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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______to_______.
Commission File 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.)
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 433-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------------------- ------------------------
Common Stock, $0.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [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
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant, based upon the closing price of the Common
Stock on June 30, 2002, as reported on the New York Stock Exchange, was
approximately $8.75. Shares of Common Stock held by each executive officer and
director and by each person who owns more than 5% of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 7, 2003, the Registrant had 375,208,474 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part
III of this Form 10-K Report: Proxy Statement for Registrant's 2003 Annual
Meeting of Stockholders.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) YES [X] No [ ]
================================================================================
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including the risk factors set forth below and
elsewhere in this Report. See "Risk Factors" in Part I, Item 1 and "Factors
that may Affect Future Results" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 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 four markets: communications, consumer products, storage components
and storage systems. Our integrated circuits are used in a wide range of
communication devices, including devices used for wireless and broadband data
networking applications. We also provide other types of integrated circuit
products and board-level products for use in consumer applications,
high-performance storage controllers and systems for storage area networks.
We operate in two segments -- the Semiconductor segment and the Storage
Systems segment -- in which we offer products and services for a variety of
electronic systems applications. Our products are marketed primarily to
original equipment manufacturers ("OEMs") who sell products targeted for
applications in our major markets.
In the Semiconductor segment, we use advanced process technologies and
comprehensive design methodologies to design, develop, manufacture and market
highly complex integrated circuits ("ICs"). These system-on-a-chip solutions
include both application specific integrated circuits, commonly referred to as
ASICs, and standard products. Semiconductor segment product offerings also
include redundant array of independent disks ("RAID") host bus adapters and
related products and services. 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.
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[RegTM] 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. We have developed and use complementary metal oxide
semiconductor ("CMOS") process technologies to manufacture our integrated
circuits.
In the Storage 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 OEMs and a
specialized network of resellers. Products and solutions distributed through
these channels may exclude LSI Logic Storage Systems' brand identification.
When included, LSI Logic Storage Systems' brand identity may appear alone or in
tandem with OEM brand identification.
LSI Logic Corporation was incorporated in California on November 6, 1980,
and was reincorporated in Delaware on June 11, 1987. Our principal offices are
located at 1621 Barber Lane, Milpitas, California 95035, and our telephone
number at that location is (408) 433-8000. Our home page on the Internet is
www.lsilogic.com. The contents of this website are not incorporated in or
otherwise to be regarded as part of this annual report on Form 10-K. Copies of
this and other annual reports, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to these reports are available free of charge on
our website as soon as reasonably practical after such documents are filed
electronically with the Securities and Exchange Commission.
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Business Strategy
Semiconductor Business Strategy
Our objective is to continue our industry leadership in the design,
development, manufacture and marketing of highly integrated, complex integrated
circuits and other electronic components and system-level products that provide
our customers with silicon-based system-level solutions. To achieve this
objective, our business strategy includes the following key elements:
- Target Growth Markets and Selected Customers. We concentrate our sales
and marketing efforts on leading OEM customers in targeted growth markets,
including communications, consumer and storage components applications. Our
engineering expertise is focused on developing technologies that will meet the
needs of leading-edge customers in order to succeed in these market areas.
- Emphasize CoreWare Methodology and System-on-a-Chip Capability. Our
CoreWare design methodology enables the integration of one or more pre-designed
circuit elements with customer-specified elements and memory to create system
capabilities on a single chip. This results in higher product functionality,
higher performance, greater differentiation and faster time to market. We also
have used this design methodology to develop proprietary standard products.
-Promote Highly Integrated Design and Manufacturing Technology. We use
proprietary and leading third-party electronic design automation, or EDA,
software design tools. Our design tool environment is highly integrated with
our manufacturing process requirements so that it will accurately simulate
product performance. This integration reduces design time and project cost. We
continually evaluate and, as appropriate, develop expertise with third-party
EDA tools from leading and emerging suppliers of such products.
- Provide Flexibility in Design Engineering. We engage with customers of
our semiconductor products under various arrangements whereby the extent of the
engineering support we provide will be determined in accordance with the
customer's requirements. For example, a customer may primarily use its own
engineers for substantial development of its product design and retain our
support for silicon-specific engineering work. We also enter into engineering
design projects, including those on a "turn-key" basis.
- Maintain High-Quality and Cost-Effective Manufacturing. 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. 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, are ISO-9002 and ISO-14000 certified
and our assembly and test subcontractors in Asia are ISO-9002 certified, which
are important international measures for quality and environmental stewardship.
- Leverage Alliances with Key Partners. We are continually seeking to
establish relationships with key partners in a diverse range of semiconductor
technologies to promote new products, services, operating standards and
manufacturing capabilities and to avail ourselves of cost efficiencies that may
be obtained through collaborative development.
- Develop and Drive Industry Standards to Achieve Market Advantage. We are
a leader in developing and promoting important industry standard architectures,
functions, protocols and interfaces. We believe that this strategy will enable
us to quickly launch new standard-based products, allowing our customers to
achieve time-to-market and other competitive advantages.
- Operate Worldwide. We market our products and engage with our customers
on a worldwide basis through direct sales, marketing and field technical staff
and through independent sales representatives and distributors. Our network of
design centers located in major markets allows us to provide customers with
highly experienced engineers, to interact with customer engineering management
and system architects, to develop designs for new products and to provide
continuing after-sale customer support.
Storage Systems Business Strategy
- Highly Leveraged Core Competencies. In the Storage Systems market, we
leverage expertise used to develop our semiconductors, storage input/output
components, storage management software and storage systems in the
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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.
- Flexible Business Models. Our strategy is to provide flexible,
customizable solutions with room for value-added components, software and
services provided by the channel. In addition to providing engineering
services, we provide sales training and marketing assistance both to our OEM
customers and to their end-customers. Our modular product set allows OEMs and
resellers to devise a solution to best meet their needs and to satisfy
customers.
- Leveraged Alliances. In January 2002, the Company and Storage Technology
Corporation ("StorageTek") announced an alliance under which StorageTek became
the worldwide master distributor of co-branded open storage products.
- Expanded Opportunities through Acquisitions. In August 2002, we
completed the asset purchase of the Mylex business unit of IBM Corporation
("IBM"). The acquisition expanded the engineering capacity and expertise of the
Company to develop new products in the expanding entry-level storage systems
space. We also gained access to the Mylex sales channels and an expanded
customer base in new geographic markets.
Technology, Products and Services
ASIC Technology
Our CoreWare design methodology offers a comprehensive design approach for
creating a system-on-a-chip efficiently, predictably and rapidly. Our CoreWare
libraries include high-level intellectual property building blocks created
around industry standards. Our CoreWare cells are connected electronically with
other memory and logic elements to form an entire system on a single chip.
These system-on-a-chip solutions serve our customers in the communications,
consumer and storage markets.
Our continued 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 our cell-based technology than they do with other technologies.
We have expanded our technology product offerings to include the
RapidChipTM product in addition to our cell-based product lines. Introduced in
the third quarter of 2002, our new RapidChip product addresses a growing market
need for flexible, cost-effective and a fast time-to-market solution with
performance comparable to cell-based ASICs and at a cost significantly lower
than field programmable gate arrays ("FPGAs"). RapidChip is an innovative
semiconductor platform set to reshape the way complex chips are designed and
manufactured. A key feature of RapidChip is the customer-friendly interface
that dramatically simplifies the underlying complexity of the design tools and
flows associated with system-on-a-chip design. Rule sets automatically manage
architectural design, verification and physical design. As a result, design
schedules for high-performance chips can be very predictable.
