e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File No. 1-10317
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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94-2712976 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS Employer
Identification No.) |
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(408) 433-8000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each Exchange on which registered |
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Common Stock, $0.01 par value
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New York Stock Exchange |
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Preferred Share Purchase Rights
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
NONE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrant’s knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the Registrant, based upon the
closing price of the Common Stock on July 2, 2004, as
reported on the New York Stock Exchange, was approximately
$2,707,056,534. Shares of Common Stock held by each executive
officer and director and by each person who owns more than 5% of
the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 11, 2005, the Registrant had 387,760,836 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference
into Part III of this Form 10-K Report: Proxy
Statement for Registrant’s 2005 Annual Meeting of
Stockholders to be held on May 12, 2005.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a
result of a number of risks and uncertainties, including the
risk factors set forth below and elsewhere in this Report. See
“Risk Factors” in Part I, Item 1. Statements
made herein are as of the date of the filing of this
Form 10-K with the Securities and Exchange Commission and
should not be relied upon as of any subsequent date. We
expressly disclaim any obligation to update information
presented herein, except as may otherwise be required by law.
PART I
General
LSI Logic Corporation (together with its subsidiaries
collectively referred to as “LSI Logic,”
“LSI,” or the “Company” and referred to as
“we,” “us,” and “our”) designs,
develops, manufactures and markets complex, high-performance
integrated circuits and storage systems. We are focused on four
markets: communications, consumer products, storage components
and storage systems. Our integrated circuits are used in a wide
range of communication devices, including devices used for
wireless and broadband data networking applications. We also
provide other types of integrated circuit products and
board-level products for use in consumer applications,
communications, high-performance storage controllers and systems
for storage area networks.
We operate in two segments — the Semiconductor segment
and the Storage Systems segment — in which we offer
products and services for a variety of electronic systems
applications. Our products are marketed primarily to original
equipment manufacturers (“OEMs”) that sell products
targeted for applications in our major markets.
For the year ended December 31, 2004, revenues from the
Semiconductor segment were $1,249 million (73% of total
consolidated revenues) and the loss from operations was
$450 million. In the Semiconductor segment, we use advanced
process technologies and comprehensive design methodologies to
design, develop, manufacture and market highly complex
integrated circuits (“ICs”). These system-on-a-chip
solutions include both application specific integrated circuits,
commonly referred to as ASICs, and standard products.
Semiconductor segment product offerings also include host bus
adapters, RAID adapters (“redundant array of independent
disks”) and related products and services. ASICs are
designed for a specific application defined by the customer,
whereas standard products are for market applications that we
define. See also “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in
Item 7 of Part II.
Leveraging key competencies into fast time-to-market platform
ASIC capability, we have developed methods of designing
integrated circuits based on a library of building blocks of
industry-standard electronic functions, interfaces and
protocols. Among these is our CoreWare® design methodology.
Our advanced deep sub-micron manufacturing process technologies
allow our customers to combine one or more CoreWare library
elements with memory and their own proprietary logic to
integrate a highly complex, system-level solution on a single
chip. We have developed and use complementary metal oxide
semiconductor (“CMOS”) process technologies to
manufacture our integrated circuits.
For the year ended December 31, 2004, revenues from the
Storage Systems segment were $452 million (27% of total
consolidated revenues) and the income from operations was
$13 million. In the Storage Systems segment, our enterprise
storage systems are designed, manufactured and sold by our
majority-owned subsidiary — Engenio Information
Technologies, Inc. (“Engenio” or “Storage Systems
segment”). On May 6, 2004, LSI Logic announced that it
had changed the name of LSI Logic Storage Systems, Inc. to
Engenio. Our high-performance, highly scalable open storage area
network systems and storage solutions are available through
leading OEMs and a specialized network of resellers. Products
and solutions distributed
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through these channels may exclude Engenio’s brand
identification. When included, Engenio’s brand identity may
appear alone or in tandem with OEM brand identification.
In November 2003, the Company announced its intention to
separate the Storage Systems segment and create an independent
storage systems company. On February 19, 2004, Engenio
filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the initial public
offering of its common stock. On July 29, 2004, the Company
announced that it had decided to postpone the initial public
offering of Engenio’s common stock due to then present
market conditions.
LSI Logic Corporation was incorporated in California on
November 6, 1980, and was reincorporated in Delaware on
June 11, 1987. Our principal offices are located at 1621
Barber Lane, Milpitas, California 95035, and our telephone
number at that location is (408) 433-8000. Our home page on
the Internet is www.lsilogic.com. The contents of this
website are not incorporated in or otherwise to be regarded as
part of this annual report on Form 10-K. Copies of this and
other annual reports, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to these
reports are available free of charge on our website as soon as
reasonably practicable after such documents are filed
electronically with the Securities and Exchange Commission
(“SEC”). Any materials that the Company files with the
SEC can be read at the SEC’s website on the Internet at
http://www.sec.gov or read and copied at the SEC’s
Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC
at (800) 732-0330.
Business Strategy
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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:
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Target Growth Markets and Selected Customers. We
concentrate our sales and marketing efforts on leading OEM
customers in targeted growth markets, including communications,
consumer products and storage components applications. Our
engineering expertise is focused on developing technologies that
will meet the needs of leading-edge customers in order to
succeed in these market areas. |
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Emphasize CoreWare Methodology and System-on-a-Chip
Capability. Our CoreWare® design methodology enables
the integration of one or more pre-designed circuit elements
with customer-specified elements and memory to create system
capabilities on a single chip. This results in higher product
functionality, higher performance, greater differentiation and
faster time to market. We also have used this design methodology
to develop proprietary standard products. |
We leverage our in-depth system-level expertise, extensive
CoreWare IP library, innovative technology, understanding of
customer requirements and philosophy of providing predictable
Right First Time, On
Timetm
silicon solutions to serve customers with highly specific needs
in the communications, consumer and storage markets worldwide.
We have expanded our technology product offerings to include the
RapidChip® product. The RapidChip platform ASIC fills the
void between the field programmable gate arrays
(“FPGAs”) and standard-cell ASIC products.
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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. |
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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. |
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Maintain High-Quality and Cost-Effective Manufacturing.
Our wafer manufacturing strategy is a combination of our own
manufacturing facilities and outsourcing arrangements with
third-party foundries. We perform substantially all of our
packaging, assembly and final test operations through
subcontractors in Asia. |
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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. |
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Forge Successful Partnerships with Leading Distribution
Partners. Our partner program is designed to effectively
market the Company’s host bus adapter product families and
integrated circuit products utilizing distribution and reseller
partnerships. Such partnerships enable us to provide an extended
population of customers with the full range of product
offerings, services and support needed to enable their success. |
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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. |
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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. |
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Storage Systems Business Strategy |
Our objective is to be the leading provider to server and
storage OEMs of modular disk storage systems and sub-assemblies.
We intend to enhance our market position by:
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Continuing to innovate and extend our product offering.
We intend to lead the market in adopting and implementing new
storage system technologies, interfaces, features and customer
requirements. In addition, we intend to define, design and
develop products that enable our channel customers to offer a
broad storage system product line, which incorporates their own
intellectual property, to address multiple markets. In this
manner, we intend to continue to expand our product offerings
further into the entry-level, mid-range and high-end markets. |
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Adding feature functionality to meet expanding enterprise
requirements. Implementation and management of storage
systems within the enterprise is increasingly complex. To
address this increasing complexity, we plan to develop
additional premium software management and hardware system
features to enhance reliability, data availability and
serviceability of our products. We also intend to expand our
Engenio Solutions program implementation guides, which are
designed to help our customers rapidly implement our products
for specific business applications. |
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Enhancing interoperability among our products, our
customers’ products and other leading enterprise
products. We provide significant value to our channel
customers and enterprises by testing and certifying our products
with the products of other leading enterprise information
technology vendors to |
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ensure broad interoperability and compatibility. We intend to
work closely with our channel customers and enterprises to
extend and enhance the capabilities of our storage
sub-assemblies and storage management software. We also seek to
enhance our position in the storage industry by actively
participating in a variety of organizations focused on
developing standards for emerging technologies and facilitating
industry-wide interoperability. |
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Obtaining new channel customers. Our channel customers
sell storage solutions based on or incorporating our products
and technology through their direct sales forces and other
channels. We will continue to seek new customers in domestic and
international markets in order to expand the total marketing and
sales resources that are focused on our products. In this
manner, we intend to increase the market addressable by our
products. |
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Expanding our joint marketing and sales efforts with existing
and new channel customers. We seek to add value to our
customers’ sales, marketing and support initiatives through
the provision of extensive training, customized go-to-market
campaigns, product positioning, marketing materials, competitive
analysis and product support infrastructure. We maintain 15
Experience Centers worldwide, which allow our channel
customers to demonstrate to enterprise users the performance and
benefits of storage deployments incorporating our products. We
plan to open additional centers to reach a broader customer base
in the future. |
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Promoting our brand. We believe that a strong association
of our brand with innovation and integrity is valuable in
achieving increased scale, market leadership and OEM acceptance
within our industry. Furthermore, we believe that brand
recognition and reputation will become more important as OEMs
increasingly outsource their storage system offerings and their
customers focus on the performance and reliability of the
storage systems or sub-assemblies integrated into OEM storage
solutions. We intend to continue to promote our brand and build
brand equity to establish and bolster our position in the disk
storage systems and related storage management software markets. |
Technology, Products and Services
We have been continuously supplying ASIC products for over
20 years. We leverage our system level expertise and
technology providing silicon solutions primarily in
communications, consumer and storage markets worldwide.
Our CoreWare design methodology offers a comprehensive design
approach for creating a system-on-a-chip efficiently,
predictably and rapidly. Our CoreWare libraries include
high-level intellectual property building blocks created around
industry standards. Our CoreWare cells are connected
electronically with other memory and logic elements to form an
entire system on a single chip.
Our ASIC product offerings now consist of our cell-based product
for complex, high volume, high performance, system level designs
and our RapidChip platform product.
Our RapidChip platform products address a growing market need
for a flexible, cost-effective and fast time-to-market solution
with performance comparable to cell-based ASICs and at a cost
significantly lower than FPGAs. Products based on the RapidChip
methodology are innovative semiconductor platforms set to
reshape the way complex chips are designed and manufactured. A
key feature of the RapidChip methodology is the
customer-friendly interface that dramatically simplifies the
underlying complexity of the design tools and flows associated
with system-on-a-chip design. Rule sets automatically manage
architectural design, verification and physical design. As a
result, design schedules for high-performance chips can be more
predictable.
Typically, the ASIC design process involves participation by
both LSI Logic and customer engineers. We engage our customers
early in their new system product development process and accept
large design assignments where we share development costs with
the customer. We provide advice on the product design strategies
to optimize product performance and suitability for the targeted
application. In addition, our
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capabilities include support in the areas of architecture,
system-level design simulation, verification and synthesis used
in the development of complex integrated circuits.
Our software design tool environment supports and automatically
performs key elements of the design process from circuit concept
to physical layout of the circuit design. The design tool
environment features a combination of internally developed
proprietary software and third-party tools that are highly
integrated with our manufacturing process requirements. The
design environment includes expanded interface capabilities with
a range of third-party tools from leading EDA vendors and
features hardware/ software co-verification capability. We
provide a suite of MIPS cores and ARM processors, in addition to
industry-standard interface cores such as USB, PCI-Express,
DDR1&2, QDR, SPI4, SFI, XAUI, XGXS and others.
After completion of the ASIC engineering design effort, we
produce and test prototype circuits for shipment to the
customer. We then begin volume production of integrated circuits
that have been developed through one or more of the arrangements
described above in accordance with the customer’s quantity
and delivery requirements.
In our semiconductor components business, we design, manufacture
and supply ASICs, standard products, host bus adapters and RAID
storage adapters and related software to customers competing in
global communications, consumer and storage markets.
ASICs are semiconductors that are designed for unique,
customer-specified applications. Standard products are developed
for market applications we define and are targeted to be sold to
multiple customers. Both ASIC and standard products are sold to
customers for incorporation into system-level products and may
incorporate our intellectual property building blocks. Our ASIC,
RapidChip and standard products are predominantly designed and
manufactured using our proprietary process technologies.
Storage Components. Our ASIC and standard product
solutions offered to customers in worldwide storage component
markets make possible data transmission and storage between a
host computer and peripheral devices such as magnetic and
optical disk drives, scanners, printers and disk and tape-based
storage systems. We offer Fibre Channel and SCSI standard
products, including host adapter ICs for motherboard and adapter
applications, SCSI expander ICs, storage adapter boards and our
own
Fusion-MPTtm
software drivers for these product families. We are also an
industry leader in the on-going development of new storage
interface standards and products, including Serial-Attached SCSI
(“SAS”).
In addition, we offer the industry’s widest spectrum of
direct-attach RAID solutions, spanning from integrated RAID in
our Fusion-MPT storage IC and adapter products and our IDEal
software-based RAID products to our MegaRAID® product
family. Our MegaRAID products include integrated single-chip
RAID on motherboard solutions and a broad family of PCI and PCI
Express RAID controller boards featuring ATA, Serial ATA
(“SATA”) and SCSI interfaces, along with fully
featured software and utilities for robust storage configuration
and management.
We also offer solutions using our ASIC and RapidChip technology
to customers who develop Fibre Channel storage area network
(“SAN”) switches and host adapters, storage systems,
hard disk drives and tape peripherals. Through leveraging our
extensive experience in providing solutions for these
applications, LSI Logic has developed a full portfolio of
high-speed interface CoreWare that is employed on the ASIC or
RapidChip platform providing a connection to the network, the
SAN, memory and host buses. Using these pre-verified interfaces,
our customers reduce development risk and achieve quicker time
to market. Our CoreWare offerings include the GigaBlaze®
high performance SerDes Core supporting Fibre Channel, SATA,
Gigabit Ethernet, Infiniband, SAS, Serial RapidIO and
PCI-Express industry standards and a family of high-performance
Fibre Channel, RapidIO, PCI-E, SAS and SATA protocol controllers.
Consumer Products. For the consumer market, we offer a
broad array of semiconductor products, including both standard
products and custom solutions.
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Consumer standard products. We design, develop,
manufacture and market semiconductor devices, software and
reference designs for digital video and audio applications,
enabling new digital video and audio applications. We are
focused on providing solutions for high-growth applications such
as DVD recorders, flat panel displays, digital video recorders,
digital set-top boxes, as well as broadcast encoders and video
editing systems.
Consumer custom solutions. We also offer system-on-a-chip
solutions for consumer applications. We focus on consumer market
segments employing our intellectual property portfolio, design
methodology and turn-key product offerings (including
manufacturing, assembly and test) to provide a customized
solution. Our focus is in video game console, digital cameras
and camcorders, portable digital audio and video, and other
emerging multimedia applications where a standard product
solution is not available or our customers want customized
solutions for differentiation.
At the center of our strategy is our industry leading
DoMiNo® architecture. Products based on this flexible
architecture provide software programmable, cost effective
solutions to our customers in our target markets.
Communications. LSI Logic offers highly integrated,
high-performance, system-on-a-chip silicon solutions for use in
the design of communications equipment. We focus on delivering
custom semiconductor solutions to customers who develop systems
for the Enterprise, Metropolitan and Wide Area Network sectors.
Our standard-cell ASIC and RapidChip programs constitute two
distinct paths for realizing custom silicon, providing a good
fit – regardless of whether schedule, performance, power or
price is the driving consideration. Our cell-based program
continues to deliver LSI Logic’s wide portfolio of
communications-related intellectual property in compact,
high-performance solutions, while our RapidChip program delivers
the same intellectual property with lower initial cost and
faster time to market.
Leading edge switches and routers require tera-bit throughput
capability. LSI Logic’s HyperPHY® SerDes
(Serializer-Deserializer) technology enables chip-to-chip and
back-plane connectivity at speeds in excess of 6 Gbits/second.
We also provide our customers with CoreWare intellectual
property in support of key industry standard interconnect
technologies, including RapidIO, HyperTransport, SPI-4, SPI-5,
SFI-4, SFI-5, NPSI, PCI Express and 10/100/1G/10G Ethernet, as
well as a wide range of proprietary interfaces. In addition to
the above, our solutions incorporate a variety of embedded
processors: ARM, MIPS, and ZSP® processors (LSI
Logic’s widely-adopted digital signal processor) with all
the sub-system collateral for communications applications.
We offer a broad line of open, modular storage products
comprised of complete systems and sub-assemblies configured from
modular components, such as our storage controller modules, disk
drive enclosure modules and related management software. The
modularity of our products provides channel customers with the
flexibility to either integrate our sub-assemblies with
third-party components, such as disk drives, or software to form
their own storage system products. Our modular product approach
allows channel customers to create highly customized storage
systems, which can then be integrated with value-added software
and services and delivered as a complete, differentiated data
storage solution to enterprises.
We design and develop storage systems, sub-assemblies and
management software that operate within all major open operating
systems, including Windows, UNIX and UNIX variants and Linux
environments. We test and certify our products, both
independently and jointly with our customers, with those of
other hardware, networking and software storage vendors to
ensure a high level of interoperability and performance. Our
products are targeted at a wide variety of data storage
applications, including Internet-based applications such as
online transaction processing and e-commerce, data warehousing,
video editing and post-production and high-performance computing.
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Marketing and Distribution
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Semiconductor Marketing and Distribution |
The highly competitive semiconductor industry is characterized
by rapidly changing technology, short product cycles and
emerging standards. Our marketing strategy requires that we
accurately forecast trends in the evolution of product and
technology development. We must then act upon this knowledge in
a timely manner to develop competitively priced products
offering superior performance. As part of this strategy, we are
active in the formulation and adoption of critical industry
standards that influence the design specifications of our
products. Offering products with superior price and performance
characteristics is essential to satisfy the rapidly changing
needs of our customers in the dynamic communications, consumer
and storage markets.
Our semiconductor products and design services are primarily
sold through our network of direct sales and marketing and field
engineering offices located in North America, Europe, Japan and
elsewhere in Asia. Our sites are interconnected by means of
advanced computer networking systems that allow for the
continuous, uninterrupted exchange of information that is vital
for the proper execution of our sales and marketing activities.
International sales are subject to risks common to export
activities, including governmental regulations, geopolitical
risks, tariff increases and other trade barriers, and currency
fluctuations.
We rely primarily on direct sales and marketing, but we also
work with independent component and commercial distributors and
manufacturers’ representatives or other channel partners in
North America, Europe, Japan and elsewhere in Asia. Some of our
distributors possess engineering capabilities, and design and
purchase both ASICs and standard products from us for resale to
their customers. Other distributors focus solely on the sale of
standard products. Our agreements with distributors generally
grant limited rights to return standard product inventory and we
defer revenue for such inventory until the distributor sells the
product to a third party.
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Storage Systems Marketing and Distribution |
Our products are sold worldwide through our channel customers
and, to a smaller degree, to a limited installed base of
end-users. We closely develop and manage our channel customer
relationships to meet the diverse needs and requirements of
enterprises. By selling products through our channel customers,
we are able to address more markets, reach a greater number of
enterprises, and reduce our overall sales and marketing
expenditures.
Our marketing efforts are designed to support our channel
customers with programs targeted at developing differentiated
go-to-market strategies and increasing sales effectiveness.
Depending on the nature of our channel customer engagement, our
marketing teams offer various levels of assistance in assessing
and analyzing the competitive landscape, defining product
strategy and roadmap, developing product positioning and
pricing, creating product launch support materials and assisting
in closing the sales process. These marketing teams carefully
coordinate joint product development and marketing efforts
between our customers and us to ensure that we address and
effectively target enterprise requirements. We maintain sales
and marketing organizations at our headquarters in Milpitas, and
also in regional offices in Dallas, Texas; Chicago, Illinois;
Houston, Texas; Los Angeles and Irvine, California; New York,
New York; Parsippany, New Jersey; Reston, Virginia; and Wichita,
Kansas. We also market our products internationally in China,
France, Germany, Japan, Sweden and the United Kingdom.
Customers
In 2004, IBM accounted for approximately 16% of our consolidated
revenues. No other customer accounted for greater than 10% of
consolidated revenues. We currently have a highly concentrated
customer base; we are therefore dependent on a limited number of
customers for a substantial portion of our revenues as a result
of this strategy to focus our marketing and sales efforts on
select, large-volume customers. The loss of any of our
significant customers, any substantial decline in sales to these
customers, or any significant change in the timing or volume of
purchases by our customers, could result in lower revenues and
could harm our business, financial condition or results of
operations.
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We seek to leverage our expertise in the fields of
communications, consumer and storage components by marketing our
products and services predominately to market leaders. Our
current strategic account focus is on large, well-known
companies that produce high-volume products incorporating our
semiconductors. We recognize that this strategy may result in
increased dependence on a limited number of customers for a
substantial portion of our revenues. It is possible that we will
not achieve anticipated sales volumes from one or more of the
customers we focus on. While this could result in lower
revenues, we believe this strategy provides us with an
opportunity to drive further growth in sales and unit volumes.
With the introduction of our RapidChip methodology, we have not
only created new opportunities with our existing accounts, but
also created opportunities within the broader industrial,
medical and military/aerospace markets as well as smaller
accounts in the communications, consumer and storage segments.
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Storage Systems Customers |
Our customers can be characterized into two major go-to-market
categories:
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OEM Partners. These channel customers independently
resell or distribute OEM-branded or Engenio co-branded products,
which may be integrated with value-added services, hardware and
software and delivered as differentiated complete storage
solutions to enterprises. OEM Partners receive basic training
services to enhance their abilities to sell and support our
products. After receiving our basic training services, OEM
Partners independently market, sell and support our products,
requiring limited ongoing product support from us. |
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OEM+ Partners. In addition to providing our OEM+ Partners
with products and basic services as described above, we also
assist our OEM+ Partners with additional resources that may
provide tailored, account-specific education, training and sales
and marketing assistance, allowing our OEM+ Partners to leverage
our storage products and industry expertise. |
Manufacturing
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Semiconductor Manufacturing |
Our semiconductor manufacturing operations convert a product
design from the development stage into an integrated circuit.
Manufacturing begins with wafer fabrication, where the design is
transferred to silicon wafers through a series of processes,
including photolithography, ion implantation, deposition of
numerous films and the etching of these various films and
layers. Each circuit on the wafer is tested in the wafer sort
operation. The good circuits are identified and the wafer is
then separated into individual die. Each good die is then
assembled into a package using different standards and advanced
assembly technologies. This package encapsulates the circuit for
protection and allows for electrical connection to the printed
circuit board. The final step in the manufacturing process is
final test, where the finished devices undergo stringent and
comprehensive testing using computer systems.
The wafer fabrication operation is very complex and costly, and
the industry trend has been towards outsourcing all or a portion
of this operation to silicon foundries located throughout the
world. The Company’s strategy is a combination of internal
and external fabrication. In 2004, the majority of the
Company’s wafers were fabricated internally, however, in
the future we expect to increase our reliance on external
sources for wafer fabrication.
We currently outsource portions of our wafer fabrication to a
variety of wafer foundries in Taiwan, Japan, China and Malaysia.
For the more advanced deep sub-micron technologies, we use a
combination of standard foundry process technologies and process
technologies jointly developed with our foundry partners. These
joint development agreements provide us access to leading edge
technology and additional wafer capacity.
Our final assembly and test operations are performed by
independent subcontractors in South Korea, Taiwan, the
Philippines, Malaysia, Thailand and China. The Company has a
long history of outsourcing these
9
operations and therefore can offer a wide range of high
performance packaging solutions for system-on-a-chip designs,
including flip chip technology.
Development of advanced manufacturing technologies in the
semiconductor industry frequently requires that critical
selections be made as to those vendors from which essential
equipment (including future enhancements) and after-sales
service and support will be purchased. Some of our equipment
selections require that we procure specific types of materials
or components specifically designed to our specifications.
Therefore, when we implement these technology choices, we may
become dependent upon certain sole source vendors. Accordingly,
our capability to switch to other technologies and vendors may
be substantially restricted and a switch may involve significant
expense and could delay our technology advancements and decrease
manufacturing capabilities.
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Storage Systems Manufacturing |
We use third-party suppliers for standard components, such as
disk drives and standard computer processors, which are designed
and incorporated into our products. Additionally, we outsource
the manufacturing of the majority of our product components,
such as printed circuit boards, in order to take advantage of
quality and cost benefits afforded by using third-party
manufacturing services. We believe that using outsourced
manufacturing services allows us to focus on product development
and increases operational flexibility, both in terms of
adjusting manufacturing capacity in response to customer demand
and rapidly introducing new products.
The assembly of our storage system products involves integrating
supplied components and manufactured sub-assemblies into final
products, which are configured and rigorously tested before
being delivered to our customers. The highly modularized nature
of our storage system products allows for flexible assembly and
delivery models, which include build-to-order,
configure-to-order, direct shipment, bulk shipment and local
fulfillment services. We have implemented these models in an
effort to reduce requisite lead times for delivery of our
products and to provide channel customers with multiple
manufacturing and delivery alternatives that best complement
their operations.
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• |
United States Assembly. Our wholly-owned United States
manufacturing facility in Wichita, Kansas, assembles and tests
complete storage systems and sub-assemblies configured from
modular components, such as our storage controller modules and
disk drive enclosure modules. ISO-9001 certification at our
Kansas manufacturing facility has been maintained since April
1992. This facility has been certified as ISO-9001:2000
compliant since October of 2001. Product quality is achieved
through extensive employee training, exhaustive and automated
testing, and sample auditing. Quality control and measurement is
extended through the subcomponent supplier and component
manufacturer base with continuous reporting and ongoing
qualification programs. |
| |
| |
• |
European Assembly. We outsource manufacturing in Cork,
Ireland, to a Flextronics International Ltd. facility.
ISO-9001:2000 certification at the Cork assembly facility has
been maintained since December 2001. This facility is capable of
the assembly and testing of complete storage systems and
sub-assemblies configured from modular components, such as our
storage controller modules and disk drive enclosure modules. The
site in Ireland was established to provide operational
flexibility in meeting surges in demand, address growing
European demand and to serve as a backup site in the event of
natural or human-made disasters that could disrupt the
operations of our Wichita facility. |
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between the
commencement of design work and the receipt of a purchase order
for the units of a developed
10
product. Also, customers may from time to time revise delivery
quantities or delivery schedules to reflect their changing
needs. For these reasons, our backlog as of any particular date
may not be a meaningful indicator of future annual sales.
Due to the nature of our business, we maintain relatively low
levels of backlog in the Storage Systems segment. Consequently,
we believe that backlog is not a good indicator of future sales,
and our quarterly revenues depend largely on orders booked and
shipped in that quarter. Because lead times for delivery of our
products are relatively short, we must build in advance of
orders. This subjects us to certain risks, most notably the
possibility that expected sales will not materialize, leading to
excess inventory, which we may be unable to sell to our
customers.
Competition
|
|
|
Semiconductor Competitors |
The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources. Some of these are
also customers who have internal semiconductor design and
manufacturing capacity. We also compete with smaller and
emerging companies whose strategy is to sell products into
specialized markets or to provide only a portion of the products
and services that we offer.
Our major competitors in the Semiconductor segment include large
companies such as Agere Systems, Inc., International Business
Machines Corporation, Philips Electronics, N.V.,
STMicroelectronics, Texas Instruments, Inc., and Toshiba
Corporation. Other competitors in strategic markets include
Adaptec, Inc., ATI Technologies, Inc., Broadcom Corporation,
Cirrus Logic, Inc., ESS Technology, Inc., Genesis Microchip,
Inc., Marvell Technology Group, Ltd., MediaTek Incorporated, NEC
Corporation, Pixelworks, Inc., Trident Microsystems, Inc. and
Zoran Corporation.
The principal competitive factors in the semiconductor industry
include:
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• |
design capabilities; |
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• |
differentiating product features; |
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• |
product performance characteristics; |
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• |
time to market; |
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• |
price; |
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• |
manufacturing processes; and |
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| |
• |
utilization of emerging industry standards. |
It is possible that our competitors will develop other design
solutions that could have a material adverse impact on our
competitive position. Our competitors may also decide from time
to time to aggressively lower prices of products that compete
with our products in order to sell related products or achieve
strategic goals. Due to their customized nature, ASICs are not
as susceptible to price fluctuations as standard products.
However, strategic pricing by competitors can place strong
pricing pressure on our products in certain transactions,
resulting in lower selling prices and lower gross profit margins
for those transactions.
The markets into which we sell our semiconductor products are
subject to severe price competition. We expect to continue to
experience declines in the selling prices of our semiconductor
products over the life cycle of each product. In order to offset
or partially offset declines in the selling prices of our
products, we continue to reduce the costs of products through
product design changes, manufacturing process changes, yield
improvements and procurement of wafers from outsourced
manufacturing partners.
11
We emphasize our CoreWare design methodology and
system-on-a-chip capability. Competitive factors that continue
to be important to the success of this strategy include:
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| |
• |
selection, quantity and quality of our CoreWare library elements; |
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| |
• |
our ability to offer our customers system-level
expertise; and |
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| |
• |
quality of software to support system-level integration. |
Competition in this area is increasing, and there is no
assurance that our CoreWare methodology approach and product
offerings will continue to receive market acceptance. Customers
in our targeted markets frequently require system-level
solutions. Our ability to deliver complete solutions may also
require that we succeed in obtaining licenses to necessary
software and integrating this software with our semiconductors.
|
|
|
Storage Systems Competitors |
The market for our storage system products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from large well-capitalized storage system
companies such as EMC Corporation, Hitachi Data Systems and
Network Appliance, Inc., as well as with other storage system
and component providers, such as Adaptec, Inc., Dot Hill Systems
Corporation, Infortrend Technology Inc., XIOtech Corporation,
Xyratex Group Limited and the internal storage divisions of
existing and potential channel customers. We also compete with
internally developed products and, indirectly, through our
channel customers, with third-party products being sold by major
server vendors such as Dell Inc., Hewlett-Packard Company,
International Business Machines Corporation and Sun
Microsystems, Inc. The competitive factors affecting the market
for our storage system products include:
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• |
features and functionality; |
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• |
product performance and price; |
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• |
reliability, scalability and data availability; |
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• |
interoperability with other networking devices; |
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• |
support for emerging industry and customer standards; |
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• |
levels of training, marketing and customer support; |
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• |
level of easily customizable features; |
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• |
quality and availability of supporting software; |
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• |
quality of system integration; and |
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• |
technical services and support. |
Our ability to remain competitive will depend to a great extent
upon our ongoing performance in the areas of product development
and customer support. To be successful in the future, we believe
that we must respond promptly and effectively to the challenges
of technological change and our competitors’ innovations by
continually enhancing our product offerings. We must also
continue to aggressively recruit and retain employees highly
qualified and technically experienced in hardware and software
development in order to achieve industry leadership in product
development and support.
Patents, Trademarks and Licenses
We maintain a patent program, and believe that our patents and
other intellectual property rights have value to our business.
We have filed a number of patent applications and currently hold
more than 3,000 issued United States (“U.S.”) patents
and additional issued foreign patents, expiring from 2005 to
2023, in both the Semiconductor and the Storage Systems segments
combined. In both segments, we also maintain trademarks for
certain of our products and services and claim copyright
protection for certain proprietary software and
12
documentation. Patents, trademarks and other forms of protection
for our intellectual property are important, but we believe our
future success principally depends upon the technical competence
and creative skills of our employees.
We continue to expand our portfolio of patents and trademarks.
We offer a staged incentive to employees to identify, document
and submit invention disclosures. We have developed an internal
review procedure to maintain a high level of disclosure quality
and to establish criteria, priorities and plans for filings both
in the United States and abroad. The review process is based
solely on engineering, business, legal and management judgment,
with no assurance that a specific filing will issue or, if
issued, will deliver any lasting value to us. There is no
assurance that the rights granted under any patent will provide
competitive advantages to us or will be adequate to protect our
innovations, products or services. Moreover, the laws of certain
countries in which our products are or may be manufactured or
sold may not protect our products and intellectual property
rights to the same extent as the U.S. legal system.
As is typical in the high technology industry, from time to
time, we have received communications from other parties
asserting that certain of our products or processes infringe
upon their patent rights, copyrights, trademark rights or other
intellectual property rights. We regularly evaluate such
assertions. In light of industry practice, we believe that, with
respect to existing or future claims, any licenses or other
rights that may be necessary may generally be obtained on
commercially reasonable terms. Nevertheless, there is no
assurance that licenses will be obtainable on acceptable terms
or that a claim will not result in litigation or other
administrative proceedings.
In the Semiconductor segment, we protect our know-how, trade
secrets and other proprietary information through
confidentiality agreements with our customers, suppliers,
employees and consultants, and through other security measures.
We have entered into certain patent cross-license agreements
that generally provide for the non-exclusive licensing of rights
to design, manufacture and sell products and, in some cases, for
cross-licensing of future improvements developed by either party.
In the Storage Systems segment, we own a portfolio of patents
and patent applications concerning a variety of storage
technologies. We also maintain trademarks for certain of our
products and services and claim copyright protection for certain
proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other
proprietary information through agreements and other security
measures, and have implemented internal procedures to obtain
patent protection for inventions and pursue protection in
selected jurisdictions.
Please see Item 3, Legal Proceedings for information
regarding pending patent litigation against the Company. Please
also refer to the additional risk factors set forth in the Risk
Factors section and Note 12 of the Notes to the
Consolidated Financial Statements (“Notes”) for
additional information.
Research and Development
Our industry is characterized by rapid changes in products,
design tools and process technologies. We must continue to
improve our existing products, design-tool environment and
process technologies, and to develop new ones in a
cost-effective manner to meet changing customer requirements and
emerging industry standards. If we are not able to successfully
introduce new products, design tools and process technologies or
to achieve volume production of products at acceptable yields
using new manufacturing processes, there could be a material
adverse impact on our operating results and financial condition.
We operate the majority of our research and development
facilities in Arizona, California, Colorado, Georgia, Kansas,
Maryland, Minnesota, Oregon and Texas. Internationally, we also
have facilities in Russia,
13
Canada, Germany, India, China and the United Kingdom. The
following table shows our expenditures on research and
development activities for each of the last three fiscal years
(in thousands).
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Percent of | |
| Year |
|
Amount | |
|
Revenue | |
| |
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| |
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| |
|
2004
|
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$ |
421,516 |
|
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|
25 |
% |
|
2003
|
|
$ |
432,695 |
|
|
|
26 |
% |
|
2002
|
|
$ |
457,351 |
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|
25 |
% |
Research and development activities primarily consist of
materials expenses, salaries and related costs of employees
engaged in ongoing research, design and development activities
and subcontracting costs.
Working Capital
Information regarding our working capital practices is
incorporated herein by reference from Item 7 of
Part II hereof under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Financial Condition, Capital Resources
and Liquidity.”
Financial Information about Segments and Geographic Areas
This information is included in Note 4 (“Segment and
Geographic Information”) of the Notes, which information is
incorporated herein by reference from Item 8 of
Part II.
For a discussion of various risks attendant to foreign
operations, see (1) “Risk Factors” in this
Item 1, in particular “We are exposed to fluctuations
in foreign currency exchange rates,” “We procure parts
and raw materials from limited domestic and foreign
sources,” and “Our global operations expose the
Company to numerous international business risks,” and
(2) the section in Item 7A of Part II entitled
“Foreign Currency Exchange Risk.” This information is
incorporated herein by reference.
Environmental Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on the use
and discharge of certain chemicals and gases used in
semiconductor and storage product processing. Our facilities
have been designed to comply with these regulations through the
implementation of environmental management systems. We believe
that our activities conform to current environmental
regulations. However, increasing public attention has been
focused on the environmental impact of electronics and
semiconductor manufacturing operations. While to date we have
not experienced any material adverse impact on our business from
environmental regulations, we cannot provide assurance that such
regulations will not be amended so as to impose expensive
obligations on us in the future. In addition, violations of
environmental regulations or impermissible discharges of
hazardous substances could result in the necessity for the
following actions:
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• |
additional capital improvements to comply with such regulations
or to restrict discharges; |
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| |
• |
liability to our employees and/or third parties; and/or |
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• |
business interruptions as a consequence of permit suspensions or
revocations or as a consequence of the granting of injunctions
requested by governmental agencies or private parties. |
Employees
As of December 31, 2004, we had 4,414 full-time
employees, of which 934 were employees of our Storage Systems
segment.
As a result of the decline in revenues in the semiconductor
industry and a corresponding decline in the Company’s
outlook as of the latter part of the third quarter of 2004, in
October 2004, the Company initiated a comprehensive
restructuring program, which included asset impairments, a
global reduction in workforce of
14
approximately 560 employees and the consolidation of certain
facilities. See Note 3 of the Notes to the Consolidated
Financial Statements for further discussion.
Our future success depends upon the continued service of our key
technical and management personnel and on our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the manufacture of existing products and the development of
new products and processes. We currently have favorable employee
relations, but the competition for technical personnel is
intense, and the loss of key employees or the inability to hire
such employees when needed could have a material adverse impact
on our business and financial condition.
Seasonality
The Company’s business is largely focused on the
information technology and consumer products markets. Due to
seasonality in these markets, the Company typically expects to
see stronger growth in the last two quarters of the year.
RISK FACTORS
Keep these risk factors in mind when you read
“forward-looking” statements elsewhere in this
Form 10-K and in the documents incorporated herein by
reference. These are statements that relate to our expectations
for future events and time periods. Generally, the words,
“anticipate,” “expect,” “intend”
and similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those anticipated in
the forward-looking statements.
A general economic weakness may reduce our
revenues. The semiconductor industry is cyclical in
nature and is characterized by wide fluctuations in product
supply and demand. In addition, our results of operations are
dependent on the global economy. Any geopolitical factors such
as terrorist activities, armed conflict or global health
conditions, which adversely affects the global economy, may
adversely impact our operating results and financial condition.
In addition, goodwill and other long-lived assets could be
impacted by a further decline in revenues because impairment is
measured based upon estimates of future cash flows. These
estimates include assumptions about future conditions within our
company and industry.
We operate in highly competitive markets. The
Semiconductor and Storage Systems segments in which we conduct
business are characterized by rapid technological change, short
product cycles and evolving industry standards. We believe our
future success depends, in part, on our ability to improve on
existing technologies and to develop and implement new ones in
order to continue to reduce semiconductor chip size and improve
product performance and manufacturing yields. We must also be
able to adopt and implement emerging industry standards in a
timely manner and to adapt products and processes to
technological changes. If we are not able to implement new
process technologies successfully or to achieve volume
production of new products at acceptable yields, our operating
results and financial condition may be adversely impacted.
Our competitors include many large domestic and foreign
companies that have substantially greater financial, technical
and management resources than we do. Several major diversified
electronics companies offer ASIC products and/or other standard
products that are competitive with our product lines. Other
competitors are specialized, rapidly growing companies that sell
products into the same markets that we target. Some of our large
customers may develop internal design and production
capabilities to manufacture their own products, thereby
displacing our products. There is no assurance that the price
and performance of our products will be superior relative to the
products of our competitors. As a result, we may experience a
loss of competitive position that could result in lower prices,
fewer customer orders, reduced revenues, reduced gross profit
margins and loss of market share.
We are dependent on a limited number of customers.
Our concentrated customer base accounts for a substantial
portion of our revenues. IBM represented 16% of our total
consolidated revenues for the year ended December 31, 2004.
15
Our operating results and financial condition could be
significantly affected if:
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• |
we do not win new product designs from major existing customers; |
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• |
major customers reduce or cancel their existing business with us; |
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• |
major customers make significant changes in scheduled
deliveries; or |
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• |
there are declines in the prices of products that we sell to
these customers. |
Our new products may not achieve market
acceptance. We introduce many new products each year. We
must continue to develop and introduce new products that compete
effectively on the basis of price and performance and that
satisfy customer requirements. We continue to emphasize
engineering development and acquisition of CoreWare building
blocks and integration of our CoreWare libraries into our design
capabilities. Our cores and standard products are intended to be
based upon industry standard functions, interfaces, and
protocols so that they are useful in a wide variety of systems
applications. Development of new products and cores often
requires long-term forecasting of market trends, development and
implementation of new or changing technologies and a substantial
capital commitment. We cannot provide assurance that the cores
or standard products that we select for investment of our
financial and engineering resources will be developed or
acquired in a timely manner or will enjoy market acceptance.
