and management judgment,
with no assurance that a specific filing will issue or, if
issued, will deliver any lasting value to us. There is no
assurance that the rights granted under any patent will provide
competitive advantages to us or will be adequate to protect our
innovations, products or services. Moreover, the laws of certain
countries in which our products are or may be manufactured or
sold may not protect our products and intellectual property
rights to the same extent as the U.S. legal system.
As is typical in the high technology industry, from time to
time, we have received communications from other parties
asserting that certain of our products or processes infringe
upon their patent rights, copyrights, trademark rights or other
intellectual property rights. We regularly evaluate such
assertions. In light of industry practice, we believe that, with
respect to existing or future claims, any licenses or other
rights that may be necessary may generally be obtained on
commercially reasonable terms. Nevertheless, there is no
assurance that licenses will be obtainable on acceptable terms
or that a claim will not result in litigation or other
administrative proceedings.
In the Semiconductor segment, we protect our know-how, trade
secrets and other proprietary information through
confidentiality agreements with our customers, suppliers,
employees and consultants, and through other security measures.
We have entered into certain patent cross-license agreements
that generally provide for the non-exclusive licensing of rights
to design, manufacture and sell products and, in some cases, for
cross-licensing of future improvements developed by either party.
In the Storage Systems segment, we own a portfolio of patents
and patent applications concerning a variety of storage
technologies. We also maintain trademarks for certain of our
products and services and claim copyright protection for certain
proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other
proprietary information through agreements and other security
measures, and have implemented internal procedures to obtain
patent protection for inventions and pursue protection in
selected jurisdictions.
Please see Item 3, Legal Proceedings for information
regarding pending patent litigation against the Company. Please
also refer to the additional risk factors set forth in the Risk
Factors section and Note 12 of the Notes to the
Consolidated Financial Statements (“Notes”) for
additional information.
Research and Development
Our industry is characterized by rapid changes in products,
design tools and process technologies. We must continue to
improve our existing products, design-tool environment and
process technologies, and to develop new ones in a
cost-effective manner to meet changing customer requirements and
emerging industry standards. If we are not able to successfully
introduce new products, design tools and process technologies or
to achieve volume production of products at acceptable yields
using new manufacturing processes, there could be a material
adverse impact on our operating results and financial condition.
We operate the majority of our research and development
facilities in Arizona, California, Colorado, Georgia, Kansas,
Maryland, Minnesota, Oregon and Texas. Internationally, we also
have facilities in Russia,
13
Canada, Germany, India, China and the United Kingdom. The
following table shows our expenditures on research and
development activities for each of the last three fiscal years
(in thousands).
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Percent of | |
| Year |
|
Amount | |
|
Revenue | |
| |
|
| |
|
| |
|
2004
|
|
$ |
421,516 |
|
|
|
25 |
% |
|
2003
|
|
$ |
432,695 |
|
|
|
26 |
% |
|
2002
|
|
$ |
457,351 |
|
|
|
25 |
% |
Research and development activities primarily consist of
materials expenses, salaries and related costs of employees
engaged in ongoing research, design and development activities
and subcontracting costs.
Working Capital
Information regarding our working capital practices is
incorporated herein by reference from Item 7 of
Part II hereof under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Financial Condition, Capital Resources
and Liquidity.”
Financial Information about Segments and Geographic Areas
This information is included in Note 4 (“Segment and
Geographic Information”) of the Notes, which information is
incorporated herein by reference from Item 8 of
Part II.
For a discussion of various risks attendant to foreign
operations, see (1) “Risk Factors” in this
Item 1, in particular “We are exposed to fluctuations
in foreign currency exchange rates,” “We procure parts
and raw materials from limited domestic and foreign
sources,” and “Our global operations expose the
Company to numerous international business risks,” and
(2) the section in Item 7A of Part II entitled
“Foreign Currency Exchange Risk.” This information is
incorporated herein by reference.
