UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 30, 2007
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-32832
Jazz Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-3320580 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
4321 Jamboree Road Newport Beach, California | 92660 | |
(Address of principal executive offices) | (Zip Code) |
(949) 435-8000
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 14, 2007, 23,957,457 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
JAZZ TECHNOLOGIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION | 1 | ||
Item 1. | Financial Statements | 1 | |
Unaudited Condensed Consolidated Balance Sheets at March 30, 2007 and December 31, 2006 | 1 | ||
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 30, 2007 and March 31, 2006 | 2 | ||
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 30, 2007 | 3 | ||
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2007 and March 31, 2006 | 4 | ||
Notes to Unaudited Condensed Consolidated Financial Statements | 5 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26 | |
Item 4. | Controls and Procedures | 26 | |
PART II - OTHER INFORMATION | 27 | ||
Item 1A. | Risk Factors | 27 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 44 | |
Item 4. | Submission of Matters to a Vote of Security Holders | 45 | |
SIGNATURES | 49 | ||
Index to Exhibits | 50 |
i
JAZZ TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
March 30, 2007 | December 31, 2006 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 32,474 | $ | 633 | |||
Cash and cash equivalents held in trust and escrow accounts | — | 334,465 | |||||
Short-term investments | 7,950 | — | |||||
Restricted cash | 2,589 | — | |||||
Receivables, net of allowance for doubtful accounts of $1,075 | 29,216 | — | |||||
Inventories | 20,387 | — | |||||
Deferred tax asset | 5,811 | — | |||||
Prepaid expenses and other current assets | 2,820 | 827 | |||||
Total current assets | 101,247 | 335,925 | |||||
Property, plant and equipment, net | 151,731 | — | |||||
Investments | 19,300 | — | |||||
Intangible assets, net | 63,802 | — | |||||
Other assets | 7,579 | 8,180 | |||||
Total assets | $ | 343,659 | $ | 344,105 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 19,034 | $ | — | |||
Accrued compensation and benefits | 4,946 | — | |||||
Deferred revenues | 9,218 | — | |||||
Accrued interest | 3,780 | 445 | |||||
Other current liabilities | 21,566 | 12,136 | |||||
Total current liabilities | 58,544 | 12,581 | |||||
Long term liabilities: | |||||||
Convertible senior notes | 166,750 | 166,750 | |||||
Deferred tax liability | 5,811 | — | |||||
Accrued pension, retirement medical plan obligations and other long-term liabilities | 17,748 | — | |||||
Total liabilities | 248,853 | 179,331 | |||||
Common stock, subject to possible conversion, 5,750 shares at conversion value | — | 33,512 | |||||
Stockholders’ equity | |||||||
Common stock | 2 | 3 | |||||
Additional paid-in capital | 103,195 | 127,971 | |||||
Other comprehensive income | 2 | — | |||||
Retained earnings (deficit) | (8,393 | ) | 3,288 | ||||
Total stockholders’ equity | 94,806 | 131,262 | |||||
Total liabilities and stockholders’ equity | $ | 343,659 | $ | 344,105 |
See accompanying notes.
1.
JAZZ TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended | |||||||
March 30, 2007 | March 31, 2006 | ||||||
Net revenues | $ | 22,523 | $ | — | |||
Cost of revenues | 21,941 | — | |||||
Gross profit | 582 | — | |||||
Operating expenses: | |||||||
Research and development | 1,990 | — | |||||
Selling, general and administrative | 4,604 | 61 | |||||
Amortization of intangible assets | 176 | — | |||||
Write off of in-process research and development | 3,800 | — | |||||
Total operating expenses | 10,570 | 61 | |||||
Loss from operations | (9,988 | ) | (61 | ) | |||
Interest, and other expense (income), net | 1,585 | (216 | ) | ||||
Net income (loss) before provision for income taxes | (11,573 | ) | 155 | ||||
Provision for income taxes | 108 | 2 | |||||
Net income (loss) | $ | (11,681 | ) | $ | 153 | ||
Net income (loss) per share (basic and diluted) | $ | (0.39 | ) | $ | 0.02 | ||
Weighted average shares (basic and diluted) | 30,140 | 10,069 |
The amounts included in the three months ended March 30, 2007 reflect the acquisition of Jazz Semiconductor, Inc. on February 16, 2007 and the results of operations for Jazz Semiconductor, Inc. following the date of acquisition.