The manufacturing facilities we operate are highly complex
and require high fixed costs. Our wafer fabrication site
is located in Gresham, Oregon. In addition, we own our Storage
Systems segment manufacturing facility in Wichita, Kansas. The
manufacture and introduction of our products is a complicated
process. We continually strive to implement the latest process
technologies and manufacture products in a clean and tightly
controlled environment. We confront challenges in the
manufacturing process that require us to:
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maintain a competitive manufacturing cost structure; |
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implement the latest process technologies required to
manufacture new products; |
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• |
exercise stringent quality control measures to ensure high
yields; |
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• |
effectively manage the subcontractors engaged in the wafer
fabrication, test and assembly of products; and |
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• |
update equipment and facilities as required for leading edge
production capabilities. |
We outsource a substantial portion of wafers
manufactured. We have consolidated our internal
semiconductor manufacturing in Gresham, Oregon. We have
developed outsourcing arrangements for the manufacture of some
of our products based on process technology that is unique to
the supplier. There is no assurance that the third party
manufacturer will be able to produce and deliver wafers that
meet our specifications or that our supplier will be able to
successfully provide the process technology. If the third party
is not able to deliver products and process technology on a
timely and reliable basis, our results of operations could be
adversely affected.
We have significant capital requirements to maintain and
grow our business. We continue to make significant
investments in our facilities and capital equipment, and, as a
result, our fixed costs for manufacturing remain high. We also
seek to obtain access to advanced manufacturing capacities
through strategic supplier alliances with wafer foundries. In
general, we seek to optimally allocate the manufacture of our
products between our facilities and those of our foundry
suppliers. Nonetheless, a high level of capital expenditures in
our facilities results in relatively high fixed costs. If demand
for our products does not absorb the available capacity, the
fixed costs and operating expenses related to our production
capacity could have a material adverse impact on our operating
results and financial condition.
We finance our capital expenditure needs from operating cash
flows, bank financing and capital market financing. As of
December 31, 2004, we had convertible notes outstanding of
approximately $772 million. We may need to seek additional
equity or debt financing from time to time and cannot be certain
that additional
16
financing will be available on favorable terms. Moreover, any
future equity or equity-linked financing may dilute the equity
ownership of existing stockholders.
We are exposed to fluctuations in foreign currency
exchange rates. We have some exposure to fluctuations in
foreign currency exchange rates. We have international
subsidiaries and distributors that operate and sell our products
globally. We routinely hedge these exposures in an effort to
minimize the impact of currency fluctuations. However, we may
still be adversely affected by changes in foreign currency
exchange rates or declining economic conditions in these
countries.
We procure parts and raw materials from limited domestic
and foreign sources. We do not maintain an extensive
inventory of parts and materials for manufacturing. We purchase
a portion of our requirements for parts and raw materials from a
limited number of sources, primarily from suppliers in Japan and
their U.S. subsidiaries, and we obtain other material
inputs on a local basis. There is no assurance that, if we have
difficulty in obtaining parts or materials in the future,
alternative suppliers will be available, or that these suppliers
will provide parts and materials in a timely manner or on
favorable terms. As a result, we may be adversely affected by
delays in product shipments. If we cannot obtain adequate
materials for manufacture of our products or if such materials
are not available at reasonable prices, there could be a
material adverse impact on our operating results and financial
condition.
We utilize indirect channels of distribution over which we
have limited control. Our financial results could be
adversely affected if our relationship with resellers or
distributors were to deteriorate or if the financial condition
of these resellers or distributors were to decline. In addition,
as our business grows, we may have an increased reliance on
indirect channels of distribution. There can be no assurance
that we will be successful in maintaining or expanding these
indirect channels of distribution. This could result in the loss
of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our
visibility with respect to future business, thereby making it
more difficult to accurately forecast orders.
Our operations are affected by cyclical
fluctuations. The Semiconductor and Storage Systems
segments in which we compete are subject to cyclical
fluctuations in demand. The Semiconductor industry has in the
past experienced periods of rapid expansion of production
capacity followed by periods of significant downturn. Even when
the demand for our products remains constant, the availability
of additional excess production capacity in the industry creates
competitive pressure that can degrade pricing levels, which can
reduce revenues. Furthermore, customers who benefit from shorter
lead times may defer some purchases to future periods, which
could adversely affect revenues in the short term. As a result,
we may experience downturns or fluctuations in demand for our
products and experience adverse effects on our operating results
and financial condition.
We engage in acquisitions and alliances giving rise to
economic and technological risks. We are continually
exploring strategic acquisitions that build upon our existing
library of intellectual property, human capital and engineering
talent, and increase our leadership position in the markets
where we operate. We completed two acquisitions in 2004 and two
acquisitions in 2002. We did not complete any material
acquisitions or alliances in 2003. Mergers and acquisitions of
high-technology companies bear inherent risks. No assurance can
be given that our previous or future acquisitions will be
successful and will not materially adversely affect our
business, operating results or financial condition. We must
manage any growth effectively. Failure to manage growth
effectively and to integrate acquisitions could adversely affect
our operating results and financial condition.
In addition, we intend to continue to make investments in
companies, products and technologies through strategic
alliances. Investment activities often involve risks, including
the need to acquire timely access to needed capital for
investments related to alliances and to invest in companies and
technologies that contribute to the growth of our business.
The price of our securities may be subject to wide
fluctuations. Our stock has experienced substantial
price volatility, particularly as a result of quarterly
variations in results, the published expectations of analysts
and announcements by our competitors and us. In addition, the
stock market has experienced price and volume fluctuations that
have affected the market price of many technology companies and
that have often
17
been unrelated to the operating performance of such companies.
The price of our securities may also be affected by general
global, economic and market conditions. While we cannot predict
the individual effect that these and other factors may have on
the price of our securities, these factors, either individually
or in the aggregate, could result in significant variations in
price during any given period of time. These fluctuations in our
stock price also impact the price of our outstanding convertible
securities and the likelihood of the convertible securities
being converted into cash or equity. If our stock price is below
the conversion price of our convertible bonds on the date of
maturity, they may not convert into equity and we may be
required to redeem the convertible securities for cash. However,
in the event they do not convert to equity, we believe that our
current cash position and expected future operating cash flows
will be adequate to meet these obligations as they mature.
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 impact 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. We must incur substantial research and development
costs to confirm the technical feasibility and commercial
viability of any ASIC products that in the end may not be
successful. Therefore, we cannot guarantee that any new ASIC
products will result in market acceptance.
Our global operations expose us to numerous international
business risks. We have substantial business activities
in Asia and Europe. Both manufacturing and sales of our products
may be adversely impacted by changes in political and economic
conditions abroad. A change in the current tax laws, tariff
structures, export laws, regulatory requirements or trade
policies in either the United States or foreign countries could
adversely impact our ability to manufacture or sell our products
in foreign markets. Moreover, a significant decrease in sales by
our customers to end users in either Asia or Europe could result
in a decline in orders.
We subcontract 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, copyright rights and trademarks. We
have a program whereby we actively protect our intellectual
property by acquiring patent and other intellectual property
rights. 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.
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 may
generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be
obtainable on acceptable terms or that a claim will not result
in litigation or other administrative proceedings. Resolution of
whether our product or intellectual property has infringed on
valid rights held by others could have a material adverse effect
on our financial position or results of operations and may
require material changes in production processes and products.
18
See “Legal Matters” in Note 12 (“Commitments
and Contingencies”) of the Notes regarding current patent
litigation.
Our manufacturing facilities are subject to
disruption. Operations at any of our primary
manufacturing facilities may be disrupted for reasons beyond our
control, including work stoppages, fire, earthquake, tornado,
floods or other natural disasters, which could have a material
adverse effect on our financial position or results of operation.
We depend on independent foundry subcontractors to
manufacture a portion of our current products, and any failure
to secure and maintain sufficient foundry capacity could
materially and adversely affect our business. Outside
foundry subcontractors, located in Asia, manufacture a portion
of our semiconductor devices in current production. Availability
of foundry capacity has in the recent past been reduced due to
strong demand. In addition, a recurrence of SARS or the
occurrence of another public health emergency in Asia could
further affect the production capabilities of our manufacturers
by resulting in quarantines or closures. If we are unable to
secure sufficient capacity at our existing foundries, or in the
event of a quarantine or closure at any of these foundries, our
revenues, cost of revenues and results of operations would be
negatively impacted. If any of our foundries experiences a
shortage in capacity, or suffers any damage to its facilities
due to earthquakes or other natural disasters, experiences power
outages, encounters financial difficulties or any other
disruption of foundry capacity, we may need to qualify an
alternative foundry in a timely manner. Even our current
foundries need to have new manufacturing processes qualified if
there is a disruption in an existing process. We typically
require several months to qualify a new foundry or process
before we can begin shipping products from it. If we cannot
accomplish this qualification in a timely manner, we may
experience a significant interruption in supply of the affected
products.
Because we rely on outside foundries with limited capacity, we
face several significant risks, including:
|
|
|
| |
• |
a lack of guaranteed wafer supply and potential wafer shortages
and higher wafer prices; |
| |
| |
• |
limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and |
| |
| |
• |
the unavailability of, or potential delays in obtaining access
to, key process technologies. |
In addition, the manufacture of integrated circuits is a highly
complex and technologically demanding process. Although we work
closely with our foundries to minimize the likelihood of reduced
manufacturing yields, our foundries have from time to time
experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the
installation and start-up of new process technologies. Poor
yields from our foundries could result in product shortages or
delays in product shipments, which could seriously harm our
relationships with our customers and materially and adversely
affect our results of operations.
The ability of each foundry to provide us with semiconductor
devices is limited by its available capacity and existing
obligations. Although we have entered into contractual
commitments to supply specified levels of products to some of
our customers, we do not have a long-term volume purchase
agreement or a significant guaranteed level of production
capacity with any of our foundries. Foundry capacity may not be
available when we need it or at reasonable prices. Availability
of foundry capacity has in the recent past been reduced from
time to time due to strong demand. We place our orders on the
basis of our customers’ purchase orders or our forecast of
customer demand, and the foundries can allocate capacity to the
production of other companies’ products and reduce
deliveries to us on short notice. It is possible that foundry
customers that are larger and better financed than we are, or
that have long-term agreements with our main foundries, may
induce our foundries to reallocate capacity to them. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use a number of independent
foundries to manufacture our semiconductor products, most of our
components are not manufactured at more than one foundry at any
given time, and our products typically are designed to be
manufactured in a specific process at only one of these
foundries. Accordingly, if one of our foundries is unable to
provide us with components as needed, we could experience
significant delays in securing sufficient supplies of those
components. Also, our third party foundries typically migrate
capacity to newer, state-of-the-art manufacturing processes on a
regular basis,
19
which may create capacity shortages for our products designed to
be manufactured on an older process. We cannot assure you that
any of our existing or new foundries will be able to produce
integrated circuits with acceptable manufacturing yields, or
that our foundries will be able to deliver enough semiconductor
devices to us on a timely basis, or at reasonable prices. These
and other related factors could impair our ability to meet our
customers’ needs and have a material and adverse effect on
our operating results.
Although we may utilize new foundries for other products in the
future, in using new foundries we will be subject to all of the
risks described in the foregoing paragraphs with respect to our
current foundries.
We depend on third-party subcontractors to assemble,
obtain packaging materials for, and test substantially all of
our current products. If we lose the services of any of our
subcontractors or if these subcontractors are unable to attain
sufficient packaging materials, shipments of our products may be
disrupted, which could harm our customer relationships and
adversely affect our net sales. Third-party
subcontractors located in Asia assemble, obtain packaging
materials for, and test substantially all of our current
products. Because we rely on third-party subcontractors to
perform these functions, we cannot directly control our product
delivery schedules and quality assurance. This lack of control
has in the past resulted, and could in the future result, in
product shortages or quality assurance problems that could delay
shipments of our products or increase our manufacturing,
assembly or testing costs.
If our third-party subcontractors are unable to obtain
sufficient packaging materials for our products in a timely
manner, we may experience a significant product shortage or
delay in product shipments, which could seriously harm our
customer relationships and materially and adversely affect our
net sales. If any of these subcontractors experiences capacity
constraints or financial difficulties, suffers any damage to its
facilities, experiences power outages or any other disruption of
assembly or testing capacity, we may not be able to obtain
alternative assembly and testing services in a timely manner.
Due to the amount of time that it usually takes us to qualify
assemblers and testers, we could experience significant delays
in product shipments if we are required to find alternative
assemblers or testers for our components. Any problems that we
may encounter with the delivery, quality or cost of our products
could damage our customer relationships and materially and
adversely affect our results of operations. We are continuing to
develop relationships with additional third-party subcontractors
to assemble and test our products. However, even if we use these
new subcontractors, we will continue to be subject to all of the
risks described above.
We are increasingly exposed to various legal, business,
political and economic risks associated with our international
operations. We currently obtain a substantial portion
all of our manufacturing, and all of our assembly and testing
services from suppliers located outside the United States. We
also frequently ship products to our domestic customers’
international manufacturing divisions and subcontractors. We
also undertake design and development activities in Canada,
China, India, Taiwan and the United Kingdom. We intend to
continue to expand our international business activities and to
open other design and operational centers abroad. The recent war
in Iraq and the lingering effects of terrorist attacks in the
United States and abroad, the resulting heightened security and
the increasing risk of extended international military conflicts
may adversely impact our international sales and could make our
international operations more expensive. International
operations are subject to many other inherent risks, including
but not limited to:
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| |
• |
political, social and economic instability; |
| |
| |
• |
exposure to different legal standards, particularly with respect
to intellectual property; |
| |
| |
• |
natural disasters and public health emergencies; |
| |
| |
• |
nationalization of business and blocking of cash flows; |
| |
| |
• |
trade and travel restrictions; |
| |
| |
• |
the imposition of governmental controls and restrictions; |
| |
| |
• |
burdens of complying with a variety of foreign laws; |
| |
| |
• |
import and export license requirements and restrictions of the
United States and each other country in which we operate; |
20
|
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|
| |
• |
unexpected changes in regulatory requirements; |
| |
| |
• |
foreign technical standards; |
| |
| |
• |
changes in tariffs; |
| |
| |
• |
difficulties in staffing and managing international operations; |
| |
| |
• |
fluctuations in currency exchange rates; |
| |
| |
• |
difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and |
| |
| |
• |
potentially adverse tax consequences. |
Any of the factors described above may have a material adverse
effect on our ability to increase or maintain our foreign sales.
Additionally, our operations may be impacted by SARS-related
factors, including, but not limited to, disruptions at our
third-party manufacturers that are primarily located in Asia,
reduced sales in our international retail channels and increased
supply chain costs. If SARS recurs or spreads to other areas, or
other similar public health emergencies arise, our international
sales and operations could be harmed.
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. Despite the economic slowdown
of the last few years, competition for certain key technical and
engineering personnel remains intense. Our continued growth and
future operating results will depend upon our ability to
attract, hire and retain significant numbers of qualified
employees.
Engenio Information Technologies, Inc. represents a
significant portion of our business, and an initial public
offering, sale or spin-off of the Storage Systems segment, may
cause our operating results to suffer and may cause net revenues
and income to decline. Engenio Information Technologies,
Inc. represents a significant portion of our business, and it is
currently reported as a separate segment in our consolidated
financial statements. For the fiscal years ended 2004, 2003, and
2002, the Storage Systems segment represented 27%, 25%, and 18%
of our revenues, respectively.
If we engage in a transaction that results in Engenio no longer
being our subsidiary, the Storage Systems segment’s
financial results, including its net revenues and net income,
will no longer be included in our consolidated financial
statements. Consequently, our financial results may be harmed as
a result of a spin-off or sale of the storage systems business,
which may cause our stock price to decline. Accordingly, our
historical consolidated financial results may not necessarily
reflect our future financial position, results of operations and
cash flows after Engenio ceases to be a subsidiary
The separation and possible initial public offering, sale
or spin-off of Engenio Information Technologies, Inc. from us is
a substantial undertaking that may disrupt our ongoing business
and may increase expenses, which may affect our results of
operations or financial condition. The separation of
Engenio, and the possible initial public offering of the
subsidiary’s common stock to the public and the potential
spin-off of the subsidiary to our stockholders continues to
require the substantial dedication of management resources.
Furthermore, we expect to incur significant expenses in future
periods related to the separation. We have not yet made any
adjustments to our historical financial information to reflect
the significant changes that may occur in our cost structure,
funding and operations as a result of the separation. In
addition, the efforts required to complete the separation of
Engenio from us may disrupt our ongoing business activities, may
result in employee distraction and may harm Engenio’s and
our ability to attract, retain and motivate key employees. If
any of the foregoing occurs, our results of operations or
financial condition may suffer.
Future changes in financial accounting standards or
practices or existing taxation rules or practices may cause
adverse unexpected fluctuations and affect our reported results
of operations. Financial accounting standards in the
United States are constantly under review and may be changed
from time to time. We would be required to apply these changes
when adopted. Once implemented, these changes could result in
material
21
fluctuations in our financial results of operations and/or the
way in which such results of operations are reported. Similarly,
we are subject to taxation in the United States and a number of
foreign jurisdictions. Rates of taxation, definitions of income,
exclusions from income, and other tax policies are subject to
change over time. Changes in tax laws in a jurisdiction in which
we have reporting obligations could have a material impact on
our results of operations.
We expect that the adoption of Statement of Financial Accounting
Standard (“SFAS”) No. 123 (Revised 2004),
entitled “Share-Based Payment,” effective for the
periods commencing after June 15, 2005, will have a
material and adverse impact on our reported results as described
under “Recent Accounting Pronouncements.” Because the
factors which will affect compensation expense we incur due to
the adoption of SFAS No. 123 (Revised 2004) are
unknown, the impact on our operating results at the point of
adoption, or in the future, cannot be determined. Changes in
these or other rules, or modifications to our current practices,
may have a significant adverse effect on our reported operating
results or in the way in which we conduct our business in the
future.
We face uncertainties related to the effectiveness of
internal controls. Public companies in the United States
are required to review their internal controls over financial
reporting under the Sarbanes-Oxley Act of 2002. It should be
noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control
systems, there can be no assurance that any design will achieve
its stated goal under all potential future conditions,
regardless of how remote.
Internal control deficiencies or weaknesses that are not
yet identified could emerge. Over time we may identify
and correct deficiencies or weaknesses in our internal controls
and, where and when appropriate, report on the identification
and correction of these deficiencies or weaknesses. However, the
internal control procedures can provide only reasonable, and not
absolute, assurance that deficiencies or weaknesses are
identified. Deficiencies or weaknesses that are not yet
identified could emerge and the identification and corrections
of these deficiencies or weaknesses could have a material impact
on the results of operations for the Company.
Internal control issues that appear minor now may later
become reportable conditions. We are required to
publicly report on deficiencies or weaknesses in our internal
controls that meet a materiality standard as required by law.
While the Company meets its statutory obligations, management
may, at a point in time, accurately categorize a deficiency or
weakness as immaterial or minor and therefore not be required to
publicly report such deficiency or weakness. Such determination,
however, does not preclude a change in circumstances such that
the deficiency or weakness could, at a later time, become a
reportable condition that could have a material impact on our
results of operations.
The Company leases approximately 527,000 square feet of
real property in Milpitas, California for its corporate
headquarters, administration and engineering offices. Engenio
leases approximately 38,000 square feet for its corporate
headquarters in a separate facility also located in Milpitas,
California.
The Company owns the land and buildings housing its
588,000 square foot manufacturing facilities for the
Semiconductor segment in Gresham, Oregon. The Company also owns
the land and buildings housing sales and engineering offices in
Fort Collins and Colorado Springs, Colorado, and owns the
logistics center in Tsuen Wan, Hong Kong.
In the Storage Systems segment, the Company owns the
manufacturing and executive offices site in Wichita, Kansas,
which includes approximately 330,000 square feet of space,
and leases a facility in Boulder, Colorado, which consists of
approximately 50,000 square feet.
The Company also maintains leased executive offices, design
centers and sales offices in Norcross, Georgia, Bracknell,
United Kingdom and Tokyo, Japan. 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
22
Semiconductor segment and its Storage Systems segment at various
other locations in North America, Europe, Japan, China, India,
Canada and Russia. Leased facilities described in this section
are subject to operating leases that expire in 2005 through
2014. (See Note 12 of the Notes.)
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 12 (“Commitments
and Contingencies”) of the Notes, 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. Their ages are as of December 31, 2004.
| |
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|
|
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|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
Wilfred J. Corrigan
|
|
|
66 |
|
|
Chairman and Chief Executive Officer |
|
John D’Errico
|
|
|
61 |
|
|
Executive Vice President, Storage and Communications Components |
|
Donald Esses
|
|
|
53 |
|
|
Executive Vice President, Worldwide Operations |
|
Thomas Georgens
|
|
|
45 |
|
|
Executive Vice President, Storage Systems (and Chief Executive
Officer, Engenio Information Technologies, Inc.) |
|
Jon R. Gibson
|
|
|
57 |
|
|
Vice President, Human Resources |
|
Christopher L. Hamlin
|
|
|
61 |
|
|
Senior Vice President, Chief Technology Officer |
|
Bryon Look
|
|
|
50 |
|
|
Executive Vice President and Chief Financial Officer |
|
W. Richard Marz
|
|
|
61 |
|
|
Executive Vice President, Worldwide Strategic Marketing |
|
Umesh Padval
|
|
|
47 |
|
|
Executive Vice President, Consumer Products |
|
David G. Pursel
|
|
|
59 |
|
|
Vice President, General Counsel and Corporate Secretary |
|
Frank A. Tornaghi
|
|
|
50 |
|
|
Executive Vice President, Worldwide Sales |
|
Joseph M. Zelayeta
|
|
|
58 |
|
|
Executive Vice President, ASIC Technology & Methodology |
Mr. Corrigan is the principal founder of the Company and
has served as its Chairman and Chief Executive Officer since its
organization in January 1981. Prior to founding the Company, he
was President, Chairman and Chief Executive Officer of Fairchild
Camera and Instrument Corporation. 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
and Communications Components in January 2003. He served as
Executive Vice President Storage Components from August 2000 to
January 2003 and as Executive Vice President, Storage Components
and Colorado Operations from August 1998 to 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.
Donald Esses was named Executive Vice President, Worldwide
Operations in December 2003. He joined the Company in 1983 and
has held management positions in process and product
engineering. From July 1994
23
to November 2000, Mr. Esses held the position of Vice
President, U.S. Manufacturing. From November 2000 to
December 2003, he was Vice President of Supply Chain Management.
Thomas Georgens has served as Chief Executive Office of Engenio
Information Technologies, Inc. since February of 2004 and
Executive Vice President of LSI Logic Storage Systems since
November 2000. From August 1998, upon the acquisition of
Symbios, Inc., by the Company, to November 2000,
Mr. Georgens served as the Company’s Senior Vice
President and General Manager, Storage Systems.
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.
Dr. Christopher Hamlin joined the Company in May 2000, as
Senior Vice President and Chief Technology Officer. He served as
Chief Technology Officer of Ridge Technologies, a data storage
company, from September 1997 until that company was acquired by
Adaptec Inc., a data storage company, in May 1998. 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 data storage company.
Bryon Look was named Executive Vice President and Chief
Financial Officer in November 2000. Mr. Look joined the
Company in March 1997 as Vice President, Corporate Development
and Strategic Planning. Prior to joining the Company, he was
manager of business development at Hewlett-Packard’s
corporate development department. During a 21-year career at
Hewlett-Packard, Mr. Look held a variety of management
positions in finance and research and development.
W. Richard Marz was named Executive Vice President,
Strategic Worldwide Marketing in December 2003. 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 and served as
Executive Vice President, Communications and ASIC Technology
from January 2003 to December 2003.
Umesh Padval was named Executive Vice President, Consumer
Products in August 2004. He served as Senior Vice President and
General Manager for LSI Logic’s Broadband Entertainment
Division, a position he held since June 2001, when LSI Logic
acquired C-Cube Microsystems Inc., a Delaware corporation.
Mr. Padval served as the Chief Executive Officer of C-Cube
from May 2000 until June 2001, and President of C-Cube’s
semiconductor division from 1998 to 2000. Prior to joining
C-Cube, Mr. Padval was Senior Vice President and General
Manager of the Consumer Digital Entertainment and Computing
Products Divisions at VLSI Technology, Inc.
David G. Pursel serves as Vice President, General Counsel and
Corporate Secretary. He was named to this position in June 2000.
Mr. Pursel joined LSI Logic in February 1996 as Associate
General Counsel, Chief Intellectual Property Counsel and
Assistant Secretary.
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.
Joseph M. Zelayeta was named Executive Vice President ASIC
Technology and Methodology in December 2003. He served as
Executive Vice President, Worldwide Operations from September
1997 to December 2003. 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 among any executive officers
and directors.
24
Corporate Governance
The Board of Directors (the “Board”) is the ultimate
decision-making body of the Company except with respect to those
matters reserved for decision by the stockholders. The Board is
responsible for selection of the executive management team,
providing oversight responsibility and direction to management,
and evaluating the performance of this team on behalf of the
stockholders. Responsibility for day-to-day management of
operations is delegated to the executive management team. The
Board has adopted Corporate Governance Guidelines to assist it
in the exercise of its responsibilities. These Guidelines are
available on the Company’s website at
www.lsilogic.com.
The Company has adopted a Code of Ethics for principal executive
and senior financial officers. A copy of this Code of Ethics is
available on the Company’s website at
www.lsilogic.com.
The Board is composed of a majority of independent directors.
Currently, seven out of eight directors are independent, as
defined by the New York Stock Exchange Listing Standards. The
Board has a lead director. The Board has an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance
Committee. The Audit, Compensation and Nominating and Corporate
Governance Committees consist solely of non-employee,
independent directors. All Committees operate under charters
approved by the Board. These charters are available on the
Company’s website at www.lsilogic.com. The Board of
Directors appoints the members and chairs of the committees
annually.
The Audit Committee reviews the Company’s accounting
policies and practices, internal controls, financial reporting
practices, contingent risks and risk management strategies and
plans. The Audit Committee selects and retains the
Company’s independent accountants to serve the following
year to examine the Company’s accounts, reviews the
independence of the independent accountants as a factor in
making these determinations and pre-approves all audit and
non-audit services performed by the independent accountants. The
Audit Committee regularly meets alone with the Company’s
management, independent accountants and the director of the
Company’s Internal Audit Department, and grants them
unfettered access to the Audit Committee at any time. All
members of the Audit Committee are financially literate, as such
qualification is interpreted by the Company’s Board in its
business judgment. In addition, three members of the Committee
are financial experts.
At least annually, the Compensation Committee reviews the
compensation plans for the Company’s executive officers and
directors and amends or recommends that the Board amend these
plans if the Committee deems it appropriate. The Compensation
Committee evaluates and reviews, at least annually, the
performance of the Chief Executive Officer and other executive
officers in light of the goals of these plans. Based upon such
an evaluation, the Compensation Committee establishes the
Company’s overall executive compensation strategy, and, in
particular, determines the compensation structure for the Chief
Executive Officer and other executive officers of the Company.
The Committee approves any incentive, bonus or similar plans of
the Company based upon the recommendations submitted by the
Chief Executive Officer and the Vice President of Human
Resources. The Committee reviews and approves the Company’s
stock option and other stock incentive award programs and
reviews, as needed (with an independent consultant), executive
compensation matters and significant issues that relate to
executive compensation.
The Nominating and Corporate Governance Committee provides
assistance to the Board in recommending to the Board individuals
qualified to serve as directors of the Company and on committees
of the Board, recommending to the Board the director nominees
for the next annual meeting of stockholders, advising the Board
with respect to Board composition, procedures and whether to
form or dissolve committees, advising the Board with respect to
the corporate governance principles applicable to the Company
and developing criteria for oversight of the evaluation of the
Board and management. The Nominating and Corporate Governance
Committee will consider shareholder recommendations for
candidates to the Company’s Board.
25
PART II
|
|
| Item 5. |
Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our stock trades on the New York Stock Exchange
(“NYSE”) under the symbol “LSI.” The
Company’s Chief Executive Officer has certified to the NYSE
that he is unaware of any violation by the Company of the
NYSE’s corporate governance listing standards. 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 NYSE are:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
High — Low | |
|
High — Low | |
| |
|
| |
|
| |
|
First Quarter
|
|
$ |
11.45 — 8.64 |
|
|
$ |
6.32 — 3.97 |
|
|
Second Quarter
|
|
$ |
9.91 — 7.15 |
|
|
$ |
7.74 — 4.44 |
|
|
Third Quarter
|
|
$ |
6.80 — 4.03 |
|
|
$ |
11.96 — 7.08 |
|
|
Fourth Quarter
|
|
$ |
5.81 — 4.27 |
|
|
$ |
10.14 — 8.30 |
|
| |
|
|
|
|
|
|
|
Year
|
|
$ |
11.45 — 4.03 |
|
|
$ |
11.96 — 3.97 |
|
| |
|
|
|
|
|
|
At March 11, 2005, there were 3,642 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.
Equity Compensation Plan Information
As of December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(c) | |
| |
|
|
|
|
|
Number of | |
| |
|
(a) | |
|
(b) | |
|
Securities | |
| |
|
Number of | |
|
Weighted- | |
|
Remaining Available | |
| |
|
Securities to be | |
|
Average Exercise | |
|
for Future Issuance | |
| |
|
Issued upon | |
|
Price of | |
|
under Equity | |
| |
|
Exercise of | |
|
Outstanding | |
|
Compensation Plans | |
| |
|
Outstanding | |
|
Options, | |
|
(Excluding | |
| |
|
Options, Warrants | |
|
Warrants and | |
|
Securities Reflected | |
| Plan Category |
|
and Rights | |
|
Rights | |
|
in Column(a)) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders(1)
|
|
|
30,240,882 |
|
|
$ |
17.06 |
|
|
|
56,391,762 |
|
|
Equity compensation plans not approved by security holders(2)
|
|
|
37,492,191 |
|
|
$ |
12.56 |
|
|
|
19,362,028 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67,733,073 |
|
|
$ |
14.57 |
|
|
|
75,753,790 |
|
|
|
| (1) |
Equity compensation plans approved by security holders are the
following: |
|
|
| |
(i) The Employee Stock Purchase Plan, amended and restated
(“US ESPP”), under which rights are granted to LSI
Logic employees in the United States to purchase shares of
common stock at 85% of the lesser of the fair market value of
such shares at the beginning of a 12-month offering period or
the end of each six-month purchase period within such an
offering period. There are 14,796,431 shares remaining
available for future issuance under this plan. The US ESPP
includes an annual replenishment calculated at 1.15% of the
Company’s common stock issued and outstanding at the fiscal
year end less the number of shares available for future grants
under the US ESPP. No shares have been added to the US ESPP from
the annual replenishment since January 2001. |
| |
| |
(ii) The 2003 Equity Incentive Plan was approved by stockholders
in May 2003. Under this plan, the Company may grant stock
options or restricted stock to employees, officers and
consultants. There are 10,172,141 shares remaining
available for future issuance under this plan, including
595,334 shares reserved for restricted stock awards that
have been granted, but will not be issued until the awards have
vested. Stock options will have an exercise price that is no
less than the fair market value of the stock on |
26
|
|
| |
the date of grant. The term of each option or restricted stock
award is determined by the Board of Directors and for options
grants on or after February 12, 2004, will generally be
seven years. Options generally vest in annual increments of
25% per year commencing one year from the date of grant.
Restricted stock awards may be granted with the vesting
requirements determined by the Board of Directors. |
| |
| |
(iii) Under the 1991 Equity Incentive Plan the Company may grant
stock options to employees, officers and consultants, with an
exercise price that is no less than the fair market value of the
stock on the date of grant. The term of each option is
determined by the Board of Directors and has generally been ten
years. For options granted on or after February 12, 2004,
the term of the options will generally be seven years. Options
generally vest in annual increments of 25% per year
commencing one year from the date of grant. With respect to
shares previously approved by stockholders, no incentive stock
options may be granted under this plan after March 2001. |
| |
| |
(iv) Under the 1995 Director Option Plan new directors
receive an initial grant of 30,000 options to purchase shares of
common stock and directors receive subsequent automatic grants
of 30,000 options to purchase shares of common stock each year
thereafter. The initial grants vest in annual increments of
25% per year, commencing one year from the date of grant.
Subsequent option grants become exercisable in full six months
after the grant date. The term of each option is ten years. The
exercise price of the options granted is equal to the fair
market value of the stock on the date of grant. |
|
|
| (2) |
Equity compensation plans not previously approved by security
holders are the following: |
|
|
| |
(i) An aggregate of 6,527,893 options with a weighted-average
exercise price of $12.44 per share are outstanding that
were assumed in acquisitions. No further options may be granted
under these assumed plans. |
| |
| |
(ii) A total of 316,042 shares of common stock were
reserved under the 2001 Supplemental Stock Issuance Plan, of
which 14,830 shares remain available for future issuance.
Shares of common stock may be issued under this plan pursuant to
share right awards, which entitle the recipients to receive
those shares upon the satisfaction of the following service
requirements: 20% of the shares subject to an award will be
issued upon completion of three months of continuous service
measured from the award date, an additional 30% of the shares
will be issued upon completion of 12 months of continuous
service measured from the award date and the remaining 50% of
the shares will be issued upon completion of 24 months of
continuous service measured from the award date. |
| |
| |
(iii) Under the 1999 Nonstatutory Stock Option Plan the Company
may grant stock options to its employees, excluding officers,
with an exercise price that is no less than the fair market
value of the stock on the date of grant. The term of each option
is determined by the Board of Directors and has generally been
ten years. For options granted on or after February 12,
2004, the term of the options will be seven years. Options
generally vest in annual increments of 25% per year
commencing one year from the date of grant. |
| |
| |
(iv) Under the International Employee Stock Purchase Plan rights
are granted to LSI Logic employees (excluding executive
officers) outside of the United States to purchase shares of
common stock at 85% of the lesser of the fair market value of
such shares at the beginning of a 12-month offering period or
the end of each six-month purchase period within such an
offering period. There are 1,565,180 shares remaining
available for future issuance under this plan. |
On July 28, 2000, the Company’s Board of Directors
authorized a stock repurchase program in which up to
5 million shares of the Company’s common stock may be
repurchased in the open market from time to time. There is no
expiration date for the plan. No shares were repurchased under
this plan during 2004. There are 3.5 million shares
available for repurchase under this plan as of December 31,
2004.
27
|
|
| Item 6. |
Selected Financial Data |
Five-Year Consolidated Summary
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Revenues
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
$ |
1,816,938 |
|
|
$ |
1,784,923 |
|
|
$ |
2,737,667 |
|
|
Cost of revenues
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,122,696 |
|
|
|
1,160,432 |
|
|
|
1,557,232 |
|
|
Additional excess inventory and related charges
|
|
|
— |
|
|
|
— |
|
|
|
45,526 |
|
|
|
210,564 |
|
|
|
11,100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total cost of revenues
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,168,222 |
|
|
|
1,370,996 |
|
|
|
1,568,332 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
735,608 |
|
|
|
677,205 |
|
|
|
648,716 |
|
|
|
413,927 |
|
|
|
1,169,335 |
|
|
Research and development
|
|
|
421,516 |
|
|
|
432,695 |
|
|
|
457,351 |
|
|
|
503,108 |
|
|
|
378,936 |
|
|
Selling, general and administrative
|
|
|
243,498 |
|
|
|
234,156 |
|
|
|
230,202 |
|
|
|
307,310 |
|
|
|
306,962 |
|
|
Acquired in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
2,920 |
|
|
|
96,600 |
|
|
|
77,438 |
|
|
Restructuring of operations and other items, net
|
|
|
423,444 |
|
|
|
180,597 |
|
|
|
67,136 |
|
|
|
219,639 |
|
|
|
2,781 |
|
|
Amortization of non-cash deferred stock compensation
|
|
|
8,449 |
|
|
|
26,021 |
|
|
|
77,303 |
|
|
|
104,627 |
|
|
|
41,113 |
|
|
Amortization of intangibles
|
|
|
75,050 |
|
|
|
76,352 |
|
|
|
78,617 |
|
|
|
188,251 |
|
|
|
72,648 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/ income from operations
|
|
|
(436,349 |
) |
|
|
(272,616 |
) |
|
|
(264,813 |
) |
|
|
(1,005,608 |
) |
|
|
289,457 |
|
|
Interest expense
|
|
|
(25,320 |
) |
|
|
(30,703 |
) |
|
|
(51,977 |
) |
|
|
(44,578 |
) |
|
|
(41,573 |
) |
|
Interest income and other, net
|
|
|
17,066 |
|
|
|
18,933 |
|
|
|
26,386 |
|
|
|
14,529 |
|
|
|
51,766 |
|
|
Gain on sale of equity securities
|
|
|
5,104 |
|
|
|
— |
|
|
|
— |
|
|
|
5,302 |
|
|
|
80,100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/ income before income taxes and minority interest
|
|
|
(439,499 |
) |
|
|
(284,386 |
) |
|
|
(290,404 |
) |
|
|
(1,030,355 |
) |
|
|
379,750 |
|
|
Provision for/ (benefit from) income taxes
|
|
|
24,000 |
|
|
|
24,000 |
|
|
|
1,750 |
|
|
|
(39,198 |
) |
|
|
142,959 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/ income before minority interest
|
|
|
(463,499 |
) |
|
|
(308,386 |
) |
|
|
(292,154 |
) |
|
|
(991,157 |
) |
|
|
236,791 |
|
|
Minority interest in net income of subsidiary
|
|
|
32 |
|
|
|
161 |
|
|
|
286 |
|
|
|
798 |
|
|
|
191 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/ income
|
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
$ |
(292,440 |
) |
|
$ |
(991,955 |
) |
|
$ |
236,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss)/ income per share
|
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
|
$ |
(2.84 |
) |
|
$ |
0.76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss)/ income per share
|
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
|
$ |
(2.84 |
) |
|
$ |
0.70 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
|
$ |
4,012,736 |
|
|
$ |
4,525,077 |
|
|
$ |
4,092,762 |
|
| |
Long-term obligations
|
|
$ |
859,545 |
|
|
$ |
1,007,079 |
|
|
$ |
1,315,557 |
|
|
$ |
1,547,197 |
|
|
$ |
970,761 |
|
| |
Stockholders’ equity
|
|
$ |
1,618,046 |
|
|
$ |
2,042,450 |
|
|
$ |
2,300,355 |
|
|
$ |
2,479,885 |
|
|
$ |
2,498,137 |
|
The Company’s fiscal years ended on December 31 for
each of the years presented above. During 2004, the Company
recorded $423 million in charges for restructuring of
operations and other items, net. (See Note 3 of the Notes.)
During 2003, the Company recorded $181 million in charges
for restructuring of operations and other items, net. (See
Note 3 of the Notes.) On January 1, 2003, the Company
adopted SFAS No. 146,
28
“Accounting for Exit or Disposal Activities.”
SFAS No. 146 has been applied to restructuring
activities initiated after December 31, 2002 and changes
the timing of when restructuring charges are recorded to the
date when the liabilities are incurred.
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 3 and 6 of the Notes.) 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.
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.
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.
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Statements in this discussion and analysis include
forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. All forward-looking statements included in this
discussion and analysis are based on information available to us
on the date of filing of this Annual Report on Form 10-K,
and we assume no obligation to update any such forward-looking
statements. These statements involve known and unknown risks and
uncertainties. Our actual results in future periods may be
significantly different from any future performance suggested in
this report. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“will,” “expects,” “plans,”
“anticipates,” “believes,”
“estimates,” “intends,”
“projects,” “predicts,” or similar
expressions. For such statements, we claim the protection under
the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. For a detailed
discussion of risk factors, refer to the “Risk
Factors” section set forth in Part I, Item 1 of
this Annual Report on Form 10-K, which is
incorporated by reference into this Part II,
Item 7.
While management believes that the discussion and analysis in
this report is adequate for a fair presentation of the
information, we recommend that you read this discussion and
analysis in conjunction with the remainder of this Annual Report
on Form 10-K.
OVERVIEW
We design, develop, manufacture and market complex,
high-performance integrated circuits and storage systems. We
operate in two segments — the Semiconductor segment
and the Storage Systems segment. Within the Semiconductor
segment, we offer three enabling system-on-a-chip
technologies — standard-cell ASICs, Platform ASICs and
application specific standard products that are focused on the
consumer, communication and storage component markets. Within
the Storage Systems segment we focus on high-performance modular
disk storage systems, sub-assemblies and storage management
software. Our products are marketed primarily to original
equipment manufacturers (“OEMs”) that sell products
targeted for applications in these markets.
