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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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. 0-11674
LSI LOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2712976
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1551 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 433-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
COMMON STOCK, $0.01 PAR VALUE ON WHICH REGISTERED
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 5,
2001 as reported on the New York Stock Exchange, was approximately
$5,424,965,381.62. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 5, 2001, registrant had 322,530,641 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Parts
III, of this Form 10-K Report: Proxy Statement for registrant's 2001 Annual
Meeting of Stockholders.
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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" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below. 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
ITEM 1. BUSINESS
GENERAL
LSI Logic Corporation (together with its subsidiaries collectively referred
to as LSI Logic or the Company and referred to as we, us and our) is a leader in
the design, development, manufacture, and marketing of complex, high-performance
integrated circuits and storage systems. We are focused on the four markets of
broadband communications, networking infrastructure, storage infrastructure, and
storage area network systems. Our integrated circuits are used in a wide range
of communication devices, including devices used for wireless, broadband, data
networking, and set-top-box applications. We also provide other types of
integrated circuit products and board-level products for use in network
computing applications, high-performance storage controllers, and systems for
storage area networks.
We operate in two segments -- the Semiconductor segment and the Storage
Area Network ("SAN") 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") who sell products
targeted for applications in four major markets, which are:
- Broadband Communications;
- Networking Infrastructure;
- Storage Infrastructure; and
- Storage Area Network Systems.
In the Semiconductor segment, we use advanced process technology and design
methodologies to design, develop and manufacture highly complex integrated
circuits. These include both application specific integrated circuits, commonly
referred to as ASICs, and standard products. ASICs are designed for specific
applications 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 herein.
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(R) design methodology.
Our advanced submicron 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. (Our G10(R), G11(TM), and G12(TM) submicron process technologies
are more fully described in the section on Manufacturing below.) We have
developed and use complementary metal oxide semiconductor ("CMOS") process
technologies to manufacture our integrated circuits.
In the SAN Systems segment, our enterprise storage systems are designed,
manufactured, and sold by our wholly owned subsidiary -- LSI Logic Storage
Systems, Inc. Our high-performance, highly scalable open storage area network
systems and storage solutions are available through leading original equipment
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manufacturers, or OEMs, and a worldwide network of resellers under the
MetaStor(R) brand name. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of Part II herein.
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 1551 McCarthy Boulevard, Milpitas, California 95035, and our
telephone number at that location is (408) 433-8000. Our home page on the
Internet is at www.lsilogic.com.
BUSINESS STRATEGY
Semiconductor Business Strategy
Our objective is to continue to be an industry leader in the design and
manufacture 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, led by the communications, networking, and storage area network
systems 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 complexity, greater differentiation, and faster time to market. We
also have used this design methodology to develop proprietary standard
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 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.
- 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 on a "turn-key" basis.
- Maintain High-Quality and Cost-Effective Manufacturing. We operate
our own manufacturing facilities in order to control our deployment of
advanced wafer fabrication technology, our manufacturing costs, and our
response to customer delivery requirements. We also use independent wafer
foundry services when appropriate and may seek to fill unused capacity in
our own foundries by offering such services to third parties. We perform
substantially all of our packaging, assembly, and final test operations
through subcontractors in Asia. Our production operations in Gresham,
Oregon, and Tsukuba, Japan, and our assembly and test subcontractors in
Asia, are ISO-9002 certified, an important international measure for
quality.
- Leverage Alliances with Key Partners. We are continually seeking to
establish relationships with key partners in a diverse range of
semiconductor and storage-system 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.
- Develop and Drive Industry Standards to Achieve Market Advantage. We
have been a leader in developing and promoting important industry standard
architectures, functions, protocols, and interfaces.
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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.
SAN Systems Business Strategy
- Highly Leveraged Core Competencies. In the SAN systems market, we
leverage expertise used to develop our semiconductors, storage I/O components,
storage management software, and storage systems in the development of scalable
storage solutions. We use the full scope of our technical expertise to design
and develop interoperable, easy-to-manage, leading price/performance products.
- Modular Design Philosophy. Our flexible approach to storage system design
allows elements of a system to be configured and/or customized together or
separately to meet customer requirements. Benefits to our customers include
investment protection, reduced support costs, and a common management interface
and features. This allows customers to start with pilot projects and later scale
to full implementation.
- Complementary Channels of Distribution. We conduct sales of storage
systems through both direct and indirect channels to reach the largest and
fastest growing segments of the market. We sell on a direct basis to OEM
customers that are among the top ten sellers of storage products worldwide. In
addition, we are dedicated to providing proven and tested SAN solutions in the
open storage systems market through the reseller channel. Resellers are the
exclusive channel for the sale of MetaStor-brand storage products.
- Flexible Business Models. Our strategy is to provide flexible,
customizable solutions with room for value-added components, software, and
services provided by the channel. Our modular product set allows OEMs and
resellers to devise a solution to best meet their needs and to satisfy
customers.
PRODUCTS AND SERVICES
Semiconductor Products
In our semiconductor business, we manufacture, market, and sell both ASICs
and standard products for electronic systems applications. ASICs are
semiconductors that are designed for a unique, customer-specified application.
Our standard products are sold to customers who sell system-level products using
applications for which our standard products are designed. Both our ASICs and
standard products are predominately manufactured using our proprietary process
technologies. We offer a wide range of products targeted for the broadband
communications, networking infrastructure and storage components.
Broadband Communications. For the burgeoning communications market, we offer a
broad array of products, including devices for wireless, broadband access and
networks and broadband entertainment applications.
- Wireless. Our product offerings feature a programmable single-chip code
division multiple access baseband processor for use in wireless handsets. We are
also working on future CDMA generation products leading to third-generation
wideband digital products. In addition, our customers benefit from ASIC-design
capabilities based on strong microprocessor and digital signal processor core
offerings, mixed-signal functions, and industry-standard interfaces.
- Broadband access and networks. We offer a blend of high-performance,
high-integration and low-power silicon solutions that are pivotal in development
of Internet infrastructure. We offer ADSL Analog Fronted End ("AFE") standard
products used in the broadband access network. We develop ASICs using ARM-based
processor cores, digital signal processor cores, high-speed transceiver cores
and mixed-signal cores, targeting the following markets: high speed metropolitan
and wide area networks, optical networking,
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wireless communications infrastucture, wireless local area networks, home
networking, residential broadband gateways, and digital subscriber lines
("xDSL").
- Broadband entertainment. Our channel and source products are complete
system solutions that are designed into digital set-top-box systems for
satellite, cable, and terresrial TV reception and Internet connectivity. We
target high-volume consumer product applications with advanced digital and mixed
signal technology, which is delivered to the market both in the form of
customer-specific solutions ("ASICs") and standard products. Furthermore, we
employ this technology to manufacture products incorporated in home video games,
digital audio processors, digital cameras, and DVD players.
Networking Infrastructure. We market a line of standard product physical layer
and switching devices as well as ASIC product offerings comprised of value-added
intellectual property such as Gigabit Ethernet, Fast Ethernet and Ethernet MACs
and PHYs, embedded processors, content addressable memories ("CAMs"), and high
speed serial transceivers optimized for backplane applications.
Storage Infrastructure
- Internet computing. We provide tools, libraries, semiconductor processes
and packaging products that enable our OEM customers to reliably develop
high-performance designs for advanced computer systems. We provide a suite of
MIPS cores and ARM processors, in addition to industry-standard bus interface
cores such as USB, IEEE 1394, and PCI.
- Storage components. Our storage components make possible data storage and
transmission 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 industry leading I/O Standard Products including product
families in Fibre Channel, SCSI, and SCSI expanders, integrated circuits for
motherboard or adapter applications, host adapter boards, and software. We also
offer ASIC solutions to customers who develop Fibre Channel SAN switches and
host adapters, Storage systems, and HDD and tape peripherals. Our fibre channel
offerings include the GigaBlaze high 2Gb/s FC transceiver and the Merlin(TM)
family of high-performance Fibre Channel protocol controllers.
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 building blocks based on industry standard
electronic functions, interfaces, and protocols. Our emphasis on cell-based
product lines reflects the market preference for use of this methodology to
develop advanced integrated circuits. Customers obtain greater flexibility in
the design of system-level products using cell-based technology than is
available in an array-based methodology that limits the placement of circuits to
a fixed grid. Our CoreWare cells are connected together electronically to form
an entire system on a single chip. These system-on-a-chip solutions can be used
in ASICs or standard products focused on the broadband communications,
networking infrastructure and storage infrastructure markets.
Customers for our ASIC products may utilize our engineering design
capabilities in a variety of ways. Typically, the ASIC design process involves
participation by both our engineers and the customer's engineers.