LSI works with customers to pre-define RapidSlicesTM applicable to the
communications, consumer and storage market segments to provide the basis for
rapid personalization of the RapidChip to help meet the customer product
objectives. A slice is a pre-manufactured chip in which all silicon-based
layers have been built, leaving the top metal layers to be completed with the
customer's unique intellectual property. In January 2003, we introduced the
first offering in the RapidChip configurable product family. Featuring 20
gigabits per second of full-duplex throughput, StreamSlice targets, high-end
switches, routers and other communications system applications. We believe the
RapidChip platform product fills a growing gap between the traditional ASIC and
FPGA solutions, complementing our ASIC product offerings.
Typically, the ASIC design process involves participation by both LSI
Logic and customer engineers. We engage our customers early in their new system
product development process and accept large design assignments where we share
development costs with the customer. We provide advice on the product design
strategies to optimize
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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.
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.
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.
Semiconductor Products
In our semiconductor components business, we design, manufacture and
supply ASICs, standard products, host adapter boards and RAID host adapter
board software to customers competing in global communications, consumer and
storage markets.
ASICs are semiconductors that are designed for unique, customer-specified
applications. Standard products are developed for market applications we define
and are targeted to be sold to multiple customers. Both ASIC and standard
products are sold to customers for incorporation into system level products and
may incorporate our intellectual property building blocks. Our ASICs and
standard products are predominantly designed and manufactured using our
proprietary process technologies.
Communications
LSI Logic offers highly integrated, high-performance, system-on-a-chip
silicon solutions for use in the design of communications equipment. We focus
on serving customers who develop systems for the Enterprise, Metropolitan, and
Wide Area Network sectors.
Leading edge switches and routers require multi-gigabit throughput
capability. LSI Logic's HyperPHY[RegTM] SERDES (Serializer-Deserializer)
technology enables chip-to-chip and back-plane connectivity at speeds in excess
of 3Gbits/second. We also provide our customers with CoreWare intellectual
property in support of key industry standard interconnect technologies
including RapidIO, HyperTransport, SPI-4, 5, SFI-4, 5, NPSI and 10/100/1G/ 10G
Ethernet.
In addition to customer logic, our solutions incorporate embedded ARM,
MIPS, digital signal processors ("DSPs") as well as memory structures and
mixed-signal cores. We provide each customer with the opportunity to deliver
unique value in a custom silicon device.
Consumer Products. For the consumer market, we offer a broad array of
products, including both standard products and custom solutions.
o Consumer standard products. We design, develop, manufacture and market
semiconductor devices, software and reference designs for digital video
and audio applications, enabling new digital video and audio applications.
We are focused on providing solutions into rapidly growing applications
such as DVD players, digital set-top boxes, cable modems, broadcast
encoders, video editing systems, as well as emerging applications such as
DVD recorders, home servers, residential gateways and personal video
recorders.
o Consumer custom solutions. We also offer systems-on-a-chip for consumer
applications. We focus on consumer market segments employing our
intellectual property portfolio, design methodology and turn-key product
offerings (including manufacturing, assembly and test) to provide a
customized solution. Our main focus is in the video game console market.
Other market opportunities include digital cameras and camcorders,
portable digital audio and video, automobile infotainment (GPS, digital
radio and backseat
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entertainment), personal digital assistant multimedia products and other
emerging multimedia applications where an effective standard solution is
not currently available.
o DSL products. We provide standard products, device and applications
software and reference designs for DSL modems, Home Gateways and embedded
DSL applications. We are focused on the network-centric modem market for
which we provide a complete reference platform. We also provide a variety
of home connectivity solutions, both wired and wireless, based on this
platform.
Storage Components
Our ASIC and standard product solutions offered to customers in worldwide
storage component markets 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 standard products in Fibre Channel and SCSI, including host adapter ICs
for motherboard or adapter applications, SCSI expander ICs, PCI-based host
adapter boards and LSI's Fusion-MPTTM software drivers for these product
families.
In addition, we offer a wide range of RAID storage solutions, including
our IDEal software-based RAID product, integrated RAID in our Fusion-MPT
based-storage IC and adapter products, MegaRAID[RegTM], RAID on Motherboard
single chip solutions, and a family of PCI-RAID host adapters featuring ATA,
Serial ATA, SCSI and Fibre Channel interfaces, along with fully featured
software and utilities for storage configuration and management.
We also offer solutions using our ASIC technology to customers who develop
Fibre Channel storage area network ("SAN") switches and host adapters, storage
systems, hard disk drive and tape peripherals. Our Fibre Channel offerings
include the GigaBlaze high performance serial transceiver supporting Fibre
Channel, Serial ATA, Gigabit Ethernet, Infiniband, Serial Attach SCSI and
PCI-Express industry standards and the Merlin[RegTM] family of high-performance
Fibre Channel protocol controllers.
In August 2002, we completed an asset purchase of IBM's Mylex business
unit. Through this acquisition, the Mylex PCI-RAID products and technologies
became a part of the Storage Components group and enhanced our presence in the
storage market.
Storage Systems Products
In the Storage Systems segment, we offer a broad line of network storage
that spans customer enterprises from workgroup to data center. Our product
lines range from intelligent controller and drive modules to complete storage
systems. These offerings allow our products to be integrated on a component
basis or configured 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.
- Storage Systems. Our complete storage systems are based on highly
available and scalable hardware and software components integrated into fully
tested SAN solutions for the enterprise market.
o E-Series Branded. Our E-Series storage systems for SANs combine Fibre
Channel performance with our proprietary multi-pathing architecture to
deliver high performance for a wide variety of applications. Highly
available and fully redundant dual-active controllers, efficiently managed
with SANtricityTM Storage Manager software, differentiate our storage
products from those of our competitors.
The E-Series storage family supports all high-use operating systems,
including Windows NT, SolarisTM, HP-UX, AIX, SGI, IRIX, NetWare and Linux
platforms. Our products allow customers to dynamically increase storage
capacity from 72 gigabytes (billions of information bytes) to as much as 33
terabytes (trillions of information bytes) per system. 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 and easy to manage system.
o Unbranded. Our unbranded storage systems for SANs provide similar
performance and features found in the branded family, but are marketed and
sold through OEM relationships.
o Storage Controller Modules. Our storage controller modules support medium
(1 Gbit/second) and high speed (2 Gbits/second) Fibre channel interfaces.
The controllers deliver superior performance for both high
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transaction volumes and large data block workloads. Combined with our
drive modules, each controller module manages scalable capacity up to 33
terabytes. Modules are available in either rack-mounted or desk side
configurations. Other features include HotScale technology for dynamic
system expansion and reconfiguration, redundant dual-active controllers
and automatic fail-over for maximum data availability.
o Storage Drive Modules. Our storage drive modules increase storage
capacity and performance as needs change. Drive modules use on-board
intelligence to monitor power, temperature and fans, and to relay
information back to the controller. Advanced technology from industry disk
drive vendors is integrated into the modules to maximize capacity and
minimize floor space requirements
- SANtricity Storage Manager Software. This storage management software
enables users to consolidate storage through the SANshare 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.