Our business is characterized by rapid technological change,
competitive pricing pressures and cyclical market patterns. Our
financial results are affected by a wide variety of factors,
including general economic conditions worldwide, economic
conditions specific to the semiconductor and storage systems
industries, the timely implementation of new technologies and
the ability to safeguard inventions and other intellectual
29
property in a rapidly evolving market. In addition, the
semiconductor and storage systems markets have historically been
cyclical and subject to significant economic downturns at
various times.
We reported revenues of $1,700.2 million in 2004, a slight
increase over $1,693.1 million in 2003. We reported a net
loss for the year ended December 31, 2004 of
$463.5 million or $1.21 loss per diluted share, largely as
a result of $423 million in charges for restructuring of
operations and other items, net recorded in the second half of
the year. The charges were the result of our initiation of a
comprehensive restructuring program, which included asset
impairments, primarily related to our Gresham manufacturing
facility, a global reduction in workforce and the consolidation
of certain non-manufacturing leased facilities. The
restructuring activities were triggered by the decline in
revenues in the semiconductor industry and a corresponding
decline in our outlook as of the latter part of the third
quarter of 2004. For a complete discussion of our restructuring
actions, see the “Restructuring of operations and other
items, net” section later in this MD&A.
We continued the build-out of the RapidChip® Platform ASIC
infrastructure during 2004. Our customer base for RapidChip
technology encompasses a range from small start-up companies to
major system OEMs throughout all of our geographic markets.
Markets for our RapidChip Platform ASIC solutions include
communications, storage, consumer, industrial and others. Design
wins and product shipments for RapidChip platform products
increased during 2004 as compared to 2003.
We generated $91 million and $190 million in cash from
operations during 2004 and 2003, respectively. We reduced our
long-term debt to $782 million as of December 31,
2004, through open-market purchases in 2004 of approximately
$69 million of our 2001 Convertible Subordinated Notes due
in 2006.
Through the restructuring actions taken during 2004, we
continued to improve our cost structure and align our resources
to higher value opportunities. We have adopted a balanced
manufacturing strategy in the Semiconductor segment,
supplementing the capabilities of our Gresham manufacturing
facility with strategic foundry engagements with partners in
Taiwan, Japan, China and Malaysia. We expect revenue growth in
2005 to be driven by our strong technology and market share in
products such as semiconductors used in DVD recorder products,
Ultra320 SCSI controllers, SAS (Serial Attached SCSI),
FibreChannel, RAID adapters, our RapidChip Platform ASICs, and
modular-scalable storage systems.
Separation of our Storage Systems business. On
November 13, 2003, we announced our intention to separate
our storage systems operations — Engenio Information
Technologies, Inc. (“Engenio” or “Storage Systems
segment”) and create an independent storage systems
company. A more comprehensive discussion of the separation and
related agreements is set forth in Note 13 of the Notes. On
February 19, 2004, Engenio filed a registration statement
on Form S-1 with the Securities and Exchange Commission for
the initial public offering of its common stock. On
July 29, 2004, LSI announced jointly with Engenio the
postponement of the initial public offering of its common stock
due to then current market conditions.
Significant acquisitions and other major
transactions. We are continually exploring strategic
acquisitions that build upon our existing library of
intellectual property, human capital, including engineering
talent, and seeking to increase our leadership position in the
markets in which we operate. All of our acquisitions in 2004 and
2002 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. The transactions are summarized below. There were
no significant differences between our accounting policies and
those of the companies acquired. (See Note 2 of the Notes.)
30
2004
We acquired Velio Communications, Inc. (“Velio”)
during the first quarter of 2004 and Accerant Inc.
(“Accerant”) during the second quarter of 2004. The
transactions are summarized in the table below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Fair Value of | |
|
|
|
|
|
|
| Entity Name; |
|
|
|
|
|
|
|
Tangible Net | |
|
|
|
|
|
|
| Segment Included in; |
|
|
|
Total | |
|
|
|
Assets/ | |
|
|
|
|
|
Deferred | |
| Description of Acquired |
|
Acquisition | |
|
Purchase | |
|
Type of | |
|
(Liabilities) | |
|
|
|
Amortizable | |
|
Stock | |
| Business |
|
Date | |
|
Price | |
|
Consideration | |
|
Acquired | |
|
Goodwill | |
|
Intangible Assets | |
|
Compensation | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Velio Communications, Inc.;
|
|
|
April 2, 2004 |
|
|
$ |
20.8 |
|
|
|
$19.8 cash; and |
|
|
$ |
1.5 |
|
|
|
— |
|
|
$ |
18.3 |
|
|
$ |
1.0 |
|
|
Semiconductor segment;
|
|
|
|
|
|
|
|
|
|
|
0.1 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-speed interconnect and
|
|
|
|
|
|
|
|
|
|
|
restricted common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
switch fabric application
|
|
|
|
|
|
|
|
|
|
|
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
specific standard products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accerant, Inc.;
|
|
|
May 11, 2004 |
|
|
$ |
15.9 |
|
|
|
$14.1 cash; and |
|
|
$ |
— |
|
|
$ |
8.0 |
|
|
$ |
6.1 |
|
|
$ |
1.8 |
|
|
Semiconductor segment;
|
|
|
|
|
|
|
|
|
|
|
0.2 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer product
|
|
|
|
|
|
|
|
|
|
|
restricted common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
applications
|
|
|
|
|
|
|
|
|
|
|
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
There were no material acquisitions in 2003.
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 has enhanced 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 the acquisitions in 2002
are summarized below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Entity Name or Type of |
|
|
|
|
|
|
|
Fair Value | |
|
|
|
|
|
|
|
|
| Technology; |
|
|
|
|
|
|
|
of Tangible | |
|
|
|
|
|
|
|
|
| Segment Included in; |
|
|
|
Total | |
|
|
|
Net Assets/ | |
|
|
|
Amortizable | |
|
In-Process | |
|
|
| Description of Acquired |
|
|
|
Purchase | |
|
Type of | |
|
(Liabilities) | |
|
|
|
Intangible | |
|
Research and | |
|
Deferred Stock | |
| Business |
|
Acquisition Date | |
|
price | |
|
Consideration | |
|
Acquired | |
|
Goodwill | |
|
Assets | |
|
Development | |
|
Compensation | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Mylex Business Unit of
|
|
|
August 2002 |
|
|
$ |
50.5 |
|
|
|
Cash |
|
|
$ |
14.1 |
|
|
$ |
20.5 |
|
|
$ |
14.0 |
|
|
$ |
1.9 |
|
|
$ |
— |
|
|
IBM;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entry-level storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
systems in the Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and PCI-RAID
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products in the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital video product
|
|
|
November 2002 |
|
|
$ |
6.7 |
|
|
|
Cash |
|
|
$ |
(0.2 |
) |
|
$ |
2.9 |
|
|
$ |
1.8 |
|
|
$ |
1.0 |
|
|
$ |
1.2 |
|
|
technologies;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Nonstatutory 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 under the 1999 Nonstatutory
Stock Option Plan. Our directors and executive officers were not
eligible to participate in this program. The exchange offer
expired on September 18, 2002, and we accepted options to
purchase an aggregate of 16,546,370 shares for exchange. On
March 20, 2003, we granted a new option that covered
two shares of LSI Logic common stock for every three shares
covered by an option that an employee had elected to exchange.
The exercise price per share of the new options was equal to the
fair market value of our common stock on the grant date. We
granted options to purchase 10,691,139 shares at an
exercise price of $5.06 per share. The exchange program did
not result in the recording of any compensation expense in the
statement of operations.
31
Where more than one significant factor contributed to changes in
results from year to year, we have quantified such factors
throughout the Management’s Discussion & Analysis
(“MD&A”) where practicable and useful to the
discussion.
RESULTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Semiconductor segment
|
|
$ |
1,248.6 |
|
|
$ |
1,269.7 |
|
|
$ |
1,481.4 |
|
|
Storage Systems segment
|
|
|
451.6 |
|
|
|
423.4 |
|
|
|
335.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
1,700.2 |
|
|
$ |
1,693.1 |
|
|
$ |
1,816.9 |
|
| |
|
|
|
|
|
|
|
|
|
There were no significant inter-segment revenues during the
periods presented.
2004 compared to 2003
Total consolidated revenues for 2004 increased $7.1 million
or less than one percent as compared to 2003.
Revenues for the Semiconductor segment decreased
$21.1 million or 2% in 2004 as compared to 2003. The
decrease in revenues in the Semiconductor segment is primarily
attributable to a decrease in average selling prices and demand
for semiconductors used in video game products, and a decrease
in demand for semiconductors used in office automation products
and enterprise switch products. These decreases were offset in
part by the following:
|
|
|
| |
• |
Increases in demand for semiconductors used in storage product
applications such as our Ultra320 SCSI and Ultra320 RAID
products, as well as ASICs used in hard disk drives and host
adapter boards. The Ultra320 product line was introduced in the
latter part of 2003. |
| |
| |
• |
Increases in demand for semiconductors used in consumer product
applications such as DVD-recorders. We introduced our
DVD-recorder semiconductor product in the latter part of 2003
and early 2004. |
| |
| |
• |
Increases in demand for semiconductors used in communication
product applications such as wireless solutions. |
Revenues for the Storage Systems segment increased
$28.2 million or 7% in 2004 from 2003. The increase in
revenues in the Storage Systems segment was primarily
attributable to increased demand from IBM, StorageTek and the
Teradata division of NCR for our entry-level controller products
that were introduced in late April 2003 and increased demand for
our other controller and disk enclosure related products. In
addition to our introduction of the new entry-level controller
product, we believe that the increased demand from our largest
customers was driven by the trend toward purchasing modular
storage systems, our increased focus on sales of our products to
our channel customers, the economic rebound that began in the
middle of 2003, increased spending on information technology by
organizations and increased outsourcing by OEMs.
We expect total consolidated revenues in the first quarter of
2005 to be within a range of $420 million to
$435 million.
2003 compared to 2002
Total consolidated revenues for 2003 decreased
$123.8 million or 7% as compared to 2002. Revenues for the
Semiconductor segment decreased $211.7 million or 14% in
2003 as compared to the previous year. The decline in revenues
was primarily attributable to lower demand for our
semiconductors sold into certain product applications such as
set-top box, DVD playback, video games and applications for the
wide-area-network (WAN) market. The above-noted declines in
revenues were partially offset by growth in revenues
32
from semiconductors used in product applications such as DVD
recorders, Ultra320 SCSI and ASICs supplied to the disk-drive
industry.
Revenues for the Storage Systems segment increased
$87.9 million or 26% in 2003 from 2002. The increase was
due to a significant increase in sales to IBM, from
$120.4 million in 2002 to $219.4 million in 2003. As a
percentage of Storage Systems revenues, revenues from IBM
increased to 52% in 2003 from 36% in 2002. The increase in
revenues from IBM was primarily due to growth in demand for our
high-performance controller products and an entry-level
controller product introduced during the year, together with the
enclosure products that are generally sold with these
controllers. In addition, this increase was due to IBM’s
purchases of products added to our product line pursuant to the
acquisition of IBM’s Mylex business unit in August 2002.
Growth in the demand for our premium software features also
contributed to an increase in revenues. The growth in revenues
for 2003 over 2002 was offset in part by a decrease in aggregate
revenues of $10.8 million from StorageTek and the Teradata
division of NCR. As a percentage of Storage Systems revenues,
sales to these two customers decreased in 2003 as compared to
2002.
Significant Customers. The following table
summarizes the number of our significant customers, each of whom
accounted for 10% or more of our revenues, along with the
percentage of revenues they individually represent on a
consolidated basis and by segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
| |
Percentage of segment revenues
|
|
|
— |
|
|
|
18% |
|
|
|
22% |
|
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
| |
Percentage of segment revenues
|
|
|
54%, 14%, 12% |
|
|
|
52%, 14%, 11% |
|
|
|
36%, 20%, 15% |
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
| |
Percentage of consolidated revenues
|
|
|
16% |
|
|
|
15%, 13% |
|
|
|
18% |
|
Revenues by geography. The following table summarizes our
revenues by geography:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
852.5 |
|
|
$ |
863.6 |
|
|
$ |
905.3 |
|
|
Asia, including Japan
|
|
|
655.1 |
|
|
|
677.3 |
|
|
|
748.9 |
|
|
Europe
|
|
|
192.6 |
|
|
|
152.2 |
|
|
|
162.7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,700.2 |
|
|
$ |
1,693.1 |
|
|
$ |
1,816.9 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues by geography are accumulated based on the revenues
generated by our subsidiaries located within the three
geographic areas noted in the above table. In 2004, Engenio
formed new subsidiaries within Europe. These subsidiaries
recorded approximately $48 million in revenues. In prior
years, all revenues generated by Engenio in Europe were reported
in North America.
In 2004, revenues decreased in North America and Asia, including
Japan, while increasing in Europe as compared to 2003. The
decrease in revenues in North America is primarily attributable
to a decrease in revenues for modular storage products
associated with Engenio as a result of the allocation of revenue
to the newly formed subsidiaries in Europe, as discussed above,
a decrease in demand for semiconductors used in storage and
consumer product applications, such as cable and set-top-box
solutions. The decrease in North America was offset in part by
an increase in demand for semiconductors used in communication
product applications such as routers, switches and wireless
solutions. The decrease in revenues in Asia, including
33
Japan, is primarily due to decreased demand for semiconductors
used in consumer product applications, such as video game
products, and semiconductors used in communication product
applications, such as office automation products and switches.
The decrease in Asia, including Japan, was offset in part by an
increase in demand for semiconductors used in consumer product
applications, such as DVD-recorders, and semiconductors used in
storage product applications, such as hard disk drives and our
Ultra320 product line. The increase in Europe is a result of the
allocation of revenue to the newly formed subsidiaries in Europe
for Engenio as previously discussed, offset in part by decreased
demand across all semiconductor product applications.
In 2003, revenues declined in all geographic regions as compared
to 2002. The decline in revenues in North America for 2003 was
mainly due to the continued economic downturn in the United
States. The decline in revenues in Asia, including Japan, in
2003 compared to 2002 is primarily attributable to lower demand
for our semiconductors used in certain consumer product
applications such as DVD playback and video games. The decline
in revenues for Asia, including Japan, was partially offset by
growth in revenues from semiconductors used in consumer product
applications such as DVD recorders and semiconductors used in
storage product applications such as Ultra320 SCSI and ASICs
supplied to the disk-drive industry.
Operating costs and expenses. Key elements of the
consolidated statements of operations for the respective
segments are as follows:
Gross profit margin:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Semiconductor segment
|
|
$ |
573.8 |
|
|
$ |
518.2 |
|
|
$ |
523.4 |
|
| |
Percentage of segment revenues
|
|
|
46% |
|
|
|
41% |
|
|
|
35% |
|
|
Storage Systems segment
|
|
$ |
161.8 |
|
|
$ |
159.0 |
|
|
$ |
125.3 |
|
| |
Percentage of segment revenues
|
|
|
36% |
|
|
|
38% |
|
|
|
37% |
|
| |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
735.6 |
|
|
$ |
677.2 |
|
|
$ |
648.7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Percentage of revenues
|
|
|
43% |
|
|
|
40% |
|
|
|
36% |
|
2004 compared to 2003
The consolidated gross profit margin as a percentage of revenues
increased to 43% in 2004 from 40% in 2003. The following factors
contributed to the improvement in gross profit margins in 2004
as compared to 2003:
|
|
|
| |
• |
A favorable shift in the overall mix to products with higher
margins, including the introduction of new products such as
semiconductors used in consumer product applications such as
DVD-recorders, and semiconductors used in storage product
applications such as our Ultra320 product line and ASICs used in
hard disk drives for the year ended December 31, 2004, as
compared to the same period of 2003. The improvement was offset
in part by higher sales of storage systems by Engenio, which
typically have lower gross profit margins, and lower average
selling prices for semiconductors used in video game products; |
| |
| |
• |
Lower manufacturing variances for the Gresham manufacturing
facility associated with yield improvements and better factory
utilization; |
| |
| |
• |
A reduction in cost of revenues as a result of the sale of our
Japan manufacturing facility in the fourth quarter of 2003; |
| |
| |
• |
Lower period costs in 2004 as compared to 2003, as a result of
the implementation of our 130 nanometer manufacturing process
technology during 2003; and |
| |
| |
• |
A reduction in compensation-related costs and equipment-related
depreciation and rent expense primarily as a result of the
restructuring and lease refinancing initiatives during 2004. |
34
Sales of previously reserved inventories were not significant
compared to such inventory sales in 2003.
The gross profit margin, as a percentage of revenues for the
Semiconductor segment, increased to 46% in 2004 from 41% in
2003. The following factors contributed to the improvement in
the Semiconductor segment’s gross profit margins in 2004 as
compared to the prior year:
|
|
|
| |
• |
A favorable shift in the overall mix of products sold to
products with higher margins, including the introduction of new
products such as semiconductors used in consumer product
applications such as DVD-recorders and semiconductors used in
storage product applications such as our Ultra320 product line
and ASICs used in hard disk drives, offset in part by lower
average selling prices for semiconductors used in video game
products for the year ended December 31, 2004, as compared
to the same period of 2003; |
| |
| |
• |
Lower manufacturing variances for the Gresham manufacturing
facility associated with yield improvements and better factory
utilization; |
| |
| |
• |
A reduction in cost of revenues as a result of the sale of our
Japan manufacturing facility in the fourth quarter of 2003; |
| |
| |
• |
Lower period costs in 2004 as compared to 2003, as a result of
the implementation of our 130 nanometer manufacturing process
technology during 2003; and |
| |
| |
• |
A reduction in compensation-related costs and equipment-related
depreciation and rent expense primarily as a result of the
restructuring actions and lease refinancing initiatives during
2004. |
Sales of previously reserved inventories were not significant
compared to such inventory sales in 2003.
The gross profit margin as a percentage of revenues for the
Storage Systems segment decreased to 36% in 2004 from 38% in
2003 primarily as a result of an unfavorable shift in the mix of
products sold. In 2004, we continued to see an increase, as a
percentage of total Storage Systems revenues, in the sale of
entry-level controller and related drive products, which have
lower gross profit margins than other products offered within
the Storage Systems segment.
2003 compared to 2002
In September 2003, we entered into a definitive agreement to
sell the Tsukuba, Japan facility to Rohm, a Japanese company.
The sale closed during November 2003 for 2.82 billion Yen
(approximately $25.8 million). See Note 3 of the
Notes. With these actions, we completed the consolidation of our
internal manufacturing into our Gresham, Oregon campus,
supplemented by strategic foundry relationships from which we
acquire wafers. Utilizing a diversity of manufacturing sources
allows us to better manage our manufacturing needs, including
investment in and access to world-class process technology.
The consolidated gross profit margin as a percentage of revenues
increased to 40% in 2003 from 36% in 2002. The following factors
were primarily attributable to the improvement in gross profit
margins in 2003 as compared to 2002:
|
|
|
| |
• |
Lower charges for obsolete and unmarketable inventories in 2003
as compared to 2002 in the Semiconductor segment; |
| |
| |
• |
Lower manufacturing variances associated primarily with yield
improvements in 2003 related to our 0.18 –micron technology; |
| |
| |
• |
Lower compensation-related costs for manufacturing in the
Semiconductor segment; |
| |
| |
• |
Higher sales of previously reserved inventory. In 2003, sales of
previously reserved inventory improved gross profit margins by
less than one percentage point as compared to sales of
previously reserved inventory in 2002. The majority of this
improvement in gross profit margin was in the Semiconductor
segment; |
| |
| |
• |
A favorable change in product mix for the Semiconductor segment
during 2003; and |
35
|
|
|
| |
• |
A favorable change in product mix for the Storage Systems
segment, offset by higher compensation related costs, due to
headcount increases, and higher freight costs incurred during
2003. |
The gross profit margin as a percentage of revenues for the
Semiconductor segment increased to 41% from 35%. The gross
profit margin improved in 2003 as compared to 2002, even though
Semiconductor segment revenues were lower in 2003 as compared to
2002. The following factors were primarily attributable to the
improvement in the Semiconductor segment’s gross profit
margins in 2003 as compared to 2002:
|
|
|
| |
• |
Lower charges for obsolete and unmarketable inventories in 2003
as compared to 2002; |
| |
| |
• |
Lower manufacturing variances associated primarily with yield
improvements in 2003 related to our 0.18–micron technology; |
| |
| |
• |
Lower compensation-related costs for manufacturing; |
| |
| |
• |
A favorable change in product mix during 2003; and |
| |
| |
• |
Higher sales of previously reserved inventory. In 2003, sales of
previously reserved inventory improved gross profit margins by
less than one percentage point as compared to sales of
previously reserved inventory in 2002. |
The gross profit margin as a percentage of revenues for the
Storage Systems segment increased to 38% in 2003 from 37% in
2002. The slight increase in gross profit margin as a percentage
of revenues was primarily a function of the mix of products
sold. Offsetting this increase were higher compensation-related
costs for manufacturing, due to headcount increases, and higher
freight costs incurred during 2003.
|
|
|
Research and development: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Semiconductor segment
|
|
$ |
362.5 |
|
|
$ |
386.9 |
|
|
$ |
421.3 |
|
| |
|
Percentage of segment revenues
|
|
|
29% |
|
|
|
30% |
|
|
|
28% |
|
|
Storage Systems segment
|
|
$ |
59.0 |
|
|
$ |
45.8 |
|
|
$ |
36.1 |
|
| |
Percentage of segment revenues
|
|
|
13% |
|
|
|
11% |
|
|
|
11% |
|
| |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
421.5 |
|
|
$ |
432.7 |
|
|
$ |
457.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Percentage of revenues
|
|
|
25% |
|
|
|
26% |
|
|
|
25% |
|
2004 compared to 2003
Research and development (“R&D”) expenses, on a
consolidated basis, decreased $11.2 million or 3% during
2004 as compared to 2003.
R&D expenses for the Semiconductor segment decreased
$24.4 million or 6% in 2004 as compared to 2003. The
decrease is primarily a result of benefits from the cost-cutting
measures implemented as part of the restructuring actions in
2003 and 2004 (see Note 3 of the Notes) including lower
compensation-related costs and benefits from the consolidation
of our non-manufacturing facilities. In addition, we had lower
equipment-related costs as a result of entering into two
equipment operating leases to replace two existing operating
leases for the same equipment in the third quarter of 2004, the
buyout and write-down of the purchased equipment from the new
operating leases in the fourth quarter of 2004, and certain
assets becoming fully depreciated during 2004.
We develop advanced sub-micron product technologies. We
continued the build-out of the RapidChip Platform ASIC
infrastructure in 2004. Products utilizing RapidChip technology
combine the high-density, high-performance and proven
intellectual property benefits of cell-based ASICs with the
advantages of lower development costs and faster time to market.
We expect products utilizing RapidChip technology to have
performance comparable to cell-based ASICs at a cost
significantly lower than Field Programmable Gate
36
Arrays (“FPGAs”). Markets for our RapidChip Platform
ASIC solutions include communications, storage, consumer,
industrial and others. Our customer base for RapidChip
technology encompasses a range from small start-up companies to
major system OEMs throughout all of our geographic markets.
Design wins and product shipments for RapidChip platform
products increased during 2004 as compared to 2003.
R&D expenses for the Storage Systems segment consist
primarily of employee salaries and materials used in product
development, as well as deprecation of capital equipment and
facilities. In addition to the significant resources required to
support hardware technology transitions, we devote significant
resources to developing and enhancing software features and
functionality to remain competitive. R&D expenses for the
Storage Systems segment increased by $13.2 million or 29%
in 2004 as compared to 2003. This is primarily a result of
increased compensation costs due to higher headcount, higher
expenses for outside service providers related to development
programs and higher depreciation expense related to assets
purchased for product development.
2003 compared to 2002
R&D expenses, on a consolidated basis, decreased
$24.7 million or 5% during 2003 as compared to 2002.
R&D expenses for the Semiconductor segment decreased
$34.4 million or 8% in 2003 as compared to 2002. The
decrease in R&D expenses for the Semiconductor segment is
primarily due to benefits from the cost-cutting measures
implemented as part of the restructuring actions of 2001 to 2003
(see Note 3 of the Notes). The decrease was offset in part
because the technology transfer agreement entered into with
Silterra during 1999 ended in 2002, which included a benefit of
$8 million for 2002. We continued the build-out of the
current generation RapidChip platform infrastructure in 2003. We
shipped our first RapidChip platform products in the fourth
quarter of 2003. R&D expenses for the Semiconductor segment
increased to 30% of revenues in 2003 from 28% in 2002.
R&D expenses for the Storage Systems segment increased by
$9.7 million or 27% in 2003 as compared to 2002. The
increase primarily resulted from our strategy to invest in
R&D programs to enhance the features, functionality and
performance of our existing products and to add new products to
our portfolio. In particular, we incurred additional R&D
expenses in 2003 as a result of hiring 91 additional R&D
employees in connection with our August 2002 acquisition of
IBM’s Mylex business unit. R&D expenses as a percentage
of revenues for the Storage Systems segment remained unchanged
at 11% in 2003 and 2002.
|
|
|
Selling, general and administrative: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Semiconductor segment
|
|
$ |
168.7 |
|
|
$ |
171.8 |
|
|
$ |
181.2 |
|
| |
Percentage of segment revenues
|
|
|
14% |
|
|
|
14% |
|
|
|
12% |
|
|
Storage Systems segment
|
|
$ |
74.8 |
|
|
$ |
62.4 |
|
|
$ |
49.0 |
|
| |
Percentage of segment revenues
|
|
|
17% |
|
|
|
15% |
|
|
|
15% |
|
| |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
243.5 |
|
|
$ |
234.2 |
|
|
$ |
230.2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Percentage of revenues
|
|
|
14% |
|
|
|
14% |
|
|
|
13% |
|
2004 compared to 2003
Consolidated selling, general and administrative
(“SG&A”) expenses increased $9.3 million or
4% during 2004 as compared to 2003.
SG&A expenses for the Semiconductor segment decreased
$3.1 million or 2% in 2004 as compared to 2003. The
decrease is primarily a result of benefits from the cost-cutting
measures implemented as part of the restructuring actions in
2003 and 2004 (see Note 3 of the Notes) including lower
compensation related costs, benefits from the consolidation of
our non-manufacturing facilities and other cost savings.
37
SG&A expenses for the Storage Systems segment increased
$12.4 million or 20% in 2004 as compared to 2003. On
July 29, 2004, we announced jointly with Engenio the
postponement of the initial public offering of its common stock
due to then current market conditions. The increase in SG&A
expenses in the Storage Systems segment is primarily due to
higher compensation-related costs mainly as a result of
employees hired in anticipation of the proposed initial public
offering; higher legal, accounting and other professional fees
in preparation for the proposed initial public offering; and
$3.5 million of expenses associated with the proposed
initial public offering, which includes fees for professional
services that were directly and solely related to the initial
public offering.
2003 compared to 2002
Consolidated SG&A expenses increased $4.0 million or 2%
during 2003 as compared to 2002.
SG&A expenses for the Semiconductor segment decreased
$9.4 million or 5% in 2003 as compared to 2002. The
decrease for the Semiconductor segment was primarily
attributable to the various cost reduction measures implemented
from 2001 to 2003 (see Note 3 of the Notes) offset in part
by a slight increase in compensation-related costs. For the
Semiconductor segment, SG&A expenses as a percentage of
revenues increased to 14% in 2003 from 12% in 2002. This is
primarily a function of lower semiconductor segment revenues,
offset in part by lower SG&A expenses.
SG&A expenses for the Storage Systems segment increased
$13.4 million or 27% in 2003 as compared to 2002. The
increase is primarily a result of spending increases on sales
and related activities to support existing channel customers and
develop new channel customers. In addition, higher revenues
resulted in higher selling commissions. For the Storage Systems
segment, SG&A expenses as a percentage of revenues remained
unchanged at 15% in 2003 as compared to 2002.
|
|
|
Acquired in-process research and development: |
There were no acquired in-process research and development
(“IPR&D”) expenses in 2004 and 2003. We recorded a
charge of $2.9 million for the year ended December 31,
2002 associated with IPR&D primarily in connection with an
acquisition as summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Acquisition | |
|
|
|
|
|
Revenue Projections | |
| Company |
|
Date | |
|
IPR&D | |
|
Discount Rate | |
|
Extend Through | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollar amounts in millions) | |
|
Mylex unit of IBM
|
|
|
August 2002 |
|
|
$ |
1.9 |
|
|
|
25 |
% |
|
|
2006 |
|
Mylex unit of IBM. On August 29, 2002, we finalized
an Asset Purchase Agreement with IBM. Under the agreement, we
acquired certain tangible and intangible assets associated with
IBM’s Mylex business unit. The acquisition has enhanced
product offerings in the expanding entry-level storage systems
space within the Storage Systems segment and the PCI-RAID
offering in the Semiconductor segment. As of the acquisition
date, there were several projects in process. Development of
storage systems hardware technology started in 2000, while
development of firmware and subsystems components technology
started in 2002. As of August 29, 2002, we estimated that
the projects were from 10% to 50% complete. As of the
acquisition date, the cost to complete these projects was
estimated at $4.6 million in 2002 and $2.6 million in
2003. As of December 31, 2003, the projects were completed.
For additional information regarding the methodology used in
determining IPR&D, see Note 2 of the Notes.
|
|
|
Restructuring of operations and other items, net: |
We recorded net charges of $423.4 million in restructuring
of operations and other items for the year ended
December 31, 2004, consisting of $433.5 million in
charges for restructuring of operations and impairment of
long-lived assets and a gain of $10.1 million for other
items. Of these charges, $420.2 million was recorded in the
Semiconductor segment and $3.2 million was included in the
Storage Systems segment. In 2005, we expect to realize savings
of approximately $80 million as a result of these
restructuring actions.
38
|
|
|
Restructuring and impairment of long-lived assets: |
We recorded a gain of $3.3 million on the sale of fixed
assets that had previously been held for sale and an expense of
$1.1 million for the abandonment of fixed assets that had
previously been held for sale. In addition, an expense of
$1.1 million was recorded for the write-down of fixed
assets due to impairment.
An expense of $0.3 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
An expense of $0.2 million was recorded primarily for
severance and termination benefits for four employees involved
in research and development.
We recorded a gain of $1.0 million on the sale of fixed
assets that had previously been held for sale and an expense of
$4.0 million primarily for the write-down of the Colorado
Springs fabrication facility to reflect a decline in fair market
value and to write down certain spare parts for fixed assets.
An expense of $0.4 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
Previously accrued contract termination fees of
$0.4 million were reversed as the result of favorable than
expected negotiations to terminate those contracts.
As a result of the decline in revenues in the semiconductor
industry and a corresponding decline in our outlook as of the
latter part of the third quarter of 2004, we initiated a
comprehensive restructuring program, which included asset
impairments, a global reduction in workforce and the
consolidation of certain facilities as described further below.
We concluded in accordance with SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” that the Gresham manufacturing facility assets
were impaired. Accordingly, an asset write down of
$205.5 million was recorded in the semiconductor segment
during the third quarter of 2004. The fair values of impaired
equipment and facilities were researched and estimated by
management.
We announced workforce reductions of approximately 560 positions
worldwide across all job functions and recorded a charge of
$14.6 million in the Semiconductor segment for severance
and termination benefits.
We recorded a gain of $1.9 million on the sale of fixed
assets that had previously been held for sale and an expense of
$3.4 million for the write-down of the Colorado Springs
fabrication facility to reflect a decline in fair market value,
the impairment of certain acquired intangible assets in the
Semiconductor segment and the write down of leasehold
improvements related to the facility operating leases discussed
below.
In the third quarter of 2004, we consolidated additional
non-manufacturing facilities and recorded $6.1 million for
costs associated with exiting certain operating leases for real
estate as the facilities ceased being used. An expense of
$0.4 million was recorded to reflect the change in time
value of prior accruals for facility lease termination costs. In
addition, an expense of $1.8 million was recorded for
changes in sublease assumptions for certain previously accrued
facility lease termination costs.
In November 2004, we exercised our right to purchase all of the
wafer fabrication equipment that had previously been under two
operating lease and security agreements. The purchase amount was
$332 million. Cash collateral of $311 million
associated with the leases was returned to us. Termination fees
under the lease agreements were not significant. The formerly
leased equipment is part of the Gresham manufacturing facility,
but was not impaired in the third quarter of 2004, because we
did not own the equipment until November of 2004, as discussed
above. Accordingly, in the fourth quarter of 2004, after
purchasing the previously leased
39
equipment, we recorded an additional impairment charge of
$177.7 million in restructuring of operations and other
items within the Semiconductor segment. The charge includes a
write-down of $247.7 million to reflect the equipment at
fair value, the reversal of a $56.0 million deferred gain
previously recorded in non-current liabilities related to the
sale-leaseback of equipment during 2003, lease termination fees
and the write-off of capitalized lease fees and deferred rent.
The fair values of the impaired equipment were researched and
estimated by management.
In the Semiconductor segment, we recorded a gain of
$0.6 million on the sale of fixed assets that had
previously been held for sale; an expense of $11.4 million
for the write-down of the Colorado Springs fabrication facility
to reflect a decline in fair market value; and an expense of
$0.3 million for the write-down of leasehold improvements
related to the facility operating leases discussed below and
other fixed assets.
During the third quarter of 2004, we reclassified a parcel of
land in Japan with a book value of $1.4 million from a
long-term asset to a current asset held for sale. The land was
part of the total assets in the Semiconductor segment. The land
was sold in the fourth quarter of 2004 and a gain of
$0.2 million was recorded.
As part of the restructuring program initiated in the third
quarter, we decided to discontinue development of a product line
in the Semiconductor segment that had been acquired in
connection with the Datapath acquisition in 2000. As a result,
we performed an analysis of the future net cash flows related to
the affected product line and determined that certain acquired
intangible assets were impaired. An impairment charge of
$4.7 million for the write-down of the acquired intangible
assets to fair market value was recorded in the Semiconductor
segment.
In the fourth quarter of 2004, we consolidated additional
non-manufacturing facilities and recorded $1.9 million for
costs associated with exiting certain operating leases for real
estate as the facilities ceased being used. An expense of
$0.5 million was recorded to reflect the change in time
value of accruals for facility lease termination costs.
Previously accrued lease termination fees of $0.3 million
were reversed as the result of favorable negotiations to
terminate those contracts.
We recorded $2.5 million for additional severance and
termination benefits in the Semiconductor segment related to the
workforce reductions described in the third quarter of 2004
above, primarily in Europe and the United States due to changes
in estimates.
In our Storage Systems segment, during the fourth quarter, we
initiated realignment of our product portfolio and overhead cost
structures driven by the future operating and financial
performance goals of the Storage Systems segment. In connection
with this action we recorded a $1.5 million charge for
severance and termination benefits for 70 employees across
multiple activities and functions. In addition, we recorded a
charge of $1.7 million for the write-off of previously
capitalized software development costs. We cancelled the related
project based upon our determination that this project would not
achieve the desired future financial performance goals.
The fair values of impaired equipment and facilities were
researched and estimated by management. Given that current
market conditions for the sale of older fabrication facilities
and related equipment may fluctuate due to demand for used
semiconductor equipment, there can be no assurance that we will
realize the current net carrying value of the assets held for
sale. We reassess the realizability of the carrying value of
these assets at the end of each quarter until the assets are
sold or otherwise disposed of and additional adjustments may be
necessary. Assets held for sale of $11 million and
$30 million were included as a component of prepaid
expenses and other current assets as of December 31, 2004
and 2003, respectively. Assets classified as held for sale are
not depreciated. We are making appropriate efforts to sell
assets held for sale within the next twelve months.
40
The following table sets forth our restructuring reserves as of
December 31, 2004, which are included in other accrued
liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve | |
|
During | |
|
December 31, | |
| |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
2,661 |
|
|
$ |
404,723 |
|
|
$ |
(760 |
) |
|
$ |
(405,417 |
) |
|
$ |
1,207 |
|
|
Lease terminations and maintenance contracts(b)
|
|
|
21,021 |
|
|
|
11,388 |
|
|
|
(665 |
) |
|
|
(11,679 |
) |
|
|
20,065 |
|
|
Facility closure and other exit costs(c)
|
|
|
2,136 |
|
|
|
64 |
|
|
|
— |
|
|
|
(1,657 |
) |
|
|
543 |
|
|
Payments to employees for severance(d)
|
|
|
874 |
|
|
|
18,812 |
|
|
|
(18 |
) |
|
|
(12,260 |
) |
|
|
7,408 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
26,692 |
|
|
$ |
434,987 |
|
|
$ |
(1,443 |
) |
|
$ |
(431,013 |
) |
|
$ |
29,223 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The amounts utilized in 2004 reflect $411.6 million of
non-cash write-downs of long-lived assets in the U.S. due
to impairment and $0.8 million in cash payments to
decommission and sell assets, offset by a $7.0 million
realized gain on the sale of fixed assets previously held for
sale. The write-downs of long-lived assets were accounted for as
a reduction of the assets and did not result in a liability. The
$1.2 million balance as of December 31, 2004, relates
to machinery and equipment decommissioning costs in the U.S. and
estimates of selling costs for assets held for sale that is
expected to be utilized during 2005. |
|
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations will be paid during
the remaining terms of these contracts, which extend through
2011. |
| |
|
(c) |
|
Amounts utilized represent cash payments. The balance remaining
for facility closure and other exit costs is expected to be paid
during 2005. |
| |
|
(d) |
|
Amounts utilized represent cash severance payments to 495
employees during the year ended December 31, 2004. The
balance remaining for severance benefits is expected to be paid
by the end of 2005. |
During the second quarter of 2004, we reclassified a parcel of
land in Colorado with a book value of $1.4 million from a
long-term asset to a current asset held for sale. The land is
part of total assets in the Semiconductor segment. We expect to
sell the property within the next 12 months for an amount
in excess of book value.
During the third quarter of 2004, we entered into two new lease
agreements for wafer fabrication equipment. The equipment was
previously on lease immediately prior to the closing of the new
lease agreements. The Company had capitalized and was amortizing
fees related to the previous leases. Upon entering into the new
lease agreements, $2.5 million in remaining unamortized
fees for the previous leases were recorded as an expense in the
statement of operations.
During the third quarter of 2004, we discontinued hedge
accounting treatment on the interest rate swap related to the
equipment operating leases that were refinanced and recorded the
$3.8 million balance in accumulated comprehensive income as
a gain in the statement of operations (see Note 8 of the
Notes).
During the fourth quarter of 2004, we released $8.8 million
in accruals that were established in years prior to 2004,
because management determined that the accruals were no longer
necessary.
We recorded net charges of $180.6 million in restructuring
of operations and other items for the year ended
December 31, 2003 consisting of $182.8 million in
charges for restructuring of operations and a gain of
$2.2 million for other items. Of these charges,
$165.7 million was recorded in the Semiconductor segment
and $14.9 million was included in the Storage Systems
segment.
41
|
|
|
Restructuring and impairment of long-lived
assets: |
On January 1, 2003, we adopted SFAS No. 146,
“Accounting for Exit or Disposal Activities.”
SFAS No. 146 has been applied to restructuring
activities initiated after December 31, 2002 and changes
the timing of when restructuring charges are recorded to the
date when the liabilities are incurred.
In February 2003, we downsized operations and recorded
$35.7 million in charges for restructuring of operations
and other items. Of this charge, $21.1 million was
associated with the Semiconductor segment and $14.6 million
was attributable to the Storage Systems segment. The charges
consisted of severance and termination benefits of
$4.5 million for 210 employees involved in manufacturing
operations, R&D and SG&A; $1.4 million for costs
associated with exiting certain operating leases primarily for
real estate; and write-downs of $24.1 million for certain
acquired intangible assets, $3.5 million for capitalized
software and $2.2 million for fixed assets. During the year
ended December 31, 2003, payments related to the February
2003 restructuring actions consisted of approximately
$4.4 million for severance and termination benefits and
$0.6 million for lease and contract terminations.
In April 2003, we announced a restructuring of our operations
that included a reduction in workforce and the consolidation of
certain non-manufacturing facilities. A charge of
$32.4 million was recorded in the Semiconductor segment
consisting of severance and termination benefits of
$9.1 million for 325 employees involved in manufacturing
operations, research and development, marketing, sales and
administration; $18.6 million for costs associated with
exiting certain operating leases primarily for real estate;
other exit costs of $0.2 million; and a write-down of
$4.5 million for fixed assets due to impairment. During the
year ended December 31, 2003, payments related to the April
2003 restructuring actions consisted of approximately
$9.0 million for severance and termination benefits,
$2.6 million for lease and contract terminations and
$0.1 million for other exit costs.