We seek to engage with customers early in their new system product
development process and will accept large design assignments where we share
substantial risks and 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 capabilities include support in the areas
of architecture and 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.
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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.
SAN Systems Products
In the SAN Systems segment, we offer a broad line of network storage that
span our customers' enterprise, from workgroup to data center. The line ranges
from intelligent controller modules and drive modules to complete storage
systems. This allows our products to be integrated on a component basis or
aggregated into a complete storage solution, increasing OEM flexibility in
creating differentiated products. Modular products also allow our indirect
channel partners to customize solutions, bundling our products with value-added
components, software, and services.
Our storage systems are based on highly scalable and available hardware and
software solutions for the enterprise market, including tested, real-world
solutions for storage area networks.
- SAN Storage. MetaStor(R) E-Series storage systems for storage area
networks are an extension of the server-attached storage family. They combine
fibre channel performance with our proprietary Multi-Pathing Architecture to
deliver high performance for a wide variety of applications. High availability
and redundant, dual-active controllers and efficient management with
SANtricity(TM) Storage Manager software differentiate our storage from that of
our competitors.
- Server-Attached Storage. The MetaStor server-attached storage family
supports all high-use operating systems including Windows(R) NT, Solaris(TM),
HP-UX, AIX, SGI IRIX, NetWare, and Linux platforms. Our products allow customers
to increase storage capacity from 36 gigabytes (billions of information bytes)
to 16 terabytes (trillions of information bytes) per system. This means
customers can expand storage to their computer applications, maintain redundant
records and change configurations even when their systems are operating. The
result is a growth-oriented, highly available, easy to manage.
- SANtricity Storage Manager Software. This storage management software
helps users consolidate storage through the SANshare(TM) storage-partitioning
feature. In addition, this software provides a single management interface and
remote access capabilities, allowing centralized management of all MetaStor
storage. An enhanced graphical user interface makes the software quite easy to
use. Other features provide for automatic device discovery and one-button
configuration.
- Network-Attached Storage. The MetaStor N-Series is a family of
network-attached storage solutions that enable users to share files among a
variety of hosts, regardless of operating systems, lowering the cost of
ownership by consolidating storage and management functions in a single, open
storage environment. Features include multi-protocol support, a high-performance
file system, hot recovery point-in-time copies, a flexible backup solutions, and
enterprise-level storage management.
- Storage Controller Modules. Designed from the chip-level up, our storage
controller modules support both Ultra2 SCSI and Fibre Channel interfaces. Using
LSI Logic ASICs, the controllers deliver superior performance for both
high-transaction volume and large data block workloads. Combined with our drive
modules, each controller module manages scalable capacity up to 16 terabytes.
Modules can either be rack-mounted or installed desk-side configurations. Other
features include HotScale(TM) technology for dynamic system expansion and
reconfiguration, redundant dual-active controllers and automatic fail-over for
maximum data availability.
- Storage Drive Modules. Our storage drive modules increase storage
capacity and performance as needs change. Drive modules use our chip
capabilities to monitor power, temperature, and fans, and to relay information
back to the controller. And advanced technology from industry disk drive vendors
is integrated into the modules to maximize capacity and minimize floor space
requirements.
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As a major open computing vendor, we deliver storage systems that operate
within the Windows NT, UNIX, Solaris, NetWare, and Linux operating-system
environments. These products are targeted at key data storage applications,
including:
- Internet servers;
- Electronic commerce;
- Data warehousing;
- On-line transaction processing;
- Video delivery, editing and production; and
- Migration of mission critical applications off mainframe computers.
In 2000, LSI Logic Storage Systems, Inc. enhanced its entire product line
when it introduced the E240, the E4400 and the N-Series. Customers of both the
E-Series and the N-Series can now migrate from the low-end of the product line
to the top without losing their storage investment. Users also can upgrade and
reconfigure systems dynamically without shuttling systems down and losing money.
We offer a toll-free 24 hour-a-day, 7 day-a-week technical support hotline
for customers worldwide using the MetaStor line of network- and server-attached
enterprise storage systems. We also offer a number of flexible services and
support programs that allow customers to choose the level of telephone and
onsite support appropriate to their needs.
MARKETING AND DISTRIBUTION
Semiconductor Marketing and Distribution
Our semiconductor products and design services are primarily sold through
our network of direct sales and marketing, field engineering offices and sales
representatives located in North America, Europe, Japan, China 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, tariff increases and other trade barriers and currency
fluctuations.
The highly competitive semiconductor industry is characterized by rapidly
changing technology, short product cycles, and emergent 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 and network computing markets.
We rely primarily on direct sales and marketing, but we also work with
independent distributors 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 obtain credits for price reductions applicable to standard
products held in inventory. We maintain appropriate reserves to account for
these factors. However, owing to the relatively small quantities of products
held in inventory by our distributors, we believe that these arrangements do not
result in material financial exposure for our company.
SAN Systems Marketing and Distribution
SAN systems products are sold worldwide both on a direct basis to OEMs and
through indirect reseller channels to end-users. The MetaStor brand of scalable
SAN systems is exclusively marketed through a
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worldwide network of value-added resellers, system integrators and distributors.
We closely manage these relationships to meet the diverse needs of end-users.
Our marketing efforts are driven by an industry-wide trend toward the
implementation of storage area networks to maximize performance, availability
and efficiency.
Our direct sales force provides customized SAN systems solutions generally
to large, well-known manufacturers of computer equipment. Our product
development strategy focuses on implementing the latest storage technologies to
improve the performance of our hardware and software storage solutions. As a
pioneer in the development of redundant array of independent disks technology,
and as a member of the Fibre Channel Industry Association and Storage Networking
Industry Association, we are continually driving industry standards for fibre
channel and SAN solutions.
CUSTOMERS
We seek to leverage our expertise in the fields of broadband
communications, networking infrastructure, storage infrastructure and SAN
systems by marketing our products and services to market leaders. Our
strategic-account focus is on larger, well-known companies that produce
high-volume products incorporating our semiconductors and storage system
products. 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 significant sales volumes from one or more of
the customers we have selected. While this could result in lower revenues and
higher unit costs owing to an under-utilization of our resources, we believe
this strategy provides us with the greatest opportunity to drive further growth
in sales and unit volumes.
We operate in a rigorous competitive environment and our continued success
requires that we consistently develop and manufacture products that meet the
needs of our customers. There is no assurance that we will achieve significant
sales revenues from one or more of our strategic customers. This could result in
lower revenues for our company.
In 2000, Sun Microsystems, Inc. accounted for approximately 12% of our
consolidated revenues. No other customer accounted for greater than 10% of
consolidated revenues.
MANUFACTURING
Semiconductor Manufacturing
Our semiconductor manufacturing operations convert a design into packaged
silicon chips and support customer requirements for volume production.
Manufacturing begins with fabrication of custom-diffused silicon wafers. Layers
of metal interconnects are deposited onto the wafer and patterned using
customized photo masks. Wafers are then tested and cut into die. Die that pass
initial tests are then sent to the assembly process where the fabricated
circuits are assembled into plastic package or laminate substrate ball grid
array. The finished devices undergo additional testing and quality assurance
before shipment. Dedicated computer systems are used in this comprehensive
testing sequence. The test programs use the basic functional test criteria from
the design simulation. The customer specifies the functional test criteria for
ASIC circuits.
We own and operate manufacturing operations in the United States, Japan,
and Hong Kong. We utilize various high-performance CMOS process technologies in
the volume manufacture of our products. The production operations are fully
computer-integrated to increase efficiency and reduce costs.
Semiconductor process technologies are identified in terms of the size of
channel length within the transistors, measured in millionths of a meter called
"microns." The measurement of the channel length is expressed in two ways:
effective electrical channel length and drawn gate length. The effective channel
length is smaller than the drawn gate length. In this Report on Form 10-K, we
use the effective channel length to identify our process technologies.
Our advanced submicron manufacturing processes are capable of producing
products with an effective electrical channel length within each transistor as
small as 0.18 micron (G11(TM) process technology) allowing for up to 24 million
usable gates on a single chip. Our G10(R) process technology is capable of
producing
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0.25-micron products. Volume production on our 0.13-micron G12(TM) process
technology began in the third quarter of 2000. In addition, in the first quarter
of 2000, we introduced a Gflx(TM), a new flexible process technology capable of
combining all of the system functions to create totally new classes of
communications products on a single chip. The Gflx technology is more than twice
as dense as the previous generation G12 process technology, allowing designers
to incorporate added functions onto a single chip. The 0.10-micron effective
channel length Gflx process technology offers 78 million usable logic gates.