See accompanying notes.
2.
JAZZ TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
Common Stock | Additional paid-in capital | Other comprehensive income | Retained earnings accumulated | Total | |||||||||||||||
Shares | Amount | ||||||||||||||||||
Balance at December 31, 2006 | 34,457 | $ | 3 | $ | 127,971 | $ | — | $ | 3,288 | $ | 131,262 | ||||||||
Reversal of common stock subject to possible conversion of 5,750 shares | — | — | 33,512 | — | — | 33,512 | |||||||||||||
Conversion of common stock in connection with acquisition | (5,668 | ) | (1 | ) | (33,158 | ) | — | — | (33,159 | ) | |||||||||
Redemption of founder common stock | (1,874 | ) | — | (9 | ) | — | — | (9 | ) | ||||||||||
Repurchase of common stock | (2,958 | ) | — | (14,363 | ) | — | — | (14,363 | ) | ||||||||||
Repurchase of warrants | — | — | (10,758 | ) | — | — | (10,758 | ) | |||||||||||
Comprehensive loss: | |||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 2 | — | 2 | |||||||||||||
Net loss | — | — | — | — | (11,681 | ) | (11,681 | ) | |||||||||||
Total comprehensive loss | (11,679 | ) | |||||||||||||||||
Balance at March 30, 2007 | 23,957 | $ | 2 | $ | 103,195 | $ | 2 | $ | (8,393 | ) | $ | 94,806 |
See accompanying notes.
��
3.
JAZZ TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Three months ended | |||||||
March 30, 2007 | March 31, 2006 | ||||||
Operating activities: | |||||||
Net income (loss) | $ | (11,681 | ) | $ | 153 | ||
Adjustments to reconcile net income (loss) for the period to net cash used by operating activities: | |||||||
Depreciation | 3,773 | — | |||||
Amortization of deferred loan costs | 386 | — | |||||
Provision for doubtful accounts | 276 | — | |||||
Loss on disposal of equipment | 2 | — | |||||
Acquisition-related items: | |||||||
Amortization of purchased intangible assets | 998 | — | |||||
Write-off of in-process research and development | 3,800 | — | |||||
Changes in operating assets and liabilities, net of effects from acquisition of Jazz Semiconductor, Inc.: | |||||||
Receivables | (3,677 | ) | — | ||||
Inventories | (1,294 | ) | — | ||||
Prepaid expenses and other current assets | (1,588 | ) | (294 | ) | |||
Long term portion of restricted cash | 2,116 | — | |||||
Accounts payable | (4,897 | ) | — | ||||
Accrued compensation, benefits and deferred revenues | (2,529 | ) | — | ||||
Accrued interest convertible notes | 3,335 | — | |||||
Other current liabilities | (2,886 | ) | 45 | ||||
Other long-term liabilities | 256 | — | |||||
Net cash used by operating activities | (13,610 | ) | (96 | ) | |||
Investing activities: | |||||||
Jazz Semiconductor, Inc. purchase price, net of cash acquired | (236,303 | ) | — | ||||
Purchases of property and equipment | (872 | ) | — | ||||
Net proceeds from sale of short-term investments | 16,295 | — | |||||
Release of funds from trust and escrow accounts | 334,465 | — | |||||
Net proceeds from issuance of common stock placed in trust account | — | (164,368 | ) | ||||
Net cash provided (used) by investing activities | 113,585 | (164,368 | ) | ||||
Financing activities: | |||||||
Redemption of founder’s common stock | (9 | ) | — | ||||
Net proceeds from issuance of common stock | — | 165,447 | |||||
Repayment of note payable to stockholder | — | (275 | ) | ||||
Conversion of common stock in connection with acquisition | (33,159 | ) | — | ||||
Repurchase of common stock | (14,363 | ) | — | ||||
Repurchase of warrants | (10,602 | ) | — | ||||
Payment of debt and acquisition-related liabilities | (10,003 | ) | — | ||||
Net cash provided (used) by financing activities | (68,136 | ) | 165,172 | ||||
Effect of foreign currency on cash | 2 | — | |||||
Net increase in cash and cash equivalents | 31,841 | 708 | |||||
Cash and cash equivalents at beginning of period | 633 | 77 | |||||
Cash and cash equivalents at end of period | $ | 32,474 | $ | 785 |
See accompanying notes.
4.