- Storage Virtualization. The ContinuStor[RegTM] Director is an
intelligent storage management system that provides storage virtualization,
heterogeneous storage, host support and local and remote mirroring
capabilities. Storage virtualization is an emerging method of managing storage
without regard to its physical characteristics, enabling the interoperability
of storage devices from different manufacturers in a more efficient manner.
This generally results in a significant reduction of storage management
complexity, improvements in capacity utilization and more cost-effective
business continuance and disaster recovery implementations with respect to data
storage.
As a major open storage 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 high
performance computing applications.
In 2002, LSI Logic Storage Systems, Inc. enhanced its entire product line
when it introduced the E4600, the E5600 and E5600HPCx and SANtricity Storage
Manager 8.30 software. These new products extend the range of applicability to
better serve market segments that demand the highest levels of connectivity,
performance and storage capacity.
In August 2002, we completed an asset purchase of IBM's Mylex business
unit. The acquisition expanded our entry-level product portfolio for storage
systems.
We offer a toll-free 24 hours-a-day, 7 days-a-week technical support
hotline for customers worldwide using the E-Series line of 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
The highly competitive semiconductor industry is characterized by rapidly
changing technology, short product cycles and emerging standards. Our marketing
strategy requires that we accurately forecast trends in the evolution of
product and technology development. We must then act upon this knowledge in a
timely manner to develop competitively priced products offering superior
performance. As part of this strategy, we are active in the formulation and
adoption of critical industry standards that influence the design
specifications of our products. Offering products with superior price and
performance characteristics is essential to satisfy the rapidly changing needs
of our customers in the dynamic communications, consumer and storage markets.
Our semiconductor products and design services are primarily sold through
our network of direct sales and marketing and field engineering offices located
in North America, Europe, Japan and elsewhere in Asia. Our sites are
interconnected by means of advanced computer networking systems that allow for
the continuous, uninterrupted exchange of information that is vital for the
proper execution of our sales and marketing activities. International sales are
subject to risks common to export activities, including governmental
regulations, geopolitical risks, tariff increases and other trade barriers and
currency fluctuations.
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We rely primarily on direct sales and marketing, but we also work with
independent distributors and manufacturers' representatives in North America,
Europe, Japan and elsewhere in Asia. Some of our distributors possess
engineering capabilities, and design and purchase both ASICs and standard
products from us for resale to their customers. Other distributors focus solely
on the sale of standard products. Our agreements with distributors generally
grant limited rights to return standard product inventory and we defer revenue
for such inventory until the distributor sells the product to a third party.
Storage Systems Marketing and Distribution
Storage systems products are sold worldwide both on a direct basis to OEMs
and through indirect channels to end-users. The LSI Logic E-Series brand of
scalable storage systems is exclusively marketed through a network of
specialized 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 towards the
implementation of storage area networks to maximize performance, availability
and efficiency.
Our direct sales force provides customized storage 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 RAID 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 storage
systems solutions.
In January 2002, LSI Logic and StorageTek announced an alliance under
which StorageTek became the worldwide master distributor of co-branded open
storage products for LSI Logic Storage Systems. Further, the companies agreed
to market a full line of scalable, high performance, high availability disk
storage systems that will be engineered and manufactured by LSI Logic Storage
Systems and sold, installed and supported by StorageTek.
Customers
We seek to leverage our expertise in the fields of communications,
consumer, storage components and storage 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 us.
In 2002, Sony accounted for approximately 18% 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. Typically, 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.
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We own and operate manufacturing operations in the United States and
Japan. In addition, we utilize external wafer foundries located in Taiwan and
Malaysia. We use 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" or billionths of a meter called "nanometers." The measurement of the
channel length is expressed in two ways: effective electrical channel length
and drawn gate length. The effective electrical channel length is smaller than
the drawn gate length. Although we have used the convention of the effective
electrical channel length in the past, the drawn gate length measurement is now
believed to be more commonly used for the most advanced technologies.
Accordingly, in this Report on Form 10-K, we use only the drawn gate length to
identify our process technologies and have conformed all references to our
process technologies to reflect this change.
Our advanced submicron manufacturing processes are capable of producing
products with a drawn gate length as small as 0.18-micron in our G12[RegTM]
technology. Our 0.25-micron (G11[RegTM] process technology) allows up to 24
million usable gates on a single chip. Our G10[RegTM] process technology
utilizes 0.35-micron gate lengths. We have introduced our 0.13-micron GflxTM
technology through a joint development with our leading edge foundry partner,
Taiwan Semiconductor Manufacturing Company ("TSMC"). This new and flexible
process technology is capable of combining all of the system functions to
create totally new classes of 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
0.13-micron Gflx process technology offers 78 million usable logic gates. The
next generation is the 90-nanometer process technology. We have completed the
definition of a 90-nanometer system-on-a-chip process platform, which we call
G90, in participation with TSMC and other leading edge technology companies.
These advanced process technologies allow for greater circuit density and
increased functionality on a single chip.
A majority of our wafers are fabricated in our factories in Gresham,
Oregon and Tsukuba, Japan. The rest of the wafers are manufactured at external
wafer foundries in Taiwan and Malaysia. The factories in Gresham and Tsukuba
are ISO-9002 and ISO-14000 certified, which are important internationally
recognized standards for quality and environmental stewardship.
Our most advanced 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 in accordance with the G10,
G11, G12 and Gflx processes.
In January 2002, we announced a set of actions to reduce costs and
streamline operations, including a worldwide workforce reduction and downsizing
the Japan manufacturing facility. We recorded a restructuring charge for
severance of approximately 1,150 employees worldwide and exit costs primarily
associated with cancelled contracts and operating leases. As a result of the
restructuring actions, we recorded fixed asset write-downs due to impairment in
the United States and Japan that will be disposed of by sale.
In April 2001, we announced a co-development and foundry supply agreement
with TSMC. This agreement is part of our strategy to outsource, by which we
intend to procure a larger portion of our wafer requirements from external
sources. As a result of our joint development efforts with TSMC, we anticipate
purchasing, consistent with our outsourcing strategy, such portion of our wafer
volume requirements based on our Gflx process technology that we do not
manufacture ourselves. In addition, we anticipate being able to defer the need
to expand our manufacturing capacity for our Gflx process technology beyond the
time when products designed for that technology would begin volume production.
As described earlier, we have completed the definition of our newest technology
at the 90-nanometer technology node in participation with TSMC and other
leading edge technology companies. This technology is in the final stages of
development with prototype deployment expected in 2004.
Our fixed costs for manufacturing are high and are expected to remain high
because we continually make significant capital expenditures and access 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
8
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 smaller geometries. We also offer a mini-ball
grid array package that features a smaller package size without sacrificing
electrical and thermal performance. In addition, we 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 performed through independent subcontractors in the
Philippines, Malaysia, South Korea, Taiwan, Hong Kong and China. We also
utilize subcontractors in Thailand for the assembly and test of our host
adapter boards and RAID storage adapter controllers.
Both manufacturing and selling 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 a switch may
involve significant expense and could delay our technology advancements and
decrease manufacturing capabilities.