In June 2003, we announced the decision to sell the Tsukuba,
Japan manufacturing facility. During the second quarter, a
charge of $72.9 million was recorded in the Semiconductor
segment to write-down fixed assets to their fair market value.
The fair value was reclassified from property, plant and
equipment to other current assets to reflect the intention to
dispose of the facility within the next twelve months. In
addition, approximately $2.0 million in restructuring
charges were recorded in the second quarter for severance and
other exit costs. See further discussion in the third quarter
below.
In June 2003, we also recorded $19.4 million of additional
fixed asset write-downs to reflect the decrease in fair market
value of assets held for sale during the period. This write-down
included a reduction in the value of the Colorado Springs
fabrication facility of $16.4 million to reflect continued
and accelerated efforts to sell the facility.
|
|
|
Agreement to sell Japan fabrication facility: |
In September 2003, we entered into a definitive agreement to
sell the Tsukuba, Japan manufacturing facility to Rohm, a
Japanese company. The sale closed during November 2003 for
2.82 billion Yen (approximately $25.8 million). As
part of the definitive agreement, we agreed to purchase a
minimum amount of production wafers from Rohm for a period of
15 months following the close of the transaction. As a
result, a charge of $4.3 million was recorded in cost of
revenues during the third quarter of 2003. This charge is a
result of the application of our policy to accrue for
non-cancelable inventory purchase commitments in excess of
12 months of estimated demand. Included in the
$4.3 million charge to cost of revenues is a
reclassification of $3.0 million from restructuring expense
originally recorded in the second quarter of 2003 to better
reflect the terms of the definitive agreement. Also in the
quarter, $1.8 million was recorded for additional severance
benefits to be paid and for contract termination and other exit
costs associated with the definitive agreement.
42
During the year ended December 31, 2003, payments related
to the Japan restructuring actions consisted of approximately
$1.3 million for severance and termination benefits and
$0.2 million for lease and contract terminations.
|
|
|
Other third quarter 2003 restructuring actions: |
In the third quarter of 2003, we continued to consolidate
non-manufacturing facilities and recorded $1.5 million for
costs associated with exiting certain operating leases for real
estate as the facilities ceased being used.
In September 2003, we decided to discontinue development
programs and to refocus sales and marketing efforts for certain
product lines in the Semiconductor segment. As a result of an
analysis of future net cash flows related to the affected
product lines, it was determined that certain acquired
intangible assets were impaired. An impairment charge of
$21.0 million related to the write-down of the acquired
intangible assets to fair market value was recorded in the third
quarter of 2003. These intangible assets were originally
acquired in connection with the acquisition of C-Cube
Microsystems in the second quarter of 2001. In addition,
$3.2 million in restructuring charges were recorded in the
third quarter of 2003. These charges related to severance and
termination benefits for 97 employees primarily involved in
research and development and for certain contract termination
costs and fixed asset write-downs due to impairment. The
severance benefits were paid during the third quarter of 2003.
In the fourth quarter of 2003, we reversed approximately
$2.2 million of previously accrued restructuring expenses.
The reversal was primarily due to the combination of a favorable
negotiation to terminate leases for real property and severance
payments that were lower than expected due to the timing of the
sale of the Japan manufacturing facility to Rohm. An expense of
$1.6 million was recorded primarily to reflect the change
in time value of accruals for facility lease termination costs
and the write-down of fixed assets due to impairment. Certain
other reclassifications were made between asset decommissioning
costs and other facility closure costs to reflect changes in
management estimates for the remaining costs for these
activities.
In December 2003, we recorded $1.6 million of additional
fixed asset write-downs to reflect the decrease in fair market
value of assets held for sale during the period. We also
recorded a realized gain of $5.1 million on the sale of
fixed assets that had been previously held for sale.
The following table sets forth our restructuring reserves as of
December 31, 2003, which are included in other accrued
liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve and | |
|
During | |
|
December 31, | |
| |
|
2002 | |
|
2003 | |
|
Reclassifications | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
6,008 |
|
|
$ |
147,454 |
|
|
$ |
(6,422 |
) |
|
$ |
(144,379 |
) |
|
$ |
2,661 |
|
|
Lease terminations and maintenance contracts(b)
|
|
|
6,757 |
|
|
|
23,444 |
|
|
|
(1,146 |
) |
|
|
(8,034 |
) |
|
|
21,021 |
|
|
Facility closure and other exit costs(c)
|
|
|
8,129 |
|
|
|
1,072 |
|
|
|
1,203 |
|
|
|
(8,268 |
) |
|
|
2,136 |
|
|
Payments to employees for severance(d)
|
|
|
1,391 |
|
|
|
18,095 |
|
|
|
(928 |
) |
|
|
(17,684 |
) |
|
|
874 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
22,285 |
|
|
$ |
190,065 |
|
|
$ |
(7,293 |
) |
|
$ |
(178,365 |
) |
|
$ |
26,692 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The amounts utilized in 2003 reflect $142.4 million of
non-cash write-downs of amortizable intangible and other
long-lived assets in the U.S and Japan due to impairment, and
$2.0 million in cash payments to decommission and sell
assets. The write-downs of the intangible and other long-lived
assets were accounted for as a reduction of the assets and did
not result in a liability. The $2.7 million balance as of |
43
|
|
|
December 31, 2003, relates to machinery and equipment
decommissioning costs in the U.S and estimates of selling costs
for assets held for sale. |
|
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations and maintenance
contracts will be paid during the remaining terms of these
contracts, which extend through 2011. |
| |
|
(c) |
|
Amounts utilized represent cash payments. |
| |
|
(d) |
|
Amounts utilized represent cash severance payments to 777
employees during 2003. The $0.9 million balance as of
December 31, 2003 was paid during 2004. |
A gain of approximately $2.2 million was recorded in
restructuring and other items, net during the second quarter of
2003 associated with additional sales of intellectual property
associated with the CDMA handset product technology.
We recorded approximately $67.1 million in restructuring of
operations and other items for the year ended December 31,
2002, consisting of $75.2 million for restructuring of
operations, and a gain of $8.1 million for other items,
including the gain on sale of CDMA handset product technology.
Restructuring of operations and other items were primarily
included in the Semiconductor segment; the restructuring expense
included in the Storage Systems segment was not significant.
|
|
|
Restructuring and impairment of long-lived assets: |
In the first quarter of 2002, we announced a set of actions to
reduce costs and streamline operations. These actions included a
worldwide reduction in workforce, downsizing our manufacturing
operations in Tsukuba, Japan, and the decision to exit CDMA
handset product technology. During the three months ended
March 31, 2002, we recorded a restructuring charge for
severance for 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 U.S. and Japan for assets
to be disposed of by sale. In the second quarter of 2002, we
completed the sale of CDMA handset product technology to a third
party, recognizing a net gain of $6.4 million.
During the fourth quarter of 2002, we reversed approximately
$5 million of previously accrued restructuring expenses. As
a result of our decision to terminate fewer employees than the
original plan contemplated in Tsukuba, Japan, we reversed
previously accrued restructuring expenses for termination
benefits, including outplacement costs and certain contract
termination fees of $7 million. This was offset by
additional expense accruals of $2 million for costs related
to the previously announced closure of the Colorado Springs
fabrication facility. Certain other reclassifications were made
between lease and contract terminations and facility closure and
other exit costs to reflect changes in management estimates for
the remaining costs for these activities.
In September 2002, we recorded $13 million of additional
fixed asset write-downs to reflect the decrease in the fair
market value of the assets during the period.
44
The following table sets forth our restructuring reserves as of
December 31, 2002, which are included in other accrued
liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve and | |
|
During | |
|
December 31, | |
| |
|
2001 | |
|
2002 | |
|
Reclassifications | |
|
2002 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
3,762 |
|
|
$ |
38,918 |
|
|
$ |
5,147 |
|
|
$ |
(41,819 |
) |
|
$ |
6,008 |
|
|
Lease terminations and maintenance contracts(c)
|
|
|
10,695 |
|
|
|
12,871 |
|
|
|
(10,559 |
) |
|
|
(6,250 |
) |
|
|
6,757 |
|
|
Facility closure and other exit costs(c)
|
|
|
14,153 |
|
|
|
415 |
|
|
|
4,058 |
|
|
|
(10,497 |
) |
|
|
8,129 |
|
|
Payments to employees for severance(b)
|
|
|
724 |
|
|
|
27,490 |
|
|
|
(3,150 |
) |
|
|
(23,673 |
) |
|
|
1,391 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
29,334 |
|
|
$ |
79,694 |
|
|
$ |
(4,504 |
) |
|
$ |
(82,239 |
) |
|
$ |
22,285 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Amounts utilized in 2002 reflect a non-cash write-down of fixed
assets in the U.S. and Japan due to impairment of
$38.3 million and cash payments for machinery and equipment
decommissioning costs of $3.5 million. The fixed asset
write-downs were accounted for as a reduction of the assets and
did not result in a liability. The $6.0 million balance as
of December 31, 2002 relates to machinery and equipment
decommissioning costs in the U.S and selling costs for assets
held for sale. |
|
|
|
|
(b) |
|
Amounts utilized represent cash severance payments to 1,290
employees during the year ended December 31, 2002. The
$1.4 million balance as of December 31, 2002 was paid
during 2003. |
| |
|
(c) |
|
Amounts utilized represent cash payments. |
We recorded a net gain of $1.7 million in other items
during the first quarter of 2002, which consisted of a
nonrefundable deposit paid to us in the first quarter of 2002
related to the termination of the agreement to sell the Colorado
Springs fabrication facility during 2001, offset in part by
certain costs associated with maintaining CDMA handset product
technology held for sale.
|
|
|
Amortization of non-cash deferred stock
compensation: |
Amortization of non-cash deferred stock compensation of
$8.4 million, $26.0 million and $77.3 million was
recorded in 2004, 2003 and 2002, respectively. The acquisitions
for which deferred stock compensation and related amortization
were recorded consisted primarily of the Accerant transaction in
the second quarter of 2004; the Velio transaction in the first
quarter of 2004 (see Note 2 of the Notes for both
acquisitions); an acquisition in the fourth quarter of 2002; the
acquisition of C-Cube, and the RAID business from AMI in 2001;
and the acquisition of DataPath in 2000. No deferred stock
compensation was recorded in connection with the acquisition of
the Mylex business unit in 2002. We also recorded non-cash
deferred stock compensation for restricted common shares issued
to our employees, Engenio employees and the non-employee
directors of Engenio during 2004. We amortize deferred stock
compensation ratably over the related vesting periods. Deferred
stock compensation is adjusted to reflect the forfeitures prior
to vesting. At December 31, 2004, the deferred stock
compensation that remained was $8.9 million, which is
expected to be amortized over the next four years.
|
|
|
Amortization of intangibles: |
Amortization of intangibles decreased to $75.1 million in
2004 from $76.4 million in 2003. The decrease is due in
part to the write-down of intangible assets during 2003, as
discussed below. In addition, during the fourth quarter of 2004,
we recorded a charge in restructuring and other items to
write-down $4.7 million of intangible assets originally
acquired in connection with the acquisition of Datapath, which
was added to our
45
Semiconductor segment during 2000. Certain intangible assets
became fully amortized during 2004. These decreases were offset
in part by amortization of intangible assets acquired in the
first and second quarters of 2004. As of December 31, 2004,
we had $108.5 million of intangible assets, net of
accumulated amortization that will continue to amortize.
Amortization of intangibles decreased to $76.4 million in
2003 from $78.6 million in 2002. Amortization decreased
during 2003 as a result of the write-down in the first quarter
of $15.1 million of intangible assets in the Semiconductor
segment and $9.0 million of intangible assets in the
Storage Systems segment. In the third quarter of 2003 we wrote
down an additional $21.0 million of intangible assets
originally acquired in connection with the acquisition of C-Cube
Microsystems, which was added to our Semiconductor segment in
the second quarter of 2001. The charges were recorded in
restructuring and other items, net in 2003. See Note 3 of
the Notes. These decreases were offset in part by a full year of
amortization for intangible assets acquired during the third and
fourth quarters of 2002.
With the objective of protecting our cash flows and earnings
from the impact of fluctuations in interest rates, while
minimizing the cost of capital, we may enter into or terminate
interest rate swaps. In June 2002, we entered into interest rate
swaps (“the Swaps”) with various investment banks. The
Swaps effectively converted fixed interest payments on a portion
of our Convertible Subordinated Notes (“Convertible
Notes”) to LIBOR-based floating rates. The Swaps qualified
for hedge accounting treatment. (See Note 8 of the Notes.)
During the second quarter of 2003, we terminated the Swaps,
resulting in a deferred gain of $44.1 million that is being
amortized as a benefit to interest expense over the remaining
term of the hedged Convertible Notes. A portion of the deferred
gain was written off as part of the net gain or loss on the
repurchase/redemption of the hedged Convertible Notes during
2003 and 2004. As of December 31, 2004, a deferred gain of
$10.3 million was recorded as a component of the
Convertible Notes.
Interest expense decreased by $5.4 million to
$25.3 million in 2004 from $30.7 million in 2003. The
decrease is due to the repurchase/redemption of
$710.0 million of Convertible Notes during 2003, an
additional repurchase of $68.5 million in the third quarter
of 2004 and changes in the benefit received from the Swaps prior
to termination and the benefit from the amortization of the
deferred gain after termination of the Swaps, offset by the
issuance of $350.0 million of Convertible Notes during the
second quarter of 2003 (see Note 9 of the Notes).
Our interest expense continued to be below the stated coupon
rate of approximately 4% as a result of the Swaps on the
Convertible Notes entered into in the second quarter of 2002.
Interest expense decreased by $21.3 million to
$30.7 million in 2003 from $52.0 million in 2002. The
decrease is due to the repurchase/redemption of
$710.0 million of Convertible Notes during 2003 and
$135.0 million during 2002. The decrease from the
repurchases and redemptions was partly offset by interest
expense on the $350 million of 4% Convertible Notes
issued on May 12, 2003 (see Note 9 of the Notes).
|
|
|
Interest income and other, net: |
Interest income and other, net, was $22.2 million in 2004
as compared to $18.9 million in 2003. Interest income
decreased by $9.6 million to $18.7 million in 2004
from $28.3 million in 2003. The decrease in interest income
is mainly due to lower returns on our short-term investments
during the year ended December 31, 2004 as compared to the
same period of 2003.
Other income, net of $3.5 million in 2004 included the
following:
|
|
|
| |
• |
A pre-tax gain of $3.0 million associated with our
investment in marketable available-for-sale equity securities of
a certain technology company that was acquired by another
publicly traded technology company; |
| |
| |
• |
A pre-tax gain of $5.1 million on sales of certain
marketable available-for-sale equity securities; |
| |
| |
• |
A pre-tax gain of $1.8 million on repurchase of 2001
Convertible Notes (see Note 9 of the Notes); |
46
|
|
|
| |
• |
A pre-tax loss of $6.2 million on impairment of our
investment in certain marketable and non-marketable
available-for-sale equity securities and other miscellaneous
items. Management considered the impairments to be other than
temporary (See Note 5 of the Notes). |
Interest income and other, net, was $18.9 million in 2003
as compared to $26.4 million in 2002. Interest income
decreased by $3.3 million to $28.3 million in 2003
from $31.6 million in 2002. The decrease in interest income
is mainly due to lower returns on our short-term investments
during the year ended December 31, 2003 as compared to the
same period of 2002.
Other expenses net of $9.4 million in 2003 included
$8.5 million in charges associated with write-downs of
investments in marketable and non-marketable available-for-sale
equity securities due to impairments, that were considered by
management to be other than temporary (See Note 5 of the
Notes), a net loss on the redemption/repurchase of Convertible
Notes of $3.9 million, and currency option premium
expenses, which were offset in part by net foreign exchange
gains, gains on sale of miscellaneous assets, and other expenses
that were individually insignificant.
Other expense of $5.2 million in 2002 included the
following:
|
|
|
| |
• |
A gain of $14.3 million on the repurchase of a portion of
the Convertible Notes, net of the write-off of debt issuance
costs associated with the issuance of the Convertible Notes.
During the third and fourth quarters of 2002, we repurchased and
retired $115.0 million of the $500 million
4% Convertible Notes issued in 2000 and $20.0 million
of the $345 million
41/4% Convertible
Notes issued in 1999. Effective January 1, 2002, we early
adopted the provisions of Statement of Financial Accounting
Standards No. 145, “Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections” related to extinguishment of
debt. As a result, the gain on the repurchase of debt is
included in interest income and other, net, in the statement of
operations (See Note 9 of the Notes); |
| |
| |
• |
A net write-down of investments in certain marketable and
non-marketable available-for-sale equity securities for
$19.4 million due to impairment considered by our
management to be other than temporary (See Note 5 of the
Notes); and |
| |
| |
• |
A gain on miscellaneous asset sales, the cost of purchased
option contracts, bank fees and other miscellaneous expenses. |
For all investment in debt and equity securities, unrealized
losses are evaluated to determine if they are other than
temporary. The Company frequently monitors the credit quality of
its investments in marketable debt securities. In order to
determine if impairment has occurred for equity securities, we
review the financial performance of each investee, industry
performance and outlook for each investee, the trading prices of
marketable equity securities and pricing in current rounds of
financing for non-marketable equity securities. If an unrealized
loss is determined to be other than temporary, a loss is
recognized as a component of interest income and other. For
marketable equity securities, the impairment losses were
measured using the closing market price of the marketable
securities on the date management determined that the
investments were impaired. For non-marketable equity securities,
the impairment losses were measured by using pricing in current
rounds of financing.
|
|
|
Provision for income taxes: |
During 2004, we recorded an income tax expense of
$24.0 million, which represents an effective tax rate of
approximately (5%). This rate differs from the
U.S. statutory rate primarily due to increases in net
deferred tax assets not currently benefited in the U.S., losses
of certain foreign subsidiaries which are benefited at lower
rates and earnings of certain foreign subsidiaries taxed in the
U.S. The Company operates in multiple jurisdictions
throughout the world. The Company’s income tax expense is
primarily related to taxable income in certain foreign
jurisdictions, which are not reduced by separate losses in other
foreign jurisdictions.
During 2003, we recorded an income tax expense of
$24.0 million, which represents an effective tax rate of
approximately (8%). This rate differs from the
U.S. statutory rate primarily due to losses of our foreign
47
subsidiaries, which are not benefited or are benefited at lower
rates, earnings of certain foreign subsidiaries taxed in the
U.S., and alternative minimum taxes. The effect of these charges
has been partially offset by the benefit of foreign tax and
research and development tax credits.
In 2002, we recorded an income tax expense of $1.8 million,
which represents an effective tax rate of approximately (1%).
This rate differs from the U.S. statutory rate primarily
due to losses of our foreign subsidiaries, which are not
benefited or are benefited at lower rates, foreign tax expense
in certain jurisdictions, and reductions in the value of our
deferred tax assets with the corresponding charge to income tax
expense of approximately $62 million. The effect of these
charges was partially offset by the expanded net operating loss
carry-back provided by a law change in 2002, as well as the
reversal of taxes previously accrued and the conclusion of a
federal income tax audit with the Internal Revenue Service for
the income tax years 1995 through 2000.
See Note 11 of the Notes.
|
|
|
Minority interest in net income of subsidiary: |
Minority interest in net income of subsidiary was not
significant for the periods presented. The changes in minority
interest were attributable to the composition of earnings and
losses in our majority-owned Japanese subsidiary for each of the
respective years.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to
$814.6 million at December 31, 2004, from
$813.7 million at December 31, 2003. The increase is
mainly due to cash and cash equivalents provided by operating
activities, partially offset by net cash outflows from investing
and financing activities as described below.
Working capital. Working capital decreased by
$29.8 million to $969.0 million at December 31,
2004, from $998.8 million as of December 31, 2003.
Working capital declined in 2004 as a result of the following:
|
|
|
| |
• |
Prepaid expenses and other current assets decreased by
$84.5 million, primarily due to: |
|
|
|
| |
- |
A decrease of $57.8 million in the current portion of the
collateral balance on the equipment operating leases. During the
fourth quarter of 2004, we exercised our right to buyout or
purchase all of the wafer fabrication equipment that had
previously been under two operating lease and security
agreements (see Note 12 of the Notes). The associated
collateral was returned to us; |
| |
| |
- |
An $18.8 million decrease in assets held for sale primarily
due to write-downs as a result of decreases in fair value, as
well as sales, net of additions (see Note 3 of the
Notes); and |
| |
| |
- |
The receipt of a $6.6 million income tax refund in the
first quarter of 2004. |
|
|
|
| |
• |
Accounts payable increased by $19.8 million due to the
timing of payments. |
| |
| |
• |
Income taxes payable increased by $14.5 million due to the
timing of tax payments made and the income tax provision
recorded in 2004. |
| |
| |
• |
Current deferred tax assets, net of current deferred tax
liabilities decreased by $2.5 million due to net changes in
underlying temporary differences (see Note 11 of the Notes). |
The decrease in working capital was offset, in part, by the
following:
|
|
|
| |
• |
Accounts receivable increased by $40.9 million to
$272.1 million as of December 31, 2004 from
$231.2 million at December 31, 2003. The increase is
mainly attributable to slower collections due to some major
customers with longer payment terms and fewer customers with
letter of credit or cash in advance arrangements in the fourth
quarter of 2004 as compared to the fourth quarter of 2003. |
48
|
|
|
| |
• |
Inventories increased by $20.4 million to
$218.9 million as of December 31, 2004 from
$198.5 million as of December 31, 2003. The increase
was attributable to a build-up in finished goods and raw
materials inventories to support future sales. |
| |
| |
• |
Accrued salaries, wages and benefits decreased by
$17.5 million primarily due to timing differences in
payment of salaries and bonuses and a decrease in headcount as a
result of the restructuring actions taken during 2004 (see
Note 3 of the Notes). |
| |
| |
• |
Other accrued liabilities decreased by $11.6 million mainly
due to our reversal of estimates for certain accrued liabilities
of $8.8 million that management no longer considered to be
necessary (See Note 3 of the Notes). |
Cash and cash equivalents generated from operating
activities. During 2004, we generated $90.8 million
of net cash and cash equivalents from operating activities
compared to $189.8 million generated in 2003. Cash and cash
equivalents generated from operating activities for the year
ended December 31, 2004 were the result of the following:
|
|
|
| |
• |
Income (before depreciation and amortization, non-cash
restructuring and other items, amortization of non-cash deferred
stock compensation, loss on write-down of equity securities, net
of gain on sales, gain or loss on repurchase/redemption of
Convertible Notes, and gain on the sale of property and
equipment). The non-cash items and other non-operating
adjustments are quantified in our Consolidated Statements of
Cash Flows included in this Current Report on Form 10-K; |
| |
| |
• |
Offset by a net decrease in assets and liabilities, net of
assets acquired and liabilities assumed in business combinations
including changes in working capital components from
December 31, 2004 as compared to December 31, 2003 as
discussed above. |
During 2003, we received cash of $44.9 million upon
termination of the Swaps. The fair value of the Swaps was
formerly included in other non-current assets.
Cash and cash equivalents used in investing
activities. Cash and cash equivalents used in investing
activities during 2004 were $89.6 million as compared to
$0.2 million used in 2003. The investing activities or
changes during 2004 were as follows:
|
|
|
| |
• |
Purchases of debt and equity securities available for sale, net
of sales and maturities. |
| |
| |
• |
Purchases of property and equipment. |
| |
| |
• |
Proceeds from the sale of property and equipment. |
| |
| |
• |
Acquisition of companies (see Note 2 of the Notes). |
| |
| |
• |
During the third quarter of 2004, we entered into two new
operating leases for wafer fabrication equipment, replacing two
existing operating leases for the same wafer fabrication
equipment. Non-current assets and deposits decreased as a result
of a refund of collateral from the former equipment operating
leases and increased as a result of collateral deposited on the
new equipment operating leases. |
| |
| |
• |
During the fourth quarter of 2004, we exercised our right to
buyout or purchase all of the wafer fabrication equipment that
had previously been under two operating lease and security
agreements (see Note 3 of the Notes). The early termination
or buyout amount was $332 million. Cash collateral of
$311 million associated with the leases was returned to us.
Termination fees under the lease agreements were not significant. |
| |
| |
• |
Non-current assets and deposits also decreased during 2004 as a
result of collateral refunded due to the termination of a letter
of credit arrangement during the first quarter of 2004 and the
termination of the Lease Swap during the third quarter of 2004
(see Note 8 of the Notes). |
We expect capital expenditures to be approximately
$80 million in 2005. In recent years we have reduced our
level of capital expenditures as a result of our focus on
establishing strategic supplier alliances with
49
foundry semiconductor manufacturers, which enables us to have
access to advanced manufacturing capacity, and reduces our
capital spending requirements.
Cash and cash equivalents used in financing
activities. Cash and cash equivalents used in financing
activities during 2004 were $48.6 million as compared to
$375.0 million in 2003. The financing activities during
2004 were as follows:
|
|
|
| |
• |
The repurchase of a portion of the Convertible Notes due in 2006; |
| |
| |
• |
Additional purchase of minority interests in our Japanese
subsidiary; |
| |
| |
• |
The issuance of common stock under our employee stock option and
purchase plans; and |
| |
| |
• |
The repayment of debt obligations. |
It is our policy to reinvest our earnings and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
We believe that our existing cash, cash equivalents, short-term
investments and funds generated from operations will be adequate
to meet our operating and capital requirements in the
short-term. These resources, combined with funds from financing
and our ability to borrow funds, will be adequate to meet our
operating and capital requirements and obligations for the
foreseeable future. We may seek additional equity or debt
financing from time to time. We cannot be certain that
additional financing will be available on favorable terms.
Moreover, any future equity or convertible debt financing will
decrease the percentage of equity ownership of existing
stockholders and may result in dilution, depending on the price
at which the equity is sold or the debt is converted.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at
December 31, 2004, and the effect these obligations are
expected to have on our liquidity and cash flow in future
periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
Less than | |
|
|
|
After | |
|
|
| Contractual Obligations |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Convertible Subordinated Notes
|
|
$ |
— |
|
|
$ |
421.5 |
|
|
$ |
— |
|
|
$ |
350.0 |
|
|
$ |
771.5 |
|
|
Operating lease obligations
|
|
|
56.7 |
|
|
|
81.0 |
|
|
|
39.6 |
|
|
|
34.4 |
|
|
|
211.7 |
|
|
Capital lease obligations
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
Purchase commitments
|
|
|
273.1 |
|
|
|
20.3 |
|
|
|
— |
|
|
|
— |
|
|
|
293.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
329.9 |
|
|
$ |
522.8 |
|
|
$ |
39.6 |
|
|
$ |
384.4 |
|
|
$ |
1,276.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Subordinated Notes |
As of December 31, 2004, we have $422 million of
Convertible Notes due in November 2006 (“2001 Convertible
Notes”) and $350 million of the 2003 Convertible Notes
due in May 2010 (“2003 Convertible Notes”). All of the
Convertible Notes are subordinated to all existing and future
senior debt and are convertible at the holder’s option, at
any time prior to the maturity date of the Convertible Notes,
into shares of our common stock. The 2001 and 2003 Convertible
Notes have conversion prices of approximately $26.34 per
share and $13.42 per share, respectively. The 2001
Convertible Notes are redeemable at our option, in whole or in
part, on at least 30 days notice at any time on or after
the call date, which is two years before the due date. We cannot
elect to redeem the 2003 Convertible Notes prior to maturity.
Each holder of the 2001 and 2003 Convertible Notes has the right
to cause us to repurchase all of such holder’s convertible
notes at 100% of their principal amount plus accrued interest
upon the occurrence of any fundamental change, which includes a
transaction or event such as an exchange offer, liquidation,
tender offer, consolidation, merger or combination. Interest is
payable semiannually.
50
Fluctuations in our stock price impact the prices of our
outstanding convertible securities and the likelihood of the
convertible securities being converted into cash or equity. If
we are required to redeem any of the Convertible Notes for cash,
it may affect our liquidity position. 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. From time to time, we may
repurchase or redeem Convertible Notes.
|
|
|
Operating Lease Obligations |
We lease real estate, certain non-manufacturing equipment and
software under non-cancelable operating leases.
See Note 12 of the Notes for a discussion of the two
operating leases for manufacturing equipment that were
refinanced in the third quarter of 2004 and then terminated and
bought out during the fourth quarter 2004. As of
December 31, 2004, there are no future payments under these
leases included in the table above.
We maintain certain purchase commitments primarily for raw
materials with suppliers and for some non-production items.
Purchase commitments for inventory materials are generally
restricted to a forecasted time-horizon as mutually agreed upon
between the parties. This forecasted time-horizon can vary among
different suppliers.
|
|
|
Standby letters of credit |
At December 31, 2004 and 2003, we had outstanding standby
letters of credit of $5 million and $77 million,
respectively. These instruments are off-balance sheet
commitments to extend financial guarantees for leases and
certain self-insured risks, import/export taxes and performance
under contracts, and generally have one-year terms. The fair
value of the letters of credit approximates the contract amount.
The decline in standby letters of credit as of December 31,
2004 compared to December 31, 2003 reflects the termination
and buyout of the two operating leases for manufacturing
equipment further discussed in Note 12 of the Notes.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and
results of operations are based on the consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
Note 1 of the Notes describes the significant accounting
policies essential to the consolidated financial statements. The
preparation of these financial statements requires estimates and
assumptions that affect the reported amounts and disclosures.
We believe the following to be critical accounting estimates.
They are both important to the portrayal of our Company’s
financial condition and results, and they require significant
management judgments and estimates about matters that are
inherently uncertain. As a result of the inherent uncertainty,
there is a likelihood that materially different amounts would be
reported under different conditions or using different
assumptions. Although we believe that our judgments and
estimates are reasonable, appropriate and correct, actual future
results may differ materially from our estimates.
Inventory Valuation Methodology. Inventories are
valued at the lower of cost or market using the first-in,
first-out (FIFO) method. We write down our inventories for
estimated obsolescence and unmarketable inventory in an amount
equal to the difference between the cost of the inventory and
the estimated market value based upon assumptions about future
demand and market conditions. Inventory impairment charges
create a new cost basis for inventory.
We balance the need to maintain strategic inventory levels to
ensure competitive delivery performance to our customers with
the risk of inventory obsolescence due to rapidly changing
technology and customer requirements, product life-cycles,
life-time buys at the end of supplier product runs and a shift
of production to outsourcing. If actual demand or market
conditions are less favorable than we project or our customers
fail to
51
CORPORATE
INFORMATION
PROXY
STATEMENT
meet projections, additional inventory write-downs may be
required. Our inventory balance was approximately
$219 million and $199 million as of December 31,
2004, and 2003, respectively.
If market conditions are more favorable than expected, we could
experience more favorable gross profit margins going forward as
we sell inventory that was previously written down. See
discussion in “Gross Profit Margin” section earlier in
this MD&A.
Valuation of long-lived assets, intangible assets and
goodwill. We operate our own wafer fabrication
facilities and make significant capital expenditures to ensure
that we are technologically competitive. In addition, we have
actively pursued the acquisition of businesses, which has
resulted in significant goodwill and intangible assets. We
assess the impairment of long-lived assets, identifiable
intangibles and related goodwill annually or sooner if events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors that could trigger an impairment
review include the following: (i) significant negative
industry or economic trends; (ii) exiting an activity in
conjunction with a restructuring of operations;
(iii) current, historical or projected losses that
demonstrate continuing losses associated with an asset; or
(iv) a significant decline in our market capitalization,
for an extended period of time, relative to net book value. When
we determine that there is an indicator that the carrying value
of long-lived assets, identifiable intangibles or related
goodwill may not be recoverable, we measure impairment based on
estimates of future cash flows. These estimates include
assumptions about future conditions such as future revenues,
gross margins, operating expenses within our Company; the fair
values of certain assets based on thoroughly researched
management estimates; and industry trends. See Notes 6 and
7 to the Notes for more details on long-lived assets, intangible
assets and goodwill.
As of December 31, 2004 we have a goodwill balance of
$973.1 million that is not amortized. We monitor the
recoverability of goodwill recorded in connection with
acquisitions annually, or sooner if events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Impairment, if any, would be determined in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangibles Assets,” which uses a fair value model for
determining the carrying value of goodwill.
As a result of the decline in revenues in the semiconductor
industry and the corresponding decline in our outlook as of the
latter part of the third quarter of 2004 and the conclusion that
the Gresham manufacturing facility was impaired (see Note 3
of the Notes), we reviewed goodwill by reporting unit for
impairment as of September 30, 2004, which was updated as
of December 31, 2004. Our reporting units are Semiconductor
and Storage Systems or Engenio. The impairment testing is a
two-step process. The first step requires comparing the fair
value of each reporting unit to its net book value. We concluded
that goodwill was not impaired under the first step as of
September 30, 2004 and December 31, 2004. The second
step is only performed if impairment is indicated after the
first step is performed, as it involves measuring the actual
impairment to goodwill. Our next annual test for the impairment
of goodwill will be performed in our fourth fiscal quarter in
2005. We use management estimates of future cash flows to
perform the first step of the goodwill impairment test. These
estimates include assumptions about future conditions such as
future revenues, gross margins and operating expenses within
LSI. Two methodologies were used to obtain the fair value for
each reporting unit as of September 30, 2004: Discounted
Cash Flow and Market Multiple.
The Discounted Cash Flow and Market Multiple methodologies
include assumptions about future conditions within our reporting
units and related industries. These assumptions include
estimates of future market size and growth, expected trends in
technology, timing of new product introductions by our
competitors and us, and the nature of the industry in which
comparable companies and we operate. If significant changes to
these assumptions occur, goodwill could become impaired in the
future.
Restructuring reserves. We have recorded
reserves/accruals for restructuring costs related to the
restructuring of operations. The restructuring reserves include
payments to employees for severance, termination fees associated
with leases and other contracts, decommissioning and selling
costs associated with assets held for sale, and other costs
related to the closure of facilities. After the adoption of
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” on January 1, 2003,
the reserves have been recorded when management has approved a
plan to restructure operations and a liability has been
52
incurred rather than the date upon which management has approved
and announced a plan. The restructuring reserves are based upon
management estimates at the time they are recorded. These
estimates can change depending upon changes in facts and
circumstances subsequent to the date the original liability was
recorded. For example, existing accruals for severance may be
modified if employees are redeployed due to circumstances not
foreseen when the original plans were initiated, accruals for
outplacement services may not be fully utilized by former
employees, and severance accruals could change for statutory
reasons in countries outside the United States. Accruals for
facility leases under which we ceased using the benefits
conveyed to us under the lease may change if market conditions
for subleases change or if we later negotiate a termination of
the lease. Prior to the adoption of SFAS No. 146,
restructuring reserves were recorded at the time we announced a
plan to exit certain activities and were based on estimates of
the costs and length of time to exit those activities. See
Note 3 of the Notes for a complete discussion of our
restructuring actions and all related restructuring reserves by
type as of December 31, 2004. See discussion in
“Restructuring of operations and other items, net”
earlier in this MD&A for changes in estimates made during
2004, 2003 and 2002.
Income taxes. We recognize deferred tax assets and
liabilities based on the differences between the financial
statement carrying amounts and the tax basis of the assets and
liabilities. We have recorded a valuation allowance to reduce
the deferred tax assets to the amount that is more likely than
not to be realized. We have considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. See Note 11
of the Notes for more details about our deferred tax assets and
liabilities.
The calculation of our tax liabilities involves the application
of United States generally accepted accounting principles to
complex tax rules and regulations within multiple jurisdictions
throughout the world. Our tax liabilities include estimates for
all income and related taxes that we believe are probable and
that can be reasonably estimated. To the extent that our
estimates are understated, additional charges to income tax
expense would be recorded in the period in which we determine
such understatement. If our income tax estimates are overstated,
income tax benefits will be recognized when realized.
Recent Accounting Pronouncements
The information contained in Part II, Item 8 in
Note 1 of the Notes under the heading “Recent
Accounting Pronouncements” is hereby incorporated by
reference into this Part II, Item 7.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
Interest rate sensitivity. With the objective of
protecting our cash flows and earnings from the impact of
fluctuations in interest rates, while minimizing the cost of
capital, we may enter into or terminate interest rate swaps.
In June 2002, we entered into interest rate swap transactions
(the “Swaps”) with several investment banks. The Swaps
effectively converted fixed interest payments on a portion of
our 4% and 4.25% Convertible Notes to LIBOR-based floating
rates. The Swaps qualified for hedge accounting as fair value
hedges, with changes in the fair value of the interest rate risk
on the Convertible Notes being offset by changes in the fair
values of the Swaps recorded as a component of interest expense.
(See Note 8 of the Notes.)
In the second quarter of 2003, we terminated Swaps with a
notional amount of $740 million. The termination resulted
in a deferred gain of $44 million being recorded as a
component of the Convertible Notes and to be amortized as a
benefit to interest expense over the remaining term of the
hedged Convertible Notes. A portion of the deferred gain was
written off as part of the net gain or loss on the
repurchase/redemption of the hedged Convertible Notes during
2003 and 2004. As of December 31, 2004, a deferred gain of
$10.3 million remains to be amortized. In 2003, before
termination, the difference between the changes in the fair
values of the derivative and the hedged risk resulted in a
benefit to interest expense of $1 million.
In May 2003, we entered into an interest rate swap transaction
to effectively convert the LIBOR-based floating rate interest
payments on the equipment operating lease, with an original
notional amount of $395 million, to a fixed interest rate
(“Lease Swap”). An expense of approximately
$2 million was recorded to
53
cost of revenues in 2004 as the lease payments were made. In
August 2004, the Company entered into two new equipment
operating leases for the wafer fabrication equipment that was
previously on the above-mentioned leases. As a result of
entering into the new leases, the hedged forecasted interest
payments were no longer probable. Hedge accounting treatment was
discontinued prospectively and the balance in accumulated
comprehensive income was immediately recorded as a gain of
$3.8 million in restructuring and other items in the
statement of operations. In September 2004, the Company
terminated the Lease Swap.
In 2004, an interest rate move of 40 basis points (10% of
our weighted-average worldwide interest rate on outstanding debt
in 2004) affecting our fixed and floating rate financial
instruments as of December 31, 2004, including investments
and debt obligations, would not have had a significant effect on
our financial position, results of operations and cash flows
over the next fiscal year, assuming that the debt and investment
balances remain consistent. In 2003, an interest rate move of
33 basis points (10% of our weighted-average worldwide
interest rate on outstanding debt in 2003) affecting our
floating rate financial instruments as of December 31,
2003, including debt obligations, investments and fabrication
equipment leases, would not have had a significant effect on our
financial position, results of operations and cash flows over
the next fiscal year, assuming that the investment balance
remains consistent.
Foreign currency exchange risk. We have foreign
subsidiaries that operate and sell our products in various
global markets. As a result, our cash flows and earnings are
exposed to fluctuations in foreign currency exchange rates. We
attempt to limit these exposures through operational strategies
and financial market instruments. We use various hedge
instruments, primarily forward contracts with maturities of
twelve months or less and currency option contracts, to manage
our exposure associated with net asset and liability positions
and cash flows denominated in non-functional currencies. We did
not enter into derivative financial instruments for trading
purposes during 2004 and 2003.
Based on our overall currency rate exposures at
December 31, 2004, including derivative financial
instruments and non-functional currency-denominated receivables
and payables, a near-term 10% appreciation or depreciation of
the U.S. dollar would not have a significant effect on our
financial position, results of operations and cash flows over
the next fiscal year. In 2003, a near-term 10% appreciation or
depreciation of the U.S. dollar would also not have had a
significant effect.
Equity price risk. We have investments in
available-for-sale equity securities included in long-term
assets. The fair values of these investments are sensitive to
equity price changes. Changes in the value of these investments
are ordinarily recorded through accumulated comprehensive
income. The increase or decrease in the fair value of the
investments would affect our results of operations to the extent
the investments were sold or that declines in value were
concluded by management to be other than temporary.
If prices of the available-for-sale equity securities increase
or decrease 10% from their fair value as of December 31,
2004, it would increase or decrease the investment values by
$3.8 million. As of December 31, 2003, a 10% increase
or decrease in fair value would have increased or decreased the
investment values by $3.5 million. We do not use any
derivatives to hedge the fair value of our marketable
available-for-sale equity securities.