Jazz Technologies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
March 30, 2007
1. | ORGANIZATION |
The Company
Jazz Technologies, Inc., formerly known as Acquicor Technology Inc. (the “Company”), was incorporated in Delaware on August 12, 2005. The Company was formed to serve as a vehicle for the acquisition of one or more domestic and/or foreign operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination.
On February 16, 2007, the Company completed the acquisition of all of the outstanding capital stock of Jazz Semiconductor, Inc., a Delaware corporation (“Jazz”), for a purchase price of approximately $262.4 million, or a net purchase price of $236.3 million after taking into account $26.1 million of cash acquired as part of the assets of Jazz. The accompanying unaudited condensed consolidated financial statements include the results of operations for Jazz following the date of acquisition. The acquisition was accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method, Jazz was treated as the “acquired” company. In connection with the acquisition the Company adopted Jazz’s fiscal year.
Unless specifically noted otherwise, as used throughout these notes to the unaudited condensed consolidated financial statements, “Company,” “we,” “us,” and “our” refers to the business of Jazz Technologies, Inc. and “Jazz” refers only to the business of Jazz Semiconductor, Inc.
Based in Newport Beach, California, the Company became an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. The Company’s specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes, for the manufacture of analog and mixed-signal semiconductors. Its customer’s analog and mixed-signal semiconductor devices are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
Acquisition of Jazz Semiconductor, Inc.
On February 16, 2007, pursuant to the terms of a merger agreement signed on September 26, 2006, the Company acquired all of Jazz’s outstanding capital stock for approximately $262.4 million, funded with existing cash resources as well as proceeds from the convertible senior notes that were issued in the fourth quarter of fiscal 2006.
For accounting purposes, the purchase price of $262.4 million was calculated as follows (in thousands):
(in thousands) | ||||
Merger consideration | $ | 260,000 | ||
Estimated working capital adjustment | 4,500 | |||
Jazz transaction costs for acquisition and terminated IPO | (6,591 | ) | ||
Company transaction costs | 4,474 | |||
Total purchase price | $ | 262,383 |
Jazz’s transaction costs primarily consist of fees for financial advisors, attorneys, accountants and other advisors incurred in connection with Jazz’s terminated initial public offering and the acquisition. Jazz’s transaction costs include $2.2 million in costs associated with bonus payments made to Jazz officers, directors and employees in connection with the acquisition that were not previously reported as a transaction cost. The Company’s transaction costs primarily consist of fees for financial advisors, attorneys, accountants and other advisors directly related to the acquisition of Jazz.
5.
Payments made by the Company at closing included the impact of a $4.5 million estimated working capital adjustment and a deduction for $6.6 million of transaction costs incurred by Jazz in connection with the acquisition and its terminated initial public offering. The purchase price is subject to adjustment based on (among other factors) the closing working capital amount as defined in the merger agreement relating to the acquisition of Jazz, which is calculated based on the final closing balance sheet as of February 16, 2007, that the Company expects to be prepared within 90 days following the acquisition.
In connection with the acquisition of Jazz, the Company acquired an equity investment in Shanghai Hau Hong NEC Electronics Company, Ltd. (“HHNEC”). Under the merger agreement, the Company is obligated to pay additional amounts to former stockholders of Jazz if the Company realizes proceeds in excess of $10 million from its investment in HHNEC during the three-year period following the completion of the acquisition of Jazz. In that event, the Company will pay an amount equal to 50% of the amount (if any) of the proceeds received that exceed $10 million to Jazz's former stockholders.
Preliminary Purchase Price Allocation
The total preliminary purchase price of $262.4 million has been initially allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values as of February 16, 2007, as follows (in thousands):
February 16, 2007 | |||||||
Fair value of the net tangible assets acquired and liabilities assumed: | |||||||
Cash and cash equivalents | $ | 26,080 | |||||
Short term investments | 24,245 | ||||||
Restricted cash | 3,154 | ||||||
Receivables | 25,815 | ||||||
Inventories | 19,094 | ||||||
Deferred tax asset | 5,811 | ||||||
Other current assets | 2,520 | ||||||
Property, plant and equipment | 153,946 | ||||||
Investments | 19,300 | ||||||
Other assets | 521 | ||||||
Accounts payable | (23,087 | ) | |||||
Accrued compensation, benefits and other | (6,299 | ) | |||||
Deferred tax liability | (5,811 | ) | |||||
Deferred revenues | (10,394 | ) | |||||
Other current liabilities | (23,619 | ) | |||||
Accrued pension, retirement medical plan obligations and other long term liabilities | (17,493 | ) | |||||
Total net tangible assets acquired and liabilities assumed | $ | 193,783 | |||||
Fair value of identifiable intangible assets acquired: | |||||||
Existing technology | 2,000 | ||||||
Patents and other core technology rights | 11,300 | ||||||
In-process research and development | 3,800 | ||||||
Customer relationships | 5,400 | ||||||
Customer backlog | 2,900 | ||||||
Trade name | 5,000 | ||||||
Facilities lease | 38,200 | ||||||
Total identifiable intangible assets acquired | 68,600 | ||||||
Total purchase price | $ | 262,383 |
6.