Environmental Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on the use
and discharge of certain chemicals and gases used in
semiconductor and storage product processing. Our facilities
have been designed to comply with these regulations through the
implementation of environmental management systems. We believe
that our activities conform to current environmental
regulations. However, increasing public attention has been
focused on the environmental impact of electronics and
semiconductor manufacturing operations. While to date we have
not experienced any material adverse impact on our business from
environmental regulations, we cannot provide assurance that such
regulations will not be amended so as to impose expensive
obligations on us in the future. In addition, violations of
environmental regulations or impermissible discharges of
hazardous substances could result in the necessity for the
following actions:
|
|
|
| |
• |
additional capital improvements to comply with such regulations
or to restrict discharges; |
| |
| |
• |
liability to our employees and/or third parties; and/or |
| |
| |
• |
business interruptions as a consequence of permit suspensions or
revocations or as a consequence of the granting of injunctions
requested by governmental agencies or private parties. |
Employees
As of December 31, 2004, we had 4,414 full-time
employees, of which 934 were employees of our Storage Systems
segment.
As a result of the decline in revenues in the semiconductor
industry and a corresponding decline in the Company’s
outlook as of the latter part of the third quarter of 2004, in
October 2004, the Company initiated a comprehensive
restructuring program, which included asset impairments, a
global reduction in workforce of
14
approximately 560 employees and the consolidation of certain
facilities. See Note 3 of the Notes to the Consolidated
Financial Statements for further discussion.
Our future success depends upon the continued service of our key
technical and management personnel and on our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the manufacture of existing products and the development of
new products and processes. We currently have favorable employee
relations, but the competition for technical personnel is
intense, and the loss of key employees or the inability to hire
such employees when needed could have a material adverse impact
on our business and financial condition.
Seasonality
The Company’s business is largely focused on the
information technology and consumer products markets. Due to
seasonality in these markets, the Company typically expects to
see stronger growth in the last two quarters of the year.
RISK FACTORS
Keep these risk factors in mind when you read
“forward-looking” statements elsewhere in this
Form 10-K and in the documents incorporated herein by
reference. These are statements that relate to our expectations
for future events and time periods. Generally, the words,
“anticipate,” “expect,” “intend”
and similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those anticipated in
the forward-looking statements.
A general economic weakness may reduce our
revenues. The semiconductor industry is cyclical in
nature and is characterized by wide fluctuations in product
supply and demand. In addition, our results of operations are
dependent on the global economy. Any geopolitical factors such
as terrorist activities, armed conflict or global health
conditions, which adversely affects the global economy, may
adversely impact our operating results and financial condition.
In addition, goodwill and other long-lived assets could be
impacted by a further decline in revenues because impairment is
measured based upon estimates of future cash flows. These
estimates include assumptions about future conditions within our
company and industry.
We operate in highly competitive markets. The
Semiconductor and Storage Systems segments in which we conduct
business are characterized by rapid technological change, short
product cycles and evolving industry standards. We believe our
future success depends, in part, on our ability to improve on
existing technologies and to develop and implement new ones in
order to continue to reduce semiconductor chip size and improve
product performance and manufacturing yields. We must also be
able to adopt and implement emerging industry standards in a
timely manner and to adapt products and processes to
technological changes. If we are not able to implement new
process technologies successfully or to achieve volume
production of new products at acceptable yields, our operating
results and financial condition may be adversely impacted.
Our competitors include many large domestic and foreign
companies that have substantially greater financial, technical
and management resources than we do. Several major diversified
electronics companies offer ASIC products and/or other standard
products that are competitive with our product lines. Other
competitors are specialized, rapidly growing companies that sell
products into the same markets that we target. Some of our large
customers may develop internal design and production
capabilities to manufacture their own products, thereby
displacing our products. There is no assurance that the price
and performance of our products will be superior relative to the
products of our competitors. As a result, we may experience a
loss of competitive position that could result in lower prices,
fewer customer orders, reduced revenues, reduced gross profit
margins and loss of market share.