54
|
|
| Item 8. |
Financial Statements and Supplementary Data |
LSI Logic Corporation
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except per-share | |
| |
|
amounts) | |
|
ASSETS |
|
Cash and cash equivalents
|
|
$ |
218,723 |
|
|
$ |
269,682 |
|
|
Short-term investments
|
|
|
595,862 |
|
|
|
544,007 |
|
|
Accounts receivable, less allowances of $6,600 and $7,415
|
|
|
272,065 |
|
|
|
231,184 |
|
|
Inventories
|
|
|
218,900 |
|
|
|
198,517 |
|
|
Prepaid expenses and other current assets
|
|
|
59,737 |
|
|
|
146,647 |
|
| |
|
|
|
|
|
|
| |
Total current assets
|
|
|
1,365,287 |
|
|
|
1,390,037 |
|
|
Property and equipment, net
|
|
|
311,916 |
|
|
|
481,489 |
|
|
Other intangible assets, net
|
|
|
108,457 |
|
|
|
161,236 |
|
|
Goodwill
|
|
|
973,130 |
|
|
|
968,483 |
|
|
Non-current assets and deposits
|
|
|
— |
|
|
|
318,176 |
|
|
Other assets
|
|
|
115,211 |
|
|
|
128,480 |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Accounts payable
|
|
$ |
122,422 |
|
|
$ |
102,632 |
|
|
Accrued salaries, wages and benefits
|
|
|
58,516 |
|
|
|
75,968 |
|
|
Other accrued liabilities
|
|
|
142,278 |
|
|
|
153,857 |
|
|
Income taxes payable
|
|
|
72,935 |
|
|
|
58,417 |
|
|
Current portion of long-term obligations
|
|
|
129 |
|
|
|
377 |
|
| |
|
|
|
|
|
|
| |
Total current liabilities
|
|
|
396,280 |
|
|
|
391,251 |
|
| |
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
781,846 |
|
|
|
865,606 |
|
|
Tax related liabilities and other
|
|
|
77,570 |
|
|
|
141,096 |
|
| |
|
|
|
|
|
|
| |
Total long-term obligations and other liabilities
|
|
|
859,416 |
|
|
|
1,006,702 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary
|
|
|
259 |
|
|
|
7,498 |
|
| |
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par value; 2,000 shares
authorized; none outstanding
|
|
|
— |
|
|
|
— |
|
|
Common stock; $.01 par value; 1,300,000 shares
authorized; 387,490 and 381,491 shares outstanding
|
|
|
3,875 |
|
|
|
3,815 |
|
|
Additional paid-in capital
|
|
|
2,969,478 |
|
|
|
2,950,051 |
|
|
Deferred stock compensation
|
|
|
(8,936 |
) |
|
|
(24,839 |
) |
|
Accumulated deficit
|
|
|
(1,384,321 |
) |
|
|
(920,790 |
) |
|
Accumulated other comprehensive income
|
|
|
37,950 |
|
|
|
34,213 |
|
| |
|
|
|
|
|
|
| |
Total stockholders’ equity
|
|
|
1,618,046 |
|
|
|
2,042,450 |
|
| |
|
|
|
|
|
|
| |
Total liabilities and stockholders’ equity
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
55
LSI Logic Corporation
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Revenues
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
$ |
1,816,938 |
|
|
Cost of revenues
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,122,696 |
|
|
Additional excess inventory and related charges
|
|
|
— |
|
|
|
— |
|
|
|
45,526 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total cost of revenues
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,168,222 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
735,608 |
|
|
|
677,205 |
|
|
|
648,716 |
|
|
Research and development
|
|
|
421,516 |
|
|
|
432,695 |
|
|
|
457,351 |
|
|
Selling, general and administrative
|
|
|
243,498 |
|
|
|
234,156 |
|
|
|
230,202 |
|
|
Acquired in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
2,920 |
|
|
Restructuring of operations and other items, net
|
|
|
423,444 |
|
|
|
180,597 |
|
|
|
67,136 |
|
|
Amortization of non-cash deferred stock compensation(*)
|
|
|
8,449 |
|
|
|
26,021 |
|
|
|
77,303 |
|
|
Amortization of intangibles
|
|
|
75,050 |
|
|
|
76,352 |
|
|
|
78,617 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(436,349 |
) |
|
|
(272,616 |
) |
|
|
(264,813 |
) |
|
Interest expense
|
|
|
(25,320 |
) |
|
|
(30,703 |
) |
|
|
(51,977 |
) |
|
Interest income and other, net
|
|
|
22,170 |
|
|
|
18,933 |
|
|
|
26,386 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
|
(439,499 |
) |
|
|
(284,386 |
) |
|
|
(290,404 |
) |
|
Provision for income taxes
|
|
|
24,000 |
|
|
|
24,000 |
|
|
|
1,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before minority interest
|
|
|
(463,499 |
) |
|
|
(308,386 |
) |
|
|
(292,154 |
) |
|
Minority interest in net income of subsidiary
|
|
|
32 |
|
|
|
161 |
|
|
|
286 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
$ |
(292,440 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted
|
|
|
384,070 |
|
|
|
377,781 |
|
|
|
370,529 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (*) |
Amortization of non-cash deferred stock compensation, if not
shown separately, would have been included in cost of revenues,
research and development, and selling, general and
administrative expenses, as shown below: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cost of revenues
|
|
$ |
198 |
|
|
$ |
446 |
|
|
$ |
1,520 |
|
|
Research and development
|
|
|
6,289 |
|
|
|
20,412 |
|
|
|
58,623 |
|
|
Selling, general and administrative
|
|
|
1,962 |
|
|
|
5,163 |
|
|
|
17,160 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,449 |
|
|
$ |
26,021 |
|
|
$ |
77,303 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
56
LSI Logic Corporation
Consolidated Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Other | |
|
|
| |
|
| |
|
Paid-In | |
|
Deferred Stock | |
|
Accumulated | |
|
Comprehensive | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
Income/(Loss) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balances at December 31, 2001
|
|
|
368,446 |
|
|
$ |
3,684 |
|
|
$ |
2,905,638 |
|
|
$ |
(124,091 |
) |
|
$ |
(319,803 |
) |
|
$ |
14,457 |
|
|
$ |
2,479,885 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292,440 |
) |
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,358 |
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,089 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301,171 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
6,292 |
|
|
|
63 |
|
|
|
45,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,165 |
|
|
Issuance of common stock in conjunction with acquisitions
(Note 2)
|
|
|
358 |
|
|
|
4 |
|
|
|
3,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,546 |
|
|
Deferred stock compensation (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,373 |
) |
|
|
|
|
|
|
|
|
|
|
(4,373 |
) |
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,303 |
|
|
|
|
|
|
|
|
|
|
|
77,303 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2002
|
|
|
375,096 |
|
|
|
3,751 |
|
|
|
2,954,282 |
|
|
|
(51,161 |
) |
|
|
(612,243 |
) |
|
|
5,726 |
|
|
|
2,300,355 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308,547 |
) |
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,309 |
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,183 |
|
|
|
|
|
|
Change in unrealized gain on derivative instruments designated
and qualifying as cash-flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,995 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280,060 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
6,386 |
|
|
|
64 |
|
|
|
30,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,950 |
|
|
Issuance or return from escrow of common stock in conjunction
with acquisitions
|
|
|
9 |
|
|
|
|
|
|
|
(6,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,816 |
) |
|
Forfeiture of restricted shares (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(301 |
) |
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for call spread options (Note 9)
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,021 |
|
|
|
|
|
|
|
|
|
|
|
26,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
381,491 |
|
|
|
3,815 |
|
|
|
2,950,051 |
|
|
|
(24,839 |
) |
|
|
(920,790 |
) |
|
|
34,213 |
|
|
|
2,042,450 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(463,531 |
) |
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948 |
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,784 |
|
|
|
|
|
|
Change in unrealized gain on derivative instruments designated
and qualifying as cash-flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,995 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459,794 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
5,852 |
|
|
|
59 |
|
|
|
27,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,987 |
|
|
Issuance or return from escrow of common stock in conjunction
with acquisitions (Note 2)
|
|
|
147 |
|
|
|
1 |
|
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(413 |
) |
|
Grants of restricted shares (Note 10)
|
|
|
|
|
|
|
|
|
|
|
6,401 |
|
|
|
(6,401 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
Forfeiture of restricted shares and stock options assumed in an
acquisition (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(14,488 |
) |
|
|
14,488 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
387,490 |
|
|
$ |
3,875 |
|
|
$ |
2,969,478 |
|
|
$ |
(8,936 |
) |
|
$ |
(1,384,321 |
) |
|
$ |
37,950 |
|
|
$ |
1,618,046 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
57
LSI Logic Corporation
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
$ |
(292,440 |
) |
| |
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
176,606 |
|
|
|
262,728 |
|
|
|
349,326 |
|
| |
|
Amortization of non-cash deferred stock compensation
|
|
|
8,449 |
|
|
|
26,021 |
|
|
|
77,303 |
|
| |
|
Acquired in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
2,920 |
|
| |
|
Non-cash restructuring and other items
|
|
|
401,058 |
|
|
|
148,252 |
|
|
|
46,050 |
|
| |
|
(Gain) on sale of equity securities/loss on write-down
|
|
|
(1,913 |
) |
|
|
8,518 |
|
|
|
19,423 |
|
| |
|
(Gain)/loss on redemption/repurchase of Convertible Subordinated
Notes
|
|
|
(1,767 |
) |
|
|
3,885 |
|
|
|
(14,260 |
) |
| |
|
(Gain)/loss on sale of property and equipment, including assets
held-for-sale
|
|
|
(6,348 |
) |
|
|
(6,896 |
) |
|
|
2,928 |
|
| |
|
Changes in deferred tax assets and liabilities
|
|
|
4,895 |
|
|
|
(646 |
) |
|
|
61,385 |
|
| |
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable, net
|
|
|
(40,076 |
) |
|
|
18,220 |
|
|
|
(54,619 |
) |
| |
|
Inventories
|
|
|
(20,660 |
) |
|
|
(4,232 |
) |
|
|
75,579 |
|
| |
|
Prepaid expenses and other assets
|
|
|
23,377 |
|
|
|
63,325 |
|
|
|
18,648 |
|
| |
|
Accounts payable
|
|
|
21,056 |
|
|
|
1,684 |
|
|
|
(35,828 |
) |
| |
|
Accrued and other liabilities
|
|
|
(10,329 |
) |
|
|
(22,559 |
) |
|
|
(91,619 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
90,817 |
|
|
|
189,753 |
|
|
|
164,796 |
|
| |
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchase of debt securities available-for-sale
|
|
|
(747,096 |
) |
|
|
(2,219,484 |
) |
|
|
(1,771,809 |
) |
| |
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
679,483 |
|
|
|
2,203,313 |
|
|
|
1,478,596 |
|
| |
Purchases of equity securities
|
|
|
(2,250 |
) |
|
|
(200 |
) |
|
|
(11,894 |
) |
| |
Proceeds from sales of equity securities
|
|
|
10,518 |
|
|
|
1,060 |
|
|
|
— |
|
| |
Purchases of property and equipment
|
|
|
(52,776 |
) |
|
|
(78,189 |
) |
|
|
(48,245 |
) |
| |
Proceeds from sale of property and equipment
|
|
|
10,936 |
|
|
|
24,737 |
|
|
|
6,745 |
|
| |
Buyout of equipment operating lease
|
|
|
(332,396 |
) |
|
|
— |
|
|
|
— |
|
| |
Increase in non-current assets and deposits
|
|
|
(313,013 |
) |
|
|
(390,135 |
) |
|
|
(8,920 |
) |
| |
Decrease in non-current assets and deposits
|
|
|
688,994 |
|
|
|
272,868 |
|
|
|
9,156 |
|
| |
Acquisitions of companies, net of cash acquired
|
|
|
(32,025 |
) |
|
|
— |
|
|
|
(55,916 |
) |
| |
Proceeds from the sale-lease back of equipment
|
|
|
— |
|
|
|
160,000 |
|
|
|
— |
|
| |
Proceeds from the sale of the Japan manufacturing facility
|
|
|
— |
|
|
|
25,846 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(89,625 |
) |
|
|
(184 |
) |
|
|
(402,287 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Redemption/ Repurchase of Convertible Subordinated Notes
|
|
|
(68,117 |
) |
|
|
(715,983 |
) |
|
|
(118,938 |
) |
| |
Issuance of common stock
|
|
|
27,988 |
|
|
|
30,306 |
|
|
|
43,992 |
|
| |
Purchase of minority interest in subsidiary
|
|
|
(8,020 |
) |
|
|
— |
|
|
|
— |
|
| |
Repayment of debt obligations
|
|
|
(438 |
) |
|
|
(327 |
) |
|
|
(332 |
) |
| |
Proceeds from borrowings
|
|
|
— |
|
|
|
350,000 |
|
|
|
— |
|
| |
Debt issuance costs
|
|
|
— |
|
|
|
(10,984 |
) |
|
|
— |
|
| |
Cash paid for call spread options
|
|
|
— |
|
|
|
(28,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in financing activities
|
|
|
(48,587 |
) |
|
|
(374,988 |
) |
|
|
(75,278 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(3,564 |
) |
|
|
6,254 |
|
|
|
4,478 |
|
| |
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(50,959 |
) |
|
|
(179,165 |
) |
|
|
(308,291 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
269,682 |
|
|
|
448,847 |
|
|
|
757,138 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
218,723 |
|
|
$ |
269,682 |
|
|
$ |
448,847 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
58
LSI Logic Corporation
Notes to Consolidated Financial Statements
Note 1 — Significant Accounting policies
Nature of the business. LSI Logic Corporation
(“the Company” or “LSI”) designs, develops,
manufactures and markets complex, high-performance integrated
circuits and storage systems. The Company operates in two
segments — the Semiconductor segment and the Storage
Systems segment. Within the Semiconductor segment, the Company
offers three enabling system-on-a-chip technologies —
standard-cell ASICs, Platform ASICs and application specific
standard products that are focused on the consumer,
communication and storage component markets. Within the Storage
Systems segment, the Company focuses on high-performance modular
disk storage systems, sub-assemblies and storage management
software. The Company’s products are marketed primarily to
original equipment manufacturers (“OEMs”) that sell
products targeted for applications in these markets.
The semiconductor and storage systems industries are
characterized by rapid technological change, competitive pricing
pressures and cyclical market patterns. The Company’s
financial results are affected by a wide variety of factors,
including general economic conditions worldwide, economic
conditions specific to the semiconductor and storage systems
industries, the timely implementation of new technologies and
the ability to safeguard patents and intellectual property in a
rapidly evolving market. In addition, the semiconductor and
storage systems markets have historically been cyclical and
subject to significant economic downturns at various times.
Basis of presentation. The consolidated financial
statements include the accounts of the Company and all of its
subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Minority interest in a subsidiary represents the minority
stockholders’ proportionate share of the net assets and the
results of operations for one of the Company’s
majority-owned Japanese subsidiaries. Sales of common stock of
the Company’s subsidiary and purchases of such shares may
result in changes in the Company’s proportionate share of
the subsidiary’s net assets. During 2004, the Company
purchased a portion of the minority interest. At
December 31, 2004, the Company owned approximately 99.84%
of the Japanese affiliate.
The Company began applying the provisions of Financial
Accounting Standards Board Interpretation 46-Revised
(“FIN 46-R”), “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51”
during the second quarter of 2004. FIN 46-R requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The Company
does not have relationships with any variable interest entities.
Where the functional currency of the Company’s foreign
subsidiaries is the local currency, all assets and liabilities
are translated into U.S. dollars at the current rates of
exchange as of the balance sheet date and revenues and expenses
are translated using weighted average rates prevailing during
the period. Accounts and transactions denominated in foreign
currencies have been remeasured into functional currencies
before translation into U.S. dollars. Foreign currency
transaction gains and losses are included as a component of
interest income and other. Gains and losses from foreign
currency translation are included as a separate component of
comprehensive income.
Use of estimates. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ
materially from these estimates.
59
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Acquisitions. The estimated fair value of acquired
assets and assumed liabilities and the results of operations of
purchased businesses are included in the Company’s
consolidated financial statements as of the effective date of
the purchase, through the end of the period. The total purchase
price is allocated to the estimated fair value of assets
acquired and liabilities assumed based on management estimates.
The fair value of common shares issued for acquisitions was
determined using the average closing stock price for the period
of two days before and after the date the number of LSI common
shares to be issued was fixed. The purchase price includes
direct acquisition costs consisting of investment banking, legal
and accounting fees. There were no significant differences
between the accounting policies of the Company and the acquired
entities. See Note 2.
Revenue recognition. The majority of the
Company’s product revenues are recognized upon shipment,
when persuasive evidence of a sales arrangement exists, the
price is fixed or determinable, title has transferred and
collection of resulting receivables is reasonably assured or
probable in the case of software. Standard products sold to
distributors are subject to specific rights to return products;
therefore, revenue recognition is deferred until the distributor
sells the product to a third party. Revenues from the licensing
of the Company’s design and manufacturing technology is
recognized when the significant contractual obligations have
been fulfilled. Royalty revenues are recognized upon the sale of
products subject to royalties. The Company uses the
percentage-of-completion method for recognizing revenues on
fixed-fee design arrangements. All amounts billed to a customer
related to shipping and handling are classified as revenues
while all costs incurred by the Company for shipping and
handling are classified as cost of revenues. Consideration given
to customers, when offered, is primarily in the form of
discounts and rebates. Such consideration is accounted for as a
reduction to revenues in the period the related sale is made.
Reserves for estimated sales returns are established based on
historical returns experience. The Company has substantial
historical experience to form a basis for estimating returns
when products are shipped.
In arrangements that include a combination of our hardware and
our software products that are also sold separately, where
software is more than incidental and essential to the
functionality of the product being sold, the Company follows the
guidance in Emerging Issues Task Force (“EITF”) Issue
No. 03-05, “Applicability of AICPA Statement of Position
97-2 to Non-software Deliverables in an Arrangement Containing
More-Than-Incidental Software,” accounts for the entire
arrangement as a sale of software and software-related items and
follows the revenue recognition criteria in Statement of
Position (“SOP”) 97-2, “Software Revenue
Recognition,” and related interpretations.
The provisions of EITF Issue No. 00-21 “Accounting for
Revenue Arrangements with Multiple Deliverables” apply to
sales arrangements with multiple arrangements that include a
combination of hardware, software and/or services. For multiple
element arrangements, revenue is allocated to the separate
elements based on fair value, which is determined using the
price charged when the element is sold separately. If an
arrangement includes undelivered elements that are not essential
to the functionality of the delivered elements, the Company
defers the fair value of the undelivered elements and the
residual revenue is allocated to the delivered elements. If the
undelivered elements are essential to the functionality of the
delivered elements, no revenue is recognized. Discounts are
allocated only to the delivered elements. Undelivered elements
typically include installation, training, software warranty and
maintenance, hardware maintenance and professional services.
60
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Earnings per share. Basic earnings per share
(“EPS”) is computed by dividing net income available
to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during
the period. Diluted EPS is computed using the weighted-average
number of common and dilutive potential common shares
outstanding during the period using the treasury-stock method
for outstanding stock options and restricted stock awards and
the if-converted method for convertible notes. A reconciliation
of the numerators and denominators of the basic and diluted per
share amount computations is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Per-Share | |
|
|
|
Per-share | |
|
|
|
Per-Share | |
| |
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share amounts) | |
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss available to common stockholders
|
|
$ |
(463,531 |
) |
|
|
384,070 |
|
|
$ |
(1.21 |
) |
|
$ |
(308,547 |
) |
|
|
377,781 |
|
|
$ |
(0.82 |
) |
|
$ |
(292,440 |
) |
|
|
370,529 |
|
|
$ |
(0.79 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Effect of dilutive securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss available to common stockholders
|
|
$ |
(463,531 |
) |
|
|
384,070 |
|
|
$ |
(1.21 |
) |
|
$ |
(308,547 |
) |
|
|
377,781 |
|
|
$ |
(0.82 |
) |
|
$ |
(292,440 |
) |
|
|
370,529 |
|
|
$ |
(0.79 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ Denominator
Options to purchase approximately 67,733,073, 69,165,802 and
57,064,593 shares were outstanding at December 31,
2004, 2003 and 2002, respectively, and were excluded from the
computation of diluted shares because of their antidilutive
effect on net loss per share. The exercise price of these
options ranged from $0.06 to $72.25 at December 31, 2004,
2003 and 2002.
Weighted average restricted common shares of 282,488, 100,599
and 846,000 were outstanding at December 31, 2004, 2003 and
2002, respectively, and were excluded from the computation of
diluted shares because of their antidilutive effect on net loss
per share.
A total of 43,728,665 weighted average potentially dilutive
shares associated with the 2003 and 2001 Convertible Notes were
excluded from the calculation of diluted shares because of their
antidilutive effect on loss per share for the year ended
December 31, 2004. A total of 50,850,649 weighted average
potentially dilutive shares associated with the 2003, 2001, 2000
and 1999 Convertible Notes were excluded from the calculation of
diluted shares because of their antidilutive effect on loss per
share for the year ended December 31, 2003. For the year
ended December 31, 2002, 47,059,516 weighted average
potentially dilutive shares associated with the 2001, 2000 and
1999 Convertible Notes were excluded from the calculation of
diluted shares because of their antidilutive effect on loss per
share.
Advertising. Advertising costs are charged to
expense in the period incurred. Advertising expense was
$5 million, $4 million and $3 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
Cash equivalents. All highly liquid investments
purchased with an original maturity of 90 days or less are
considered to be cash equivalents. Cash equivalents are reported
at amortized cost plus accrued interest.
Accounts receivable and allowance for doubtful
accounts. Trade receivables are reported in the balance
sheet reduced by an allowance for doubtful accounts for
estimated losses resulting from receivables not considered to be
collectible. The allowance for doubtful accounts is estimated by
evaluating customer’s history and credit worthiness as well
as current economic and market trends.
61
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Investments. Available-for-sale investments
include marketable short-term investments and long-term
investments in marketable and non-marketable shares of
technology companies. Short-term investments in marketable debt
securities are reported at fair value and include all debt
securities regardless of their maturity dates. Long-term
investments in marketable equity securities are reported at fair
value with unrealized gains and losses, net of related tax,
recorded as a separate component of comprehensive income in
stockholders’ equity until realized. The investments in
long-term non-marketable equity securities are recorded at
adjusted cost basis consist primarily of common and preferred
stock of various non-marketable technology companies. Gains and
losses on securities sold are determined based on the specific
identification method and are included in interest income and
other or research and development in the statement of
operations. The Company does not hold any of these securities
for speculative or trading purposes.
For all investment securities, unrealized losses that are
considered to be other than temporary are considered impairment
losses and recognized as a component of interest income and
other in the statement of operations. In order to determine if
an impairment has occurred, the Company reviews the financial
performance and outlook of each investee, industry performance,
the trading prices of marketable securities and pricing in
current rounds of financing for non-marketable equity
securities. For marketable equity securities, impairment losses
are measured using the closing market prices of the marketable
securities on the date management determined that the
investments were impaired. For non-marketable equity securities,
impairment losses are generally measured by using pricing in
current rounds of financing. The fair values of the
Company’s non-marketable equity investments are not
estimated if there are no identified events or changes in
circumstances that may have a significant adverse effect on the
investment because it is not practicable to estimate such fair
values.
Inventories. Inventories are stated at the lower
of cost or market. Cost is computed on a currently adjusted
standard basis (which approximates first-in, first-out) for raw
materials, work-in-process and finished goods. Inventory
reserves are established when conditions indicate that the
selling price could be less than cost due to physical
deterioration, obsolescence, changes in price levels, or other
causes. Reserves are established for excess inventory generally
based on inventory levels in excess of 12 months of demand,
as judged by management, for each specific product.
Property and equipment. Property and equipment are
recorded at cost and include interest on funds borrowed during
the construction period (see Note 6). Depreciation and
amortization for property and equipment are calculated based on
the straight-line method over the estimated useful lives of the
assets as presented below:
| |
|
|
|
|
|
Buildings and improvements
|
|
|
20-40 years |
|
|
Equipment
|
|
|
3-5 years |
|
|
Furniture and fixtures
|
|
|
5 years |
|
Amortization of leasehold improvements is computed using the
shorter of the remaining term of the Company’s facility
leases or the estimated useful lives of the improvements. While
the majority of the Company’s equipment is depreciated over
a three to five year period, some tools are being depreciated
over a seven-year period.
Software. The Company capitalizes both purchased
software and, to a lesser extent, certain software development
costs associated with the Storage Systems segment. Purchased
software primarily includes software and external consulting
fees related to the purchase and implementation of software
projects used for business operations and engineering design
activities. Capitalized software projects are amortized over the
estimated useful lives of the projects, typically a two-to-five
year period. Development costs for software that will be sold to
customers and/or embedded in certain hardware products are
capitalized beginning when a product’s technological
feasibility has been established. Prior to the establishment of
technological feasibility, software development costs are
expensed as research and development. Capitalized development
costs are
62
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
amortized on a straight-line basis to cost of revenues when
ready for general release to customers over the estimated useful
life of the product, typically an 18 to 24 month period. On
a quarterly basis, the Company assesses the realizability of
each product. The amount by which the unamortized capitalized
software development costs exceed the estimated net realizable
value is written-off immediately.
Impairment of long-lived assets. The Company
evaluates the carrying value of long-lived assets whenever
events or changes in circumstances indicate the carrying value
of an asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. When
assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value
of the assets over their fair value.
Goodwill. Goodwill is not amortized. The Company
monitors the recoverability of goodwill recorded in connection
with acquisitions, by reporting unit, annually, or sooner if
events or changes in circumstances indicate that the carrying
amount may not be recoverable. The Company’s two reporting
units are Semiconductor and Storage Systems or Engenio.
Impairment, if any, would be determined in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 142, which uses a fair value model for determining the
carrying value of goodwill. The impairment test is a two-step
process. The first step requires comparing the fair value of
each reporting unit to its net book value. The Company uses
management estimates of future cash flows to perform the first
step of the goodwill impairment test. These estimates include
assumptions about future conditions such as future revenues,
gross margins and operating expenses. Discounted Cash Flow and
Market Multiple methodologies are used to obtain the fair value
for each reporting unit. The second step is only performed if
impairment is indicated after the first step is performed, as it
involves measuring the actual impairment to goodwill.
Fair value disclosures of financial instruments.
The estimated fair value of financial instruments is determined
by the Company, using available market information and valuation
methodologies considered to be appropriate. However,
considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation
methodologies could have a significant effect on the estimated
fair value amounts. The fair value of investments, derivative
instruments and convertible debt are based on market data.
Carrying amounts of accounts receivable and accounts payable
approximate fair value due to the short maturity of these
financial instruments.
Derivative instruments. All of the Company’s
derivative instruments are recognized as assets or liabilities
in the statement of financial position and measured at fair
value (see Note 8). The Company does not enter into
derivative financial instruments for speculative or trading
purposes. On the date a derivative contract is entered into, the
Company designates its derivative as either a hedge of the fair
value of a recognized asset or liability (“fair-value”
hedge), as a hedge of the variability of cash flows to be
received (“cash-flow” hedge), or as a foreign-currency
hedge. Changes in the fair value of a derivative that is highly
effective and is designated and qualifies as a fair-value hedge,
along with the loss or gain on the hedged asset or liability
that is attributable to the hedged risk (including losses or
gains on firm commitments), are recorded in current period
earnings. Effective changes in the fair value of a derivative
that is highly effective and is designated and qualifies as a
cash-flow hedge, are recorded in other comprehensive income,
until earnings are affected by the variability of the cash
flows. Changes in the fair value of derivatives that are highly
effective, and are designated and qualify as a foreign-currency
hedge, are recorded in either current period earnings or other
comprehensive income, depending on whether the hedge transaction
is a fair-value hedge (e.g., a hedge of a firm commitment that
is to be settled in a foreign currency) or a cash-flow hedge
(e.g., a foreign-currency-denominated forecasted transaction).
63
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that
are designated as fair-value, cash-flow or foreign-currency
hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The
Company also assesses, both at the hedge’s inception and on
an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes
in fair values or cash flows of the hedged items. If it were to
be determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the
Company would discontinue hedge accounting prospectively, as
discussed below.
The Company would discontinue hedge accounting prospectively
when (1) it is determined that the derivative is no longer
highly effective in offsetting changes in the fair value or cash
flows of a hedged item (including firm commitments or forecasted
transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is no longer
designated as a hedge instrument, because it is unlikely that a
forecasted transaction will occur; (4) the hedged firm
commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the
derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as a highly effective
fair-value hedge, the derivative will continue to be carried on
the balance sheet at its fair value, and the hedged asset or
liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the derivative
will continue to be carried on the balance sheet at its fair
value, and any asset or liability that was previously recorded
pursuant to recognition of the firm commitment will be removed
from the balance sheet and recognized as a gain or loss in
current period earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not
occur, the derivative will continue to be carried on the balance
sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized
immediately in earnings. When a fair value hedge on an
interest-bearing financial instrument (such as an interest rate
swap) is cancelled and hedge accounting is discontinued, the
hedged item is no longer adjusted for changes in its fair value,
and the remaining asset or liability will be amortized to
earnings over the remaining life of the hedged item.
Concentration of credit risk of financial
instruments. Financial instruments that potentially
subject the Company to credit risk consist of cash equivalents,
short-term investments and accounts receivable. Cash equivalents
and short-term investments are maintained with high quality
institutions, the composition and maturities of which are
regularly monitored by management. A majority of the
Company’s trade receivables are derived from sales to large
multinational computer, communication, networking, storage and
consumer electronics manufacturers, with the remainder
distributed across other industries. There is one customer that
accounted for 22% of trade receivables as of December 31,
2004. No customers accounted for greater than 10% of trade
receivables as of December 31, 2003. Concentrations of
credit risk with respect to all other trade receivables are
considered to be limited due to the quantity of customers
comprising the Company’s customer base and their dispersion
across industries and geographies. The Company performs ongoing
credit evaluations of its customers’ financial condition
and requires collateral as considered necessary. Write-offs of
uncollectable amounts have not been significant.
Self-insurance. The Company retains certain
exposures in its insurance plan under self-insurance programs.
Reserves for claims made and reserves for estimated claims
incurred but not yet reported are recorded as current
liabilities.
Product warranties. The Company warrants finished
goods against defects in material and workmanship under normal
use and service for periods of one to five years for
Semiconductor products and Storage Systems’
64
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
hardware products and 90 days for Storage Systems’
software products. A liability for estimated future costs under
product warranties is recorded when products are shipped (see
Note 12).
Litigation and Settlement Costs. The Company is
involved in legal actions arising in the ordinary course of
business. The Company aggressively defends these legal actions.
In accordance with SFAS No. 5, “Accounting for
Contingencies,” the Company records an estimated loss
for a loss contingency when both of the following conditions are
met: (i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the amount of loss
can be reasonably estimated.
Stock-based compensation. The Company accounts for
stock-based compensation, including stock options granted,
restricted stock awards and shares issued under the Employee
Stock Purchase Plan, using the intrinsic value method as
prescribed in APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations.
Compensation cost for stock options, if any, is measured as the
excess of the quoted market price at grant date over the
exercise price and recognized ratably over the vesting period.
The Company’s policy is to grant options with an exercise
price equal to the quoted market price of the Company’s
stock on the grant date.
For all acquisitions that closed after July 2000, the intrinsic
value of the unvested options, restricted awards and warrants
assumed as part of the acquisitions as of the closing date of
the acquisitions was recorded as deferred stock compensation as
a component of the purchase price to be amortized over the
respective vesting periods of the options and awards. The
Company calculated the value of restricted shares issued using
the closing price of its common stock on the date of
consummation of the purchase. The fair value of the vested
options and warrants assumed was determined using the
Black-Scholes model. Deferred stock compensation is included as
a component of stockholders’ equity and is amortized
straight line over the vesting period of one to four years.
Forfeitures of acquisition related stock awards prior to vesting
would result in any recognized compensation cost being reduced
to zero in the period of forfeiture and any remaining unearned
compensation cost being reversed through equity.
The following table provides pro forma disclosures as if the
Company had recorded compensation costs based on the estimated
grant date fair value, as defined by SFAS No. 123, for
all awards granted under its stock-based compensation plans. In
such case, the Company’s net loss per share would have been
adjusted to the pro forma amounts below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Net loss, as reported
|
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
$ |
(292,440 |
) |
|
Add: Amortization of non-cash deferred stock compensation
expense determined under the intrinsic value method as reported
in net loss, net of related tax effects*
|
|
|
3,494 |
|
|
|
9,243 |
|
|
|
30,583 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects
|
|
|
(120,265 |
) |
|
|
(200,470 |
) |
|
|
(253,599 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(580,302 |
) |
|
$ |
(499,774 |
) |
|
$ |
(515,456 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted -as reported
|
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
| |
Basic and diluted -pro forma
|
|
$ |
(1.51 |
) |
|
$ |
(1.32 |
) |
|
$ |
(1.39 |
) |
|
|
| * |
This amount excludes amortization of non-cash deferred stock
compensation on restricted stock awards. |
65
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The pro forma disclosure provided above may not be
representative of the effect of applying SFAS No. 123
(Revised 2004). (See further discussion in “Recent
Accounting Pronouncements” later in this Note 1.)
The stock-based compensation expense determined under the fair
value method, included in the table above, was calculated using
the Black-Scholes model. The Black-Scholes model was developed
to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
significantly differ from the Company’s stock option
awards. This model also requires highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair
value. The following weighted average assumptions were used in
determining the estimated grant date fair values:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Employee Stock Options Granted |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Weighted average estimated grant date fair value
|
|
$ |
4.39 |
|
|
$ |
4.95 |
|
|
$ |
8.29 |
|
|
Assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
3.90 |
|
|
|
3.85 |
|
|
|
3.84 |
|
|
Risk-free interest rate
|
|
|
3.03 |
% |
|
|
2.73 |
% |
|
|
3.97 |
% |
|
Volatility
|
|
|
79.72 |
% |
|
|
81.56 |
% |
|
|
77.00 |
% |
|
Dividend yield
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Employee Stock Purchase Plan Right to Purchase Stock |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Weighted average estimated grant date fair value
|
|
$ |
2.65 |
|
|
$ |
3.09 |
|
|
$ |
3.44 |
|
|
Assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.91 |
|
|
|
0.87 |
|
|
|
0.87 |
|
|
Risk-free interest rate
|
|
|
2.05 |
% |
|
|
1.18 |
% |
|
|
1.69 |
% |
|
Volatility
|
|
|
69.17 |
% |
|
|
88.59 |
% |
|
|
80.39 |
% |
|
Dividend yield
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income Taxes. The calculation of the
Company’s tax liabilities involves the application of
United States generally accepted accounting principles to
complex tax rules and regulations within multiple jurisdictions
throughout the world. The Company’s tax liabilities include
estimates for all income and related taxes that the Company
believes are probable and that can be reasonably estimated. To
the extent that the Company’s estimates are understated,
additional charges to income tax expense would be recorded in
the period in which the Company determines such understatement.
If the Company’s income tax estimates are overstated,
income tax benefits will be recognized when realized.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized.
Related party transactions. There were no
significant related party transactions during the years ended
December 31, 2004, 2003 and 2002.
|
|
|
Recent accounting pronouncements. |
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standard (“SFAS”) No. 123 (Revised 2004),
entitled “Share-Based Payment.” This statement
eliminates the alternative to use the intrinsic value method of
accounting for stock options issued to employees. This statement
requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on
the grant-date fair value of those awards. This statement
applies to all
66
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
awards granted, modified, repurchased or cancelled as of the
beginning of the first interim or annual reporting period that
begins after June 15, 2005. The Company will apply the
Statement beginning in the third fiscal quarter of 2005. In
addition, compensation cost will be recognized on or after the
effective date for the portion of outstanding awards for which
the requisite service has not been rendered, based on the
grant-date fair value of those awards calculated under
SFAS No. 123 for pro forma disclosures. This statement
also requires additional disclosures in the notes to the
consolidated financial statements. We are currently evaluating
the impact of adopting this statement; however, we expect that
it will have a significant impact on our consolidated balance
sheet and statement of operations. The impact on our financial
statements will be dependent on the transition method, the
option-pricing model used to compute fair value and the inputs
to that model such as volatility and expected life. The pro
forma disclosures of the impact of SFAS No. 123
provided earlier in this Note 1 may not be representative
of the impact of adopting this statement.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets-an amendment of APB
Opinion No. 29.” This statement amends APB Opinion
No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement
is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application
is permitted. The adoption of this standard is not expected to
have a material impact on the Company’s consolidated
balance sheet or statement of operations.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the “Act”). The Act introduced a
special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The
Company has yet to complete its evaluation of the Foreign
Earnings Repatriation Provision within the Act. At this time the
Company has not been able to reasonably estimate the income tax
effect of the Foreign Earnings Repatriation Provision. The
Company plans to complete its evaluation in the second half of
2005.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs-an amendment of ARB No. 43,
Chapter 4.” This statement clarifies the accounting
for abnormal amounts of facility expense, freight, handling
costs and wasted materials (spoilage) to require them to be
recognized as current-period charges. This statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is
permitted. The adoption of this standard is not expected to have
a material impact on the Company’s consolidated balance
sheet or statement of operations.
In November 2004, the Emerging Issues Task Force
(“EITF”) reached a consensus on Issue No. 03-13,
“Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,’ in Determining Whether to
Report Discontinued Operations.” EITF No. 03-13 provides
guidance on when a component of an entity should be reported in
discontinued operations if the entity will have cash flows from
or continuing involvement in the component that is disposed of
or held for sale. The consensus is effective for components of
an entity disposed of or classified as held for sale in fiscal
periods beginning after December 15, 2004. The adoption of
this consensus is not expected to have a material impact on the
Company’s consolidated balance sheet or statement of
operations.
In October 2004, EITF issued EITF Issue No. 04-08,
“Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings
Per Share.” This issue addresses when contingently
convertible instruments should be included in diluted earnings
per share computations. The pronouncement is effective for the
reporting periods ending after December 15, 2004. The
adoption of this standard did not have an impact to the
Company’s computation of diluted earnings per share.
In October 2004, the EITF issued EITF Issue No. 04-10,
“Applying Paragraph 19 of Statement of Financial
Accounting Standards No. 131, in Determining Whether to
Aggregate Operating Segments that do
67
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
not meet the Quantitative Thresholds.”
SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related Information”, requires that a public
business enterprise report financial and descriptive information
about its reportable operating segments. This issue addresses
how to aggregate operating segments that do not meet the
quantitative thresholds in SFAS No. 131. The
pronouncement is effective for fiscal years beginning in 2005.
The adoption of this standard will not have an impact to the
existing reportable operating segments of the Company.
In March 2004, the EITF reached a consensus on Issue
No. 03-01, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.”
EITF No. 03-01 provides guidance on recording
other-than-temporary impairments of cost-method investments and
requires additional disclosures for those investments. In
September 2003, a FASB Staff Position was issued that delays the
recognition and measurement guidance in EITF No. 03-01
until the final issuance of FASB Staff Position Issue 03-01
a. The adoption of the recognition and measurement provisions is
not expected to have a material impact on the Company’s
consolidated balance sheet or statement of operations.
Note 2 — Business Combinations
The Company is continually exploring strategic acquisitions that
build upon our existing library of intellectual property, human
capital and engineering talent, and seeking to increase our
leadership position in the markets in which we operate. Below is
a discussion of recent acquisitions and acquired in-process
research and development.
Acquisition of Accerant Inc. On May 11, 2004,
the Company acquired Accerant Inc. (“Accerant”). The
acquisition is anticipated to expand consumer product offerings
within the Semiconductor segment. The acquisition was accounted
for as a purchase of a business.
The Company paid approximately $14.1 million in cash for
the acquisition. In addition, as of the acquisition date, the
Company agreed to issue approximately 234,000 restricted common
shares to certain Accerant employees hired as part of the
transaction. The resulting deferred stock compensation is being
amortized to expense over a vesting period of two years using
the straight-line method. See Note 10 for forfeitures of
restricted shares prior to vesting. The total purchase price was
allocated to the estimated fair value of net assets acquired
based on management estimates as follows (in thousands):
| |
|
|
|
|
|
Fair value of tangible net assets acquired
|
|
$ |
31 |
|
|
Current technology
|
|
|
5,700 |
|
|
Non-compete agreements
|
|
|
400 |
|
|
Goodwill
|
|
|
7,972 |
|
| |
|
|
|
|
Total purchase price excluding deferred stock compensation
|
|
|
14,103 |
|
|
Deferred stock compensation
|
|
|
1,765 |
|
| |
|
|
|
|
Total purchase price
|
|
$ |
15,868 |
|
| |
|
|
|
Useful life of intangible assets. The amounts allocated
to current technology and non-compete agreements are being
amortized over their estimated useful lives of 5 and
2 years, respectively, using the straight-line method.