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. While such parts and materials have been available
to us, we have, on occasion, experienced difficulty in procuring certain parts
and materials. In 2002, we did not experience a shortage in the availability of
parts and raw materials.
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 be assured 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. An
interruption in the supply of raw materials or energy inputs for any reason
would have an adverse effect on our manufacturing operations.
9
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.
Storage Systems Manufacturing
The manufacturing of storage systems products involves the assembly and
testing of components, including our semiconductors, which are then integrated
into final products.
Storage systems product and manufacturing designs are highly modularized
for flexibility. Our manufacturing operations include 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.
- US Manufacturing. Our US 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. This facility has been certified ISO-9001:2000
compliant as of October 2001. Product quality is achieved through employee
training, automated testing and sample auditing. Supply line management extends
quality through the component and sub-assembly supplier base with continuous
reporting and supplier/product qualification programs.
- European Manufacturing. We maintain a manufacturing facility in Cork,
Ireland through an agreement with Flextronics International Ltd. This facility
is capable of assembly and testing of high performance array controllers,
rack-mount modules and complete storage systems.
The Irish site was established to provide flexibility in satisfying
European demand and to serve as a backup site in the event natural or
human-made disasters affect the manufacturing capacity of the Wichita, Kansas
facility. The Irish site is certified as ISO 9001:2000 compliant as of December
2001.
Our storage systems manufacturing operations are based primarily on an
integrated enterprise resource planning ("ERP") 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 man made
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 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 may not be a meaningful indicator of future
sales.
Storage Systems Backlog
In the Storage Systems segment, our large customers, who are OEMs, 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 may not be a
meaningful indicator of future sales.
10
Competition
Semiconductor Competitors
The semiconductor industry is intensely competitive and characterized by
constant technological change, rapid product obsolescence, evolving industry
standards and price erosion. Many of our competitors are larger, diversified
companies with substantially greater financial resources. Some of these are
also customers who have internal semiconductor design and manufacturing
capacity. We also compete with smaller and emerging companies whose strategy is
to sell products into specialized markets or to provide a portion of the
products and services that we offer.
Our major competitors include large companies such as Agere Systems, Inc.,
IBM Corporation, Philips Electronics, N.V., STMicroelectronics, Texas
Instruments, Inc. and Toshiba Corporation. Other competitors in strategic
markets include Adaptec, Inc., Agilent Technologies, Inc., Broadcom
Corporation, Mediatek Corp. and NEC 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 our competitors will develop other
design solutions that could have a material adverse impact on our competitive
position. Our competitors may also decide from time to time to aggressively
lower prices of products that compete with us in order to sell related products
or achieve strategic goals. Due to their customized nature, ASICs are not as
susceptible to price fluctuations as standard products. However, strategic
pricing by competitors can place strong pricing pressure on our products in
certain transactions, resulting in lower selling prices and lower gross profit
margins for those transactions.
The markets into which we sell our semiconductor products are subject to
severe price competition. We expect to continue to experience declines in the
selling prices of our semiconductor products over the life cycle of each
product. In order to offset or partially offset declines in the selling prices
of our products, we continue to reduce the costs of products through product
design changes, manufacturing process changes, yield improvements or
procurement of wafers from outsourced manufacturing partners. We do not believe
that we can continually achieve cost reductions that fully offset the price
declines of our products. 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 system-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.
11
Storage Systems Competitors
The storage 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 storage systems products compete primarily with
products from independent storage providers such as EMC Corporation and Hitachi
Data Systems Corporation, as well as offerings from major server vendors, such
as Hewlett Packard Company, IBM Corporation and Sun Microsystems, Inc. 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 systems products. There is no assurance that these
customers, which include IBM Corporation, NCR Corporation, Silicon Graphics,
Inc., Storage Technology Corporation and Sun Microsystems, Inc., will continue
to purchase our storage systems products.
Patents, Trademarks and Licenses
We maintain a patent program, and believe that our patents and other
intellectual property rights have value to our business. We have filed a number
of patent applications and currently hold more than 2,200 issued U.S. patents
and additional issued foreign patents, expiring from 2004 to 2022, relating to
certain of our products and technologies in both the Semiconductor and the
Storage 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 employees.
In the Semiconductor segment, we also protect our trade secrets and other
proprietary information through agreements with our customers, suppliers,
employees and 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 patent 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,
12
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 Storage Systems segment, we own a portfolio of patents and patent
applications concerning a variety of storage technologies. We also maintain
trademarks for certain of our products and services and claim copyright
protection for certain proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other proprietary
information through agreements and other security measures, and have
implemented internal procedures to identify patentable inventions and pursue
protection in selected jurisdictions.
Please see Item 3, Legal Proceedings for information regarding pending
patent litigation against LSI. Please also refer to the additional risk factors
set forth in the Risk Factors section and Note 13 of the Notes to the
Consolidated Financial Statements for additional information.
Research and Development
Our industry is characterized by rapid changes in products, design tools
and process technologies. We must continue to improve our existing products,
design-tool environment and process technologies, and to develop new ones in a
cost-effective manner to meet changing customer requirements and emerging
industry standards. If we are not able to successfully introduce new products,
design tools and process technologies or to achieve volume production of
products at acceptable yields using new manufacturing processes, there could be
a material adverse impact on our operating results and financial condition.
We operate the majority of our research and development facilities in
California, Colorado, Georgia, Kansas, Maryland, Minnesota, Oregon, Texas,
Canada, Germany and the United Kingdom. The following table shows our
expenditures on research and development activities for each of the last three
fiscal years (in thousands).
Year Amount Percent of Revenue
- ---- ------ ------------------
2002 ............................. $457,351 25%
2001 ............................. $503,108 28%
2000 ............................. $378,936 14%
Research and development expenses primarily consist of salaries and
related costs of employees engaged in ongoing research, design and development
activities and subcontracting costs.
Working Capital
Information regarding our working capital practices is incorporated herein
by reference from Item 7 of Part II hereof under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition, Capital Resources and Liquidity."
Financial Information about Geographic Areas
This information is included in Note 12 ("Segment and Geographic
Information Reporting") of the Notes to the Consolidated Financial Statements,
which information is incorporated herein by reference from Item 8 of Part II.
For a discussion of various risks attendant to foreign operations, see (1)
"Risk Factors" in this Item 1, in particular "We are exposed to fluctuations in
foreign currency exchange rates," "We procure parts and raw materials from
limited domestic and foreign sources," and "Our global operations expose the
Company to numerous international business risks," and (2) the section in Item
7A of Part II entitled "Foreign Currency Exchange Risk." This information is
incorporated herein by reference.
Environmental Regulation
Federal, state and local regulations, in addition to those of other
nations, impose various environmental controls on the use and discharge of
certain chemicals and gases used in semiconductor and storage product
processing. Our facilities have been designed to comply with these regulations
through the implementation of environmental management systems. We believe that
our activities conform to current environmental regulations. However,
increasing public attention has been focused on the environmental impact of
electronics and semiconductor
13
manufacturing operations. While to date, we have not experienced any material
adverse impact on our business from environmental regulations, we cannot
provide assurance that such regulations will not be amended so as to impose
expensive obligations on us in the future. In addition, violations of
environmental regulations or impermissible discharges of hazardous substances
could result in the necessity for the following actions:
- additional capital improvements to comply with such regulations or to
restrict discharges;
- liability to our employees and/or third parties; and/or
- business interruptions as a consequence of permit suspensions or
revocations or as a consequence of the granting of injunctions
requested by governmental agencies or private parties.