We are dependent on a limited number of customers.
Our concentrated customer base accounts for a substantial
portion of our revenues. IBM represented 16% of our total
consolidated revenues for the year ended December 31, 2004.
15
Our operating results and financial condition could be
significantly affected if:
|
|
|
| |
• |
we do not win new product designs from major existing customers; |
| |
| |
• |
major customers reduce or cancel their existing business with us; |
| |
| |
• |
major customers make significant changes in scheduled
deliveries; or |
| |
| |
• |
there are declines in the prices of products that we sell to
these customers. |
Our new products may not achieve market
acceptance. We introduce many new products each year. We
must continue to develop and introduce new products that compete
effectively on the basis of price and performance and that
satisfy customer requirements. We continue to emphasize
engineering development and acquisition of CoreWare building
blocks and integration of our CoreWare libraries into our design
capabilities. Our cores and standard products are intended to be
based upon industry standard functions, interfaces, and
protocols so that they are useful in a wide variety of systems
applications. Development of new products and cores often
requires long-term forecasting of market trends, development and
implementation of new or changing technologies and a substantial
capital commitment. We cannot provide assurance that the cores
or standard products that we select for investment of our
financial and engineering resources will be developed or
acquired in a timely manner or will enjoy market acceptance.
The manufacturing facilities we operate are highly complex
and require high fixed costs. Our wafer fabrication site
is located in Gresham, Oregon. In addition, we own our Storage
Systems segment manufacturing facility in Wichita, Kansas. The
manufacture and introduction of our products is a complicated
process. We continually strive to implement the latest process
technologies and manufacture products in a clean and tightly
controlled environment. We confront challenges in the
manufacturing process that require us to:
|
|
|
| |
• |
maintain a competitive manufacturing cost structure; |
| |
| |
• |
implement the latest process technologies required to
manufacture new products; |
| |
| |
• |
exercise stringent quality control measures to ensure high
yields; |
| |
| |
• |
effectively manage the subcontractors engaged in the wafer
fabrication, test and assembly of products; and |
| |
| |
• |
update equipment and facilities as required for leading edge
production capabilities. |
We outsource a substantial portion of wafers
manufactured. We have consolidated our internal
semiconductor manufacturing in Gresham, Oregon. We have
developed outsourcing arrangements for the manufacture of some
of our products based on process technology that is unique to
the supplier. There is no assurance that the third party
manufacturer will be able to produce and deliver wafers that
meet our specifications or that our supplier will be able to
successfully provide the process technology. If the third party
is not able to deliver products and process technology on a
timely and reliable basis, our results of operations could be
adversely affected.
We have significant capital requirements to maintain and
grow our business. We continue to make significant
investments in our facilities and capital equipment, and, as a
result, our fixed costs for manufacturing remain high. We also
seek to obtain access to advanced manufacturing capacities
through strategic supplier alliances with wafer foundries. In
general, we seek to optimally allocate the manufacture of our
products between our facilities and those of our foundry
suppliers. Nonetheless, a high level of capital expenditures in
our facilities results in relatively high fixed costs. If demand
for our products does not absorb the available capacity, the
fixed costs and operating expenses related to our production
capacity could have a material adverse impact on our operating
results and financial condition.
We finance our capital expenditure needs from operating cash
flows, bank financing and capital market financing. As of
December 31, 2004, we had convertible notes outstanding of
approximately $772 million. We may need to seek additional
equity or debt financing from time to time and cannot be certain
that additional
16
financing will be available on favorable terms. Moreover, any
future equity or equity-linked financing may dilute the equity
ownership of existing stockholders.
We are exposed to fluctuations in foreign currency
exchange rates. We have some exposure to fluctuations in
foreign currency exchange rates. We have international
subsidiaries and distributors that operate and sell our products
globally. We routinely hedge these exposures in an effort to
minimize the impact of currency fluctuations. However, we may
still be adversely affected by changes in foreign currency
exchange rates or declining economic conditions in these
countries.