These advanced process technologies allow for greater circuit density and
increased functionality on a single chip.
Substantially all of our wafers are fabricated in our factories in Gresham,
Oregon, Tsukuba, Japan, and Colorado Springs, Colorado. The factories in Gresham
and Tsukuba are ISO-9002 certified and the facility in Colorado Springs is
ISO-9001 certified -- important internationally recognized standards for
quality. In July 1999, the older of the two Tsukuba factories, which produced
0.38-micron products, was closed after eleven years of service. This action was
taken as part of a comprehensive restructuring and cost reduction plan commenced
in 1998.
Our newest manufacturing facility is located in Gresham, Oregon on 325
acres outside of Portland. This facility is equipped for advanced manufacturing
operations and is designed to accommodate our expansion requirements well into
the foreseeable future. The plant is equipped to produce eight-inch wafers
hosting products manufactured to the G10, G11, G12, and Gflx processes.
Our fixed costs for manufacturing are high and are expected to remain high
because we must continually make significant capital expenditures and add new
advanced capacity in order to remain competitive. If demand for our products
does not absorb the additional capacity, the increase in fixed costs and
operating expenses related to increases in production capacity may result in a
material adverse impact on our operating results and financial condition.
(Additional risk factors are set forth in the Risk Factors section below.)
We offer a wide range of packaging solutions for system-on-a-chip designs.
We have also developed a high-performance, high-density interconnect packaging
technology, known as flip chip, which essentially replaces the wires that
connect the edge of the die to a package with solder bumps spread over the
entire external surface of the die. This technology enables us to reach
exceptional performance and lead-count levels in packages required for process
technologies of 0.18 micron and below. We also offer a mini-ball grid array
package that features a smaller package size without sacrificing electrical and
thermal performance. We also offer a wide array of plastic wire-bond packaging
options.
Final assembly (i.e., assembly in a plastic or laminate substrate package)
and test operations are conducted by our Hong Kong affiliate through independent
subcontractors in the Philippines, Malaysia, South Korea, Taiwan, and Hong Kong.
We also utilize subcontractors in Thailand for the assembly and test of our host
adapter boards.
Both manufacturing and sales of our semiconductor products may be impacted
by political and economic conditions abroad. Protectionist trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws or other trade policies, could
adversely affect our ability to manufacture or sell products in or into foreign
markets. We cannot guarantee that current arrangements with our component
suppliers or assembly, testing and packaging subcontractors will continue, and
we do not maintain an extensive inventory of assembled components. The failure
to secure assembly and test capacity could affect our sales and result in a
material adverse impact on our operating results and financial condition.
Development of advanced manufacturing technologies in the semiconductor
industry frequently requires that critical selections be made as to those
vendors from which essential equipment (including future enhancements) and
after-sales services and support will be purchased. Some of our equipment
selections require that we procure certain specific types of materials or
components specifically designed to our specifications. Therefore, when we
implement specific 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 may involve significant expense
and delay in our technology advancements and manufacturing capabilities.
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The semiconductor equipment and materials industries also include a number
of vendors that are relatively small and have limited resources. Several of
these vendors supply us with equipment and/or services. We do not have long-term
supply or service agreements with vendors of certain critical items, and
shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. Given the limited number of
suppliers of certain of the materials and components used in our products, if we
experience difficulty in obtaining essential materials in the future we cannot
assure you that alternative suppliers will be available to meet our needs. Such
disruptions could materially affect our operations, which could have a material
adverse impact on our operating results and financial condition.
The primary raw materials used in the manufacturing of semiconductors
include raw wafers and certain chemicals used in the processing of
semiconductors. The raw wafers are obtained primarily from suppliers in Japan
and their U.S. subsidiaries, whereas other material inputs are obtained on a
local basis. Our operations also depend upon a continuing adequate supply of
electricity, natural gas and water. These energy sources have historically been
available on a continuous basis and in adequate quantities for our needs.
However, given the current power shortage in California, it is possible that the
shortage may spread to other areas of the country, including Oregon. An
interruption in the supply of raw materials or energy inputs for any reason
would have an adverse effect on our manufacturing operations.
Our manufacturing facilities incorporate sophisticated computer integrated
manufacturing systems, which depend upon a mix of our proprietary software and
systems and software purchased from third parties. Failure of these systems
would cause a disruption in the manufacturing process and could result in a
delay in completion and shipment of products.
SAN Systems Manufacturing
The manufacturing of SAN systems products involves the assembly and testing
of components, including our semiconductors, which are then integrated into
final products. Our manufacturing facility in Wichita, Kansas, assembles and
tests high performance array controllers, rack-mount modules, and complete
storage systems.
ISO-9001 certification at our Kansas manufacturing facility has been
maintained since April 1992. Product quality is achieved through employee
training, automated testing, and sample auditing. Supply Line Management extends
quality through the component and subassembly supplier base with continuous
reporting and supplier/product qualification programs.
SAN systems product and manufacturing designs are highly modularized for
flexibility. Our manufacturing operation includes Configure to Order and
Assemble to Order capabilities. These processes have been implemented in an
effort to reduce requisite lead times for the delivery of product.
Our SAN systems manufacturing operations are based primarily on an
integrated Enterprise Resource Planning manufacturing application system
purchased from a third party. This ERP system is augmented with several of our
proprietary software tools that support the production process through automated
product configuration and automated electronic testing. Failure of these systems
would cause a disruption in the manufacturing process and could result in delays
of product shipments and/or customer billings.
Our manufacturing facility in Wichita, Kansas depends upon a continuous
supply of electricity from a single utility provider. Any natural or manmade
disruptions could materially affect our operating results and financial
condition.
BACKLOG
Semiconductor 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
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lag between the commencement of design work and the delivery of a purchase order
for the units of a developed 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 is not a
meaningful indicator of future sales.
SAN Systems Backlog
In the SAN Systems segment, our large customers who are original equipment
manufacturers place orders that are subject to acceptance by us in accordance
with their requirements and our delivery lead time capabilities. In our reseller
channel, we typically receive requests for product to be delivered within two
weeks or less. Accordingly, our backlog as of any particular date is not a
meaningful indicator of future sales.
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 also are
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 a portion of the products and
services that we offer.
Our major competitors include large domestic companies such as IBM
Corporation, Lucent Technologies, Inc., Texas Instruments, Inc., and Agilent
Technologies, Inc. Other competitors in strategic markets include Adaptec, Inc.,
QLogic Corporation, PMC-Sierra, Inc., Broadcom Corporation, and Conexant
Systems, Inc.
We also face competition from certain large foreign corporations, including
Philips Electronics, N.V., ST Microelectronics, S.A., and Toshiba Corporation.
The principal competitive factors in the industry include:
- design capabilities;
- differentiating product features;
- product performance characteristics;
- time to market;
- price;
- manufacturing processes; and
- utilization of emerging industry standards.
We believe that we presently compete favorably with respect to these
factors. It is possible, however, that other custom design solutions will be
developed by our competitors 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 us in order to sell
related products or achieve strategic goals. 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 must continue to reduce the costs of products through
product design changes, manufacturing process changes, and yield improvements.
We do not believe that we can continually achieve cost reductions that fully
offset the
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price declines of our products, and therefore gross profit margin percentages
will generally decline for existing products over their life cycles.
We are increasingly emphasizing our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that are important to the
success of this strategy include:
- selection, quantity and quality of our CoreWare library elements;
- our ability to offer our customers systems level expertise and
- quality of software to support system-level integration.
Although there are other companies that offer similar types of products and
related services, we believe that we currently compete favorably with those
companies. However, 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.
SAN Systems Competitors
The SAN systems market is characterized by many of the same pressures found
in the semiconductor industry. We believe that important competitive factors in
the storage-systems market include the following:
- product performance and price;
- support for new industry and customer standards;
- scalability;
- interoperability with other network devices;
- features and functionality;
- availability;
- reliability, technical service, and support;
- quality of system integration;
- existence and accessibility of differentiating features; and
- quality and availability of supporting software.
Our failure to compete successfully with respect to any of these or other
factors could have a material adverse effect on our results of operations and
financial condition. Our SAN systems products compete primarily with products
from independent storage providers such as EMC Corporation, Hitachi Data Systems
Corporation and MTI Technology Corporation. In addition, many of our current and
potential customers in this market have internal storage divisions that produce
products that compete directly or indirectly with our storage-system products.
There is no assurance that these customers, which include Hewlett-Packard
Company, IBM Corporation, Sun Microsystems, Inc. and Unisys Corporation, will
continue to purchase our storage systems products.