The Company may also pay additional cash of up to
$2.5 million if certain revenue targets are achieved over
the year ending December 31, 2005. Such contingent
consideration will represent additional purchase price and
accordingly goodwill when and if such targets are met.
68
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Acquisition of Velio Communications. On
April 2, 2004, the Company acquired Velio Communications,
Inc. (“Velio”). The acquisition is anticipated to
expand product offerings for high-speed interconnect and switch
fabric application specific standard products
(“ASSPs”) for the communications market within the
Semiconductor segment. The acquisition was accounted for as a
purchase of a business.
The Company paid approximately $19.8 million in cash for
the acquisition. In addition, as of the acquisition date, the
Company agreed to issue approximately 100,000 restricted common
shares to certain Velio employees hired as part of the
transaction. The resulting deferred stock compensation is being
amortized to expense over a vesting period of two years using
the straight-line method. See Note 10 for forfeitures of
restricted shares prior to vesting. The total purchase price was
allocated to the estimated fair value of net assets acquired
based on management estimates as follows (in thousands):
| |
|
|
|
|
|
Fair value of tangible net assets acquired
|
|
$ |
1,529 |
|
|
Current technology
|
|
|
8,788 |
|
|
Customer base
|
|
|
8,788 |
|
|
Non-compete agreements
|
|
|
450 |
|
|
Existing purchase orders
|
|
|
200 |
|
| |
|
|
|
|
Total purchase price excluding deferred stock compensation
|
|
|
19,755 |
|
|
Deferred stock compensation
|
|
|
1,000 |
|
| |
|
|
|
|
Total purchase price
|
|
$ |
20,755 |
|
| |
|
|
|
Useful life of intangible assets. The amounts allocated
to current technology, customer base, non-compete agreements and
existing purchase orders are being amortized over their
estimated useful lives of 9 months to 5.5 years using
the straight-line method.
Pro forma statements of earnings information have not been
presented because the effect of these acquisitions was not
material either individually or on an aggregate basis.
There were no material acquisitions during 2003.
During 2002, the Company completed two acquisitions accounted
for under the purchase method of accounting. Pro forma
statements of earnings information have not been presented
because the effect of these
69
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
2002 acquisitions was not material either on an individual or an
aggregate basis. See summary table below (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Entity Name or Type |
|
|
|
|
|
|
|
Fair Value | |
|
|
|
|
|
|
|
|
| of Technology; |
|
|
|
|
|
|
|
of Tangible | |
|
|
|
|
|
|
|
|
| Segment Included in; |
|
|
|
|
|
|
|
Net Assets/ | |
|
|
|
Amortizable | |
|
In-Process | |
|
|
| Description of |
|
|
|
Total Purchase | |
|
Type of | |
|
(Liabilities) | |
|
|
|
Intangible | |
|
Research and | |
|
Deferred Stock | |
| Acquired Business |
|
Acquisition Date | |
|
Price | |
|
Consideration | |
|
Acquired | |
|
Goodwill | |
|
Assets | |
|
Development | |
|
Compensation | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Mylex Business Unit of
|
|
|
August 2002 |
|
|
$ |
50.5 |
|
|
|
Cash |
|
|
$ |
14.1 |
|
|
$ |
20.5 |
|
|
$ |
14.0 |
|
|
$ |
1.9 |
|
|
$ |
— |
|
|
IBM;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entry-level storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
systems in the Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems segment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI-RAID products in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the Semiconductor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital video product
|
|
|
November 2002 |
|
|
$ |
6.7 |
|
|
|
Cash |
|
|
$ |
(0.2 |
) |
|
$ |
2.9 |
|
|
$ |
1.8 |
|
|
$ |
1.0 |
|
|
$ |
1.2 |
|
|
technologies;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development. The Company
did not record any acquired in-process research and development
(“IPR&D”) charges in 2004 or 2003. The Company
recorded charges of $3 million for the year ended
December 31, 2002 associated with IPR&D primarily in
connection with an acquisition as summarized in the table below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Revenue | |
| |
|
Acquisition | |
|
|
|
Discount | |
|
Percentage of | |
|
projections extend | |
| Company |
|
Date | |
|
IPR&D | |
|
Rate | |
|
Completion | |
|
through | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollar amounts in millions) | |
|
|
|
Mylex Division of IBM
|
|
|
August 2002 |
|
|
$ |
1.9 |
|
|
|
25 |
% |
|
|
10% to 50% |
|
|
|
2006 |
|
The amounts of IPR&D were determined by identifying research
projects for which technological feasibility had not been
established and no alternative future uses existed as of the
respective acquisition dates. The value of the projects
identified to be in progress was determined by estimating the
future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value and
then applying a percentage of completion to the calculated
value. The net cash flows from the identified projects were
based on estimates of revenues, cost of revenues, research and
development costs, selling, general and administrative costs and
applicable income taxes for the projects. Total revenues for the
projects are expected to extend through the dates noted in the
table above by acquisition. These projections were based on
estimates of market size and growth, expected trends in
technology and the expected timing of new product introductions
by our competitors and the Company. These estimates did not
account for any potential synergies realizable as a result of
the acquisition and were in line with industry averages and
growth estimates.
The percentage of completion for the projects was determined by
calculating expenses incurred up to the acquisition date as a
percentage of total research and development expenses to bring
the projects to technological feasibility.
A discount rate is used for the projects to account for the
risks associated with the inherent uncertainties surrounding the
successful development of the IPR&D, market acceptance of
the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could impact the estimates
described above. As of December 31, 2003, all projects were
completed.
70
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Note 3 — Restructuring and other items
The Company recorded net charges of $423.4 million in
restructuring of operations and other items for the year ended
December 31, 2004, consisting of $433.5 million in
charges for restructuring of operations and impairment of
long-lived assets and a gain of $10.1 million for other
items. Of these charges, $420.2 million was recorded in the
Semiconductor segment and $3.2 million was included in the
Storage Systems segment.
|
|
|
Restructuring and impairment of long-lived assets: |
The Company recorded a gain of $3.3 million on the sale of
fixed assets that had previously been held for sale and an
expense of $1.1 million for the abandonment of fixed assets
that had previously been held for sale. In addition, an expense
of $1.1 million was recorded for the write-down of fixed
assets due to impairment.
An expense of $0.3 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
An expense of $0.2 million was recorded primarily for
severance and termination benefits for four employees involved
in research and development.
The Company recorded a gain of $1.0 million on the sale of
fixed assets that had previously been held for sale and an
expense of $4.0 million primarily for the write-down of the
Colorado Springs fabrication facility to reflect a decline in
fair market value and to write down certain spare parts for
fixed assets.
An expense of $0.4 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
Previously accrued contract termination fees of
$0.4 million were reversed as the result of more favorable
than expected negotiations to terminate those contracts.
As a result of the decline in revenues in the semiconductor
industry and a corresponding decline in the Company’s
outlook as of the latter part of the third quarter of 2004, the
Company initiated a comprehensive restructuring program, which
included asset impairments, a global reduction in workforce and
the consolidation of certain facilities as described further
below.
The Company concluded in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” that the Gresham manufacturing facility assets
were impaired. Accordingly, an asset write-down of
$205.5 million was recorded in the semiconductor segment
during the third quarter of 2004. The fair values of equipment
and facilities were researched and estimated by management.
The Company announced workforce reductions of approximately 560
positions worldwide across all job functions and recorded a
charge of $14.6 million in the Semiconductor segment for
severance and termination benefits.
The Company recorded a gain of $1.9 million on the sale of
fixed assets that had previously been held for sale and an
expense of $3.4 million for the write-down of the Colorado
Springs fabrication facility to reflect a decline in fair market
value, the impairment of certain acquired intangible assets in
the Semiconductor segment and the write-down of leasehold
improvements related to the facility operating leases discussed
below.
71
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
In the third quarter of 2004, the Company consolidated
additional non-manufacturing facilities and recorded
$6.1 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used. An expense of $0.4 million was recorded to reflect
the change in time value of prior accruals for facility lease
termination costs. In addition, an expense of $1.8 million
was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs.
In November 2004, the Company exercised its right to purchase
all of the wafer fabrication equipment that had previously been
under two operating lease and security agreements. The purchase
amount was $332 million. Cash collateral of
$311 million associated with the leases was returned to the
Company. Termination fees under the lease agreements were not
significant. The formerly leased equipment is part of the
Gresham manufacturing facility, but was not impaired in the
third quarter of 2004 because the Company did not own the
equipment until November of 2004, as discussed above.
Accordingly, in the fourth quarter of 2004, after purchasing the
previously leased equipment, the Company recorded an additional
impairment charge of $177.7 million in restructuring of
operations and other items within the Semiconductor segment. The
charge includes a write-down of $247.7 million to reflect
the equipment at fair value, the reversal of a
$56.0 million deferred gain previously recorded in
non-current liabilities related to the sale-leaseback of
equipment during 2003, lease termination fees and the write-off
of capitalized lease fees and deferred rent. The fair values of
the impaired equipment were researched and estimated by
management.
In the Semiconductor segment, the Company recorded a gain of
$0.6 million on the sale of fixed assets that had
previously been held for sale; an expense of $11.4 million
for the write-down of the Colorado Springs fabrication facility
to reflect a decline in fair market value; and an expense of
$0.3 million for the write-down of leasehold improvements
related to the facility operating leases discussed below and
other fixed assets.
During the third quarter of 2004, the Company reclassified a
parcel of land in Japan with a book value of $1.4 million
from a long-term asset to a current asset held for sale. The
land was part of the total assets in the Semiconductor segment.
The land was sold in the fourth quarter of 2004 and a gain of
$0.2 million was recorded.
As part of the restructuring program initiated in the third
quarter, the Company decided to discontinue development of a
product line in the Semiconductor segment that had been acquired
in connection with the Datapath acquisition in 2000. As a
result, an analysis of the future net cash flows related to the
affected product line was performed and the Company determined
that certain acquired intangible assets were impaired. An
impairment charge of $4.7 million for the write-down of the
acquired intangible assets to fair market value was recorded in
the Semiconductor segment.
In the fourth quarter of 2004, the Company consolidated
additional non-manufacturing facilities and recorded
$1.9 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used. An expense of $0.5 million was recorded to reflect
the change in time value of accruals for facility lease
termination costs. Previously accrued lease termination fees of
$0.3 million were reversed as the result of favorable
negotiations to terminate those contracts.
The Company recorded $2.5 million for additional severance
and termination benefits in the Semiconductor segment related to
the workforce reductions described in the third quarter of 2004
above, primarily in Europe and the United States due to changes
in estimates.
In our Storage Systems segment, during the fourth quarter, we
initiated realignment of our product portfolio and overhead cost
structures driven by the future operating and financial
performance goals of the Storage Systems segment. In connection
with this action the Company recorded a $1.5 million charge
for severance and termination benefits for 70 employees across
multiple activities and functions. In addition, the Company
recorded a charge of $1.7 million for the write-off of
previously capitalized software development
72
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
costs. The Company cancelled the related project based upon the
determination that this project would not achieve the desired
future financial performance goals.
Assets held for sale of $11 million and $30 million
were included as a component of prepaid expenses and other
current assets as of December 31, 2004 and
December 31, 2003, respectively. Assets classified as held
for sale are not depreciated. The fair values of impaired
equipment and facilities were researched and estimated by
management. Given that current market conditions for the sale of
older fabrication facilities and related equipment may fluctuate
due to demand for used semiconductor equipment, there can be no
assurance that the Company will realize the current net carrying
value of the assets held for sale. The Company reassesses the
realizability of the carrying value of these assets at the end
of each quarter until the assets are sold or otherwise disposed
of and additional adjustments may be necessary.
The following table sets forth our restructuring reserves as of
December 31, 2004, which are included in other accrued
liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve | |
|
During | |
|
December 31, | |
| |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
2,661 |
|
|
$ |
404,723 |
|
|
$ |
(760 |
) |
|
$ |
(405,417 |
) |
|
$ |
1,207 |
|
|
Lease terminations and maintenance contracts(b)
|
|
|
21,021 |
|
|
|
11,388 |
|
|
|
(665 |
) |
|
|
(11,679 |
) |
|
|
20,065 |
|
|
Facility closure and other exit costs(c)
|
|
|
2,136 |
|
|
|
64 |
|
|
|
— |
|
|
|
(1,657 |
) |
|
|
543 |
|
|
Payments to employees for severance(d)
|
|
|
874 |
|
|
|
18,812 |
|
|
|
(18 |
) |
|
|
(12,260 |
) |
|
|
7,408 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
26,692 |
|
|
$ |
434,987 |
|
|
$ |
(1,443 |
) |
|
$ |
(431,013 |
) |
|
$ |
29,223 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The amounts utilized in 2004 reflect $411.6 million of
non-cash write-downs of long-lived assets in the U.S. due
to impairment and $0.8 million in cash payments to
decommission and sell assets, offset by a $7.0 million
realized gain on the sale of fixed assets previously held for
sale. The write-downs of long-lived assets were accounted for as
a reduction of the assets and did not result in a liability. The
$1.2 million balance as of December 31, 2004, relates
to machinery and equipment decommissioning costs in the U.S. and
estimates of selling costs for assets held for sale and is
expected to be utilized during 2005. |
|
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations and maintenance
contracts will be paid during the remaining terms of these
contracts, which extend through 2011. |
| |
|
(c) |
|
Amounts utilized represent cash payments. The balance remaining
for facility closure and other exit costs will be paid during
2005. |
| |
|
(d) |
|
Amounts utilized represent cash severance payments to 495
employees during the year ended December 31, 2004. The
balance remaining for severance benefits is expected to be paid
by the end of 2005. |
During the second quarter of 2004, the Company reclassified a
parcel of land in Colorado with a book value of
$1.4 million from a long-term asset to a current asset held
for sale. The land is part of total assets in the Semiconductor
segment. The Company expects to sell the property within the
next 12 months for an amount in excess of book value.
During the third quarter of 2004, the Company entered into two
new lease agreements for wafer fabrication equipment. The
equipment was previously on lease immediately prior to the
closing of the new
73
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
lease agreements. The Company had capitalized and was amortizing
fees related to the previous leases. Upon entering into the new
lease agreements, $2.5 million in remaining unamortized
fees for the previous leases were recorded as an expense in the
statement of operations.
During the third quarter of 2004, the Company discontinued hedge
accounting treatment on the interest rate swap related to the
equipment operating leases that were refinanced and recorded the
$3.8 million balance in accumulated comprehensive income as
a gain in the statement of operations (see Note 8).
During the fourth quarter of 2004, the Company released
$8.8 million in accruals that were established in years
prior to 2004, because management determined that the accruals
were no longer necessary.
The Company recorded net charges of $181 million in
restructuring of operations and other items for the year ended
December 31, 2003 consisting of $183 million in
charges for restructuring of operations and a gain of
$2 million for other items. Of these charges,
$166 million was recorded in the Semiconductor segment and
$15 million was included in the Storage Systems segment.
|
|
|
Restructuring and impairment of long-lived assets: |
On January 1, 2003, the Company adopted
SFAS No. 146, “Accounting for Exit or Disposal
Activities.” SFAS No. 146 has been applied to
restructuring activities initiated after December 31, 2002
and changes the timing of when restructuring charges are
recorded to the date when the liabilities are incurred.
In February 2003, the Company downsized operations and recorded
$36 million in charges for restructuring of operations and
other items. Of this charge, $21 million was associated
with the Semiconductor segment and $15 million was
attributable to the Storage Systems segment. The charges
consisted of severance and termination benefits of
$5 million for 210 employees involved in manufacturing
operations, research and development and marketing and sales;
$1 million for costs associated with exiting certain
operating leases primarily for real estate; and write-downs of
$24 million for certain acquired intangible assets,
$4 million for capitalized software and $2 million for
fixed assets. During the year ended December 31, 2003,
payments related to the February 2003 restructuring actions
consisted of approximately $4 million for severance and
termination benefits and $1 million for lease and contract
terminations.
In April 2003, the Company announced a restructuring of its
operations that included a reduction in workforce and the
consolidation of certain non-manufacturing facilities. A charge
of $33 million was recorded in the Semiconductor segment
consisting of severance and termination benefits of
$9 million for 325 employees involved in manufacturing
operations, research and development, marketing, sales and
administration; $19 million for costs associated with
exiting certain operating leases primarily for real estate;
other exit costs of $0.2 million; and a write-down of
$5 million for fixed assets due to impairment. During the
year ended December 31, 2003, payments related to the April
2003 restructuring actions consisted of approximately
$9 million for severance and termination benefits,
$3 million for lease and contract terminations and
$0.1 million for other exit costs.
In June 2003, the Company announced the decision to sell the
Tsukuba, Japan manufacturing facility. During the second
quarter, a charge of $73 million was recorded in the
Semiconductor segment to write-down fixed assets to their fair
market value. The fair value was reclassified from property,
plant and equipment to other current assets to reflect the
intention to dispose of the facility within the next twelve
months. In addition,
74
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
approximately $2 million in restructuring charges were
recorded in the second quarter for severance and other exit
costs. See further discussion in the third quarter below.
In June 2003, the Company also recorded $19 million of
additional fixed asset write-downs to reflect the decrease in
fair market value of the assets during the period. This
write-down included a reduction in the value of the Colorado
Springs fabrication facility of $16 million to reflect
continued and accelerated efforts to sell the facility.
|
|
|
Agreement to sell Japan fabrication facility: |
In September 2003, the Company entered into a definitive
agreement to sell the Tsukuba, Japan facility to Rohm Company
Ltd. (“Rohm”), a Japanese company. The sale closed
during November 2003 for 2.82 billion Yen (approximately
$26 million). As part of the definitive agreement, the
Company agreed to purchase a minimum amount of production wafers
from Rohm for a period of 15 months following the close of
the transaction. As a result, a charge of $4 million was
recorded in cost of revenues during the third quarter of 2003.
This charge is a result of the application of our policy to
accrue for non-cancelable inventory purchase commitments in
excess of 12 months of estimated demand. Included in the
$4 million charge to cost of revenues is a reclassification
of $3 million from restructuring expense originally
recorded in the second quarter of 2003 to better reflect the
terms of the definitive agreement. Also in the quarter,
$2 million was recorded for additional severance benefits
to be paid and for contract termination and other exit costs
associated with the definitive agreement. During the year ended
December 31, 2003, payments related to the Japan
restructuring actions consisted of approximately $1 million
for severance and termination benefits and $0.2 million for
lease and contract terminations.
|
|
|
Other third quarter 2003 restructuring actions: |
In the third quarter of 2003, the Company continued to
consolidate non-manufacturing facilities and recorded
$2 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used.
In September 2003, the Company decided to discontinue
development programs and to refocus sales and marketing efforts
for certain product lines in the Semiconductor segment. As a
result of an analysis of future net cash flows related to the
affected product lines, it was determined that certain acquired
intangible assets were impaired. An impairment charge of
$21 million related to the write-down of the acquired
intangible assets to fair market value was recorded in the third
quarter of 2003. These intangible assets were originally
acquired in connection with the acquisition of C-Cube
Microsystems in the second quarter of 2001. In addition,
$3 million in restructuring charges were recorded in the
third quarter of 2003. These charges related to severance and
termination benefits for 97 employees primarily involved in
research and development and for certain contract termination
costs and fixed asset write-downs due to impairment. The
severance benefits were paid during the third quarter of 2003.
In the fourth quarter of 2003, the Company reversed
approximately $2 million of previously accrued
restructuring expenses. The reversal was primarily due to the
combination of a favorable negotiation to terminate leases for
real property and severance payments that were lower than
expected due to the timing of the sale of the Japan
manufacturing facility to Rohm. An expense of $1 million
recorded to reflect the change in time value of accruals for
facility lease termination costs and the write-down of fixed
assets due to impairment. Certain other reclassifications were
made between asset decommissioning costs and other facility
closure costs to reflect changes in management estimates for the
remaining costs for these activities.
75
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
In December 2003, the Company recorded $2 million of
additional fixed asset write-downs to reflect the decrease in
fair market value of the assets during the period. The Company
also recorded a realized gain of $5 million on the sale of
fixed assets that had previously been held for sale.
The following table sets forth the Company’s restructuring
reserves as of December 31, 2003, which are included in
other accrued liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve and | |
|
During | |
|
December 31, | |
| |
|
2002 | |
|
2003 | |
|
Reclassifications | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
6,008 |
|
|
$ |
147,454 |
|
|
$ |
(6,422 |
) |
|
$ |
(144,379 |
) |
|
$ |
2,661 |
|
|
Lease terminations and maintenance contracts(b)
|
|
|
6,757 |
|
|
|
23,444 |
|
|
|
(1,146 |
) |
|
|
(8,034 |
) |
|
|
21,021 |
|
|
Facility closure and other exit costs(c)
|
|
|
8,129 |
|
|
|
1,072 |
|
|
|
1,203 |
|
|
|
(8,268 |
) |
|
|
2,136 |
|
|
Payments to employees for severance(d)
|
|
|
1,391 |
|
|
|
18,095 |
|
|
|
(928 |
) |
|
|
(17,684 |
) |
|
|
874 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
22,285 |
|
|
$ |
190,065 |
|
|
$ |
(7,293 |
) |
|
$ |
(178,365 |
) |
|
$ |
26,692 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The amounts utilized in 2003 reflect $142 million of
non-cash write-downs of amortizable intangible and other
long-lived assets in the U.S. and Japan due to impairment, and
$2 million in cash payments to decommission and sell
assets. The write-downs of the intangible and other long-lived
assets were accounted for as a reduction of the assets and did
not result in a liability. The $3 million balance as of
December 31, 2003 relates to machinery and equipment
decommissioning costs in U.S. and estimates of selling costs for
assets held for sale. |
|
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations and maintenance
contracts will be paid during the remaining terms of these
contracts, which extend through 2011. |
| |
|
(c) |
|
Amounts utilized represent cash payments. |
| |
|
(d) |
|
Amounts utilized represent cash severance payments to 777
employees during 2003. The $0.9 million balance as of
December 31, 2003 was paid during 2004. |
A gain of approximately $2.2 million was recorded in
restructuring and other items, net during the second quarter of
2003 associated with additional sales of intellectual property
associated with the CDMA handset product technology.
The Company recorded approximately $67.1 million in
restructuring of operations and other items for the year ended
December 31, 2002, consisting of $75.2 million for
restructuring of operations, and a gain of $8.1 million for
other items, including the gain on sale of CDMA handset product
technology. Restructuring of operations and other items were
primarily included in the Semiconductor segment; the
restructuring expense included in the Storage Systems segment
was not significant.
76
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
|
|
|
Restructuring and impairments of long-lived assets: |
In the first quarter of 2002, the Company announced a set of
actions to reduce costs and streamline operations. These actions
included a worldwide reduction in workforce, downsizing the
Company’s manufacturing operations in Tsukuba, Japan and
the decision to exit the CDMA handset product technology. During
the three months ended March 31, 2002, the Company recorded
a restructuring charge for severance for 1,150 employees
worldwide and exit costs primarily associated with cancelled
contracts and operating leases. As a result of the restructuring
actions, the Company recorded fixed asset write-downs due to
impairment in the U.S. and Japan for assets to be disposed of by
sale. In the second quarter of 2002, the Company completed the
sale of CDMA handset product technology to a third party,
recognizing a net gain of $6.4 million.
During the fourth quarter of 2002, the Company reversed
approximately $5 million of previously accrued
restructuring expenses. As a result of the Company’s
decision to terminate fewer employees than the original plan
contemplated in Tsukuba, Japan, previously accrued restructuring
expenses were reversed for termination benefits, including
outplacement costs and certain contract termination fees of
$7 million. This was offset by additional expense accruals
of $2 million for costs related to the previously announced
closure of the Colorado Springs fabrication facility. Certain
other reclassifications were made between lease and contract
terminations and facility closure and other exit costs to
reflect changes in management estimates for the remaining costs
for these activities.
In September 2002, the Company recorded $13 million of
additional fixed asset write-downs to reflect the decrease in
the fair market value of the assets during the period.
The following table sets forth the Company’s restructuring
reserves as of December 31, 2002, which are included in
other accrued liabilities on the balance sheet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
| |
|
December 31, | |
|
Expense | |
|
Reserve and | |
|
During | |
|
December 31, | |
| |
|
2001 | |
|
2002 | |
|
Reclassifications | |
|
2002 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
3,762 |
|
|
$ |
38,918 |
|
|
$ |
5,147 |
|
|
$ |
(41,819 |
) |
|
$ |
6,008 |
|
|
Lease terminations and maintenance contracts(c)
|
|
|
10,695 |
|
|
|
12,871 |
|
|
|
(10,559 |
) |
|
|
(6,250 |
) |
|
|
6,757 |
|
|
Facility closure and other exit costs(c)
|
|
|
14,153 |
|
|
|
415 |
|
|
|
4,058 |
|
|
|
(10,497 |
) |
|
|
8,129 |
|
|
Payments to employees for severance(b)
|
|
|
724 |
|
|
|
27,490 |
|
|
|
(3,150 |
) |
|
|
(23,673 |
) |
|
|
1,391 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
29,334 |
|
|
$ |
79,694 |
|
|
$ |
(4,504 |
) |
|
$ |
(82,239 |
) |
|
$ |
22,285 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Amounts utilized in 2002 reflect a non-cash write-down of fixed
assets in the U.S. and Japan due to impairment of
$38.3 million and cash payments for machinery and equipment
decommissioning costs of $3.5 million. The fixed asset
write-downs were accounted for as a reduction of the assets and
did not result in a liability. The $6.0 million balance as
of December 31, 2002 relates to machinery and equipment
decommissioning costs in the U.S. and selling costs for assets
held for sale. |
|
|
|
|
(b) |
|
Amounts utilized represent cash severance payments to 1,290
employees during the year ended December 31, 2002. The
$1.4 million balance as of December 31, 2002 was paid
during 2003. |
| |
|
(c) |
|
Amounts utilized represent cash payments. |
77
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The Company recorded a net gain of $1.7 million in other
items during the first quarter of 2002, which consisted of a
nonrefundable deposit paid to the Company in the first quarter
of 2002 related to the termination of the agreement to sell the
Colorado Springs fabrication facility during 2001, offset in
part by certain costs associated with maintaining CDMA handset
product technology until sold.
Note 4 — Segment and Geographic Information
The Company operates in two reportable segments: the
Semiconductor segment and the Storage Systems segment. The
Storage Systems segment may also be referred to as Engenio. In
the Semiconductor segment, the Company uses advanced deep
sub-micron process technologies and comprehensive design
methodologies to design, develop, manufacture and market highly
complex integrated circuits. These system-on-a-chip solutions
include both application specific integrated circuits, commonly
referred to as ASICs, and application specific standard products
in silicon, or ASSPs. Semiconductor segment product offerings
also include host bus adapters, RAID adapters and related
products, and services. In the Storage Systems segment, the
Company designs, manufactures and sells high-performance, highly
scalable open storage area network systems and storage solutions
to original equipment manufacturers and a specialized network of
resellers. The Storage Systems’ products are sold as
complete storage systems or sub-assemblies configured from
modular components, including our disk array controller boards
and related enclosures, disk drive enclosures and related
management software.
In November 2003, the Company announced its intention to
separate its majority-owned subsidiary, Engenio, from the
Company and create an independent storage systems company. The
separation of Engenio from the Company, including the transfer
of related assets, liabilities and intellectual property rights,
was substantially completed in December 2003. The Company has
entered into agreements to address various arrangements between
Storage Systems and the Company as discussed in Note 13.
The separation agreements did not materially change the reported
assets or results of operations for the Storage Systems segment
during 2004 when compared to prior years.
Information about profit or loss and assets. The
following is a summary of operations by segment for the years
ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Semiconductor
|
|
$ |
1,248,531 |
|
|
$ |
1,269,708 |
|
|
$ |
1,481,386 |
|
| |
Storage Systems
|
|
|
451,633 |
|
|
|
423,362 |
|
|
|
335,552 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
$ |
1,816,938 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Semiconductor
|
|
$ |
(449,686 |
) |
|
$ |
(295,710 |
) |
|
$ |
(290,017 |
) |
| |
Storage Systems
|
|
|
13,337 |
|
|
|
23,094 |
|
|
|
25,204 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
(436,349 |
) |
|
$ |
(272,616 |
) |
|
$ |
(264,813 |
) |
| |
|
|
|
|
|
|
|
|
|
Intersegment revenues for the periods presented above were not
significant. Restructuring of operations and other items were
included in both segments.
78
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The following is a summary of total assets by segment as of
December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Semiconductor
|
|
$ |
2,549,016 |
|
|
$ |
3,115,610 |
|
|
$ |
3,721,282 |
|
| |
Storage Systems
|
|
|
324,985 |
|
|
|
332,291 |
|
|
|
291,454 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
|
$ |
4,012,736 |
|
| |
|
|
|
|
|
|
|
|
|
Significant Customers. The following table summarizes the
number of our significant customers, each of whom accounted for
10% or more of our revenues, along with the percentage of
revenues they individually represent on a consolidated basis and
by segment:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
| |
Percentage of segment revenues
|
|
|
— |
|
|
|
18% |
|
|
|
22% |
|
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
| |
Percentage of segment revenues
|
|
|
54%, 14%, 12% |
|
|
|
52%, 14%, 11% |
|
|
|
36%, 20%, 15% |
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of significant customers
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
| |
Percentage of consolidated revenues
|
|
|
16% |
|
|
|
15%, 13% |
|
|
|
18% |
|
Information about geographic areas. The Company’s
significant operations outside the United States include sales
offices in Europe, Asia and Japan. The following is a summary of
revenues and long-lived assets by entities located within the
indicated geographic areas.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
852,453 |
|
|
$ |
863,620 |
|
|
$ |
905,323 |
|
| |
Asia, including Japan
|
|
|
655,077 |
|
|
|
677,266 |
|
|
|
748,906 |
|
| |
Europe
|
|
|
192,634 |
|
|
|
152,184 |
|
|
|
162,709 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
$ |
1,816,938 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
380,527 |
|
|
$ |
865,567 |
|
|
$ |
968,976 |
|
| |
Asia, including Japan
|
|
|
37,870 |
|
|
|
50,471 |
|
|
|
133,953 |
|
| |
Europe
|
|
|
3,686 |
|
|
|
4,623 |
|
|
|
5,559 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
422,083 |
|
|
$ |
920,661 |
|
|
$ |
1,108,488 |
|
| |
|
|
|
|
|
|
|
|
|
79
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
In 2004, Engenio formed new subsidiaries within Europe. These
subsidiaries recorded approximately $48 million in
revenues. In prior years, all revenues generated by Engenio in
Europe were reported in North America.
Long-lived assets consist of net property and equipment,
capitalized software and other long-term assets, excluding
long-term deferred tax assets.
Note 5 — Cash, Cash Equivalents and
Investments
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
Cash in financial institutions
|
|
$ |
51,172 |
|
|
$ |
108,989 |
|
| |
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
| |
Overnight deposits and money market funds
|
|
|
146,292 |
|
|
|
103,185 |
|
| |
Commercial paper
|
|
|
18,260 |
|
|
|
39,294 |
|
| |
Corporate and municipal debt securities
|
|
|
— |
|
|
|
11,370 |
|
| |
U.S. government and agency securities
|
|
|
2,999 |
|
|
|
6,844 |
|
| |
|
|
|
|
|
|
| |
Total cash equivalents
|
|
|
167,551 |
|
|
|
160,693 |
|
| |
Total cash and cash equivalents
|
|
$ |
218,723 |
|
|
$ |
269,682 |
|
| |
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
Asset and mortgage-backed securities
|
|
$ |
292,898 |
|
|
$ |
345,625 |
|
|
U.S. government and agency securities
|
|
|
234,787 |
|
|
|
104,173 |
|
|
Corporate and municipal debt securities
|
|
|
68,177 |
|
|
|
90,730 |
|
|
Auction rate preferred stock
|
|
|
— |
|
|
|
3,150 |
|
|
Foreign debt securities
|
|
|
— |
|
|
|
329 |
|
| |
|
|
|
|
|
|
| |
|
Total short-term investments
|
|
$ |
595,862 |
|
|
$ |
544,007 |
|
| |
|
|
|
|
|
|
|
Long-term investments in equity securities
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$ |
28,372 |
|
|
$ |
22,912 |
|
|
Non-marketable equity securities
|
|
|
9,307 |
|
|
|
12,543 |
|
| |
|
|
|
|
|
|
| |
|
Total long-term investments in equity securities
|
|
$ |
37,679 |
|
|
$ |
35,455 |
|
| |
|
|
|
|
|
|
Contractual maturities of available-for-sale debt securities as
of December 31, 2004 were as follows (in thousands):
| |
|
|
|
|
|
Due within one year
|
|
$ |
77,090 |
|
|
Due in 1-5 years
|
|
|
330,152 |
|
|
Due in 5-10 years
|
|
|
45,175 |
|
|
Due after 10 years
|
|
|
143,445 |
|
| |
|
|
|
|
Total
|
|
$ |
595,862 |
|
| |
|
|
|
The maturities of asset and mortgage-backed securities were
allocated based on contractual principal maturities assuming no
prepayments.
Net realized gains on sales of available-for-sale debt
securities were $1 million, $10 million and
$8 million for the years ended December 31, 2004, 2003
and 2002, respectively.
80
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The Company realized pre-tax gains of $8 million related to
the following for the year ended December 31, 2004:
|
|
|
| |
• |
A $3 million pre-tax gain associated with marketable
available-for-sale equity securities of a certain technology
company that was acquired by another technology company in the
first quarter of 2004; and |
| |
| |
• |
A $5 million pre-tax gain related to the sales of certain
marketable available-for-sale equity securities in the second
quarter of 2004. |
The above pre-tax gains were recorded under interest income and
other, net in Consolidated Statements of Operations.
The following table includes the details of pre-tax losses
related to investments in equity securities that the Company has
recorded. Management believed that the declines in value were
other than temporary.
| |
|
|
|
|
|
|
|
|
|
| |
|
Non-Marketable | |
|
Marketable | |
| |
|
Equity | |
|
Equity | |
| |
|
Investments | |
|
Investments | |
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Pre-tax loss:
|
|
|
|
|
|
|
|
|
| |
Year ended December 31, 2004
|
|
$ |
3.3 |
|
|
$ |
4.1 |
|
| |
Year ended December 31, 2003
|
|
|
7.9 |
|
|
|
2.7 |
|
| |
Year ended December 31, 2002
|
|
|
15.5 |
|
|
|
6.0 |
|
|
Total carrying value of impaired investments as of
December 31, 2004
|
|
$ |
4.8 |
|
|
$ |
2.9 |
|
Investments in available-for-sale securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Adjusted | |
|
Gross Unrealized | |
|
Gross Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt securities
|
|
$ |
600,527 |
|
|
$ |
728 |
|
|
$ |
(5,393 |
) |
|
$ |
595,862 |
|
|
Long-term marketable equity securities
|
|
|
5,912 |
|
|
|
22,460 |
|
|
|
— |
|
|
|
28,372 |
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt securities
|
|
|
544,540 |
|
|
|
1,900 |
|
|
|
(2,433 |
) |
|
|
544,007 |
|
|
Long-term marketable equity securities
|
|
|
10,406 |
|
|
|
12,506 |
|
|
|
— |
|
|
|
22,912 |
|
The following table shows the gross unrealized losses and fair
values of the Company’s investments that have been in a
continuous unrealized loss position for less than and greater
than 12 months, aggregated by investment category as of
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 Months | |
|
Greater than 12 Months | |
| |
|
| |
|
| |
| |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
| |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Asset and mortgage-backed securities
|
|
$ |
107,680 |
|
|
$ |
1,177 |
|
|
$ |
38,287 |
|
|
|
1,192 |
|
|
U.S. government and agency securities
|
|
|
167,660 |
|
|
|
2,321 |
|
|
|
13,822 |
|
|
|
383 |
|
|
Corporate and municipal debt securities
|
|
|
52,029 |
|
|
|
320 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
327,369 |
|
|
$ |
3,818 |
|
|
$ |
52,109 |
|
|
$ |
1,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Debt Securities. The Company’s
investments in marketable debt securities primarily consist of
asset-backed, mortgage-backed, U.S. government,
U.S. agency, corporate and municipal debt securities.
81
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The unrealized losses on the Company’s investments in
marketable debt securities were primarily caused by rising
interest rates. The Company frequently monitors the credit
quality of its investments in marketable debt securities and, as
of December 31, 2004, there were no known material problems
with issuer credit quality. Since the unrealized losses were
primarily the result of changes in interest rates rather than
credit quality, the Company considered these unrealized losses
to be temporary as of December 31, 2004.
82
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Note 6 — Balance Sheet Detail
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Inventories:
|
|
|
|
|
|
|
|
|
| |
Raw materials
|
|
$ |
20,022 |
|
|
$ |
15,352 |
|
| |
Work-in-process
|
|
|
106,818 |
|
|
|
116,340 |
|
| |
Finished goods
|
|
|
92,060 |
|
|
|
66,825 |
|
| |
|
|
|
|
|
|
| |
|
$ |
218,900 |
|
|
$ |
198,517 |
|
| |
|
|
|
|
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
| |
Deferred tax assets
|
|
$ |
5,661 |
|
|
$ |
8,116 |
|
| |
Assets held for sale
|
|
|
11,034 |
|
|
|
29,883 |
|
| |
Current portion of assets and deposits
|
|
|
— |
|
|
|
57,805 |
|
| |
Prepaid expense and other current assets
|
|
|
43,042 |
|
|
|
50,843 |
|
| |
|
|
|
|
|
|
| |
|
$ |
59,737 |
|
|
$ |
146,647 |
|
| |
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
| |
Land
|
|
$ |
31,305 |
|
|
$ |
37,569 |
|
| |
Buildings and improvements
|
|
|
109,891 |
|
|
|
359,402 |
|
| |
Equipment
|
|
|
463,271 |
|
|
|
667,899 |
|
| |
Furniture and fixtures
|
|
|
30,697 |
|
|
|
30,567 |
|
| |
Leasehold improvements
|
|
|
30,608 |
|
|
|
34,226 |
|
| |
Construction in progress
|
|
|
10,622 |
|
|
|
26,903 |
|
| |
|
|
|
|
|
|
| |
|
|
676,394 |
|
|
|
1,156,566 |
|
| |
Accumulated depreciation and amortization
|
|
|
(364,478 |
) |
|
|
(675,077 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
311,916 |
|
|
$ |
481,489 |
|
| |
|
|
|
|
|
|
|
Depreciation for property and equipment totaling
$86 million, $149 million and $206 million was
included in the Company’s results of operations during
2004, 2003 and 2002, respectively |
|
Other assets:
|
|
|
|
|
|
|
|
|
| |
Deferred tax assets
|
|
$ |
5,044 |
|
|
$ |
7,484 |
|
| |
Software, net
|
|
|
22,959 |
|
|
|
21,755 |
|
| |
Investment in equity securities
|
|
|
37,679 |
|
|
|
35,455 |
|
| |
Debt issuance costs, net
|
|
|
11,901 |
|
|
|
17,123 |
|
| |
Other assets
|
|
|
37,628 |
|
|
|
46,663 |
|
| |
|
|
|
|
|
|
| |
|
$ |
115,211 |
|
|
$ |
128,480 |
|
| |
|
|
|
|
|
|
|
Software amortization totaling $12 million,
$25 million and $43 million was included in the
Company’s results of operations during 2004, 2003 and 2002,
respectively |
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
| |
Accrued expenses
|
|
$ |
87,094 |
|
|
$ |
105,870 |
|
| |
Warranty reserves
|
|
|
10,040 |
|
|
|
9,474 |
|
| |
Restructuring reserves
|
|
|
29,223 |
|
|
|
26,692 |
|
| |
Sales tax payable
|
|
|
11,118 |
|
|
|
6,532 |
|
| |
Interest payable
|
|
|
4,803 |
|
|
|
5,289 |
|
| |
|
|
|
|
|
|
| |
|
$ |
142,278 |
|
|
$ |
153,857 |
|
| |
|
|
|
|
|
|
|
Tax related liabilities and other:
|
|
|
|
|
|
|
|
|
| |
Other long-term tax-related liabilities
|
|
$ |
77,313 |
|
|
$ |
77,161 |
|
| |
Deferred gain on sale of equipment under operating lease
|
|
|
— |
|
|
|
56,601 |
|
| |
Liability for the fair value of residual value guarantees on
operating lease
|
|
|
— |
|
|
|
6,700 |
|
| |
Other long-term liabilities
|
|
|
257 |
|
|
|
634 |
|
| |
|
|
|
|
|
|
| |
|
$ |
77,570 |
|
|
$ |
141,096 |
|
| |
|
|
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
| |
Net unrealized gains on available-for-sale securities, net of
tax of $6,228 and $4,190
|
|
$ |
11,567 |
|
|
$ |
7,783 |
|
| |
Unrealized gain on cash-flow hedges, net of tax of $-and $698
|
|
|
— |
|
|
|
1,995 |
|
| |
Foreign currency translation adjustments
|
|
|
26,383 |
|
|
|
24,435 |
|
| |
|
|
|
|
|
|
| |
|
$ |
37,950 |
|
|
$ |
34,213 |
|
| |
|
|
|
|
|
|
The Company recorded, as a component of cost of revenues,
additional excess inventory and related charges of
$46 million for the year ended December 31, 2002. The
charges were due to underutilization
83
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
related to a temporary idling of the Company’s fabrication
facilities due to reduced demand and a sudden and significant
decrease in forecasted revenue. The charges were calculated in
accordance with the Company’s policy, which is primarily
based on inventory levels in excess of 12 months’
judged demand for each specific product.