We procure parts and raw materials from limited domestic
and foreign sources. We do not maintain an extensive
inventory of parts and materials for manufacturing. We purchase
a portion of our requirements for parts and raw materials from a
limited number of sources, primarily from suppliers in Japan and
their U.S. subsidiaries, and we obtain other material
inputs on a local basis. There is no assurance that, if we have
difficulty in obtaining parts or materials in the future,
alternative suppliers will be available, or that these suppliers
will provide parts and materials in a timely manner or on
favorable terms. As a result, we may be adversely affected by
delays in product shipments. If we cannot obtain adequate
materials for manufacture of our products or if such materials
are not available at reasonable prices, there could be a
material adverse impact on our operating results and financial
condition.
We utilize indirect channels of distribution over which we
have limited control. Our financial results could be
adversely affected if our relationship with resellers or
distributors were to deteriorate or if the financial condition
of these resellers or distributors were to decline. In addition,
as our business grows, we may have an increased reliance on
indirect channels of distribution. There can be no assurance
that we will be successful in maintaining or expanding these
indirect channels of distribution. This could result in the loss
of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our
visibility with respect to future business, thereby making it
more difficult to accurately forecast orders.
Our operations are affected by cyclical
fluctuations. The Semiconductor and Storage Systems
segments in which we compete are subject to cyclical
fluctuations in demand. The Semiconductor industry has in the
past experienced periods of rapid expansion of production
capacity followed by periods of significant downturn. Even when
the demand for our products remains constant, the availability
of additional excess production capacity in the industry creates
competitive pressure that can degrade pricing levels, which can
reduce revenues. Furthermore, customers who benefit from shorter
lead times may defer some purchases to future periods, which
could adversely affect revenues in the short term. As a result,
we may experience downturns or fluctuations in demand for our
products and experience adverse effects on our operating results
and financial condition.
We engage in acquisitions and alliances giving rise to
economic and technological risks. We are continually
exploring strategic acquisitions that build upon our existing
library of intellectual property, human capital and engineering
talent, and increase our leadership position in the markets
where we operate. We completed two acquisitions in 2004 and two
acquisitions in 2002. We did not complete any material
acquisitions or alliances in 2003. Mergers and acquisitions of
high-technology companies bear inherent risks. No assurance can
be given that our previous or future acquisitions will be
successful and will not materially adversely affect our
business, operating results or financial condition. We must
manage any growth effectively. Failure to manage growth
effectively and to integrate acquisitions could adversely affect
our operating results and financial condition.
In addition, we intend to continue to make investments in
companies, products and technologies through strategic
alliances. Investment activities often involve risks, including
the need to acquire timely access to needed capital for
investments related to alliances and to invest in companies and
technologies that contribute to the growth of our business.
The price of our securities may be subject to wide
fluctuations. Our stock has experienced substantial
price volatility, particularly as a result of quarterly
variations in results, the published expectations of analysts
and announcements by our competitors and us. In addition, the
stock market has experienced price and volume fluctuations that
have affected the market price of many technology companies and
that have often
17
been unrelated to the operating performance of such companies.
The price of our securities may also be affected by general
global, economic and market conditions. While we cannot predict
the individual effect that these and other factors may have on
the price of our securities, these factors, either individually
or in the aggregate, could result in significant variations in
price during any given period of time. These fluctuations in our
stock price also impact the price of our outstanding convertible
securities and the likelihood of the convertible securities
being converted into cash or equity. If our stock price is below
the conversion price of our convertible bonds on the date of
maturity, they may not convert into equity and we may be
required to redeem the convertible securities for cash. However,
in the event they do not convert to equity, we believe that our
current cash position and expected future operating cash flows
will be adequate to meet these obligations as they mature.