PATENTS, TRADEMARKS AND LICENSES
We own various United States and international patents and have additional
patent applications pending relating to certain of our products and technologies
in both the Semiconductor and the SAN Systems segments. In both segments, we
also maintain trademarks for certain of our products and services and claim
copyright protection for certain proprietary software and 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 personnel.
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In the Semiconductor segment, we also protect our trade secret and other
proprietary information through agreements with our customers, suppliers,
employees, consultants and through other security measures. We have entered into
certain 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.
We continue to expand our portfolio of patents and trademarks. We offer a
staged incentive to engineers 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 priorities and plans for filings
both in the United States and abroad. The review process is based solely on
engineering 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 patents will provide competitive
advantages to us or will be adequate to safeguard and maintain our proprietary
rights. 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, processes, technologies or information 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
with respect to existing or future claims that any licenses or other rights that
may be necessary can generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be obtained on acceptable
terms or that a claim will not result in litigation or other administrative
proceedings.
In the SAN 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 identify patentable inventions and pursue protection in
selected jurisdictions.
Please see Item 3, Legal Proceedings; additional risk factors set forth in
the Risk Factors section; and Note 12 of the Notes, below 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 research and development facilities in California, Colorado, and
Kansas. The following table shows our expenditures on research and development
activities for each of the last three fiscal years (in thousands).
YEAR AMOUNT PERCENT OF REVENUE
---- -------- ------------------
2000....................................... $378,936 14%
1999....................................... $297,554 14%
1998....................................... $291,125 19%
Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs. As we continue our commitment to
technological leadership in our markets, we anticipate our research and
development investment in the first quarter of 2001 to be approximately 24% of
our revenues on a consolidated basis.
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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 and Liquidity."
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
This information is included in Note 11 "Segment Reporting" of Notes to
Financial Statements and Supplementary Data, which information is incorporated
herein by reference to item 8 of Part II hereof.
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 processing. Our facilities
have been designed to comply with these regulations, and 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 assure you 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, 2000, we had 7,221 employees.
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 such personnel is intense, and the loss of key employees
or the inability to hire such employees when needed could have a material
adverse input on our business and financial condition.
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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.
OUR PRODUCT AND PROCESS DEVELOPMENT ACTIVITIES OCCUR IN A HIGHLY
COMPETITIVE ENVIRONMENT. The Semiconductor and SAN 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 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 will be
adversely impacted.
In addition, 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 assure you 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.
WE OPERATE HIGHLY COMPLEX AND COSTLY MANUFACTURING FACILITIES. The
manufacture and introduction of our products is a complicated process. 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 test and assembly of
products; and
- update equipment and facilities as required for leading edge production
capabilities.
We do not control the timing or size of orders for our products. We
generally do not have long-term volume production contracts with our customers.
There is a risk that we will be unable to meet sudden increases in demand beyond
our current manufacturing capacity, which may result in additional capital
expenditures and production costs. Meanwhile, order volumes below anticipated
levels may result in the under-utilization of our manufacturing facilities,
resulting in higher per unit costs, which could adversely affect our operating
results and financial condition.
OUR MANUFACTURING FACILITIES ARE SUBJECT TO DISRUPTION. Our newest wafer
fabrication site located in Gresham, Oregon is a highly complex,
state-of-the-art facility. Anticipated production rates depend upon the reliable
operation and effective integration of a variety of hardware and software
components. There is no assurance that all of these components will be fully
functional or successfully integrated on time or that the facility will achieve
the forecasted yield targets. The capital expenditures required to bring the
facility to full operating capacity may be greater than we anticipate and result
in lower margins.
Operations at any of our primary manufacturing facilities, or at any of our
test and assembly subcontractors, may be disrupted for reasons beyond our
control, including work stoppages, fire, earthquake, floods or other natural
disasters. In addition, California is currently experiencing a power shortage,
which may spread to other areas of the country, such as Oregon, where our newest
wafer fabrication facility is located.
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Such an unexpected disruption could cause delays in shipments of products to our
customers and alternate sources for production may be unavailable on acceptable
terms. This could result in the cancellation of orders or loss of customers.
WE HAVE SIGNIFICANT CAPITAL REQUIREMENTS TO MAINTAIN AND GROW OUR
BUSINESS. In order to remain competitive, we must continue to make significant
investments in new facilities and capital equipment. During 2001 we anticipate
that we will spend approximately $500 million on capital assets and that we will
be required to spend potentially larger amounts thereafter. We may seek
additional equity or debt financing from time to time and cannot be certain that
additional financing will be available on favorable terms. Moreover, any future
equity or convertible debt financing will decrease the percentage of equity
ownership of existing stockholders and may result in dilution, depending on the
price at which the equity is sold or the debt is converted. In addition, the
high level of capital expenditures required to remain competitive results in
relatively high fixed costs. If demand for our products does not absorb
additional capacity, the fixed costs and operating expenses related to increases
in our production capacity could have a material adverse impact on our operating
results and financial condition. As of December 31, 2000, we have convertible
notes outstanding of approximately $845 million.
WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES. We have
international subsidiaries and distributors that operate and sell our products
globally. Further, we purchase a substantial portion of our raw materials and
manufacturing equipment from foreign suppliers, and incur labor and other
operating costs in foreign currencies, particularly in our Japanese
manufacturing facilities. As a result, we are exposed to the risk of changes in
foreign currency exchange rates or declining economic conditions in these
countries.
WE DO BUSINESS IN EUROPE AND FACE RISKS ASSOCIATED WITH THE EURO. A new
European currency was implemented in January 1999 to replace the separate
currencies of eleven western European countries. This has required changes in
our operations as we modified systems and commercial arrangements to deal with
the new currency. Although a three-year transition period is expected during
which transactions may also be made in the old currencies, this is requiring
dual currency processes for our operations. We have identified issues involved
and will continue to address them. There can be no assurances that all problems
will be foreseen and controlled without any adverse impact on our operating
results and financial condition.
WE PROCURE PARTS AND RAW MATERIALS FROM LIMITED DOMESTIC AND FOREIGN
SOURCES. We use a wide range of parts and raw materials in the production of our
semiconductors, host adapter boards, and storage systems, including silicon
wafers, processing chemicals, and electronic and mechanical components. We do
not generally have guaranteed supply arrangements with our suppliers and do not
maintain an extensive inventory of parts and materials for manufacturing. We
purchase some of these parts and materials from a limited number of vendors and
some from a single supplier. On occasion, we have experienced difficulty in
securing an adequate volume and quality of parts and materials. 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 new and current product
shipments. If we cannot obtain adequate materials for manufacture of our
products, there could be a material adverse impact on our operating results and
financial condition.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS. We compete in markets that are
intensely competitive and that exhibit both rapid technological change and
continual price erosion. 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.
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To remain competitive, we continually evaluate our worldwide operations, looking
for additional cost savings and technological improvements.
Our future competitive performance depends on a number of factors,
including our ability to:
- properly identify target markets;
- accurately identify emerging technological trends and demand for product
features and performance characteristics;
- develop and maintain competitive products;
- enhance our products by adding innovative features that differentiate our
products from those of our competitors;
- bring products to market on a timely basis at competitive prices;
- respond effectively to new technological changes or new product
announcements by others;
- adapt products and processes to technological changes; and
- adopt and/or set emerging industry standards.
We may not meet our design, development and introduction schedules for new
products or enhancements to our existing and future products. In addition, our
products may not achieve market acceptance or sell at favorable prices.
WE CONCENTRATE OUR SALES EFFORTS ON A LIMITED NUMBER OF CUSTOMERS. We are
increasingly dependent on a limited number of customers for a substantial
portion of revenues as a result of our strategy to focus our marketing and
selling efforts on select, large-volume customers. One customer represented 12%
of our total consolidated revenues for the year ended December 31, 2000. While
no customer represented 10% or more of the total revenue in the Semiconductor
segment for the year ended December 31, 2000, in the SAN Systems segment, there
were three customers with revenues representing 31%, 17% and 13% of total SAN
Systems revenues.
Our operating results and financial condition could be affected if:
- we do not win new product designs from major 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.
WE UTILIZE INDIRECT CHANNELS OF DISTRIBUTION OVER WHICH WE EXERCISE LIMITED
CONTROL. We derive a material percentage of product revenues from independent
reseller and distributor channels. Our financial results could be adversely
affected if our relationship with these 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 COMPANY OPERATIONS ARE AFFECTED BY CYCLICAL FLUCTUATIONS. The
Semiconductor and SAN Systems segments in which we compete are subject to
cyclical fluctuations in demand. As a result, we may experience periodic
declines in sales or the prices of our products as a result of the following:
- rapid technological change, product obsolescence, and price erosion in
our products;
- maturing product cycles in our products or products sold by our
customers;
- increases in worldwide manufacturing capacity for semiconductors,
resulting in declining prices; and
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- changes in general economic conditions, which may cause declines in our
product markets or the markets of our suppliers and customers.