Employees
As of December 31, 2002, we had 5,281 full-time employees.
In January 2002, we announced a series of restructuring actions to tailor
the Company to our lower level of revenues. These actions included reducing the
worldwide workforce by approximately 1,150 positions or 16 percent of the
Company's workforce.
In February 2003, in an effort to further streamline operations and better
align operating expenses with projected revenues, the Company terminated
approximately 210 employees primarily involved in manufacturing operations,
research and development, marketing, and sales.
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 impact on our business and financial condition.
Seasonality
The Company's business is largely focused on the information technology
and consumer products markets. Due to seasonality in these markets, the Company
typically expects to see stronger growth in the last two quarters of the year.
RISK FACTORS
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this Form 10-K and in the documents incorporated herein by
reference. These are statements that relate to our expectations for future
events and time periods. Generally, the words, "anticipate," "expect," "intend"
and similar expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and actual results could differ
materially from those anticipated in the forward-looking statements.
A continued general economic weakness may further reduce our revenues. The
semiconductor industry is cyclical in nature and is characterized by wide
fluctuations in product supply and demand. Since 2001, the Company's financial
condition and results of operations have been significantly adversely affected
by the continuing weakness in the US economy. In addition, the Company's
results of operations are becoming increasingly dependent on the global
economy. Any geopolitical factors such as additional terrorist activities or
armed conflict, may adversely affect the global economy, which may affect the
recovery of the Company in 2003 and adversely impact its operating results and
financial condition. In addition, goodwill and other long-lived assets could be
impacted by a further decline in revenues because an impairment is measured
based upon estimates of future cash flows. These estimates include assumptions
about future conditions within our company and industry. See "Critical
Accounting Policies" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7.
Our product and process development activities occur in a highly
competitive environment characterized by rapid technological change. The
Semiconductor and Storage Systems segments in which we conduct business
14
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 may 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 provide assurance that the cores or
standard products that we select for investment of our financial and
engineering resources will be developed or acquired in a timely manner or will
enjoy market acceptance.
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 wafer
fabrication, 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. On the other hand, 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 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 wafer fabrication, test and assembly subcontractors, may be disrupted for
reasons beyond our control, including work stoppages, fire, earthquake, floods
or other natural disasters. California has experienced power shortages and any
future shortages could subject us to electrical "blackouts" or other
unscheduled interruptions of electrical power.
We outsource a substantial portion of wafers manufactured. The Company has
developed outsourcing arrangements for the manufacture of some of its products
based on process technology that is unique to the supplier. There is no
assurance that the third party manufacturer will be able to produce and deliver
wafers that meet the Company's specifications or that it will be able to
provide successfully the process technology it has committed. If the third
party is not able to deliver products and process technology on a timely and
reliable basis, the Company's results of operations could be adversely
affected. During periods of third party manufacturing capacity shortages, wafer
prices increase and may affect product margins.
We have significant capital requirements to maintain and grow our
business. We continue to make significant investments in our facilities and
capital equipment. We also seek to obtain access to advanced
15
manufacturing capacities through strategic supplier alliances with wafer
foundries. In general, we seek to optimally allocate the manufacture of our
products between our facilities and those of our foundry suppliers.
Nonetheless, a high level of capital expenditures in our facilities results in
relatively high fixed costs. If demand for our products does not absorb the
available capacity, the fixed costs and operating expenses related to our
production capacity could have a material adverse impact on our operating
results and financial condition.
We finance our capital expenditure needs from operating cash flows, bank
financing and capital market financing. As of December 31, 2002, we had
convertible notes outstanding of approximately $1.2 billion. As of December 31,
2002, we have two operating leases financed by several commercial banks. We may
need to 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 equity linked financing may dilute the equity
ownership of existing stockholders.
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 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 procure parts and raw materials from limited domestic and foreign
sources. We do not maintain an extensive inventory of parts and materials for
manufacturing. We purchase a portion of our requirements for parts and raw
materials from a limited number of sources 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. 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.
16
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 are dependent 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. Sony represented 18% of our total
consolidated revenues for the year ended December 31, 2002. In the
Semiconductor segment, one customer represented 22% of total Semiconductor
revenues for the year ended December 31, 2002. In the Storage Systems segment,
there were three customers with revenues representing 36%, 15% and 13% of total
Storage Systems revenues, respectively, for the year ended December 31, 2002.
Our operating results and financial condition could be significantly
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 have 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. Given the current economic environment, the risk of
distributors going out of business is significantly increased. In addition, as
our business grows, we may have an increased reliance on indirect channels of
distribution. There can be no assurance that we will be successful in
maintaining or expanding these indirect channels of distribution. This could
result in the loss of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our visibility with
respect to future business, thereby making it more difficult to accurately
forecast orders.
Our operations are affected by cyclical fluctuations. The Semiconductor
and Storage Systems segments in which we compete are subject to cyclical
fluctuations in demand. In 2002, we experienced declines in sales and/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;
- reduced product demand;
- excess inventory within the supply chain; and
- continued weakness of the United States and worldwide economy, causing
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 in 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 strategic 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;
17
- 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.
Mergers and acquisitions of high-technology companies bear inherent risks.
No assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition. We must manage any growth effectively. Failure
to manage growth effectively and to integrate acquisitions could adversely
affect our operating results and financial condition.
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. 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 subject to wide fluctuations. Our stock
has experienced substantial price volatility, particularly as a result of
quarterly variations in results, the published expectations of analysts and
announcements by our competitors and us. In addition, the stock market has
experienced price and volume fluctuations that have affected the market price
of many technology companies and that have often been unrelated to the
operating performance of such companies. The price of our securities may also
be affected by general global, economic and market conditions. While we cannot
predict the individual effect that these and other factors may have on the
price of our securities, these factors, either individually or in the
aggregate, could result in significant variations in price during any given
period of time. These fluctuations in our stock price also impact the price of
our outstanding convertible securities and the likelihood of the convertible
securities being converted into cash or equity. If our stock price is below the
conversion price of our convertible bonds on the date of maturity, they may not
convert into equity and we may be required to redeem the convertible securities
for cash. However, in the event they do not convert to equity, we believe that
our current cash position and expected future operating cash flows will be
adequate to meet these obligations as they mature.
We may rely on capital and bank markets to provide liquidity. In order to
finance strategic acquisitions, capital assets needed in our manufacturing
facilities and other general corporate needs, we may rely on capital and bank
markets to provide liquidity. Historically, we have been able to access capital
and bank markets, but this does not necessarily guarantee that we will be able
to access these markets in the future or at terms that are acceptable to us.
The availability of capital in these markets is affected by several factors,
including geopolitical risk, the interest rate environment and the condition of
the economy as a whole. In addition, our own operating performance, capital
structure and expected future performance impacts our ability to raise capital.
We believe that our current cash, cash equivalents, short-term investments and
future cash provided by operations will be sufficient to fund our needs in the
foreseeable future. This includes repaying our existing convertible debt when
due. However, if our operating performance falls below expectations, we may
need additional funds.