The fair values set forth above are based on preliminary valuation estimates of Jazz’s tangible and intangible assets, based in part on third party appraisals in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations” (‘‘SFAS 141’’). The final valuation, and any interim updated preliminary valuation estimates, may differ materially from these preliminary valuation estimates and, as a result, the final allocation of the purchase price may result in reclassifications of the allocated amounts that are materially different from the purchase price allocation reflected above.
The amount allocated to in-process research and development represents the fair value of acquired, to-be-completed research projects. The estimated value of approximately $3.8 million for the research projects was determined by estimating the costs to develop the acquired technology into commercially viable processes, estimating the resulting net cash flows from these projects and discounting the net cash flows to their present value. As of the acquisition date, these projects were not complete. Accordingly, the amount allocated to in-process research and development is recognized as an operating expense in the accompanying statement of operations for the three months ended March 30, 2007.
The Company leases its headquarters and Newport Beach, California fabrication and probing facilities from Conexant Systems, Inc. under non-cancelable operating leases through March 2017. The Company has the option to extend the terms of each of these leases for two consecutive five-year periods. The Company’s rental payments under these leases consist solely of its pro rata share of the expenses incurred by Conexant in the ownership of these buildings. The amount allocated to facilities lease represents the fair value of acquired leases calculated as the difference between market rates for similar facilities in the same geographical area and the rent the Company is estimated to pay over the life of the leases, discounted back over the life of the lease. The future minimum costs under these leases have been estimated based on actual costs incurred during 2006 and applicable adjustments for increases in the consumer price index.
Pro Forma Results of Operations
The accompanying unaudited condensed consolidated statements of operations only reflect the operating results of Jazz following the date of acquisition and do not reflect the operating results of Jazz prior to the acquisition. Following are pro forma unaudited results of operations for the Company for the three months ended March 30, 2007 and March 31, 2006 assuming the acquisition of Jazz occurred on January 1, 2007 and 2006, respectively (in thousands):
Three months ended | |||||||
March 30, 2007 | March 31, 2006 | ||||||
Net revenues | $ | 48,096 | $ | 55,860 | |||
Cost of revenues | 51,630 | 53,314 | |||||
Gross profit (loss) | (3,534 | ) | 2,546 | ||||
Operating expenses: | |||||||
Research and development | 4,979 | 5,222 | |||||
Selling, general and administrative | 10,239 | 5,429 | |||||
Amortization of intangible assets | 541 | 628 | |||||
Total operating expenses | 15,759 | 11,279 | |||||
Operating loss | (19,293 | ) | (8,733 | ) | |||
Net interest expense (income) | 1,370 | 3,265 | |||||
Other expenses (income) | 113 | (842 | ) | ||||
Net loss | $ | (20,776 | ) | $ | (11,156 | ) | |
Pro forma net loss per share - basic and diluted | $ | (0.69 | ) | $ | (1.11 | ) |
7.
The Company derived the pro forma results of operations from (i) the unaudited consolidated financial statements of Jazz for the period from December 30, 2006 to February 16, 2007 (the date of the Jazz acquisition) and the three months ended March 31, 2006, and (ii) the unaudited consolidated financial statements of the Company for the three months ended March 30, 2007 and March 31, 2006. The pro forma results of operations are not necessarily indicative of the results of operations that may have actually occurred had the merger taken place on the dates noted, or the future financial position or operating results of the Company or Jazz. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable. The pro forma adjustments include adjustments for interest expense (relating primarily to interest on the $166.8 million principal amount of convertible senior notes issued in December 2006) and increased depreciation and amortization expense as a result of the application of the purchase method of accounting based on the fair values set forth above. The pro forma results of operations for the three months ended March 30, 2007 do not include approximately $3.8 million in non-recurring charges relating to the write-off of in-process research and development incurred in connection with the acquisition.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction of the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2007.