The semiconductor industry has in the past experienced periods of rapid
expansion of production capacity. 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 affect our demand and
revenues for the short term. As a result, we may experience downturns or
fluctuations in demand in the future 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 intend to continue to make investments in companies,
products and technologies, either through acquisitions or investment alliances.
Acquisitions and investment activities often involve risks, including the need
to:
- acquire timely access to needed capital for investments related to
acquisitions and alliances;
- conduct acquisitions that are timely relative to existing business
opportunities;
- successfully prevail over competing bidders for target acquisitions at an
acceptable price;
- invest in companies and technologies that contribute to the growth of our
business;
- retain the key employees of the acquired operation;
- incorporate acquired operations into our business and maintain uniform
standards, controls, and procedures; and
- develop the capabilities necessary to exploit newly acquired
technologies.
Some of these factors are beyond our control. Failure to manage growth
effectively and to integrate acquisitions could adversely affect our operating
results and financial condition.
THERE IS UNCERTAINTY ASSOCIATED WITH OUR RESEARCH AND DEVELOPMENT
INVESTMENTS. Our research and development activities are intended to maintain
and enhance our competitive position by utilizing the latest advances in the
design and manufacture of semiconductors and storage systems including
networking, communications and storage technologies. Technical innovations are
inherently complex and require long development cycles and the commitment of
extensive engineering resources. We must incur substantial research and
development costs to confirm the technical feasibility and commercial viability
of a product that in the end may not be successful. If we are not able to
successfully and timely complete our research and development programs, we may
face competitive disadvantages. There is no assurance that we will recover the
development costs associated with such programs or that we will be able to
secure the financial resources necessary to fund future research and development
efforts.
THE PRICE OF OUR SECURITIES MAY BE AFFECTED BY A WIDE RANGE OF
FACTORS. Some of the factors that may cause volatility in the price of our
securities include:
- quarterly variations in results;
- business and product market cycles;
- fluctuations in customer requirements;
- the availability and utilization of manufacturing capacity;
- the timing of new product introductions; and
- the ability to develop and implement new technologies.
The price of our securities may also be affected by the estimates and
projections of the investment community, general economic and market conditions,
and the cost of operations in one or more of our product markets. While we
cannot predict the individual effect that these factors may have on the price or
our
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securities, these factors, either individually or in the aggregate, could result
in significant variations in price during any given period of time.
OUR GLOBAL OPERATIONS EXPOSE THE COMPANY TO NUMEROUS INTERNATIONAL BUSINESS
RISKS. We have substantial business activities in Asia and Europe. Both
manufacturing and sales of our products may be adversely impacted by changes in
political and economic conditions abroad. A change in the current tax laws,
tariff structures, export laws, regulatory requirements or trade policies in
either the United States or foreign countries could adversely impact our ability
to manufacture or sell our products in foreign markets. Moreover, a significant
decrease in sales by our customers to end users in either Asia or Europe could
result in a decline in orders.
We subcontract test and assembly functions to independent companies located
in Asia. A reduction in the number or capacity of qualified subcontractors or a
substantial increase in pricing could cause longer lead times, delays in the
delivery of products to customers, or increased costs.
THE HIGH TECHNOLOGY INDUSTRY IN WHICH WE OPERATE IS PRONE TO INTELLECTUAL
PROPERTY LITIGATION. Our success is dependent in part on our technology and
other proprietary rights, and we believe that there is value in the protection
afforded by our patents, patent applications and trademarks. However, the
industry is characterized by rapidly changing technology and our future success
depends primarily on the technical competence and creative skills of our
personnel, rather than on patent and trademark protection.
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, processes, technologies or information 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
with respect to existing or future claims that any licenses or other rights that
may be necessary can generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be obtained on acceptable
terms or that a claim will not result in litigation or other administrative
proceedings.
In February of 1999, a lawsuit alleging patent infringement was filed in
the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against 88
electronics industry companies, including us. The case number is
CIV990377PHXRGS. The patents involved in this lawsuit are alleged to relate to
semiconductor manufacturing and computer imaging, including the use of bar
coding for automatic identification of articles. In September 1999, the Company
filed an answer denying infringement, raising affirmative defenses and asserting
a counterclaim for declaratory judgment of non-infringement, invalidity and
unenforceability of Lemelson's patents. As of December 31, 2000, the discovery
had commenced but no trial date had been set. While we cannot make any assurance
regarding the eventual resolution of this matter, we do not believe it will have
a material adverse effect on our consolidated results of operations or financial
condition.
WE MUST ATTRACT AND RETAIN KEY EMPLOYEES IN A HIGHLY COMPETITIVE
ENVIRONMENT. Our employees are vital to our success and our key management,
engineering and other employees are difficult to replace. We do not generally
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies in Silicon Valley, Colorado, Oregon and elsewhere where we
operate our business has increased demand and competition for qualified
personnel. Our continued growth and future operating results will depend upon
our ability to attract, hire and retain significant numbers of qualified
employees.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning our principal
facilities.
PRINCIPAL LOCATIONS
NO. OF LEASED/ TOTAL
BUILDINGS LOCATION OWNED SQ. FT. USE
- --------- -------- ------- ------- ---
5 Milpitas, CA Leased 503,597 Executive Offices, Administration,
Engineering
1 Milpitas, CA Subleased 47,345 Occupied by subtenants
1 Fremont, CA Leased 74,000 Logistics
1 Fremont, CA Leased 39,246 Warehouse
2 Fremont, CA Leased 120,853 Office
2 Fremont, CA Subleased 154,441 Occupied by subtenants
3 Santa Clara, CA Leased 98,860 Manufacturing
1 San Jose, CA Leased 56,136 General Office, Engineering, Design
3 Gresham, OR Owned 532,400 Executive Offices, Engineering,
Manufacturing
1 Bracknell, UK Leased 70,000 Executive Offices, Design Center,
Sales
1 Tokyo, Japan Leased 24,271 Executive Offices, Design Center,
Sales
7 Tsukuba, Japan Owned 334,541 Executive Offices, Manufacturing
1 Etobicoke, Canada Subleased 14,005 Occupied by Subtenants
1 Tsuen Wan, HK Owned 26,000 Manufacturing Control, Assembly &
Test
2 Colorado Springs, CO Owned 415,593 Executive Offices, Manufacturing
2 Fort Collins, CO Owned 270,000 Executive Offices, Manufacturing
1 Wichita, KS Owned 332,000 Executive Offices, Manufacturing
In addition, we maintain leased regional office space for our field sales,
marketing and design center offices at locations in North America, Europe, Japan
and elsewhere in Asia. We also maintain design centers at various distributor
locations.
Leased facilities described above are subject to operating leases that
expire in 2001 through 2020. (See Note 12 of Notes to Consolidated Financial
Statements.)
We have plans to acquire additional equipment, but we believe that our
existing facilities and equipment are well maintained, in good operating
condition and are adequate to meet our current requirements.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1995, the shares of our Canadian subsidiary,
LSI Logic Corporation of Canada, Inc. ("LSI Canada"), that were not held by LSI
Logic or a subsidiary were acquired by another one of our subsidiary companies.
At that time, former shareholders of LSI Canada representing approximately
800,000 shares or about 3% (which is now approximately 580,000 shares) of the
previously outstanding shares of LSI Canada, exercised dissent and appraisal
rights as provided by Canadian law. By so doing, these parties notified LSI
Canada of their disagreement with the per share value in Canadian dollars
($4.00) that was paid to the other former shareholders. In order to resolve this
matter, a petition was filed by LSI Canada in late 1995 in the Court of Queen's
Bench of Alberta, Judicial District of Calgary (the "Court") and has been
pending since that time. The trial of that case was originally to occur in late
1998. Prior to the scheduled commencement of the trial, some of the parties who
represent approximately 410,000 shares retained a new attorney. Through their
new attorney these parties have challenged the jurisdiction of the Court to
adjudicate LSI Canada's petition with respect to the issue of the fair value of
the shares and have asked the Court to dismiss those legal proceedings. Until
their petition is heard and resolved by the Court, a new trial date for the
pending matter is not expected to be set. These parties also have initiated a
new action in the Court,
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purporting also to represent all the parties who exercised dissent and appraisal
rights, alleging that actions of LSI Logic Corporation and certain named
directors and an officer of LSI Canada were oppressive of the rights of minority
shareholders in LSI Canada, for which these parties intend to seek damages. The
individuals who are named in these proceedings have indemnification agreements
with LSI Canada. The Court has scheduled a hearing for March 2001 at which these
issues will be addressed. While we cannot give any assurances regarding the
resolution of these matters, we believe that the final outcome will not have a
material adverse effect on our consolidated results of operations or financial
condition. Also, during 1998, a claim that was brought in 1994 by another former
shareholder of LSI Canada against LSI Logic Corporation in the Court of Chancery
of the State of Delaware in and for the New Castle County was dismissed. That
dismissal was upheld on appeal to the Delaware Supreme Court.