We design and develop highly complex cell-based ASICs. As technology
advances to 0.13 micron and smaller geometries, there are increases in the
complexity, time and expense associated with the design, development and
manufacture of ASICs. These increases create opportunities into different
offerings, which include products such as RapidChip. This new offering
addresses a growing market need for cost-effective and fast time-to-market
solutions. However, this product is a new offering and has not generated any
revenues to date. Therefore, the Company cannot guarantee that such alternative
offerings will result in market acceptance.
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
18
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 wafer manufacturing, 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. In addition, the Company has a program whereby it actively protects
its intellectual property by acquiring patent and other intellectual property
rights.
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. Resolution of whether the Company's product or
intellectual property has infringed on valid rights held by others could have a
material adverse effect on the Company's financial position or results of
operations and may require material changes in production processes and
products.
See "Legal Matters" in Note 13 ("Commitments and Contingencies") of Notes
to the Consolidated Financial Statements.
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. We do, however, maintain key
person life insurance for one of our employees. The expansion of high
technology companies in Silicon Valley, Colorado, Kansas, Oregon and elsewhere
where we operate our business has increased demand and competition for
qualified personnel and, despite the economic slowdown, competition for these
personnel is intense. Our continued growth and future operating results will
depend upon our ability to attract, hire and retain significant numbers of
qualified employees.
See also the Critical Accounting Policies contained in Part II, Item 7 of
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 2. Properties
The Company's 642,425 square foot Milpitas, California facilities are
leased and contain the Company's corporate executive headquarters (for both the
Semiconductor segment and the Storage Systems segment), administration and
engineering offices. The Company maintains 229,100 square feet of leased
facilities in Fremont, California, housing engineering offices, logistics and
warehouses and 95,760 square feet of leased facilities in San Jose, California
housing engineering offices (of which the Company subleases 39,624 square
feet).
The Company owns the land and buildings housing its manufacturing
facilities for the Semiconductor segment in Gresham, Oregon, Tsukuba, Japan,
Fort Collins, Colorado, and owns the logistics center in Tsuen Wan, Hong Kong.
The Company closed the Colorado Springs semiconductor manufacturing facility in
October 2001 and is in the process of disposing of its assets.
The Company's U.S. semiconductor manufacturing operations are consolidated
in a 492,000 square foot facility at Gresham, Oregon. The Santa Clara
manufacturing facility, which closed in 2001, is being decommissioned in
preparation for the expiration of the lease to that facility in June 2003.
In the Storage Systems segment, the Company owns the manufacturing and
executive offices site in Wichita, Kansas, which includes 330,000 square feet
of space. The Company also leases 15,000 square feet of additional office
facilities at this location.
19
In addition, the Company maintains leased sales and engineering offices,
regional office space for its field sales, marketing and design center offices
for both its Semiconductor segment and its Storage Systems segment at various
locations in North America, Europe, Japan and elsewhere in Asia. The Company
also maintains leased executive offices, design centers and sales offices in
Bracknell, United Kingdom and Tokyo, Japan. Leased facilities described above
are subject to operating leases that expire in 2003 through 2011. (See Note 13
of the Notes to the Consolidated Financial Statements.)
Currently, we utilize 60% to 85% of our facilities' capacities. We have
plans to acquire additional equipment for some of the above facilities, but we
believe that our existing facilities and equipment are well maintained, in good
operating condition, suitable for our operations and are adequate to meet our
current requirements.
Item 3. Legal Proceedings
This information is included in Note 13 ("Commitments and Contingencies")
of Notes to the Consolidated Financial Statements, which information is
incorporated herein by reference from Item 8 of Part II hereof.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive officers of the Company
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, are as follows.
Name Age Position
- ---- --- --------
Wilfred J. Corrigan ............ 65 Chairman and Chief Executive Officer
John D'Errico .................. 59 Executive Vice President, Storage Components
Thomas Georgens ................ 43 Executive Vice President, Storage Systems
Jon R. Gibson .................. 56 Vice President, Human Resources
Christopher L. Hamlin .......... 60 Senior Vice President, Chief Technology Officer
Bryon Look ..................... 49 Executive Vice President and Chief Financial Officer
W. Richard Marz ................ 59 Executive Vice President, Communications & ASIC
Technology
David G. Pursel ................ 57 Vice President, General Counsel and Corporate
Secretary
Giuseppe Staffaroni ............ 51 Executive Vice President, Consumer Products
Frank A. Tornaghi .............. 48 Executive Vice President, Worldwide Sales
Joseph M. Zelayeta ............. 56 Executive Vice President, Worldwide Operations
Mr. Corrigan has been associated with the Company in his present position
for more than the past five years. Mr. Corrigan is also a member of the Board
of Directors of FEI Company, a semiconductor equipment and solutions provider.
John D'Errico was named Executive Vice President, Storage Components in
August 2000. 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. Mr. D'Errico served as Vice President and General Manager, Pan-Asia
from April 1997 to August 1998. From August 1998 to August 2000, he was Vice
President, Colorado Operations.
Thomas Georgens serves as Executive Vice President, Storage Systems
(formerly called Storage Area Network Systems). He was named to this position
in November 2000. In August 1998, upon the acquisition of Symbios, Inc., a
storage company, he was named Senior Vice President and General Manager,
Storage 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.
Jon Gibson was named Vice President, Human Resources in November 2001. He
joined LSI in September 1984 as Employee Relations Manager. Mr. Gibson was
named Director of Human Resources in October 1987. From March 1999 until
November 2001, Mr. Gibson served as Senior Director of Human Resources.
20
Dr. Christopher Hamlin joined the Company in May 2000, as Senior Vice
President and Chief Technology Officer. From December 1998 until he joined LSI
Logic, Dr. Hamlin was Chief Technology Officer and Vice President of New
Technologies for Western Digital Corporation, a storage company. He served as
Chief Technology Officer of Ridge Technologies, a storage company, from
September 1997 until that company was acquired by Adaptec Inc., a storage
company, in May 1998.
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 and Strategic Planning.
W. Richard Marz was named Executive Vice President, Communications and
ASIC Technology in January 2002. He 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, a position he held
until July 2001. He served as Executive Vice President, ASIC Technology from
July 2001 to January 2002. Mr. Marz is a member of the board of directors of
Perceptron, Inc., a measurement and control systems company, where he also
serves on the nominating and compensation committees.
David G. Pursel was named Vice President, General Counsel and Corporate
Secretary in June 2000. He joined LSI Logic in February 1996 as Associate
General Counsel, Chief Intellectual Property Counsel and Assistant Secretary.
Giuseppe Staffaroni was named Executive Vice President, Consumer Products
in January 2002. Prior to that, he 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 a Director of the Wireless business unit, and from
November 1997 to October 1999, he was Vice President and General Manager of the
Communications Products Division.
Frank A. Tornaghi was named Executive Vice President, Worldwide Sales in
July 2001. Since joining the Company in 1984, Mr. Tornaghi has held several
management positions in sales at LSI Logic and was named a vice president in
1993. He served as Vice President, North America Sales, from May 1993 to July
2001.
Mr. Zelayeta has been associated with the Company in his present position
for more than the past five years. Mr. Zelayeta joined LSI Logic in 1981 and
has held various management positions with the Company, including Senior Vice
President of U.S. Manufacturing and General Manager Gresham Operations, Vice
President of Research and Development and Vice President of U.S. Operations.