The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at March 30, 2007 and December 31, 2006, and the consolidated results of its operations and cash flow for the three months ended March 30, 2007 and March 31, 2006.
Fiscal Year
Effective with the fiscal year beginning January 1, 2007, the Company adopted a 52- or 53- week fiscal year. Each of the first three quarters of a fiscal year end on the last Friday in each of March, June and September and the fourth quarter of a fiscal year ends on the Friday prior to December 31. As a result, each fiscal quarter consists of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the first three quarters consist of 13 weeks and the fourth quarter consists of 14 weeks. The Company previously maintained a calendar fiscal year.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, inventory reserves, purchase intangible asset valuations, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Revenue Recognition
The Company’s net revenue is generated principally by sales of semiconductor wafers. The Company derives the remaining balance of its net revenue from the resale of photomasks and other engineering services. In addition, the majority of the Company’s sales occur through the efforts of its direct sales force.
8.
In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), and SAB No. 104, “Revenue Recognition” (“SAB 104”), the Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, the Company does not recognize revenue until all customer acceptance requirements have been met, when applicable. Determination of the criteria set forth in items three and four above is based on management’s judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectivity of those fees. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affect.
The Company recognizes revenues from product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable, and collection of the related receivable is reasonably assured, which is generally at the time of shipment. Revenues for engineering services are recognized ratably over the contract term or as services are performed. Revenues from contracts with multiple elements are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered elements. Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until products are shipped to the customer, services are rendered or the capacity reservation period ends.
The Company provides for sales returns and allowances as a reduction of revenues at the time of shipment based on historical experience and specific identification of an event necessitating an allowance. Estimates for sales returns and allowances require a considerable amount of judgment on the part of management.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values. The Company maintains cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
Short-term Investments
Short-term investments include auction rate securities issued by U.S. governmental agencies and municipal governments, auction rate preferred securities issued by corporations, and commercial paper that are not considered cash equivalents. All such securities are classified as available for sale and are reported at fair market value, which approximates cost, on the consolidated balance sheet.
Restricted Cash
Under the terms of its workers’ compensation insurance policies, the Company provides letters of credit (“LOC”) issued by a financial institution as security to the insurance carriers. The letters of credit totaled $1.2 million as of March 30, 2007.
The issuing financial institution requires the LOC to be secured. The Company secured the LOC with commercial paper and/or money market funds. Because the security behind the LOC was not cash, the financial institution issuing the LOC requires the Company to provide security in excess of the face value of the LOC.
The portion of the commercial paper and/or money market funds securing the LOC has been classified as current restricted cash. On April 2, 2007, the Company replaced a portion of the secured LOC with a traditional LOC, which resulted in the release of $2.1 million of the restricted cash. The balance of restricted cash continues to secure the remainder of the LOC which will mature in June 2007.
9.
Inventories
Inventories consist of raw materials, work in process and finished goods and include the costs for freight-in, materials, labor and manufacturing overhead. Inventories are stated at the lower of cost, calculated on a first-in, first-out basis, or market value. The Company establishes inventory reserves for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. Inventories acquired as a result of the acquisition of Jazz was recorded based on fair value. Shipping and handling costs are classified as a component of cost of revenue in the consolidated statements of operations.
Inventories, net of reserves, consist of the following (in thousands):
March 30, 2007 | ||||
Raw material | $ | 1,019 | ||
Work in process | 10,067 | |||
Finished goods | 9,301 | |||
$ | 20,387 |
Property, Plant and Equipment
Property, plant and equipment acquired as a result of the acquisition of Jazz was recorded based on the fair value of such assets; all subsequent purchases are recorded based on cost. Prior to the acquisition of Jazz, the Company had no property, plant or equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 12 years. Leasehold improvements are amortized over the life of the asset or term of the lease, whichever is shorter. Significant renewals and betterments are capitalized and any assets being replaced are written off. Maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations.