An allocation of interest costs incurred on borrowings during a
period required to complete construction of the asset was
capitalized as part of the historical cost of acquiring certain
assets. No interest was capitalized during 2004 and 2003. Gross
capitalized interest included in property and equipment totaled
$29 million at December 31, 2003. Accumulated
amortization of capitalized interest was $22 million at
December 31, 2003. Capitalized interest, net of accumulated
amortization was written-off in the third quarter of 2004 as a
result of the impairment of the Gresham manufacturing facility
(see Note 3).
Other long-term tax-related liabilities includes
$37 million in income taxes payable as of December 31,
2004 and 2003.
Note 7 — Intangible Assets and Goodwill
Intangible assets by reportable segment are comprised of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Gross Carrying | |
|
Accumulated | |
|
Gross Carrying | |
|
Accumulated | |
| |
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
| |
|
| |
|
| |
|
| |
|
| |
|
Semiconductor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current technology
|
|
$ |
318,402 |
|
|
$ |
(239,973 |
) |
|
$ |
319,364 |
|
|
$ |
(195,837 |
) |
| |
Trademarks
|
|
|
29,685 |
|
|
|
(20,496 |
) |
|
|
29,684 |
|
|
|
(15,981 |
) |
| |
Customer base
|
|
|
8,788 |
|
|
|
(1,198 |
) |
|
|
— |
|
|
|
— |
|
| |
Non-compete agreements
|
|
|
849 |
|
|
|
(195 |
) |
|
|
— |
|
|
|
— |
|
| |
Existing purchase orders
|
|
|
200 |
|
|
|
(200 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subtotal
|
|
|
357,924 |
|
|
|
(262,062 |
) |
|
|
349,048 |
|
|
|
(211,818 |
) |
|
Storage Systems:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current technology
|
|
|
50,039 |
|
|
|
(41,424 |
) |
|
|
50,039 |
|
|
|
(33,802 |
) |
| |
Trademarks
|
|
|
3,750 |
|
|
|
(2,950 |
) |
|
|
3,750 |
|
|
|
(2,458 |
) |
| |
Customer base
|
|
|
5,010 |
|
|
|
(3,420 |
) |
|
|
5,010 |
|
|
|
(2,540 |
) |
| |
Supply agreement
|
|
|
7,247 |
|
|
|
(5,657 |
) |
|
|
7,247 |
|
|
|
(3,240 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Subtotal
|
|
|
66,046 |
|
|
|
(53,451 |
) |
|
|
66,046 |
|
|
|
(42,040 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
423,970 |
|
|
$ |
(315,513 |
) |
|
$ |
415,094 |
|
|
$ |
(253,858 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
84
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Amortization expense and the weighted average lives of
intangible assets are shown in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted | |
|
Year Ended December 31, | |
| |
|
Average Lives | |
|
| |
| |
|
(in months) | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
Current technology
|
|
|
79 |
|
|
$ |
65,153 |
|
|
$ |
67,742 |
|
|
$ |
70,713 |
|
|
Trademarks
|
|
|
83 |
|
|
|
5,007 |
|
|
|
5,334 |
|
|
|
6,248 |
|
|
Customer base
|
|
|
68 |
|
|
|
2,078 |
|
|
|
856 |
|
|
|
836 |
|
|
Supply agreement
|
|
|
36 |
|
|
|
2,417 |
|
|
|
2,420 |
|
|
|
820 |
|
|
Non-compete agreements
|
|
|
46 |
|
|
|
195 |
|
|
|
— |
|
|
|
— |
|
|
Existing purchase orders
|
|
|
9 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
78 |
|
|
$ |
75,050 |
|
|
$ |
76,352 |
|
|
$ |
78,617 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The estimated future amortization expense of intangible assets
as of December 31, 2004 is as follows (in millions):
| |
|
|
|
|
| Fiscal Year: |
|
Amount: | |
| |
|
| |
|
2005
|
|
$ |
63 |
|
|
2006
|
|
|
31 |
|
|
2007
|
|
|
7 |
|
|
2008
|
|
|
4 |
|
|
2009
|
|
|
3 |
|
| |
|
|
|
| |
|
$ |
108 |
|
| |
|
|
|
The changes in the carrying amount of goodwill for the years
ended December 31, 2004 and 2003 are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Semiconductor | |
|
Storage Systems | |
|
|
| |
|
Segment | |
|
Segment | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance as of December 31, 2002
|
|
$ |
887,990 |
|
|
$ |
80,474 |
|
|
$ |
968,464 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjustment to goodwill acquired in prior periods
|
|
|
2 |
|
|
|
17 |
|
|
|
19 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
$ |
887,992 |
|
|
$ |
80,491 |
|
|
$ |
968,483 |
|
| |
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
8,106 |
|
|
|
— |
|
|
|
8,106 |
|
|
Adjustment to goodwill acquired in a prior year for the
resolution of a pre-acquisition income tax contingency
|
|
|
(4,463 |
) |
|
|
— |
|
|
|
(4,463 |
) |
|
Adjustment to goodwill acquired in prior periods
|
|
|
— |
|
|
|
142 |
|
|
|
142 |
|
|
Purchase of minority interest
|
|
|
862 |
|
|
|
— |
|
|
|
862 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
892,497 |
|
|
$ |
80,633 |
|
|
$ |
973,130 |
|
| |
|
|
|
|
|
|
|
|
|
As a result of the decline in revenues in the semiconductor
industry, the corresponding decline in the Company’s
outlook as of the latter part of the third quarter of 2004 and
the conclusion that the Gresham manufacturing facility was
impaired (see Note 3), the Company reviewed goodwill by
reporting unit for impairment as of September 30, 2004,
which was updated as of December 31, 2004. The Company
concluded that goodwill was not impaired under the first step of
the test for impairment, as described in Note 1, as of
September 30, 2004 and December 31, 2004. The
Company’s next annual test for the impairment of goodwill
85
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
will be performed in the fourth fiscal quarter in 2005. The
annual impairment test performed as of December 31, 2003
indicated that goodwill was not impaired.
Note 8 — Derivative Instruments
The Company has foreign subsidiaries that operate and sell the
Company’s products in various global markets. As a result,
the Company is exposed to changes in foreign currency exchange
rates and interest rates. The Company utilizes various hedge
instruments, primarily forward contracts and currency option
contracts, to manage its exposure associated with firm
intercompany and third-party transactions and net asset and
liability positions denominated in non-functional currencies.
The Company enters into forward contracts that are designated as
foreign currency cash-flow hedges of forecasted payments in
Euros. Changes in the fair value of the forward contracts due to
changes in time value are excluded from the assessment of
effectiveness and are recognized in interest income and other,
net. There were no such hedges outstanding at December 31,
2004. As of December 31, 2003, the Company held forward
contracts designated as foreign currency cash flow hedges of
forecasted Euro payment transactions that were set to expire
over a twelve-month period. For the years ended
December 31, 2003 and 2004, the change in time value of
these forward contracts was not significant. There were no
unrealized gains or losses included in accumulated other
comprehensive income as of December 31, 2003 and 2004.
There was a $1 million hedge benefit reflected in the
income statement for the year ended December 31, 2003. The
hedge expense reflected in the income statement for the year
ended December 31, 2004 was not material. The Company did
not record any gains or losses due to hedge ineffectiveness for
the years ended December 31, 2003 and 2004.
The Company entered into purchased currency option contracts
that were designated as foreign currency cash-flow hedges of
third-party Yen revenue exposures. Changes in the fair value of
currency option contracts due to changes in time value were
excluded from the assessment of effectiveness and were
recognized in interest income and other, net. During the second
quarter of 2003, the Company terminated all outstanding
purchased currency options hedging previously forecasted Yen
revenues because the underlying revenue agreements were modified
to be denominated in U.S. dollars. At the time the options
were terminated, there were no unrealized gains or losses in
accumulated other comprehensive income. For the year ended
December 31, 2003, the change in option time value was
approximately $1 million. During the year ended
December 31, 2003, amounts reclassified to revenues from
other comprehensive income were not significant. The Company did
not record any gains or losses due to hedge ineffectiveness for
the year ended December 31, 2003. There were no option
contracts outstanding as of December 31, 2004 and 2003.
In October 2003, the Company entered into a forward contract to
protect the U.S. dollar value of a portion of the net
investment in the Company’s wholly-owned Japanese
subsidiary denominated in Yen. The derivative was designated as
and qualified as a net investment hedge and was recorded as an
asset or liability in the statement of financial position while
the forward contract was outstanding. The forward contract was
settled in December 2003, and the realized loss of approximately
$0.5 million has been recorded in accumulated other
comprehensive income until such time as the subsidiary has been
liquidated. The time value of the forward contract was excluded
from the assessment of hedge effectiveness.
Forward exchange contracts and options are also used to hedge
certain foreign currency-denominated assets or liabilities.
These derivatives do not qualify for SFAS No. 133
hedge accounting treatment. Accordingly, changes in the fair
value of these hedges are recorded immediately in earnings to
offset the changes in fair value of the assets or liabilities
being hedged. The related gains and losses included in interest
income and other, net were not significant.
86
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
With the objective of protecting cash flows and earnings of the
Company from the impact of fluctuations in interest rates, while
minimizing the cost of capital, the Company may enter into or
terminate interest rate swaps, such as the below mentioned
transactions.
The Company entered into interest rate swap transactions (the
“Swaps”) with several investment banks in June 2002.
The Swaps were entered into to convert the fixed rate interest
expense on the Company’s 4% and 4.25% Convertible
Subordinated Notes (“Convertible Notes”) to a floating
rate based on LIBOR (see Note 9). The Swaps qualified for
hedge accounting as fair value hedges, with changes in the fair
value of the interest rate risk on the Convertible Notes being
offset by changes in the fair values of the Swaps recorded as a
component of interest expense. Before the termination described
below, the difference between the changes in the fair values of
the derivative and the hedged risk resulted in a benefit to
interest expense of $1 million for the year ended
December 31, 2003.
In the second quarter of 2003, the Company terminated Swaps with
a notional amount of $740 million. The deferred gain of
$44 million from the termination of these Swaps was
included as a component of the Convertible Notes. Deferred gains
on terminated Swaps associated with Convertible Notes
repurchased or redeemed during 2004 and 2003 were written-off as
part of the net gain or loss on redemption of the Convertible
Notes. As of December 31, 2004, a deferred gain of
$10 million was included as a component of the Convertible
Notes and is being amortized as an adjustment to interest
expense using the effective-interest method over the remaining
term of the hedged Convertible Notes (see Note 9).
In the second quarter of 2003, the Company entered into an
interest rate swap transaction to effectively convert the
LIBOR-based floating rate interest payments on operating leases
for wafer fabrication equipment, with an initial notional amount
of $395 million, to a fixed interest rate (the “Lease
Swap”). The Lease Swap qualified to be accounted for as a
cash-flow hedge of the forecasted interest payments attributable
to the benchmark interest rate on the operating leases for the
wafer fabrication equipment through September 2006. An expense
of approximately $2 million was recorded to cost of
revenues as the lease payments were made in 2004. In August
2004, the Company entered into two new equipment operating
leases for the wafer fabrication equipment that was previously
on the above-mentioned leases. As a result of entering into the
new leases, the hedged forecasted interest payments were no
longer probable. Hedge accounting treatment was discontinued
prospectively and the balance in accumulated other comprehensive
income was immediately recorded as a gain of $3.8 million
in restructuring and other items in the statement of operations.
In September 2004, the Company terminated the Lease Swap.
Note 9 — Debt
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
December 31, | |
| |
|
|
|
Interest | |
|
Conversion | |
|
| |
| |
|
Maturity | |
|
Rate* | |
|
Price | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
(In thousands) | |
|
2003 Convertible Subordinated Notes
|
|
|
2010 |
|
|
|
4.00 |
% |
|
$ |
13.4200 |
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
|
2001 Convertible Subordinated Notes
|
|
|
2006 |
|
|
|
4.00 |
% |
|
$ |
26.3390 |
|
|
|
421,500 |
|
|
|
490,000 |
|
|
Deferred gain on terminated swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,346 |
|
|
|
25,416 |
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
781,975 |
|
|
|
865,983 |
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
|
|
(377 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long-term debt and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
781,846 |
|
|
$ |
865,606 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
|
|
| * |
The interest rate on a portion of the Convertible Subordinated
Notes was converted to floating rates through interest rate
swaps. Interest rate swaps with a notional amount of
$740 million were terminated in the second quarter of 2003
(see Note 8). The weighted average interest rate on the
Convertible Notes, after adjusting for the impact of the
interest rate swaps, for the years ended December 31, 2004
and 2003, was 4.00% and 3.30%, respectively. |
As of December 31, 2004, we have $422 million of
Convertible Subordinated Notes due in October 2006 (“2001
Convertible Notes”) and $350 million of Convertible
Subordinated Notes due in May 2010 (“2003 Convertible
Notes”). All of the Convertible Notes are subordinated to
all existing and future senior debt and are convertible at the
holder’s option, at any time prior to the maturity date of
the Convertible Notes, into shares of our common stock. The 2001
and 2003 Convertible Notes have conversion prices of
approximately $26.34 per share and $13.42 per share,
respectively. The 2001 Convertible Notes are redeemable at our
option, in whole or in part, on at least 30 days notice at
any time on or after the call date, which is two years before
the due date. We cannot elect to redeem the 2003 Convertible
Notes prior to maturity. Each holder of the 2001 and 2003
Convertible Notes has the right to cause us to repurchase all of
such holder’s Convertible Notes at 100% of their principal
amount plus accrued interest upon the occurrence of any
fundamental change to us, which includes a transaction or event
such as an exchange offer, liquidation, tender offer,
consolidation, merger or combination. Interest is payable
semiannually. The proceeds of the 2003 Convertible Notes were
used to repurchase $288 million of the 1999 and 2000
Convertible Notes during the second quarter of 2003. The Company
paid approximately $14 million and $11 million in debt
issuance costs related to the 2001 and 2003 Convertible Notes,
respectively, that are being amortized using the interest
method. As of December 31, 2004 and 2003, total debt
issuance costs, net are included in other long-term assets (see
Note 6).
Aggregate principal payments required on outstanding capital
lease and debt obligations are $0.1 million and
$421.5 million for the years ending December 31, 2005
and 2006, respectively, and $350 million in 2010.
The Company paid $33 million, $42 million and
$47 million in interest during 2004, 2003 and 2002,
respectively.
At December 31, 2004, the estimated fair values of the 2001
and 2003 Convertible Notes were $417 million and
$326 million, respectively.
Approximately $28 million of the proceeds from issuance of
the 2003 Convertible Notes were used to purchase call spread
options on LSI’s common stock (the “Call Spread
Options”). The Call Spread Options, including fees and
costs, have been accounted for as capital transactions in
accordance with EITF Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The Call Spread
Options cover approximately 26.1 million shares of Company
common stock, which is the number of shares that are initially
issuable upon conversion of the 2003 Convertible Notes in full.
The Call Spread Options are designed to mitigate dilution from
conversion of the 2003 Convertible Notes in the event that the
market price per share of the Company’s common stock upon
exercise of the Call Spread Options is greater than $13.42 and
is less than or equal to $23.875. The Call Spread Options may be
settled at the Company’s option in either net shares or in
cash and expire in 2010. Settlement of the Call Spread Options
in net shares on the expiration date would result in the Company
receiving a number of shares, not to exceed 26.1 million
shares, of our common stock with a value equal to the amount
otherwise receivable on cash settlement. Should there be an
early unwinding of the Call Spread Options, the amount of cash
or net shares potentially receivable by the Company will be
dependent upon then existing overall market conditions, and on
the Company’s stock price, the volatility of the
Company’s stock and the amount of time remaining on the
Call Spread Options.
During 2004, the Company repurchased approximately
$69 million of the 2001 Convertible Notes. During 2003, the
Company repurchased/redeemed $325 million and
$385 million of the 1999 and 2000 Convertible Notes,
respectively. During 2004, a net pre-tax gain of approximately
$2 million and during 2003,
88
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
a net pre-tax loss of approximately $4 million were
recognized in interest income and other, net, for the
repurchases/redemptions. The pre-tax gain or loss is net of the
write-off of debt issuance costs and a portion of the deferred
gain on the terminated Swaps (see Note 8).
Note 10 — Common Stock, Stock-Based
Compensation and Other Employee Compensation Plans
Stock option plans. The Company has stock-based
compensation plans to grant stock options or restricted stock
awards to officers, employees and consultants. Under these
plans, the Company may grant stock options with an exercise
price that is no less than the fair market value of the stock on
the date of grant. The term of each option is determined by the
Board of Directors and has generally been ten years. Options
granted on or after February 12, 2004 will generally have a
term of seven years. Options generally vest in annual increments
of 25% per year commencing one year from the date of grant.
Under the 2003 Equity Incentive Plan (“2003 Plan”),
the Company may also grant restricted stock awards. No
participant may be granted more than 0.5 million shares of
restricted stock in any year. The vesting requirements for the
restricted stock awards are determined by the Board of
Directors. As of December 31, 2004, the 2003 Plan, the 1999
Nonstatutory Stock Option Plan (“1999 Plan”) and the
1991 Equity Incentive Plan (“1991 Plan”) have
10 million, 18 million and 31 million common
shares available for future grants, respectively.
The 1995 Director Option Plan, as amended
(“1995 Director Plan”), provides for an initial
grant to new directors of options to
purchase 30,000 shares of common stock and subsequent
automatic grants of options to purchase 30,000 shares
of common stock each year thereafter. The initial grants vest in
annual increments of 25% per year, commencing one year from
the date of grant. Subsequent option grants become exercisable
in full six months after the grant date. The exercise price of
the options granted is equal to the fair market value of the
stock on the date of grant. As of December 31, 2004, there
are 1 million shares available for future grants under the
1995 Director Plan.
There are a total of 127 million shares of common stock
reserved for issuance upon exercise of options, including
options available for future grants, outstanding under all stock
option plans.
Stock option exchange program. On August 20,
2002, the Company filed with the Securities and Exchange
Commission an offer to exchange stock options outstanding under
the 1991 Plan and the 1999 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 under the 1999 Plan. Directors and executive officers of
the Company were not eligible to participate in this program.
The exchange offer expired on September 18, 2002, and the
Company accepted options to purchase an aggregate of
16,546,370 shares for exchange. On March 20, 2003, the
Company granted a new option that covered two shares of LSI
Logic common stock for every three shares covered by an option
that an employee had elected to exchange. The exercise price per
share of the new options was equal to the fair market value of
the Company’s common stock on the grant date. The Company
granted options to purchase 10,691,139 shares at an
exercise price of $5.06 per share. The exchange program did
not result in the recording of any compensation expense in the
statement of operations.
89
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
The following table summarizes the Company’s stock options
for each of the years ended December 31, 2004, 2003 and
2002 (share amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
| |
|
Number of | |
|
Price per | |
|
Number of | |
|
Price per | |
|
Number of | |
|
Price per | |
| |
|
Shares | |
|
Share | |
|
Shares | |
|
Share | |
|
Shares | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Options outstanding at January 1,
|
|
|
69,166 |
|
|
$ |
15.17 |
|
|
|
57,065 |
|
|
$ |
18.24 |
|
|
|
73,997 |
|
|
$ |
22.44 |
|
|
Options assumed in acquisitions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Options canceled
|
|
|
(7,993 |
) |
|
|
(14.01 |
) |
|
|
(7,282 |
) |
|
|
(16.39 |
) |
|
|
(23,751 |
) |
|
|
(30.57 |
) |
|
Options granted
|
|
|
7,450 |
|
|
|
7.39 |
|
|
|
20,191 |
|
|
|
6.56 |
|
|
|
8,425 |
|
|
|
14.21 |
|
|
Options exercised
|
|
|
(890 |
) |
|
|
(5.87 |
) |
|
|
(808 |
) |
|
|
(5.94 |
) |
|
|
(1,606 |
) |
|
|
(8.57 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
|
|
|
67,733 |
|
|
$ |
14.57 |
|
|
|
69,166 |
|
|
$ |
15.17 |
|
|
|
57,065 |
|
|
$ |
18.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
|
44,301 |
|
|
$ |
17.54 |
|
|
|
38,936 |
|
|
$ |
18.03 |
|
|
|
34,333 |
|
|
$ |
17.02 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2004, 2003 and 2002,
all options were granted at an exercise price equal to the
market value of the Company’s common stock at the date of
grant.
Significant option groups outstanding as of December 31,
2004 are as follows (share amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding | |
|
Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Remaining | |
|
Exercise | |
|
|
|
Exercise | |
| Options with Exercise |
|
Number | |
|
Contractual Life | |
|
Price per | |
|
Number of | |
|
Price per | |
| Price Ranging from: |
|
of Shares | |
|
(Years) | |
|
Share | |
|
Shares | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 0.06 to $ 5.00
|
|
|
3,520 |
|
|
|
6.67 |
|
|
$ |
4.47 |
|
|
|
331 |
|
|
$ |
3.64 |
|
|
$ 5.01 to $10.00
|
|
|
24,974 |
|
|
|
6.78 |
|
|
|
7.14 |
|
|
|
12,599 |
|
|
|
7.83 |
|
|
$10.01 to $15.00
|
|
|
13,853 |
|
|
|
4.72 |
|
|
|
12.18 |
|
|
|
9,499 |
|
|
|
12.64 |
|
|
$15.01 to $20.00
|
|
|
10,024 |
|
|
|
5.47 |
|
|
|
17.24 |
|
|
|
7,931 |
|
|
|
17.32 |
|
|
$20.01 to $25.00
|
|
|
7,758 |
|
|
|
5.97 |
|
|
|
22.11 |
|
|
|
6,337 |
|
|
|
22.08 |
|
|
$25.01 to $30.00
|
|
|
3,352 |
|
|
|
4.58 |
|
|
|
29.19 |
|
|
|
3,352 |
|
|
|
29.19 |
|
|
$30.01 to $72.25
|
|
|
4,252 |
|
|
|
5.17 |
|
|
|
42.75 |
|
|
|
4,252 |
|
|
|
42.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
67,733 |
|
|
|
5.86 |
|
|
$ |
14.57 |
|
|
|
44,301 |
|
|
$ |
17.54 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards of LSI common stock granted during the
years ended December 31, 2004, 2003 and 2002 are as follows
(share amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 |
|
2002 | |
| |
|
| |
|
|
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average |
|
|
|
Average | |
| |
|
Number of | |
|
Grant Date | |
|
Number of | |
|
Grant Date |
|
Number of | |
|
Grant Date | |
| |
|
Shares | |
|
Fair Value | |
|
Shares | |
|
Fair Value |
|
Shares | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
Restricted stock awards granted
|
|
|
892 |
|
|
$ |
6.75 |
|
|
|
— |
|
|
$ |
— |
|
|
|
179 |
|
|
$ |
6.74 |
|
Forfeitures of stock options and restricted stock awards
prior to vesting. During 2004, forfeitures were recorded
related to certain stock options assumed in connection with the
Datapath acquisition that occurred in July 2000 and certain
restricted shares issued in connection with the acquisition of
Velio in April 2004, the acquisition of Accerant in May 2004 and
restricted shares issued to employees of the Company during 2004.
90
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
During 2003, forfeitures were recorded related to certain
restricted shares issued in connection with the AMI acquisition
that occurred in August 2001.
Stock purchase plans. The Company has Employee
Stock Purchase Plans under which rights are granted to all
employees to purchase shares of common stock at 85% of the
lesser of the fair market value of such shares at the beginning
of a 12-month offering period or the end of each six-month
purchase period within such an offering period. The maximum
number of shares that can be purchased in a single purchase
period is 1,000 shares per employee. Sales under the
Employee Stock Purchase Plans in 2004, 2003 and 2002 were
approximately 5.0 million, 5.6 million and
4.8 million shares of common stock at an average price of
$4.60, $4.85 and $7.67 per share, respectively. In May
2004, the stockholders approved an increase in the number of
shares of common stock reserved for issuance under the
Company’s Employee Stock Purchase Plan by 10 million
shares. There were approximately 16 million shares of
common stock reserved for issuance under the Employee Stock
Purchase Plan as of December 31, 2004. The Employee Stock
Purchase Plan for employees in the United States (“US
ESPP”) includes an annual replenishment calculated at 1.15%
of the Company’s common stock issued and outstanding at the
fiscal year end less the number of shares available for future
grants under the US ESPP. No shares have been added to the US
ESPP from the annual replenishment since January 2001.
Stock repurchase program. On July 28, 2000,
the Company’s Board of Directors authorized a stock
repurchase program in which up to 5 million shares of the
Company’s common stock were authorized to be repurchased in
the open market from time to time. There is no expiration date
for the program. There were no stock repurchases in 2004, 2003
or 2002. As of December 31, 2004, there are
3.5 million shares available for repurchase under this plan.
Stock purchase rights. In November 1988, the
Company implemented a plan to protect stockholders’ rights
in the event of a proposed takeover of the Company. The plan was
amended and restated in November 1998. Under the plan, each
share of the Company’s outstanding common stock carries one
Preferred Share Purchase Right. Each Preferred Share Purchase
Right entitles the holder, under certain circumstances, to
purchase one-thousandth of a share of Preferred Stock of the
Company or its acquirer at a discounted price. The Preferred
Share Purchase Rights are redeemable by the Company and will
expire in 2008.
LSI 401(k) Defined Contribution Plan. Eligible
employees in the U.S. may participate in the LSI Logic
Corporation 401(k) Plan (“LSI 401(k) Plan”). Beginning
in April 2002, the Company provides a base matching contribution
to employees of 100% of the first 2% of employee contributions.
When the Company achieves operating profitability during a
quarter, as defined by the Company, of 1% or greater of
revenues, an additional matching contribution of 50% of the next
3% of an employee’s contribution is made during the
following quarter. Prior to April 2002, the Company provided a
matching contribution of 150% of the first 2% of employee
contributions plus 50% of the next 3% of an employee’s
contribution. Company contributions to the LSI 401(k) Plan were
$12 million, $10 million and $11 million during
2004, 2003 and 2002, respectively.
91
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Note 11 — Income Taxes
The provision for taxes consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
3,815 |
|
|
$ |
8,679 |
|
|
$ |
(83,885 |
) |
| |
State
|
|
|
615 |
|
|
|
600 |
|
|
|
— |
|
| |
Foreign
|
|
|
14,689 |
|
|
|
15,056 |
|
|
|
24,250 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
19,119 |
|
|
|
24,335 |
|
|
|
(59,635 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
— |
|
|
|
— |
|
|
|
36,775 |
|
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
8,006 |
|
| |
Foreign
|
|
|
4,881 |
|
|
|
(335 |
) |
|
|
16,604 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
4,881 |
|
|
|
(335 |
) |
|
|
61,385 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
24,000 |
|
|
$ |
24,000 |
|
|
$ |
1,750 |
|
| |
|
|
|
|
|
|
|
|
|
The domestic and foreign components of loss before income taxes
and minority interest were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Domestic
|
|
$ |
(392,070 |
) |
|
$ |
(42,382 |
) |
|
$ |
(69,078 |
) |
|
Foreign
|
|
|
(47,429 |
) |
|
|
(242,004 |
) |
|
|
(221,326 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest
|
|
$ |
(439,499 |
) |
|
$ |
(284,386 |
) |
|
$ |
(290,404 |
) |
| |
|
|
|
|
|
|
|
|
|
92
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Significant components of the Company’s deferred tax assets
and liabilities as of December 31, 2004 and 2003 were as
follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
35,633 |
|
|
$ |
23,244 |
|
| |
Tax credit carryovers
|
|
|
232,013 |
|
|
|
203,027 |
|
| |
Depreciation and amortization
|
|
|
116,192 |
|
|
|
— |
|
| |
Future deductions for purchased intangible assets
|
|
|
85,043 |
|
|
|
81,334 |
|
| |
Future deductions for reserves and other
|
|
|
51,163 |
|
|
|
77,174 |
|
| |
Future deductions for inventory reserves
|
|
|
29,894 |
|
|
|
26,265 |
|
| |
|
|
|
|
|
|
| |
Total deferred tax assets
|
|
|
549,938 |
|
|
|
411,044 |
|
| |
Valuation allowance
|
|
|
(539,233 |
) |
|
|
(366,197 |
) |
| |
|
|
|
|
|
|
| |
Net deferred tax assets
|
|
|
10,705 |
|
|
|
44,847 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
— |
|
|
|
(29,247 |
) |
| |
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$ |
10,705 |
|
|
$ |
15,600 |
|
| |
|
|
|
|
|
|
In accordance with SFAS No. 109, “Accounting for
Income Taxes,” current and long-term net deferred taxes
have been netted to the extent they are in the same tax
jurisdiction. Valuation allowances reduce the deferred tax
assets to the amount that, based upon all available evidence, is
more likely than not to be realized. The deferred tax
assets’ valuation allowance is attributed to
U.S. federal, state and certain foreign deferred tax assets
primarily consisting of reserves, other one-time charges,
purchased intangible assets, tax credit carryovers and net
operating loss carryovers that could not be benefited under
existing carry-back rules. During 2004, both the deferred tax
assets and the valuation allowance of the Company increased
approximately $12 million due to carryforward income tax
attributes from acquisitions. Approximately $95 million of
the valuation allowance at December 31, 2004 relates to tax
benefits of stock option deductions, which will be credited to
equity if and when realized.
At December 31, 2004, the Company had federal, state and
foreign net operating loss carryovers of approximately
$72 million, $142 million and $27 million,
respectively. The federal and state net operating losses will
expire beginning in 2004 through 2023. The foreign net operating
losses will carry forward indefinitely. Approximately
$48 million of the federal net operating loss carryover and
$45 million of the state net operating loss carryover
relate to recent acquisitions and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended,
Section 382. As of December 31, 2004, the Company had
tax credits of approximately $220 million, which will
expire beginning in 2005.
93
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Differences between the Company’s effective tax rate and
the federal statutory rate were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
2003 | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
|
|
2002 | |
| |
|
|
|
| |
| |
|
) | |
| |
|
(In thousands | |
|
Federal statutory rate
|
|
$ |
(153,825 |
) |
|
|
(35 |
)% |
|
$ |
(99,535 |
) |
|
|
(35 |
)% |
|
$ |
(101,642 |
) |
|
|
(35 |
)% |
|
State taxes, net of federal benefit
|
|
|
400 |
|
|
|
— |
|
|
|
390 |
|
|
|
— |
|
|
|
8,006 |
|
|
|
3 |
% |
|
Net operating loss and future deductions not currently benefited
|
|
|
122,423 |
|
|
|
28 |
% |
|
|
19,590 |
|
|
|
7 |
% |
|
|
46,526 |
|
|
|
16 |
% |
|
Difference between U.S. and foreign tax rates
|
|
|
35,148 |
|
|
|
8 |
% |
|
|
79,820 |
|
|
|
28 |
% |
|
|
74,858 |
|
|
|
26 |
% |
|
Nondeductible expenses
|
|
|
10,054 |
|
|
|
2 |
% |
|
|
7,055 |
|
|
|
3 |
% |
|
|
33,733 |
|
|
|
12 |
% |
|
Foreign earnings taxed in the U.S.
|
|
|
6,191 |
|
|
|
1 |
% |
|
|
59,539 |
|
|
|
21 |
% |
|
|
— |
|
|
|
— |
|
|
Benefit of net operating losses and deferred tax assets not
previously recognized
|
|
|
(854 |
) |
|
|
— |
|
|
|
(5,378 |
) |
|
|
(2 |
)% |
|
|
— |
|
|
|
— |
|
|
Foreign tax credits
|
|
|
— |
|
|
|
— |
|
|
|
(27,469 |
) |
|
|
(10 |
)% |
|
|
— |
|
|
|
— |
|
|
Research and development tax credit
|
|
|
— |
|
|
|
— |
|
|
|
(15,905 |
) |
|
|
(6 |
)% |
|
|
— |
|
|
|
— |
|
|
Alternative minimum tax
|
|
|
— |
|
|
|
— |
|
|
|
8,679 |
|
|
|
3 |
% |
|
|
— |
|
|
|
— |
|
|
Release of income taxes previously accrued
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(61,386 |
) |
|
|
(21 |
)% |
|
Other
|
|
|
4,463 |
|
|
|
1 |
% |
|
|
(2,786 |
) |
|
|
(1 |
)% |
|
|
1,655 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$ |
24,000 |
|
|
|
5 |
% |
|
$ |
24,000 |
|
|
|
8 |
% |
|
$ |
1,750 |
|
|
|
1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid/received (refunds) of $1 million,
($2 million) and $16 million for income taxes in 2004,
2003 and 2002, respectively.
In 2004, the Inland Revenue Department of Hong Kong began an
income tax audit of certain foreign subsidiaries of the Company
for the years 1996 through 2000.
In 2003, the Internal Revenue Service (“IRS”) began an
income tax audit of the Company’s 2001 federal income tax
return. On February 16, 2005, the Company received
ratification from the Internal Revenues Services that its audit
of the 2001 federal income tax return was closed as of that
date. The finalization of the audit had no impact to the
Company’s Consolidated Financial Statements.
In December 2002, the IRS concluded its audit of the
Company’s federal income tax returns for the fiscal years
1995 through 1996. As part of the final closing agreement, the
IRS and the Company agreed to expand the scope of the audit for
the years 1995 and 1996 to all fiscal years up to and including
2000. All adjustments for the fiscal years up to and including
2000 are final and have been reflected in the Company’s
income tax expense for 2002. Upon conclusion of the audit, the
Company reassessed its reserve requirements and consequently
reversed approximately $61 million of previously accrued
income taxes.
Undistributed earnings of the Company’s foreign
subsidiaries aggregate approximately $6 million at
December 31, 2004, and are indefinitely reinvested in
foreign operations or will be remitted substantially free of
additional tax. No material provision has been made for taxes
that might be payable upon remittance of such earnings, nor is
it practicable to determine the amount of this liability.
94
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Note 12 — Commitments and Contingencies
On March 28, 2003, the Company entered into two lease and
security agreements, each with Bank of America, National
Association (“BANA”), acting as the Lessor, and Wells
Fargo Bank Northwest, as the Agent, for a total of
$395 million for certain wafer fabrication equipment (the
“Equipment”). The leases qualified for operating lease
accounting treatment. Each lease had a term of 3.5 years
with no option for renewal. The first lease was for
$235 million and was for equipment that was previously on
lease immediately prior to closing this transaction. In October
2003, BANA, with the Company’s approval, assigned its
rights as Lessor on the first lease to Bank of the West. The
second lease was for $160 million and was for Equipment
that was sold to BANA and then immediately leased back in a
transaction commonly referred to as a sale-leaseback. The
Equipment sold had a book value of approximately
$103 million. The resulting $56 million gain on the
sale of the equipment was to be deferred until the end of the
lease term and was recorded as a non-current liability until
immediately prior to the lease termination and buyout on
November 29, 2004, as discussed further below.
On August 6, 2004, the Company entered into two lease and
security agreements, each with Wells Fargo Bank Northwest,
acting as the Agent. One lease for $134 million was with
Bank of the West acting as the Lessor, and the second lease for
$201 million was with BTM Capital Corporation acting as the
Lessor. The leases were for the Equipment that was previously on
the above-mentioned lease immediately prior to closing this
transaction. The new leases qualified for operating lease
accounting treatment. Each lease had a term of 3 years. The
Company was able to, at the end of the lease term, return or
purchase, at a pre-determined amount, all of the Equipment.
On October 27, 2004, the Company notified the required
parties of its intention to exercise its early buyout right to
purchase all of the Equipment under the two lease and security
agreements. On November 29, 2004, the Company purchased the
equipment on the leases for $332 million and related
collateral of $311 million was returned to the Company.
Termination fees under the lease agreements were not
significant. The Company recorded an impairment charge of
approximately $178 million in restructuring of operations
and other items during the fourth quarter of 2004 in connection
with the impairment of the Gresham manufacturing facility and
the purchase of the equipment on the leases. The fourth quarter
impairment charge is net of the reversal of the deferred gain of
$56 million as discussed above, lease termination fees and
the write-off of capitalized lease fees and deferred rent. See
Note 3 of the Notes for a more detailed discussion of the
impairment charges taken in connection with the Company’s
Gresham manufacturing facility.
The Company leases the majority of its facilities, certain
non-manufacturing equipment and software under non-cancelable
operating leases, which expire through 2014. The facilities
lease agreements typically provide for base rental rates that
are increased at various times during the terms of the lease and
for renewal options at the fair market rental value. Future
minimum payments under the operating lease agreements for the
above-mentioned facilities, equipment and software are
$57 million, $55 million, $26 million,
$21 million, $19 million and $34 million for the
years ending December 31, 2005, 2006, 2007, 2008, 2009 and
thereafter, respectively.
Rental expense under all operating leases was $90 million,
$121 million and $125 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
The Company is a party to a variety of agreements pursuant to
which it may be obligated to indemnify others with respect to
certain matters. Typically, these obligations arise in
connection with licenses and other agreements, including those
for the sale of assets, under which the Company customarily
agrees to hold another party harmless against losses arising
from a breach of warranties, representations or covenants related
95
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
to such matters as title to assets sold, validity of certain
intellectual property rights, non-infringement of third-party
rights, and certain income tax-related matters. In each of these
circumstances, payment by the Company is typically subject to
the other party making a claim and their cooperation with the
Company pursuant to the procedures specified in the particular
agreement. These procedures usually allow the Company to
challenge the claims or, in case of an alleged breach of an
intellectual property representation or covenant, to control the
defense and settlement of any third-party claims. Further, the
Company’s obligations under these agreements are usually
limited in terms of the actions that may be requested of the
Company (typically to replace or correct the products or
terminate the agreement with a refund to the other party),
duration and/or dollar amounts. In some instances, the Company
may have recourse against third parties and/or insurance
coverage with respect to the payments made by the Company.
Product warranties.
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at the beginning of the period
|
|
$ |
9,474 |
|
|
$ |
6,328 |
|
|
Accruals for warranties issued during the period
|
|
|
10,955 |
|
|
|
9,399 |
|
|
Accruals related to pre-existing warranties (including changes
in estimates)
|
|
|
(463 |
) |
|
|
3,802 |
|
|
Settlements made during the period (in cash or in kind)
|
|
|
(9,926 |
) |
|
|
(10,055 |
) |
| |
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$ |
10,040 |
|
|
$ |
9,474 |
|
| |
|
|
|
|
|
|
Standby letters of credit. At December 31, 2004 and
2003, the Company had outstanding standby letters of credit of
$5 million and $77 million, respectively. These
instruments are off-balance sheet commitments to extend
financial guarantees for leases and certain self-insured risks,
import/export taxes as well as performance under contracts, and
generally have one-year terms. The fair value of the letters of
credit approximates the contract amount.
Purchase commitments. The Company maintains certain
purchase commitments primarily for raw materials with suppliers
and for some non-production items. Purchase commitments for
inventory materials are generally restricted to a forecasted
time-horizon as mutually agreed upon between the parties. This
forecasted time-horizon can vary among different suppliers. As
of December 31, 2004, total purchase commitments were
$293 million, which are due through 2007.