There are no family relationships between any executive officers and
directors.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our stock trades on the New York Stock Exchange under the symbol "LSI."
The high and low closing sales prices for the stock for each full quarterly
period within the two most recent fiscal years as reported on the Exchange are:
2002 2001
------------------- -------------------
High - Low High - Low
------------------- -------------------
First Quarter .......... $ 18.58 - 13.95 $ 24.99 - 15.73
Second Quarter ......... $ 17.35 - 7.89 $ 22.76 - 13.97
Third Quarter .......... $ 8.75 - 6.23 $ 24.81 - 10.80
Fourth Quarter ......... $ 8.54 - 4.14 $ 19.24 - 11.19
--------------- ---------------
Year ................... $ 18.58 - 4.14 $ 24.99 - 10.80
=============== ===============
At March 7, 2003, there were approximately 4,433 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, and we do not anticipate paying any cash
dividends to stockholders in the foreseeable future.
The table set forth in Part III, Item 12 of this Form 10-K is herby
incorporated by reference into this Part II, Item 5.
21
Item 6. Selected Financial Data
Five Year Consolidated Summary
Year Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- --------------- --------------- ------------- --------------
(In thousands, except per share amounts)
Revenues .............................................. $ 1,816,938 $ 1,784,923 $ 2,737,667 $2,089,444 $ 1,516,891
----------- ------------ ----------- ---------- -----------
Costs and expenses:
Cost of revenues ..................................... 1,122,696 1,160,432 1,557,232 1,286,844 884,598
Additional excess inventory and related
charges ............................................ 45,526 210,564 11,100 -- --
----------- ------------ ----------- ---------- -----------
Total cost of revenues ............................ 1,168,222 1,370,996 1,568,332 1,286,844 884,598
Research and development ............................. 457,351 503,108 378,936 297,554 291,125
Selling, general and administrative .................. 230,202 307,310 306,962 257,712 226,258
Acquired in-process research and
development ........................................ 2,920 96,600 77,438 4,600 145,500
Restructuring of operations and other items,
net ................................................ 67,136 219,639 2,781 (2,063) 75,400
Amortization of non-cash deferred stock
compensation ....................................... 77,303 104,627 41,113 -- --
Amortization of intangibles .......................... 78,617 188,251 72,648 46,625 22,369
----------- ------------ ----------- ---------- -----------
Total costs and expenses ............................ 2,081,751 2,790,531 2,448,210 1,891,272 1,645,250
----------- ------------ ----------- ---------- -----------
(Loss)/ income from operations ........................ (264,813) (1,005,608) 289,457 198,172 (128,359)
Interest expense ...................................... (51,977) (44,578) (41,573) (39,988) (8,865)
Interest income and other, net ........................ 26,386 14,529 51,766 17,640 (8,952)
Gain on sale of equity securities ..................... -- 5,302 80,100 48,393 16,671
----------- ------------ ----------- ---------- -----------
(Loss)/ income before income taxes,
minority interest and cumulative effect
of change in accounting principle .................... (290,404) (1,030,355) 379,750 224,217 (129,505)
Provision/ (benefit) for income taxes ................. 1,750 (39,198) 142,959 65,030 9,905
----------- ------------ ----------- ---------- -----------
(Loss)/ income before minority interest and
cumulative effect of change in accounting
principle ............................................ (292,154) (991,157) 236,791 159,187 (139,410)
Minority interest in net income of subsidiary ......... 286 798 191 239 68
----------- ------------ ----------- ---------- -----------
(Loss)/ income before cumulative effect of
change in accounting principle ....................... (292,440) (991,955) 236,600 158,948 (139,478)
Cumulative effect of change in accounting
principle ............................................ -- -- -- (91,774) --
----------- ------------ ----------- ---------- -----------
Net (loss)/ income .................................... $ (292,440) $ (991,955) $ 236,600 $ 67,174 $ (139,478)
=========== ============ =========== ========== ===========
Basic earnings per share:
(Loss)/ income before cumulative effect of
change in accounting principle ..................... $ (0.79) $ (2.84) $ 0.76 $ 0.54 $ (0.49)
Cumulative effect of change in accounting
principle .......................................... -- -- -- ( 0.31) --
----------- ------------ ----------- ---------- -----------
Net (loss)/ income ................................... $ (0.79) $ (2.84) $ 0.76 $ 0.23 $ (0.49)
=========== ============ =========== ========== ===========
Diluted earnings per share:
(Loss)/ income before cumulative effect of
change in accounting principle ..................... $ (0.79) $ (2.84) $ 0.70 $ 0.51 $ (0.49)
Cumulative effect of change in accounting
principle .......................................... -- -- -- ( 0.28) --
----------- ------------ ----------- ---------- -----------
Net (loss)/ income ................................... $ (0.79) $ (2.84) $ 0.70 $ 0.23 $ (0.49)
=========== ============ =========== ========== ===========
Year-end status:
Total assets ......................................... $ 4,142,737 $ 4,625,772 $ 4,197,487 $3,206,605 $ 2,823,805
Long-term obligations ................................ $ 1,438,426 $ 1,630,367 $ 1,067,704 $ 926,228 $ 883,649
Stockholders' equity ................................. $ 2,300,355 $ 2,479,885 $ 2,498,137 $1,855,832 $ 1,524,473
22
The Company's fiscal years ended on December 31 for each of the years
presented above. During 2002, the Company recorded $46 million in additional
excess inventory and related charges and $67 million in charges for
restructuring of operations and other items, net. (See Notes 4 and 8 of the
Notes to the Consolidated Financial Statements.) The Company adopted SFAS No.
142 "Goodwill and Other Intangible Assets" on January 1, 2002, as a result of
which goodwill is no longer amortized. (See Note 3 of the Notes to the
Consolidated Financial Statements.) During 2001, the Company recorded $211
million in additional excess inventory and related charges, a $97 million
in-process research and development ("IPR&D") charge associated with the
acquisitions of C-Cube and AMI, which were effective on May 11, 2001 and August
31, 2001, respectively. In addition, the Company recorded charges of $220
million for restructuring of operations and other items, net. (See Notes 2, 4
and 8 of the Notes to the Consolidated Financial Statements.) During 2000, the
Company recorded a $77 million IPR&D charge associated with the acquisitions of
ParaVoice, DataPath, IntraServer and the purchases of divisions of NeoMagic and
Cacheware. The Company began recording amortization of non-cash deferred stock
compensation as a result of the adoption of FASB interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," which was
effective for acquisitions after July 1, 2000. (See Note 2 of the Notes to the
Consolidated Financial Statements.) 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." During 1998, the
Company reported a charge for restructuring of operations and other items, net,
of $75 million and a $146 million IPR&D charge related to the acquisition of
Symbios on August 6, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
During 2002, our operating results continued to be impacted by the
downturn within the semiconductor industry and in the general economy. In early
2001, the most severe cyclical downturn in the semiconductor industry began,
resulting from a buildup of inventory in the supply chain and weak end-demand.