Property, plant and equipment consist of the following (in thousands):
Useful life | March 30, 2007 | ||||||
(In years) | |||||||
Building improvements | 7-12 | $ | 45,817 | ||||
Machinery and equipment | 4-6 | 99,833 | |||||
Furniture and equipment | 3-5 | 1,927 | |||||
Computer software | 3 | 1,215 | |||||
Construction in progress | 6,712 | ||||||
155,504 | |||||||
Accumulated depreciation | (3,773 | ) | |||||
$ | 151,731 |
Construction in progress primarily consists of machinery being qualified for service in the Company’s Newport Beach, California foundry.
Investment
In connection with the acquisition of Jazz, the Company acquired an investment in HHNEC. As of February 17, 2007, the investment represents a minority interest of approximately 10% in HHNEC. In accordance with the purchase method of accounting, this investment was recorded with a value of $19.3 million, which was the fair value of the investment on February 16, 2007.
10.
Intangible Assets
Intangible assets consist of the following at March 30, 2007 (based on the preliminary valuation discussed above):
Weighted Average Life (years) | Cost | Accumulated Amortization | Net | ||||||||||
Existing technology | 7 | $ | 2,000 | $ | 33 | $ | 1,967 | ||||||
Patents and other core technology rights | 7 | 11,300 | 186 | 11,114 | |||||||||
In-process research and development | — | 3,800 | 3,800 | — | |||||||||
Customer relationships | 7 | 5,400 | 89 | 5,311 | |||||||||
Customer backlog | <1 | 2,900 | 387 | 2,513 | |||||||||
Trade name | 7 | 5,000 | 83 | 4,917 | |||||||||
Facilities lease | 20 | 38,200 | 220 | 37,980 | |||||||||
Total identified intangible assets | $ | 68,600 | $ | 4,798 | $ | 63,802 |
Based on the preliminary valuation discussed above, the Company expects future amortization expense to be as follows (in thousands):
Charge to Cost of Revenues | Charge to Operating Expenses | Total | ||||||||
Fiscal year: | ||||||||||
Remainder of 2007 | $ | 5,342 | $ | 1,143 | $ | 6,485 | ||||
2008 | 3,772 | 1,524 | 5,296 | |||||||
2009 | 3,772 | 1,524 | 5,296 | |||||||
2010 | 3,772 | 1,524 | 5,296 | |||||||
2011 | 3,772 | 1,524 | 5,296 | |||||||
2012 | 3,772 | 1,524 | 5,296 | |||||||
Thereafter | 28,612 | 2,225 | 30,837 | |||||||
Total expected future amortization expense | $ | 52,814 | $ | 10,988 | $ | 63,802 |
Pension and Other Postretirement Benefit Plans
Prior to its acquisition, Jazz adopted Statement of Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (‘‘SFAS 158’’) for its 2006 fiscal year relating to its Retirement Plan for Hourly Employees and Postretirement Health and Life Benefits Plan. With the adoption of SFAS 158 in the prior fiscal year, Jazz was required to recognize all previously unrecognized obligations. These amounts were presented on Jazz’s balance sheet as accumulated other comprehensive income within stockholders’ equity. Following the acquisition of Jazz on February 16, 2007 and the application of SFAS 141, these liabilities were adjusted to their fair value. The pension and other postretirement benefit plans expense for the three months ending March 30, 2007 and March 31, 2006 was $0.3 million and zero, respectively.
Net Income (Loss) Per Share
Net income (loss) per share (basic) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income (loss) per share (diluted) is calculated by adjusting the number of shares of common stock outstanding using the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock results in a greater dilutive effect from outstanding warrants, options, restricted stock awards and convertible securities (common stock equivalents.)
Since the Company reported a net loss for the three months ended March 30, 2007, all common stock equivalents would be anti-dilutive and the basic and diluted weighted average shares outstanding are the same. There were no common stock equivalents for the three months ended March 31, 2006.
3. | LOAN & SECURITY AGREEMENT |
On February 28, 2007, the Company entered into an amended and restated loan and security agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead arranger, bookrunner and syndication agent, and Wachovia Capital Finance Corporation (Western), as administrative agent (“Wachovia”), and Jazz and Newport Fab, LLC, as borrowers, with respect to a three-year senior secured asset-based revolving credit facility in an amount of up to $65 million. The borrowing availability varies according to the levels of the borrowers’ accounts receivable, eligible equipment and other terms and conditions described in the loan agreement. Up to $5 million of the facility will be available for the issuance of letters of credit. The maturity date of the facility is February 28, 2010, unless earlier terminated. Loans under the facility will bear interest at a floating rate equal to, at borrowers’ option, either the lender's prime rate plus 0.75% or the adjusted Eurodollar rate (as defined in the loan agreement) plus 2.75% per annum. The facility is secured by all of the assets of the Company and the borrowers.