In February of 1999, a lawsuit alleging patent infringement was filed in
the United States District Court for the District of Arizona by the Lemelson
Medical, Education & Research Foundation, Limited Partnership against 88
electronics industry companies, including us. The case number is
CIV990377PHXRGS. The patents involved in this lawsuit are alleged to relate to
semiconductor manufacturing and computer imaging, including the use of bar
coding for automatic identification of articles. In September 1999, the Company
filed an answer denying infringement, raising affirmative defenses and asserting
a counterclaim for declaratory judgment of non-infringement, invalidity and
unenforceability of Lemelson's patents. As of December 31, 2000, the discovery
had commenced but no trial date had been set. While we cannot make any assurance
regarding the eventual resolution of this matter, we do not believe it will have
a material adverse effect on our consolidated results of operations or financial
condition.
The Company is a party to other litigation matters and claims that are
normal in the course of its operations, and while the results of such litigation
and claims cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a material adverse effect on the
Company's consolidated results of operations and financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows:
EMPLOYED
NAME AGE POSITION SINCE
---- --- -------- --------
Wilfred J. Corrigan..... 63 Chairman and Chief Executive Officer 1981
John D'Errico........... 57 Executive Vice President, Storage Components 1984
Bruce Entin............. 49 Executive Vice President, Networking 1984
Infrastructure Group
Thomas Georgens......... 41 Executive Vice President, SAN Systems 1998
Bryon Look.............. 47 Executive Vice President and Chief Financial 1997
Officer
W. Richard Marz......... 57 Executive Vice President, Geographic Markets 1995
David G. Pursel......... 55 Vice President, General Counsel and Secretary 1996
Lewis C. Wallbridge..... 57 Vice President, Human Resources 1984
Giuseppe Staffaroni..... 49 Executive Vice President, Broadband 1990
Communications Group
Joseph M. Zelayeta...... 54 Executive Vice President, Worldwide Operations 1981
Mr. Corrigan and Mr. Wallbridge have been associated with the Company in
their present position for more than the past five years.
John D'Errico was named Executive Vice President, Storage Components in
August 2000. From August 1998 to August 2000, he was Vice President, Colorado
Operations. Mr. D'Errico joined us in 1984 and has held various senior
management and executive positions at our manufacturing facilities in the U.S.
and Japan.
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Most recently, Mr. D'Errico served as Vice President and General Manager,
Pan-Asia from April 1997 to August 1998, and Vice President, JSI from July 1994
to April 1997.
Bruce Entin was named Executive Vice President of the Networking
Infrastructure Group in January 2001. A 16-year veteran of LSI Logic, Mr. Entin
most recently served as the Vice President and General Manager of the Internet
Computing Division from January 2000 to January 2001. From 1996 through 1998, he
served as Vice President of Customer Marketing, and in 1999, he served as Vice
President of Worldwide Marketing.
Thomas Georgens was named Executive Vice President, SAN Systems, in
November 2000. In August 1998, upon the acquisition of Symbios, Inc., a Storage
company, he was named Senior Vice President and General Manager, SAN Systems.
Mr. Georgens joined Symbios in 1996, where he served as Vice President and
General Manager of Storage Systems until its acquisition by LSI Logic. Before
joining Symbios, Mr. Georgens was employed by EMC Corporation, where he served
as Director of Engineering Operations for the Systems Group and later as
Director of Internet Marketing.
Bryon Look was named Executive Vice President and Chief Financial Officer
in November 2000. Mr. Look joined us in March 1997 as Vice President, Corporate
Development. Prior to joining LSI, during a 21-year career at Hewlett-Packard
Company, a computer company, he held a variety of management positions in
finance and research and development, with the most recent position being
Manager of Business Development for Hewlett-Packard's Corporate Development
department.
W. Richard Marz joined the Company in September 1995 as Senior Vice
President, North American Marketing and Sales, and was named Executive Vice
President, Geographic Markets in May 1996. Before joining us, Mr. Marz was
long-time senior sales and marketing executive at Advanced Micro Devices, Inc.,
a semiconductor manufacturer.
David G. Pursel was named Vice President, General Counsel and Secretary in
June 2000. He joined LSI Logic in February 1996 as Associate General Counsel,
Chief Intellectual Property Counsel, and Assistant Secretary. Prior to his
tenure with LSI Logic, Mr. Pursel held legal positions with Advanced Micro
Devices, Digital Equipment Corporation and The Boeing Company.
Giuseppe Staffaroni was named Executive Vice President Broadband
Communications Group in November 2000, having served as Vice President and
General Manager of the Broadband Communications Group since November 1999. Mr.
Staffaroni joined LSI Logic in 1990 as director of engineering in the company's
Milan, Italy design center. From January 1996 to October 1997, he was Director
of Marketing, and from November 1997 to October 1999, he was Vice President and
General Manager of the Communications Product Division. Prior to LSI Logic, Mr.
Staffaroni held management positions at Texas Instruments and AT&T
Microelectronics.
Joseph M. Zelayeta was named Executive Vice President, Worldwide Operations
in September 1997. Prior to that time, he served as Senior Vice President of
Research and Development, and General Manager of U.S. Operations between August
1995 and September 1997. Employed with the Company since 1981, Mr. Zelayeta has
held management and executive positions in research and development and
manufacturing operations since 1986.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On January 25, 2000, we announced a two-for-one stock split, which was
declared by the Board of Directors as a 100% stock dividend payable to
stockholders of record on February 4, 2000 as one new share of common stock for
each share held on that date. The newly issued common stock shares were
distributed on February 16, 2000. In the following table, market prices of our
common stock have been restated to give retroactive recognition to the
two-for-one common stock split.
Our stock trades on the New York Stock Exchange under the symbol "LSI." The
high and low sales prices for the stock for each full quarterly period within
the two most recent fiscal years as reported on the Exchange are:
2000 1999
-------------- --------------
First Quarter................................. $30.00 - 88.25 $ 8.06 - 14.75
Second Quarter................................ $43.00 - 74.94 $13.75 - 23.09
Third Quarter................................. $28.88 - 60.00 $22.56 - 30.72
Fourth Quarter................................ $16.43 - 32.63 $22.06 - 35.63
-------------- --------------
Year.......................................... $16.43 - 88.25 $ 8.06 - 35.63
============== ==============
At March 5, 2001, there were approximately 3,883 owners of record of our
common stock.
