Download Annual Report, 2.44 MB - Xyratex

We may incur expenses related to obsolescence or devaluation of unsold inventory, or to reserves necessaryto protect us against future write-offs of unsold inventory.Failure by us to accurately estimate product demand could cause us to incur expenses related toobsolescence or devaluation of unsold inventory. Due to the nature of our sales arrangements andsupply and production arrangements, we may carry a significant amount of unsold inventory. As part ofour internal controls, we have comprehensive inventory controls which include management approvalfor significant inventory purchases and monthly reviews of inventory levels and obsolescence.Historically our costs related to obsolescence have been less than 0.5% of revenues. However, if we failto accurately estimate product demand, this inventory may lose value or become obsolete before it issold. This may require us to increase our reserves for obsolete inventory which could significantly harmour financial condition.If our Malaysian subsidiary ceases to receive favorable tax treatment by the Malaysian government wemay be subject to tax liability that could significantly harm our financial condition.A large proportion of our revenues are recorded by our Malaysian subsidiary, which benefits fromtax incentives granted by the Malaysian government, currently in force until March 2007. Our favorabletax treatment in Malaysia is dependent upon meeting certain requirements set out by the Malaysianauthorities and demonstrating to both the Malaysian and the U.K. tax authorities that transactionsbetween the relevant parties take place on an arm’s-length basis. The loss of these tax benefits couldincrease our tax liabilities for past, current and future years, which could significantly harm ourfinancial condition.If our Bermudan holding company were deemed to be tax resident in the United Kingdom we could besubject to increased tax liabilities that could significantly harm our financial condition.In November 2005 we reorganised our legal group structure with Xyratex Technology Limited,Xyratex Holdings Inc and Xyratex (Malaysia) Sdn Bhd all becoming direct subsidiaries of Xyratex Ltdhaving previously been held indirectly through Xyratex Group Limited. The purpose of thereorganisation was to align the legal group structure by geographic location. Immediately after thereorganisation was completed we migrated the tax residence of Xyratex Ltd out of the UnitedKingdom. The combined effect of these actions is that income earned outside the United Kingdom canbe distributed to Xyratex Ltd without being subject to U.K. taxation. To maintain this status thecompany must be managed and controlled outside of the United Kingdom. We have put procedures inplace to continue to meet this requirement, however, if the UK tax authorities were to determine thatthe company is UK tax resident in the future then we could be subject to increased tax liabilities thatcould significantly harm our financial condition.Geopolitical military conditions, including terrorist attacks and other acts of war, may materially andadversely affect the markets on which our common shares trade, the markets in which we operate, ouroperations and our financial condition.Terrorist attacks and other acts of war, and any response to them, may lead to armed hostilitiesand such developments would likely cause instability in financial markets. Armed hostilities andterrorism may directly impact our facilities, personnel and operations which are located in the UnitedStates and internationally, as well as those of our customers and suppliers. Furthermore, severe terroristattacks or acts of war may result in temporary halts of commercial activity in the affected regions, andmay result in reduced demand for our products. These developments could have a material adverseaffect on our business and the trading price of our common shares.15