11.
The loan agreement contains customary affirmative and negative covenants and other restrictions. If the sum of excess availability plus qualified cash is at any time during any fiscal quarter less than $10,000,000, the borrowers will be subject to a minimum consolidated EBITDA financial covenant, such that the Company and its subsidiaries (other than any excluded subsidiaries) shall be required to earn, on a consolidated basis, consolidated EBITDA (as defined in the loan agreement) of not less than the applicable amounts set forth in the loan agreement.
In addition, the loan agreement contains customary events of default including the following: nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties in any material respect; cross default; bankruptcy; material judgments; ERISA events; actual or asserted invalidity of guarantees or security documents; and change of control. If any event of default occurs Wachovia may declare due immediately all borrowings under the facility and foreclose on the collateral. Furthermore, an event of default under the loan agreement would result in an increase in the interest rate on any amounts outstanding.
As of March 30, 2007, the Company had no borrowings outstanding under the facility and $1.2 million of the facility supported outstanding letters of credits. Borrowing availability under the facility as of March 30, 2007 was $60.0 million.
4. | INCOME TAXES |
The Company utilizes the liability method of accounting for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected more likely than not to be realized. The likelihood of a material change in the Company’s expected realization of these assets depends on our ability to generate sufficient future taxable income. The Company’s ability to generate sufficient taxable income to utilize its deferred tax assets depends on many factors, among which is the Company’s ability to deduct tax loss carry-forwards against future taxable income, the effectiveness of the Company’s tax planning strategies and reversing deferred tax liabilities.
In June, 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company recognized no adjustment in the amount of unrecognized tax benefits. As of the date of adoption, the Company had no unrecognized tax benefits. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.
On the date of the acquisition of Jazz by the Company, Jazz had unrecognized tax benefits of $0.4 million, which, if recognized, would increase the valuation allowance on deferred tax assets. There is no accrual of interest or penalties included within the unrecognized tax benefits of $0.4 million noted above. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within the next 12 months.
12.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2003; state and local income tax examinations before 2002; and foreign income tax examinations before 2004. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount.
The Company is not currently under Internal Revenue Service (IRS) tax examination. During the first quarter of 2007, the Texas tax authorities completed an examination of the 2002 - 2005 Jazz tax returns. The adjustments were insignificant and will not have a material impact on the Company’s position or results of operations. The Company is not currently under examination by any other state, local or foreign jurisdictions.
On the date of the acquisition, Jazz had federal and state net operating loss (“NOL”) carryforwards of approximately $104.7 million and $89.8 million, respectively. The federal and state tax net operating loss carryforwards represent a significant component of the Company’s deferred tax assets. Due to uncertainties surrounding the Company’s ability to generate sufficient future taxable income to realize these assets, a full valuation has been established to offset its net deferred tax asset. Additionally, the future utilization of the Company’s NOL carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of ownership changes. The acquisition of Jazz by the Company resulted in an ownership change as defined by Section 382. Until the Company has determined the amount of any such limitation, no amounts are being presented as an uncertain tax position in accordance with FIN 48. Such limitations could be significant. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits would not impact its effective tax rate.
5. | CONVERTIBLE SENIOR NOTES |
On December 19, 2006 and December 21, 2006, the Company completed private placements of $166.8 million aggregate principal amount of 8% convertible senior notes due 2011 (the “Convertible Senior Notes”). The gross proceeds from the Convertible Senior Notes were placed in escrow pending completion of the acquisition of Jazz.
On February 16, 2007, the conditions to release the escrowed proceeds of the convertible senior notes were met and the proceeds, net of the debt issuance costs, were released to the Company.
The Convertible Senior Notes bear interest at a rate of 8% per annum payable semi-annually on each June 30 and December 31, beginning on June 30, 2007. The Company may redeem the Convertible Senior Notes on or after December 31, 2009 at agreed upon redemption prices, plus accrued and unpaid interest. The holders of the Convertible Senior Notes also have the option to convert the Convertible Senior Notes into shares of the Company’s common stock at an initial conversion rate of 136.426 shares per $1,000 principal amount of Convertible Senior Notes, subject to adjustment in certain circumstances, which is equivalent to an initial conversion price of about $7.33 per share.