We have never paid cash dividends on our common stock. It is presently our
policy to reinvest our earnings internally, and we do not anticipate paying any
cash dividends to stockholders in the foreseeable future. In addition, pursuant
to the existing credit agreement by and among us, LSI Logic Japan Semiconductor,
Inc., and ABN AMRO Bank N.V., as further described in Item 7 of Part II herein
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition and Liquidity", we are
prohibited from declaring or paying cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR CONSOLIDATED SUMMARY
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.................................................... $2,737,667 $2,089,444 $1,516,891 $1,322,626 $1,271,855
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues.......................................... 1,568,332 1,286,844 884,598 694,274 716,755
Research and development.................................. 378,936 297,554 291,125 229,735 187,749
Selling, general and administrative....................... 306,962 257,712 226,258 196,359 171,733
Acquired in-process research and development.............. 77,438 4,600 145,500 2,850 --
Restructuring of operations and other non-recurring items,
net..................................................... 2,781 (2,063) 75,400 -- --
Amortization of non-cash deferred stock compensation...... 41,113 -- -- -- --
Amortization of intangibles............................... 72,648 46,625 22,369 4,472 3,869
---------- ---------- ---------- ---------- ----------
Total costs and expenses............................ 2,448,210 1,891,272 1,645,250 1,127,690 1,080,106
---------- ---------- ---------- ---------- ----------
Income/(loss) from operations............................... 289,457 198,172 (128,359) 194,936 191,749
Interest expense............................................ (41,573) (39,988) (8,865) (1,860) (13,850)
Interest income and other, net.............................. 51,766 17,640 (8,952) 34,891 30,483
Gain on sale of equity securities........................... 80,100 48,393 16,671 -- --
---------- ---------- ---------- ---------- ----------
Income/(loss) before income taxes, minority interest and
cumulative effect of change in accounting principle....... 379,750 224,217 (129,505) 227,967 208,382
Provision for income taxes.................................. 142,959 65,030 9,905 60,819 57,521
---------- ---------- ---------- ---------- ----------
Income/(loss) before minority interest and cumulative effect
of change in accounting principle......................... 236,791 159,187 (139,410) 167,148 150,861
Minority interest in net income of subsidiaries............. 191 239 68 727 499
---------- ---------- ---------- ---------- ----------
Income/(loss) before cumulative effect of change in
accounting principle...................................... 236,600 158,948 (139,478) 166,421 150,362
Cumulative effect of change in accounting principle......... -- (91,774) -- (1,440) --
---------- ---------- ---------- ---------- ----------
Net income/(loss)........................................... $ 236,600 $ 67,174 $ (139,478) $ 164,981 $ 150,362
========== ========== ========== ========== ==========
Basic earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.................................... $ 0.76 $ 0.54 $ (0.49) $ 0.59 $ 0.58
Cumulative effect of change in accounting principle....... -- (0.31) -- -- --
---------- ---------- ---------- ---------- ----------
Net income/(loss)......................................... $ 0.76 $ 0.23 $ (0.49) $ 0.59 $ 0.58
========== ========== ========== ========== ==========
Diluted earnings per share:
Income/(loss) before cumulative effect of change in
accounting principle.................................... $ 0.70 $ 0.51 $ (0.49) $ 0.57 $ 0.54
Cumulative effect of change in accounting principle....... -- (0.28) -- -- --
---------- ---------- ---------- ---------- ----------
Net income/(loss)......................................... $ 0.70 $ 0.23 $ (0.49) $ 0.57 $ 0.54
========== ========== ========== ========== ==========
Year-end status:
Total assets.............................................. $4,197,487 $3,206,605 $2,823,805 $2,155,365 $1,974,628
Long-term debt............................................ $ 846,311 $ 671,775 $ 558,966 $ 69,455 $ 261,508
Stockholders' equity...................................... $2,498,137 $1,855,832 $1,524,473 $1,586,382 $1,330,528
========== ========== ========== ========== ==========
The Company's fiscal years ended on December 31 in 2000, 1999, 1998 and 1997
and the Sunday closest to December 31 in 1996. For presentation purposes, the
Consolidated Financial Statements refer to December 31 as year-end. During 2000,
the Company recorded amortization of non-cash deferred stock compensation of $41
million as a result of the adoption of FASB interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" which was
effective July 1, 2000. The acquisitions of DataPath Systems, Inc. and Syntax
Systems, Inc. closed on July 14, 2000 and November 29, 2000, respectively, after
the adoption of the new interpretation. (See Note 2 of the Notes to the
Consolidated Financial Statements.) During 2000, we recorded a $77 million
in-process research and development ("IPR&D") charge associated with the
acquisitions of ParaVoice, DataPath, Intraserver and the purchases of divisions
of NeoMagic and Cacheware. During 1999, the Company expensed an unamortized
preproduction balance of $92 million, net of taxes, associated with the
manufacturing facility in Gresham, Oregon and has presented it as a cumulative
effect of a change in accounting principle in accordance with SOP No. 98-5,
"Reporting on the Costs of Start-up Activities." (See Notes 1 and 7 of the Notes
to the Consolidated Financial Statements.) During 1998, the Company reported a
charge for restructuring of $75 million (see Note 4 of the Notes) and in-process
research and development costs of $146 million related to the acquisition of
Symbios on August 6, 1998. (See Note 2 of the Notes to the Consolidated
Financial Statements.)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenues increased 31% to $2.74 billion in 2000 from 1999. The increase was
primarily the result of increased demand for products used in broadband
communications, networking infrastructure and storage infrastructure
applications and storage area network ("SAN") systems.
Gross profit margin increased to 43% in 2000 from 38% in 1999 primarily due
to improved utilization of our fabrication facilities as well as our focus on
communications and storage products as many of the products we offer in
broadband communications and storage infrastructure applications have higher
margins. Operating expenses increased 46% to $880 million in 2000 from $604
million in 1999. The increase was primarily a result of a $77.4 million charge
for acquired in-process research and development, $41.1 million amortization of
acquisition-related non-cash deferred stock compensation, $26.0 million
additional amortization of goodwill and additional increase in research and
development and selling, general and administrative expenses incurred in
connection with the acquisition of companies noted above. The acquired
in-process research and development and the deferred stock compensation stemming
from acquisitions are discussed further below and in Note 2 of the Notes. For
the years ended December 31, 2000 and 1999, gains on sale of equity securities
were $80.1 million and $48.4 million, respectively. For the year ended December
31, 2000, we recorded net income of $236.6 million or $0.70 income per diluted
share compared to net income for the same period in 1999 of $67.2 million or
$0.23 per diluted share. Net income in 1999 would have been $91.8 million or
$0.28 per share higher on a diluted basis but for the cumulative effect of a
change in accounting principle recorded in the first quarter of 1999. (See Note
1 of the Notes.)
Cash and short-term investments grew 71% to $1.13 billion as of December
31, 2000 from $661.3 million as of December 31, 1999. The increase is
attributable to increased cash flows from our continuing operations. Our
strategic cash position and greater cash flows provide us with the capital to
make strategic acquisitions and to continue investing in key technologies.
In 2000, 1999 and 1998, our fiscal year ended December 31. Fiscal years
2000, 1999 and 1998 were 52-week years.
STOCK SPLIT. On January 25, 2000, we announced a two-for-one common stock
split, which was declared by the Board of Directors as a 100% stock dividend
payable to stockholders of record on February 4, 2000 as one new share of common
stock for each share held on that date. The newly issued common stock shares
were distributed on February 16, 2000. In the following discussion and analysis,
stockholders' equity has been restated to give retroactive recognition to the
two-for-one common stock split announced on January 25, 2000 for all periods
presented by reclassifying the par value of the newly issued shares arising from
the split from additional paid-in capital to common stock. In addition, all
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of our common stock have been restated.
ACQUISITIONS. We are continually exploring strategic acquisitions that
build upon our existing library of intellectual property and increase our
leadership position in the markets where we operate. During 2000, we acquired a
division of NeoMagic Corporation ("NeoMagic"), a division of Cacheware, Inc.
("Cacheware"), Intraserver Technology, Inc. ("Intraserver"), DataPath Systems,
Inc. ("DataPath"), ParaVoice Technologies, Inc. ("ParaVoice") and Syntax
Systems, Inc. ("Syntax"). The acquisitions were accounted for as purchases, and
accordingly, the results of operations and estimated fair value of assets
acquired and liabilities assumed were included in our Consolidated Financial
Statements as of the effective date of each acquisition.
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The acquisitions are summarized below. (See Note 2 of the Notes to the
Consolidated Financial Statements referred to hereafter as "Notes".)
ACQUISITION PURCHASE IDENTIFIED DEFERRED
COMPANY DATE PRICE CONSIDERATION IPR&D GOODWILL INTANGIBLES COMPENSATION
------- ------------- -------- ------------------- ----- -------- ----------- ------------
(AMOUNTS IN MILLIONS)
Division of NeoMagic April 2000 $ 15.4 Cash $6.4 $ 1.9 $ 5.8 $ --
Division of Cacheware April 2000 22.2 Cash 8.3 8.5 5.2 --
Intraserver May 2000 62.9 1.2 million shares, 1.6 50.8 17.5 --
0.2 million options
DataPath July 2000 420.8 7.5 million shares, 54.2 154.0 17.4 201.6
1.6 million options
ParaVoice October 2000 38.6 Cash 7.0 10.4 21.2 --
Syntax November 2000 58.8 1.4 million shares, -- 42.0 25.4 2.5
0.6 million options
On June 22, 1999, we combined with SEEQ Technology, Inc. ("SEEQ") in a
transaction accounted for as a pooling of interests. All financial information
has been restated retroactively to reflect the combined operations of LSI Logic
Corporation and SEEQ as if the combination had occurred at the beginning of the
earliest period presented. (See Note 2 of the Notes.) Prior to the combination,
SEEQ's fiscal year-end was the last Sunday in September of each year, whereas we
operate on a year ending December 31. SEEQ's financial information has been
recast to conform to our year-end.
While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, we recommend that you
read this discussion and analysis in conjunction with the remainder of this
Annual Report on Form 10-K.
We operate in an industry sector where stock values are highly volatile and
may be influenced by economic and other factors beyond our control. See
additional discussion contained in "Risk Factors" set forth in Part I of this
Annual Report on Form 10-K for the year ended December 31, 2000.
Statements in this discussion and analysis include forward looking
information statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,
as amended. These statements involve known and unknown risks and uncertainties.