Since that time, we have started to see a gradual, but uneven recovery within
the industry and LSI. The economic outlook remains uncertain as any
geopolitical factors, such as additional terrorist activities or armed
conflict, may adversely affect the global economy, which may affect our
recovery in 2003 and adversely impact our operating results and financial
condition.
Total consolidated revenues for the year ended December 31, 2002,
increased $32.0 million or 2% to $1.82 billion in 2002 from $1.78 billion in
2001. Revenues from the Semiconductor segment decreased by $92.2 million while
revenue from the Storage Systems segment increased by $124.2 million. The
decrease in semiconductor revenues was primarily attributable to continuing
weak economic conditions. This decline was offset in part by a full year of
revenues from C-Cube Microsystems, Inc. ("C-Cube") and from RAID products,
which became a part of the Semiconductor segment with the acquisitions of
C-Cube and the RAID division of American Megatrends, Inc. ("AMI") in May 2001
and August 2001, respectively. Revenues from our Storage Systems segment
increased due to overall increased demand for modular storage products, sales
to a new master distributor and revenues from the Mylex business unit, which
was acquired from IBM and primarily became a part of the Storage Systems
segment from August 29, 2002.
The consolidated gross profit margin percentage increased to 36% in 2002
from 23% in 2001. This increase was mainly due to higher total revenues
accompanied by lower manufacturing variances for the Semiconductor segment,
lower compensation-related expenses due to a decrease in average headcount and
lower additional excess inventory and related charges in 2002 as compared to
2001.
Operating expenses decreased 36% to $913.5 million in 2002 from $1.4
billion in 2001. The decrease is primarily the result of lower charges for
restructuring of operations and other items, net in 2002 compared to 2001. A
charge of $67.1 million for restructuring of operations and other items, net,
was incurred in 2002, consisting of a charge of $75.2 million as the result of
a set of actions announced by us to reduce costs and streamline operations, and
a gain of $8.1 million for other items, including a gain on sale of CDMA
handset product technology. A charge of $219.6 million was recorded in 2001.
See Note 4 of the Notes to the Consolidated Financial Statements (referred to
hereafter as "Notes"). In addition, amortization of intangibles decreased by
$109.6 million in 2002 primarily as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" on January 1, 2002 (See Note 3 of the Notes), offset by additional
amortization of intangible
23
assets acquired during 2002. Charges for acquired in-process research and
development ("IPR&D") and amortization of non-cash deferred stock compensation
also decreased by $121.0 million in 2002. Finally, Research and Development
("R&D") expenses decreased 9% while Selling, General and Administrative
("SG&A") expenses decreased 25% during 2002 as compared to 2001 as a result of
the restructuring actions taken in 2001 and 2002. These cost reductions were
partially offset by continued R&D and SG&A expenses incurred for the former
C-Cube, AMI RAID and Mylex businesses, which are included in our consolidated
financial statements from May 11, 2001, August 31, 2001 and August 29, 2002,
respectively. (See Note 2 of the Notes.)
Interest expense increased by $7.4 million to $52.0 million in 2002 from
$44.6 million in 2001. The increase is due to increased debt outstanding in
2002 due to the issuance of $490 million of 4% Convertible Subordinated Notes
in October 2001, offset by a reduction in the effective interest rate payable
on the Convertible Subordinated Notes as a result of the interest rate swap
transactions entered into in the second quarter of 2002, which have effectively
converted the fixed rate payments on a portion of the Convertible Subordinated
Notes to floating rates. (See Note 7 of the Notes.)
Interest income and other, net, was $26.4 million in 2002 and was
comprised of interest income of $31.6 million and a net gain of $14.3 million
on the repurchase of a portion of the Convertible Subordinated Notes (See Note
9 of the Notes), offset in part by a net-write-down of certain equity
investments by $19.4 million due to impairment considered by our management to
be other than temporary. (See Note 6 of the Notes.)
For the year ended December 31, 2002, we recorded a net loss of $292.4
million, or $0.79 loss per diluted share, compared to a net loss of $992.0
million, or $2.84 loss per diluted share, for the same period in 2001.
Stock option exchange program. On August 20, 2002, we filed, with the
Securities and Exchange Commission, an offer to exchange stock options
outstanding under the 1991 Equity Incentive Plan and the 1999 Non-statutory
Stock Option Plan for new options. Under the exchange offer, eligible employees
had the opportunity to exchange eligible stock options for the promise to grant
new options in the future under the 1999 Non-statutory Stock Option Plan.
Directors and executive officers of LSI were not eligible to participate in
this program. The exchange offer expired September 18, 2002, and we accepted an
aggregate of 16,546,370 options for exchange. On March 20, 2003, we granted a
new option that covered 2 shares of our Company's common stock for every 3
shares covered by an option an employee elected to exchange. The exercise price
per share of the new options was equal to the fair market value of our
Company's common stock on the new grant date. (See Note 14 of the Notes.) The
exchange program did not result in the recording of any compensation expense in
our statement of operations.
Significant acquisitions and other major transactions. We are continually
exploring strategic acquisitions that build upon our existing library of
intellectual property, human capital and engineering talent, and increase our
leadership position in the markets where we operate. All of our acquisitions in
2002, 2001 and 2000 were accounted for as purchases and accordingly, the
estimated fair value of assets acquired and liabilities assumed and the results
of operations were included in our Consolidated Financial Statements as of the
effective date of each acquisition through the end of the period. The
transactions are summarized below. There were no significant differences
between the accounting policies of LSI and those of the companies acquired.
(See Note 2 of the Notes.)
2002
On August 29, 2002, we finalized an Asset Purchase Agreement with
International Business Machines Corporation ("IBM"). Under the agreement, we
acquired certain tangible and intangible assets associated with IBM's Mylex
business unit. This acquisition is expected to enhance product offerings in the
expanding entry-level storage systems space within the Storage Systems segment
and the PCI-RAID offering in the Semiconductor segment. The details of this
acquisition are summarized below.
Acquisition Purchase Identified Deferred
Company Date Price Consideration IPR&D Goodwill Intangibles Compensation
- ---------------- ------------- ---------- ------------------------ --------- ---------- ------------- -------------
(amounts in millions)
Mylex business August 2002 $ 50.5 Cash, including direct $ 1.9 $ 20.3 $ 14.0 $ --
unit of IBM acquisition costs of
$0.5 million
24
2001
During 2001, we acquired C-Cube Microsystems Inc. and certain tangible and
intangible assets associated with the redundant array of independent disks, or
RAID, business of American Megatrends, Inc. Both these acquisitions became a
part of our Semiconductor segment.
Acquisition Purchase Identified Deferred
Company Date Price Consideration IPR&D Goodwill Intangibles Compensation
- ------------------ ------------- ---------- ----------------------- ---------- ---------- ------------- -------------
(amounts in millions)
C-Cube May 2001 $ 893.7 40.2 million shares, $ 77.5 $ 608.1 $ 94.5 $ 49.3
10.6 million options,
0.8 million warrants
RAID Division of August 2001 240.5 Cash, 19.1 128.9 77.5 16.4
AMI 0.8 million restricted
shares
In April 2001, we announced a co-development and foundry supply agreement
with Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC"). This agreement
is part of our strategy to outsource, that is to procure a larger portion of
our wafer requirements from external sources. As a result of our joint
development efforts with TSMC we anticipate purchasing, consistent with our
outsourcing strategy, such portion of