In February 1999, a lawsuit alleging patent infringement was
filed in the United States District Court for the District of
Arizona by the Lemelson Medical, Education & Research
Foundation, Limited Partnership (“Lemelson”) against
88 electronics industry companies, including us. The case number
is CIV990377PHXRGS. The patents involved in this lawsuit are
alleged to relate to semiconductor manufacturing and computer
imaging, including the use of bar coding for automatic
identification of articles. The plaintiff has sought a judgment
of infringement, an injunction, treble damages, attorneys’
fees and further relief as the court may provide. In September
1999, the Company filed an answer denying infringement and
raising affirmative defenses. In addition, the Company asserted
a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelson’s patents. A
claim construction hearing was held and completed in December
2004; a ruling on the claim construction is pending. No trial
date has been set.
96
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
While the Company can give no assurances regarding the final
outcome of this lawsuit, the Company believes the allegations
are without merit and is defending the actions vigorously.
On May 4, 2001, Ning “Frank” Hui caused a lawsuit
to be filed against C-Cube Microsystems Inc. in the Superior
Court of California for the County of Santa Clara. Hui
caused the lawsuit to be filed on his behalf and on behalf of
all others similarly situated, approximately 600 employees of
C-Cube Microsystems who were employed by C-Cube Microsystems in
May 2000 at the time of the acquisition of certain C-Cube
Microsystems’ assets by Harmonic, Inc. Subsequent to the
filing of the lawsuit, the Superior Court granted Hui’s
motion for class certification. In the Complaint, Hui alleges
that C-Cube Microsystems’ management improperly reduced the
conversion factor for unvested employee stock options when such
options were converted at the time of the Harmonic transaction.
The Company, without admitting liability, has tentatively
entered into a settlement agreement with Hui, which is
contingent on a number of factors, including approval by the
Superior Court. Although the terms of the agreement are
confidential, if confirmed by the Superior Court and finalized
by the parties, the contemplated agreement will not have a
material adverse effect on the consolidated results of
operations or financial condition of the Company.
On June 14, 2002, Plasma Physics Corporation (“Plasma
Physics”) filed suit against the Company in the United
States District Court for the Eastern District of New York,
alleging that the Company is willfully and deliberately
infringing two U.S. patents. LSI was served with the
lawsuit in December of 2002. The case is number CV 02-3462 (LDW)
(WDW). The two Plasma Physics patents at issue are numbered
5,470,784 and 6,245,648. No specific Company products were
identified in the complaint. The plaintiff sought a judgment of
infringement, an injunction, treble damages, attorneys’
fees and further relief as the court may provide. Similar
lawsuits were also filed at the same time against several other
corporations. In January of 2003, the Company answered the
complaint denying infringement and asserting affirmative
defenses. In addition, the Company asserted counterclaims
seeking declaratory judgments of patent non-infringement, patent
invalidity, and that the patents are unenforceable. In June of
2004, the parties agreed to submit to the Court a Voluntary
Notice of Dismissal with Prejudice. Although the terms of the
agreement are confidential, the agreement did not have a
material adverse effect on the consolidated results of
operations or financial condition.
The Company is a party to other litigation matters and claims
that are normal in the course of its operations. While the
results of such litigation and claims cannot be predicted with
certainty, the Company aggressively defends such legal matters
and does not believe, based on currently available facts and
circumstances, that the final outcome of such matters will have
a material adverse effect on the Company’s consolidated
results of operations and financial condition.
Note 13 — Separation of Engenio Information
Technologies, Inc.
In November 2003, the Company announced its intention to
separate its wholly-owned subsidiary, Engenio Information
Technologies, Inc. (“Engenio” or “Storage Systems
segment”), from the Company and create an independent
storage systems company. The separation of Engenio from the
Company, including the transfer of related assets, liabilities
and intellectual property rights, was substantially completed in
December 2003. The Company has entered into agreements to
address various arrangements between Storage Systems and the
Company as discussed below. The major separation agreements are
outlined below.
On July 29, 2004, LSI announced jointly with Engenio the
postponement of the initial public offering of its common stock
due to then current market conditions. During the year ended
December 31, 2004, the Company recorded expenses of
$3.5 million for fees related to the initial public
offering in selling, general and administrative expenses in the
statement of operations. These fees include professional
services that were directly and solely related to the postponed
initial public offering of Engenio’s common stock.
97
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Master Separation Agreement. The master separation
agreement contains the framework with respect to Engenio’s
separation from the Company and provides for the execution of
various ancillary agreements summarized herein that further
specify the terms of the separation.
General Assignment and Assumption Agreement. The
general assignment and assumption agreement governs the transfer
of assets and assumption of liabilities relating to
Engenio’s business, to the extent that the other separation
ancillary agreements do not provide for the specific transfer of
those assets or the assumption of those liabilities. The
agreement also describes when and how these transfers and
assumptions will occur.
Intellectual Property Agreement. The intellectual
property agreement provides mechanisms by which, the technology
and intellectual property rights that relate only to
Engenio’s business (but to which the Company has legal
title or that are licensed by the Company) reside with Engenio.
This technology and intellectual property includes software and
other technology, the copyrights on that software and
technology, the applications, trademarks and domain names. The
intellectual property agreement provides that, where legal title
to technology and intellectual property allocated to Engenio is
owned by the Company, the Company will transfer and assign to
Engenio the legal title in that technology and intellectual
property.
In addition to the allocations of technology and intellectual
property, pursuant to the intellectual property agreement, the
Company grants Engenio non-exclusive licenses under patents and
other intellectual property rights included in Engenio’s
products or used in Engenio’s business. The Company also
grants Engenio a right to use, for a limited time, specified
Company trademarks related to or used to identify Engenio’s
business or products but not owned by Engenio. Engenio grants
the Company a non-exclusive license, under Engenio’s patent
and other intellectual property rights, to operate and conduct
the Company’s retained businesses.
Employee Matters Agreement. Engenio has entered
into an employee matters agreement with the Company to allocate
assets, liabilities and responsibilities relating to
Engenio’s current and former U.S. employees as well as
certain designated non-U.S. employees assigned to
Engenio’s business and their participation in the employee
benefits plans that the Company currently sponsors and maintains.
Engenio’s eligible employees generally will remain able to
participate in the Company’s benefit plans for a period of
time. Engenio intends to have its own benefit plans established
by the time its employees no longer are eligible to participate
in the Company’s benefit plans. Once Engenio’s own
benefit plans are established, Engenio will have the ability to
modify or terminate each plan in accordance with the terms of
those plans and its policies.
Indemnification and Insurance Matters Agreement.
This agreement provides that, effective as of the separation
date, Engenio and the Company will each release the other from
any liabilities arising from events occurring on or before the
separation date. The agreement also contains provisions
governing indemnification. In general, Engenio and the Company
will each indemnify the other for all liabilities arising from
their respective businesses, liabilities, contracts or breaches
of the separation agreement. In addition, Engenio has agreed to
indemnify the Company with respect to any liability arising from
any untrue statement of material fact or an omission of a
material fact in the prospectus relating to Engenio’s
proposed initial public offering. The agreement also contains
cross-indemnification provisions regarding liabilities resulting
from environmental conditions.
Tax Sharing Agreement. The Tax Sharing Agreement
sets forth the principal arrangements between the Company and
Engenio regarding the filing of tax returns, the payment of
taxes and the conduct of tax audits or disputes. The Tax Sharing
Agreement provides that Engenio’s stand-alone tax liability
equals its taxable income multiplied by the highest corporate
tax rate in effect for the year, modified by taking into account
its losses and loss carryovers from prior years and, to the
extent actually used, its credits. Engenio is obligated to pay
the Company the amount of its stand-alone tax liability to the
extent Engenio is included in any consolidated, combined or
unitary tax return with the Company.
98
LSI Logic Corporation
Notes to Consolidated Financial
Statements — (Continued)
Under the Tax Sharing Agreement, the Company is required to
prepare and file all consolidated, combined or unitary tax
returns of the Company and Engenio through the date that Engenio
ceases to be a member of the Company’s consolidated or
combined group, including the final consolidated federal income
tax return. The Company has the right to review and consent to
the federal and state income tax returns filed for the first tax
year after Engenio ceases to be a member of the Company’s
consolidated group, which may not be withheld unreasonably. In
addition, the Company has sole and complete authority to control
and resolve all tax audits and other disputes relating to any
consolidated, combined or unitary returns filed by the Company.
However, the Company may not enter into any dispute settlement
that would materially increase Engenio’s liability under
the Tax Sharing Agreement without Engenio’s consent, which
cannot be withheld unreasonably.
Transition Services Agreement. The Transition
Services Agreement governs the provisions by the Company to
Engenio of services such as finance, accounting and treasury,
human resources, sales support, legal matters and information
technology.
Real Estate Matters Agreement. The Real Estate
Matters Agreement describes the manner in which the Company will
transfer to or share with Engenio various properties leased and
owned by the Company. The agreement provides that all reasonable
costs required to effect the transfers, including landlord
consent fees and landlord attorneys’ fees, will be paid by
the Company.
Investor Rights Agreement. The Investor Rights
Agreement provides for specified registration and other rights
relating to the Company’s ownership of Engenio’s
shares of Class B common stock.
Equity Incentive Plan. Engenio’s Board of
Directors adopted the 2004 Equity Incentive Plan in February
2004. The Equity Incentive Plan Provides for the grant of the
following types of incentive awards: (1) stock options;
(2) stock appreciation rights; (3) restricted stock;
(4) performance units; and (5) performance shares. The
Compensation Committee of Engenio’s Board of Directors
administers the plan. As of December 31, 2004, there are
4.5 million shares of Engenio’s common stock reserved
for grant under the 2004 Equity Incentive Plan.
99
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of LSI Logic Corporation:
We have completed an integrated audit of LSI Logic
Corporation’s 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1), present fairly, in
all material respects, the financial position of LSI Logic
Corporation and its subsidiaries at December 31, 2004 and
2003, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) present fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
“Management’s Report on Internal Control Over
Financial Reporting,” appearing in Item 9A on
page 102, that the Company maintained effective internal
control over financial reporting as of December 31, 2004
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organization of the Treadway Commission (“COSO”), is
fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial
100
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
San Jose, California
March 14, 2005
101
Supplementary Financial Data
Interim Financial Information (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
452,357 |
|
|
$ |
447,897 |
|
|
$ |
380,217 |
|
|
$ |
419,693 |
|
|
Gross profit
|
|
|
201,432 |
|
|
|
208,816 |
|
|
|
151,799 |
|
|
|
173,561 |
|
|
Net income/(loss)
|
|
|
9,085 |
|
|
|
7,242 |
|
|
|
(282,432 |
) |
|
|
(197,426 |
) |
|
Basic income/(loss) per share:
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
(0.73 |
) |
|
$ |
(0.51 |
) |
|
Diluted income/(loss) per share:
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
(0.73 |
) |
|
$ |
(0.51 |
) |
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
372,785 |
|
|
$ |
407,213 |
|
|
$ |
450,227 |
|
|
$ |
462,845 |
|
|
Gross profit
|
|
|
124,717 |
|
|
|
168,744 |
|
|
|
184,984 |
|
|
|
198,760 |
|
|
Net (loss)/income
|
|
|
(122,425 |
) |
|
|
(162,084 |
) |
|
|
(31,652 |
) |
|
|
7,614 |
|
|
Basic (loss)/income per share:
|
|
$ |
(0.33 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.02 |
|
|
Diluted (loss)/income per share:
|
|
$ |
(0.33 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.02 |
|
During the first, second, third and fourth quarters of 2004, the
Company recorded (benefit)/charges for restructuring of
operations and other items of approximately $(1) million,
$3 million, $229 million and $192 million,
respectively. See Note 3 of the Notes.
During the first, second, third and fourth quarters of 2003, the
Company recorded charges/(benefit) for restructuring of
operations and other items of approximately $36 million,
$125 million, $24 million and $(4) million,
respectively. See Note 3 of the Notes.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
| Item 9A. |
Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
The Company maintains disclosure controls and procedures to
ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of
1934, as amended (“Exchange Act”) is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Our management evaluated, with the participation of our chief
executive officer and our chief financial officer, the
effectiveness of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the
Exchange Act. Based on this evaluation, our chief executive
officer and our chief financial officer have concluded that our
disclosure controls and procedures were effective as of
December 31, 2004.
Management’s Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Rule 13a-15(f) promulgated under the Exchange Act.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
102
Our management evaluated the effectiveness of our internal
control over financial reporting using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated
Framework. Based on our evaluation, our management concluded
that our internal control over financial reporting was effective
as of December 31, 2004.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included on
page 100 herein.
Changes in Internal Control over Financial Reporting.
There was no change in our internal control over financial
reporting that occurred during the fourth quarter of 2004 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
| Item 9B. |
Other Information |
None.
PART III
Certain information required by Part III is omitted from
this Report in that the Company will file a definitive proxy
statement within 120 days after the end of its fiscal year
pursuant to Regulation 14A (the “Proxy
Statement”) for its Annual Meeting of Stockholders to be
held May 12, 2005, and certain of the information to be
included therein is incorporated by reference herein.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information regarding the Company’s executive officers
required by this Item is incorporated by reference from the
section entitled “Executive Officers of the Company”
in Part I of this Form 10-K.
The information regarding the Company’s directors is
incorporated by reference from “Election of Directors”
in the Company’s Proxy Statement.
The information concerning Section 16(a) reporting is
incorporated by reference from “Section 16(a)
Beneficial Ownership Reporting Compliance” in the
Company’s Proxy Statement.
The information regarding the identification of Audit Committee
members and the Audit Committee Financial Expert required by
this Item is incorporated by reference from the section entitled
“Board Meetings and Committees” in the Company’s
Proxy Statement.
The Company has adopted a Code of Ethics for principal executive
and senior financial officers. A copy of this Code of Ethics is
located on the Company’s website at
www.lsilogic.com. The Company also intends to post any
waivers of or amendments to its Code of Ethics on its website.
|
|
| Item 11. |
Executive Compensation |
The information required by this Item is incorporated by
reference from “Executive Compensation” in the
Company’s Proxy Statement.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The information regarding equity compensation plans required by
this Item is incorporated by reference from “Equity
Compensation Plan Information” in Part II, Item 5
of this Form 10-K.
The information regarding stock ownership by principal
stockholders and management required by this Item is
incorporated by reference from “Security Ownership” in
the Company’s Proxy Statement.
103
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is incorporated by
reference to “Certain Transactions” in the
Company’s Proxy Statement.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is incorporated by
reference to the report of the Audit Committee of the Board of
Directors in the Company’s Proxy Statement.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedule |
(a) The following documents are filed as a part of this
Report:
1. FINANCIAL STATEMENTS. The following Consolidated
Financial Statements of LSI Logic Corporation and Report of
Independent Accountants are contained in this Form 10-K:
| |
|
|
|
|
| |
|
Page in the | |
| |
|
Form 10-K | |
| |
|
| |
|
Consolidated Balance Sheets — As of December 31,
2004 and 2003
|
|
|
55 |
|
|
Consolidated Statements of Operations — For the Three
Years Ended December 31, 2004, 2003 and 2002
|
|
|
56 |
|
|
Consolidated Statements of Stockholders’ Equity —
For the Three Years Ended December 31, 2004, 2003 and 2002
|
|
|
57 |
|
|
Consolidated Statements of Cash Flows — For the Three
Years Ended December 31, 2004, 2003 and 2002
|
|
|
58 |
|
|
Notes to Consolidated Financial Statements
|
|
|
59 |
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
100 |
|
Fiscal years 2004, 2003 and 2002 were 52-week years with a
December 31 fiscal year end.
2. FINANCIAL STATEMENT SCHEDULE.
104
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
| |
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|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
Balance at | |
|
Additions Charged to | |
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs, Expenses or | |
|
|
|
End of | |
| Description |
|
of Period | |
|
Other Accounts | |
|
Deductions* | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
(5 |
) |
|
$ |
7 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
(5 |
) |
|
$ |
7 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
20 |
|
|
$ |
9 |
|
|
$ |
(22 |
) |
|
$ |
7 |
|
|
|
| * |
Deductions include write-offs of uncollectable accounts and
collections of amounts previously reserved. |
3. EXHIBITS:
| |
|
|
|
|
| |
2 |
.1 |
|
Agreement and Plan of Reorganization dated March 26, 2001
by and among Registrant, Clover Acquisition Corporation and
C-Cube Microsystems Inc. Incorporated by reference to exhibits
filed with the Registrant’s Registration Statement on
Form S-4 (No. 333-58862) on April 13, 2001. |
| |
2 |
.2 |
|
Master Separation Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2003. |
| |
2 |
.3 |
|
General Assignment and Assumption Agreement between Registrant
and LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2003. |
| |
2 |
.4 |
|
Intellectual Property Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2003. |
| |
2 |
.5 |
|
Indemnification and Insurance Matters Agreement between
Registrant and LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2003. |
| |
2 |
.6 |
|
Employee Matters Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2003. |
| |
2 |
.7 |
|
Real Estate Matters Agreement between LSI Logic Corporation and
LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on
Form 10-Q for the quarter ending October 3, 2004. |
| |
2 |
.8 |
|
Tax Sharing Agreement between LSI Logic Corporation and LSI
Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ending October 3, 2004. |
| |
2 |
.9 |
|
Transition Services Agreement between LSI Logic Corporation and
LSI Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ending October 3, 2004. |
| |
2 |
.10 |
|
Investor Rights Agreement between LSI Logic Corporation and LSI
Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ending October 3, 2004. |
| |
3 |
.1 |
|
Restated Certificate of Incorporation of Registrant.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-46436) on September 22, 2000. |
| |
3 |
.2 |
|
By-laws of Registrant. Incorporated by reference to
Exhibit 3.1 filed with the Registrant’s Current Report
on Form 8-K filed on September 3, 2004. |
105
| |
|
|
|
|
| |
4 |
.1 |
|
Indenture dated March 15, 1999 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, covering $345,000,000 principal
amount of
41/4% Convertible
Subordinated Notes due 2004. Incorporated by reference to
exhibits filed with the Registrant’s Registration Statement
on Form S-3 (No. 333-80611) on June 14, 1999. |
| |
4 |
.2 |
|
Indenture dated February 15, 2000 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee. Incorporated by reference to
exhibits filed with the Registrant’s Current Report on
Form 8-K filed on February 24, 2000. |
| |
4 |
.3 |
|
Indenture dated as of October 30, 2001, between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee. Incorporated by reference to
exhibits filed with Registrant’s Registration Statement on
Form S-3 (No. 333-81434) on January 25, 2002. |
| |
4 |
.4 |
|
Indenture dated as of May 16, 2003, between LSI Logic
Corporation and U.S. Bank, N.A., as Trustee. Incorporated
by reference to exhibits filed with Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2003. |
| |
4 |
.5 |
|
See Exhibit 3.1. |
| |
10 |
.1 |
|
Form of Indemnification Agreement between Registrant and our
officers, directors and certain key employees. Incorporated by
reference to exhibits filed with the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
1987.* |
| |
10 |
.2 |
|
Amended and Restated LSI Logic Corporation 1991 Equity Incentive
Plan. Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-96543) on July 16, 2002.* |
| |
10 |
.3 |
|
1995 Director Option Plan. Incorporated by reference to
exhibits filed with the Registrant’s Registration Statement
on Form S-8 (No. 333-106205) on June 17, 2003.* |
| |
10 |
.4 |
|
LSI Logic Corporation International Employee Stock Purchase
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-115762) on May 21, 2004.* |
| |
10 |
.5 |
|
Form of LSI Logic Corporation Change of Control Severance
Agreement between LSI Logic Corporation and each of its
executive officers. Incorporated by reference to exhibits filed
with the Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2003.* |
| |
10 |
.6 |
|
Technology Transfer Agreement between LSI Logic Corporation and
Wafer Technology (Malaysia) Sdn. Bhd., dated September 8,
1999. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999. |
| |
10 |
.7 |
|
Mint Technology, Inc. Amended 1996 Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-34285) on August 25, 1997.* |
| |
10 |
.8 |
|
Registrant’s Amended and Restated Employee Stock Purchase
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-115762) on May 21, 2004.* |
| |
10 |
.9 |
|
Symbios Logic, Inc. 1995 Stock Plan. Incorporated by reference
to exhibits filed with the Registrant’s Form S-8
(No. 333-62159) on August 25, 1998. |
| |
10 |
.10 |
|
LSI Logic Corporation 1999 Nonstatutory Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-96549) on July 16, 2002.* |
| |
10 |
.11 |
|
SEEQ Technology, Inc. Amended and Restated 1982 Stock Option
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8
(No. 333-81435) on June 24, 1999.* |
| |
10 |
.12 |
|
IntraServer Technology, Inc. 1998 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-38746) on June 7, 2000. |
| |
10 |
.13 |
|
DataPath Systems, Inc. Amended 1994 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-42888) on August 2, 2000.* |
| |
10 |
.14 |
|
DataPath Systems, Inc. Amended and Restated 1997 Stock Option
Plan. Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8
(No. 333-42888) on August 2, 2000.* |
106
| |
|
|
|
|
| |
10 |
.15 |
|
Syntax Systems, Inc. Restated Stock Option Plan of
January 5, 1999. Incorporated by reference to exhibits
filed with Registrant’s Registration Statement on
Form S-8 (No. 333-52050) on December 18, 2000.* |
| |
10 |
.16 |
|
C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by
reference to exhibits filed with Registrant’s Registration
Statement on Form S-8 (No. 333-62960) on June 14,
2001. |
| |
10 |
.17 |
|
Wilfred J. Corrigan Employment Agreement dated as of
September 20, 2001. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2001.* |
| |
10 |
.18 |
|
Manufacturing Technology Joint Development and Foundry Supply
Agreement dated as of March 30, 2001 by and between the
Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2002. |
| |
10 |
.19 |
|
LSI Logic Corporation 2003 Equity Incentive Plan. Incorporated
by reference to exhibits filed with the Registrant’s
Registration Statement on From S-8 (No. 333-106206) on
June 17, 2003.* |
| |
10 |
.20 |
|
Registration Rights Agreement between LSI Logic Corporation and
Morgan Stanley & Co., Inc., dated May 16, 2003.
Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003. |
| |
10 |
.21 |
|
Change in Control Severance Agreement between the Registrant and
Thomas Georgens, dated as of November 20, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2003.* |
| |
10 |
.22 |
|
LSI Logic Corporation 1991 Equity Incentive Plan Nonqualified
Stock Option Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on
Form 10-Q for the quarter ending October 3, 2004. |
| |
10 |
.23 |
|
Form of Notice of Grant under LSI Logic Corporation Nonqualified
Stock Option Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on
Form 10-Q for the quarter ending October 3, 2004. |
| |
10 |
.24 |
|
LSI Logic Corporation 2003 Equity Incentive Plan Restricted
Stock Unit Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on
Form 10-Q for the quarter ending October 3, 2004. |
| |
10 |
.25 |
|
Engenio Information Technologies, Inc. Amended and Restated 2004
Equity Incentive Plan. Incorporated by reference from exhibits
filed with the Current Report on Form 8-K on
November 4, 2004. |
| |
10 |
.26 |
|
Engenio Information Technologies, Inc. 2004 Equity Incentive
Plan Nonqualified Stock Option Agreement. Incorporated by
reference from exhibits filed with the Current Report on
Form 8-K on November 4, 2004. |
| |
10 |
.27 |
|
Form of Notice of Grant under Engenio Information Technologies,
Inc. 2004 Equity Incentive Plan Nonqualified Stock Option
Agreement. Incorporated by reference from exhibits filed with
the Current Report on Form 8-K on November 4, 2004. |
| |
10 |
.28 |
|
Lease Agreement dated June 30, 2004, for
670 N. McCarthy Boulevard, Milpitas, California
between Engenio Information Technologies, Inc. and The Irvine
Company. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
| |
10 |
.29 |
|
First Amendment, dated October 28, 2004, to the Lease
Agreement (dated June 30, 2004), for
670 N. McCarthy Boulevard, Milpitas, California
between Engenio Information Technologies, Inc. and The Irvine
Company. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
| |
10 |
.30 |
|
Lease Agreement dated December 31, 2003, for 1621 Barber
Lane, Milpitas, California, between the Registrant and Limar
Realty Corp. #9. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
| |
10 |
.31 |
|
Lease Agreement dated December 31, 2003, for 765 Sycamore
Drive, Milpitas, California, between the Registrant and Limar
Realty Corp. #4. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
107
| |
|
|
|
|
| |
10 |
.32 |
|
Lease Agreement dated December 31, 2003, for 1501 McCarthy
Boulevard, Milpitas, California, between the Registrant and
Limar Realty Corp. #4. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended
December 31, 2004. |
| |
10 |
.33 |
|
Lease Agreement dated February 20, 2004, for 1855 Barber
Lane, Milpitas, California, between the Registrant and TriNet
Milpitas Associates, LLC. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31,
2004. |
| |
10 |
.34 |
|
Lease Agreement dated February 20, 2004, for 560 Cottonwood
Drive, Milpitas, California, between the Registrant and TriNet
Milpitas Associates, LLC. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31,
2004. |
| |
10 |
.35 |
|
Assignment and Assumption of Lease dated May 27, 2004, for
5400 Airport Boulevard, Suites 100 and 200, Boulder, Colorado,
between LakeCentre Plaza Limited, Ltd., LLLP and Engenio
Information Technologies, Inc. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended
December 31, 2004. |
| |
10 |
.36 |
|
Lease Modification Agreement dated June 21, 2004, for 5400
Airport Boulevard, Suites 100 and 200, Boulder, Colorado,
between LakeCentre Plaza Limited, Ltd., LLLP and Engenio
Information Technologies, Inc. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended
December 31, 2004. |
| |
10 |
.37 |
|
Form of Notice of Grant of Restricted Stock Units under LSI
Logic Corporation 2003 Equity Incentive Plan. Included as an
Exhibit to this Annual Report on Form 10-K for the year
ended December 31, 2004. |
| |
10 |
.38 |
|
LSI Logic Corporation 2004 16(b) Executive Officer
Incentive Plan. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004.* |
| |
10 |
.39 |
|
Summary Description of the Engenio Information Technologies,
Inc. 2004 Incentive Plan. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31,
2004.* |
| |
21 |
.1 |
|
List of Subsidiaries. |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
| |
24 |
.1 |
|
Power of Attorney (See page 110). |
| |
31 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-15(e) and 15d-1(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
31 |
.2 |
|
Certification of the Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-15(e) and 15de-1(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
32 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.** |
| |
32 |
.2 |
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
|
| |
* |
Denotes management contract or compensatory plan or arrangement. |
108
(b) EXHIBITS.
See Item 14(a)(3), above.
(c) FINANCIAL STATEMENT SCHEDULE
See Item 15(a)(2), above.
TRADEMARK ACKNOWLEDGMENTS
The LSI Logic logo design, ATMizer, CoreWare, G10, GigaBlaze,
HyperPHY, MegaRAID, MetaStor, MiniRISC, and SeriaLink are
registered trademarks of LSI Logic Corporation; Cablestream,
ContinuStor, FusionMPT, G11, G12, Gflx, HotScale, LogicStor,
Merlin, RapidChip, RapidSlices, Right First Time, On Time,
StreamSlice, SANtricity, and SANshare are trademarks of LSI
Logic Corporation.
ARM is a registered Trademark of Advanced RISC Machines Limited,
used under license. All other brand and product names appearing
in this report are the trademarks of their respective companies.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
| |
By: |
/s/ WILFRED J. CORRIGAN
|
|
|
| |
|
| |
Wilfred J. Corrigan |
| |
Chairman of the Board and Chief Executive Officer |
Dated: March 15, 2005
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose
signature appears below constitutes and appoints Wilfred J.
Corrigan and David G. Pursel, jointly and severally, their
attorneys-in-fact, each with the power of substitution, for them
in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or their substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ WILFRED J. CORRIGAN
(Wilfred
J. Corrigan) |
|
Chairman of the Board, Chief Executive Officer (Principal
Executive Officer) and Director |
|
March 15, 2005 |
| |
/s/ BRYON LOOK
(Bryon
Look) |
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer) |
|
March 15, 2005 |
| |
/s/ T.Z. CHU
(T.Z.
Chu) |
|
Director |
|
March 15, 2005 |
| |
/s/ MALCOLM R. CURRIE
(Malcolm
R. Currie) |
|
Director |
|
March 15, 2005 |
| |
/s/ JAMES H. KEYES
(James
H. Keyes) |
|
Director |
|
March 15, 2005 |
| |
/s/ R. DOUGLAS NORBY
(R.
Douglas Norby) |
|
Director |
|
March 15, 2005 |
110
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ MATTHEW
O’ROURKE
(Matthew
O’Rourke) |
|
Director |
|
March 15, 2005 |
| |
/s/ GREGORIO REYES
(Gregorio
Reyes) |
|
Director |
|
March 15, 2005 |
| |
/s/ LARRY W. SONSINI
(Larry
W. Sonsini) |
|
Director |
|
March 15, 2005 |
111
INDEX TO EXHIBITS
| |
|
|
|
|
| |
2 |
.1 |
|
Agreement and Plan of Reorganization dated March 26, 2001
by and among Registrant, Clover Acquisition Corporation and
C-Cube Microsystems Inc. Incorporated by reference to exhibits
filed with the Registrant’s Registration Statement on
Form S-4 (No. 333-58862) on April 13, 2001. |
| |
2 |
.2 |
|
Master Separation Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003. |
| |
2 |
.3 |
|
General Assignment and Assumption Agreement between Registrant
and LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2003. |
| |
2 |
.4 |
|
Intellectual Property Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003. |
| |
2 |
.5 |
|
Indemnification and Insurance Matters Agreement between
Registrant and LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2003. |
| |
2 |
.6 |
|
Employee Matters Agreement between Registrant and LSI Logic
Storage Systems, Inc., effective as of December 31, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003. |
| |
2 |
.7 |
|
Real Estate Matters Agreement between LSI Logic Corporation and
LSI Logic Storage Systems, Inc., effective as of
December 31, 2003. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on Form 10-Q
for the quarter ending October 3, 2004. |
| |
2 |
.8 |
|
Tax Sharing Agreement between LSI Logic Corporation and LSI
Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ending October 3, 2004. |
| |
2 |
.9 |
|
Transition Services Agreement between LSI Logic Corporation and
LSI Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ending October 3, 2004. |
| |
2 |
.10 |
|
Investor Rights Agreement between LSI Logic Corporation and LSI
Logic Storage Systems, Inc., effective as of March 15,
2004. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ending October 3, 2004. |
| |
3 |
.1 |
|
Restated Certificate of Incorporation of Registrant.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-46436) on September 22, 2000. |
| |
3 |
.2 |
|
By-laws of Registrant. Incorporated by reference to
Exhibit 3.1 filed with the Registrant’s Current Report
on Form 8-K filed on September 3, 2004. |
| |
4 |
.1 |
|
Indenture dated March 15, 1999 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, covering $345,000,000 principal
amount of
41/4% Convertible
Subordinated Notes due 2004. Incorporated by reference to
exhibits filed with the Registrant’s Registration Statement
on Form S-3 (No. 333-80611) on June 14, 1999. |
| |
4 |
.2 |
|
Indenture dated February 15, 2000 between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee. Incorporated by reference to
exhibits filed with the Registrant’s Current Report on Form
8-K filed on February 24, 2000. |
| |
4 |
.3 |
|
Indenture dated as of October 30, 2001, between LSI Logic
Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee. Incorporated by reference to
exhibits filed with Registrant’s Registration Statement on
Form S-3 (No. 333-81434) on January 25, 2002. |
| |
4 |
.4 |
|
Indenture dated as of May 16, 2003, between LSI Logic
Corporation and U.S. Bank, N.A., as Trustee. Incorporated
by reference to exhibits filed with Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003. |
| |
4 |
.5 |
|
See Exhibit 3.1. |
| |
10 |
.1 |
|
Form of Indemnification Agreement between Registrant and our
officers, directors and certain key employees. Incorporated by
reference to exhibits filed with the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 1987.* |
| |
|
|
|
|
| |
10 |
.2 |
|
Amended and Restated LSI Logic Corporation 1991 Equity Incentive
Plan. Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8 (No.
333-96543) on July 16, 2002.* |
| |
10 |
.3 |
|
1995 Director Option Plan. Incorporated by reference to
exhibits filed with the Registrant’s Registration Statement
on Form S-8 (No. 333-106205) on June 17, 2003.* |
| |
10 |
.4 |
|
LSI Logic Corporation International Employee Stock Purchase
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-115762) on May 21, 2004.* |
| |
10 |
.5 |
|
Form of LSI Logic Corporation Change of Control Severance
Agreement between LSI Logic Corporation and each of its
executive officers. Incorporated by reference to exhibits filed
with the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2003.* |
| |
10 |
.6 |
|
Technology Transfer Agreement between LSI Logic Corporation and
Wafer Technology (Malaysia) Sdn. Bhd., dated September 8,
1999. Incorporated by reference to exhibits filed with the
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999. |
| |
10 |
.7 |
|
Mint Technology, Inc. Amended 1996 Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-34285) on August 25, 1997.* |
| |
10 |
.8 |
|
Registrant’s Amended and Restated Employee Stock Purchase
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-115762) on May 21, 2004.* |
| |
10 |
.9 |
|
Symbios Logic, Inc. 1995 Stock Plan. Incorporated by reference
to exhibits filed with the Registrant’s Form S-8 (No.
333-62159) on August 25, 1998. |
| |
10 |
.10 |
|
LSI Logic Corporation 1999 Nonstatutory Stock Option Plan.
Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-96549) on July 16, 2002.* |
| |
10 |
.11 |
|
SEEQ Technology, Inc. Amended and Restated 1982 Stock Option
Plan. Incorporated by reference to exhibits filed with the
Registrant’s Registration Statement on Form S-8 (No.
333-81435) on June 24, 1999.* |
| |
10 |
.12 |
|
IntraServer Technology, Inc. 1998 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8 (No.
333-38746) on June 7, 2000. |
| |
10 |
.13 |
|
DataPath Systems, Inc. Amended 1994 Stock Option Plan.
Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8 (No.
333-42888) on August 2, 2000.* |
| |
10 |
.14 |
|
DataPath Systems, Inc. Amended and Restated 1997 Stock Option
Plan. Incorporated by reference to exhibits filed with
Registrant’s Registration Statement on Form S-8 (No.
333-42888) on August 2, 2000.* |
| |
10 |
.15 |
|
Syntax Systems, Inc. Restated Stock Option Plan of
January 5, 1999. Incorporated by reference to exhibits
filed with Registrant’s Registration Statement on
Form S-8 (No. 333-52050) on December 18, 2000.* |
| |
10 |
.16 |
|
C-Cube Microsystems Inc. 2000 Stock Plan. Incorporated by
reference to exhibits filed with Registrant’s Registration
Statement on Form S-8 (No. 333-62960) on June 14, 2001. |
| |
10 |
.17 |
|
Wilfred J. Corrigan Employment Agreement dated as of
September 20, 2001. Incorporated by reference to exhibits
filed with the Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2001.* |
| |
10 |
.18 |
|
Manufacturing Technology Joint Development and Foundry Supply
Agreement dated as of March 30, 2001 by and between the
Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2002. |
| |
10 |
.19 |
|
LSI Logic Corporation 2003 Equity Incentive Plan. Incorporated
by reference to exhibits filed with the Registrant’s
Registration Statement on From S-8 (No. 333-106206) on
June 17, 2003.* |
| |
10 |
.20 |
|
Registration Rights Agreement between LSI Logic Corporation and
Morgan Stanley & Co., Inc., dated May 16, 2003.
Incorporated by reference to exhibits filed with
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003. |
| |
10 |
.21 |
|
Change in Control Severance Agreement between the Registrant and
Thomas Georgens, dated as of November 20, 2003.
Incorporated by reference to exhibits filed with the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003.* |
| |
|
|
|
|
| |
10 |
.22 |
|
LSI Logic Corporation 1991 Equity Incentive Plan Nonqualified
Stock Option Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on Form 10-Q
for the quarter ending October 3, 2004. |
| |
10 |
.23 |
|
Form of Notice of Grant under LSI Logic Corporation Nonqualified
Stock Option Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on Form 10-Q
for the quarter ending October 3, 2004. |
| |
10 |
.24 |
|
LSI Logic Corporation 2003 Equity Incentive Plan Restricted
Stock Unit Agreement. Incorporated by reference to exhibits
filed with the Registrant’s Quarterly Report on Form 10-Q
for the quarter ending October 3, 2004. |
| |
10 |
.25 |
|
Engenio Information Technologies, Inc. Amended and Restated 2004
Equity Incentive Plan. Incorporated by reference from exhibits
filed with the Current Report on Form 8-K on November 4,
2004. |
| |
10 |
.26 |
|
Engenio Information Technologies, Inc. 2004 Equity Incentive
Plan Nonqualified Stock Option Agreement. Incorporated by
reference from exhibits filed with the Current Report on Form
8-K on November 4, 2004. |
| |
10 |
.27 |
|
Form of Notice of Grant under Engenio Information Technologies,
Inc. 2004 Equity Incentive Plan Nonqualified Stock Option
Agreement. Incorporated by reference from exhibits filed with
the Current Report on Form 8-K on November 4, 2004. |
| |
10 |
.28 |
|
Lease Agreement dated June 30, 2004, for
670 N. McCarthy Boulevard, Milpitas, California
between Engenio Information Technologies, Inc. and The Irvine
Company. Included as an Exhibit to this Annual Report on Form
10-K for the year ended December 31, 2004. |
| |
10 |
.29 |
|
First Amendment, dated October 28, 2004, to the Lease
Agreement (dated June 30, 2004), for
670 N. McCarthy Boulevard, Milpitas, California
between Engenio Information Technologies, Inc. and The Irvine
Company. Included as an Exhibit to this Annual Report on Form
10-K for the year ended December 31, 2004. |
| |
10 |
.30 |
|
Lease Agreement dated December 31, 2003, for 1621 Barber
Lane, Milpitas, California, between the Registrant and Limar
Realty Corp. #9. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
| |
10 |
.31 |
|
Lease Agreement dated December 31, 2003, for 765 Sycamore
Drive, Milpitas, California, between the Registrant and Limar
Realty Corp. #4. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004. |
| |
10 |
.32 |
|
Lease Agreement dated December 31, 2003, for 1501 McCarthy
Boulevard, Milpitas, California, between the Registrant and
Limar Realty Corp. #4. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended December 31,
2004. |
| |
10 |
.33 |
|
Lease Agreement dated February 20, 2004, for 1855 Barber
Lane, Milpitas, California, between the Registrant and TriNet
Milpitas Associates, LLC. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31, 2004. |
| |
10 |
.34 |
|
Lease Agreement dated February 20, 2004, for 560 Cottonwood
Drive, Milpitas, California, between the Registrant and TriNet
Milpitas Associates, LLC. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31, 2004. |
| |
10 |
.35 |
|
Assignment and Assumption of Lease dated May 27, 2004, for
5400 Airport Boulevard, Suites 100 and 200, Boulder, Colorado,
between LakeCentre Plaza Limited, Ltd., LLLP and Engenio
Information Technologies, Inc. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended December 31,
2004. |
| |
10 |
.36 |
|
Lease Modification Agreement dated June 21, 2004, for 5400
Airport Boulevard, Suites 100 and 200, Boulder, Colorado,
between LakeCentre Plaza Limited, Ltd., LLLP and Engenio
Information Technologies, Inc. Included as an Exhibit to this
Annual Report on Form 10-K for the year ended December 31,
2004. |
| |
10 |
.37 |
|
Form of Notice of Grant of Restricted Stock Units under LSI
Logic Corporation 2003 Equity Incentive Plan. Included as an
Exhibit to this Annual Report on Form 10-K for the year ended
December 31, 2004. |
| |
10 |
.38 |
|
LSI Logic Corporation 2004 16(b) Executive Officer
Incentive Plan. Included as an Exhibit to this Annual Report on
Form 10-K for the year ended December 31, 2004.* |
| |
10 |
.39 |
|
Summary Description of the Engenio Information Technologies,
Inc. 2004 Incentive Plan. Included as an Exhibit to this Annual
Report on Form 10-K for the year ended December 31,
2004.* |
| |
21 |
.1 |
|
List of Subsidiaries. |
| |
|
|
|
|
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm. |
| |
24 |
.1 |
|
Power of Attorney (See page 110). |
| |
31 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-15(e) and 15d-1(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
31 |
.2 |
|
Certification of the Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-15(e) and 15de-1(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
| |
32 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.** |
| |
32 |
.2 |
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
| * |
Denotes management contract or compensatory plan or arrangement |