Our actual results in future periods may be significantly different from any
future performance suggested in this report. Risks and uncertainties that may
affect our results may include, among others:
- Fluctuations in the timing and volumes of customer demand;
- Currency exchange rates;
- Availability and utilization of our manufacturing capacity;
- Timing and success of new product introductions; and
- Unexpected obsolescence of existing products.
Where more than one significant factor contributed to changes in results
from year to year, we have quantified material factors throughout the MD&A where
practicable.
RESULTS OF OPERATIONS
REVENUE. We operate in two reportable segments: the Semiconductor segment
and the SAN Systems segment. In the Semiconductor segment, we design, develop,
manufacture and market integrated circuits, including application-specific
integrated circuits, (commonly known in the industry as ASICs), application-
specific standard products and related products and services. Semiconductor
design and service revenues include engineering design services, licensing of
our advanced design tools software, and technology transfer and support
services. Our customers use these services in the design of increasingly
advanced integrated circuits characterized by higher levels of functionality and
performance. The proportion of revenues from ASIC design and related services
compared to semiconductor product sales varies among customers depending upon
their specific requirements. In the SAN Systems segment, we design, manufacture,
market
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and support high-performance data storage management and storage systems
solutions and a complete line of Redundant Array of Independent Disk ("RAID")
systems, subsystems and related software. The SAN Systems segment was added in
August 1998 with the purchase of Symbios. (See Notes 2 and 11 of the Notes.)
Total revenues increased 31% to $2.74 billion in 2000 from $2.09 billion
1999. Revenues for the Semiconductor segment increased 29% to $2.34 billion in
2000 from $1.81 billion in 1999. Significant factors that contributed to this
revenue growth included increased demand for products used in broadband
communications, networking infrastructure and storage infrastructure
applications, particularly in broadband access and networks and storage
components. Revenues for the SAN Systems segment increased 43% to $399.1 million
in 2000 from $279.3 million in 1999. The increase was attributable to growth in
demand for all products used in the SAN Systems segment. There were no
significant inter-segment revenues during the periods presented.
Total revenues increased 38% to $2.09 billion in 1999 from $1.52 billion in
1998. Revenues for the Semiconductor segment increased 27% to $1.8 billion in
1999 from $1.4 billion in 1998. Significant factors that contributed to this
revenue growth included increased demand for products used in communications
applications and additional revenues from the acquisition of Symbios on August
6, 1998 (See Notes 2 and 11 of the Notes), which included increased demand for
products used in network computing applications. Revenues for the SAN Systems
segment increased 200% to $279.3 million in 1999 from $93.0 million in 1998. The
increase was primarily attributable to recording a full year of revenue from the
acquisition of Symbios in August of 1998. The demand for products used in the
SAN Systems segment also increased significantly after the acquisition due to
rapid growth of the Internet.
One customer represented 12% and 11% of our total consolidated revenues for
each of the years ended December 31, 2000 and 1999, respectively, and another
customer represented 12% of our total consolidated revenues for the year ended
December 31, 1998. No customer represented 10% or more of total revenues in the
Semiconductor segment for the year ended December 31, 2000. For the years ended
December 31, 1999 and 1998, one customer represented 10% and 13% of total
Semiconductor revenues, respectively. In the SAN Systems segment, there were
three customers with revenues representing 31%, 17% and 13% of total SAN Systems
revenues for the year ended December 31, 2000. During 1999, there were three
customers with revenues representing 29%, 27% and 14% of SAN Systems revenues.
During 1998, there were three customers with revenues representing 17%, 15% and
14% of SAN Systems revenues.
Revenues from domestic operations were $1.68 billion, representing 61% of
consolidated revenues for 2000, as compared to $1.21 billion and $957 million
for 1999 and 1998, representing 58% and 63% of consolidated revenues,
respectively.
We expect that first quarter 2001 revenues will decline approximately 30%
sequentially from the $751 million in the fourth quarter of 2000.
OPERATING COSTS AND EXPENSES. Key elements of the consolidated statements
of operations, expressed as a percentage of revenues for the respective segment,
were as follows:
2000 1999 1998
---- ---- ----
CONSOLIDATED:
Gross profit margin....................................... 43% 38% 42%
Research and development.................................. 14% 14% 19%
Selling, general and administrative....................... 11% 12% 15%
Income/(loss) from operations............................. 11% 9% (8)%
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Key elements of the statement of operations for the Semiconductor and SAN
Systems segments, expressed as a percentage of revenues, were as follows:
2000 1999 1998
---- ---- ----
SEMICONDUCTOR SEGMENT:
Gross profit margin....................................... 44% 39% 42%
Research and development.................................. 15% 15% 20%
Selling, general and administrative....................... 11% 12% 15%
Income/(loss) from operations............................. 10% 10% (6)%
2000 1999 1998
---- ---- ----
SAN SYSTEMS SEGMENT:
Gross profit margin....................................... 38% 33% 32%
Research and development.................................. 7% 9% 9%
Selling, general and administrative....................... 13% 11% 13%
Income/(loss) from operations............................. 13% 9% (48)%
GROSS PROFIT MARGIN. We have advanced wafer manufacturing operations in
Oregon, Colorado, California and Japan. This allows us to maintain our ability
to provide products to customers with minimal disruption in the manufacturing
process due to economic and geographic risks associated with each geographic
location. During 1999, we entered into a technology transfer agreement with
Silterra Malaysia Sdn. Bhd. (formerly known as Wafer Technology (Malaysia) Sdn.
Bhd.) ("Silterra") under which we grant licenses to Silterra with respect to
certain of our wafer fabrication technologies and provide associated
manufacturing training and related services. In exchange, we receive cash and
equity consideration valued at $120.0 million over three years during which
transfers and the performance of our obligations are scheduled to occur. (See
Note 3 of the Notes.) During 2000 and 1999, we provided engineering training
valued at $4.0 million and $2.0 million, respectively. The value of the
engineering training was recorded as a credit to cost of revenues. We will
provide an additional $2.0 million of engineering training over the remaining
contract term of one year, which also will be recorded as a credit to cost of
revenues.
The gross profit margin percentage for 2000 increased to 43% from 38% in
1999 on a consolidated basis, reflecting improved gross profit margins in both
of our segments. The gross profit margin percentage for the Semiconductor
segment was 44% in 2000 compared to 39% in 1999. The increase primarily
reflected a combination of the following factors:
- Increased production capacity utilization at our fabrication facility in
Gresham, Oregon, which commenced operations in December 1998, and
- Our focus on higher margin products used in broadband communications and
storage infrastructure applications.
The increase in gross profit margin in 2000 as compared to 1999 was offset
in part by the following factors:
- $11.1 million non-recurring charge associated with the elimination of a
non-strategic product area, and
- An increase in compensation-related expenses.
The gross profit margin percentage for the SAN Systems segment was 38% in
2000 compared to 33% in 1999. The increase is primarily attributable to changes
in product mix to include newer generation products, which have higher margins
than other SAN business products.
We expect first quarter 2001 gross profit margin to be approximately 40%.
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The gross profit margin percentage for 1999 decreased to 38% from 42% in
1998 on a consolidated basis. The gross profit margin percentage for the
Semiconductor segment was 39% in 1999 compared to 42% in 1998. The decrease
primarily reflected a combination of the following factors:
- Increased cost of revenues from commencing operations at our fabrication
facility in Gresham, Oregon in December of 1998;
- Lower average selling prices of products used in certain semiconductor
product applications, including the impact from currency fluctuations;
and
- Changes in product mix primarily related to Symbios product additions
from August 6, 1998.
The gross profit margin percentage for the SAN Systems segment was
relatively flat at 33% in 1999 compared to 32% in 1998.
Our operating environment, combined with the resources required to operate
in the semiconductor industry, requires that we manage a variety of factors.
These factors include, among other things:
- Product mix;
- Factory capacity and utilization;
- Manufacturing yields;
- Availability of certain raw materials;
- Terms negotiated with third-party subcontractors; and
- Foreign currency fluctuations.
These and other factors could have a significant effect on our gross profit
margin in future periods.
Changes in the relative strength of the yen may have a greater impact on
our gross profit margin than other foreign exchange fluctuations due to our
wafer fabrication operations in Japan. Although the yen strengthened (the
average yen exchange rate for 2000 appreciated 6% from 1999), the effect on
gross profit margin and net income was not significant because yen-denominated
sales offset a substantial portion of yen-denominated costs during the period.
Moreover, we hedged a portion of our remaining yen exposure. (See Note 6 of the
Notes.) Future changes in the relative strength of the yen or mix of
foreign-denominated revenues and costs could have a significant effect on our
gross profit m