6. | SHAREHOLDERS’ EQUITY |
Warrants and Unit Purchase Option
Each unit issued in the Company’s March 2006 initial public offering and the private placement to the Company’s initial stockholders prior to the initial public offering included one share of common stock, $0.0001 par value, and two redeemable common stock purchase warrants. Each warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 and expires March 15, 2011. In addition, in connection with the initial public offering, the Company sold to ThinkEquity Partners, LLC, as the representative of the underwriters, for $100 a purchase option to 1,250,000 units at a purchase price of $7.50 per unit. The warrants included in the units issuable upon exercise of the purchase option are identical to the warrants included in the units issued in the initial public offering except that each of the warrants underlying such units entitles the holder to purchase one share of the Company’s common stock at a price of $6.65. The warrants, including warrants issuable upon exercise of the purchase option, will be redeemable at a price of $0.01 per warrant upon 30 days notice after the warrants become exercisable, only in the event that the last sale price of the Company’s common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. Upon redemption, the initial stockholders will have the right to exercise the warrants included in the 333,334 units purchased in the private placement on a cashless basis. The Company does not need the consent of the underwriters in order to redeem the outstanding warrants. The purchase option sold to ThinkEquity Partners LLC has not been exercised.
13.
As of March 30, 2007, the Company had repurchased 11,953,259 warrants at an aggregate price of $10.8 million. The outstanding number of warrants at March 30, 2007 was 46,213,409.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred stock with such designations, voting rights and other rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock
On February 16, 2007, the Company redeemed 1,873,738 common shares held by Acquicor Management LLC and the Company’s outside directors (founders) at a redemption price of $0.0047 per share.
On February 16, 2007, the Company amended its Certificate of Incorporation to increase the authorized shares of the Company’s common stock from 100,000,000 shares to 200,000,000 shares.
On February 16, 2007, 5,668,116 shares of the Company’s common stock issued in connection with its initial public offering were converted into cash at approximately $5.85 per share, or $33.2 million in the aggregate. The stockholders owning these shares voted against the acquisition of Jazz and properly elected to convert their shares into a pro-rata portion of the Company’s trust account.
Stock Repurchase Plan
On January 11, 2007, the Company announced that its Board of Directors had authorized a stock and warrant repurchase program, under which the Company may repurchase up to $50 million of its common stock and warrants through July 15, 2007. Purchases under the stock and warrant repurchase program will be made from time to time at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The program may be discontinued at any time.
As of March 30, 2007, the Company had repurchased 2,957,761 shares of common stock for an aggregate price of $14.4 million.
14.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Our future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those discussed in this section as well as in the section entitled “Risk Factors” and elsewhere in our filings with the Securities and Exchange Commission. Such statements may include but are not limited to statements concerning:
· | anticipated trends in revenue; |
· | expected benefits of the acquisition of Jazz Semiconductor, Inc.; |
· | growth opportunities in domestic and international markets; |
· | customer acceptance and satisfaction with our products; |
· | expected trends in operating and other expenses; |
· | anticipated cash and intentions regarding usage of cash; |
· | changes in effective tax rates; and |
· | anticipated product enhancements or releases. |
Our business is subject to significant risks including, but not limited to, our dependence on Jazz’s formation customers, our ability to secure new customers and additional volume from existing customers, our ability to maintain high capacity utilization and fab yields at our foundry, the complexity of our manufacturing processes, our ability to forecast customer demand, our reliance on outsourced foundry services, changes in consumer demand for our customers’ products and services, our ability to comply with the terms of our current financing arrangements and raise additional financing, our ability to obtain and protect intellectual property rights, our ability to comply with government regulations and our dependence on key personnel and an unionized workforce.
Investors are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update these forward-looking statements in light of events or circumstances occurring after the date hereof.
OVERVIEW
We were formed on August 12, 2005, for the purpose of acquiring, through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination, one or more domestic and/or foreign operating businesses in the technology, multimedia and networking sectors, focusing specifically on businesses that develop or provide technology-based products and services in the software, semiconductor, wired and wireless networking, consumer multimedia and information technology-enabled services segments.
On February 16, 2007, we completed the acquisition of all the outstanding shares of capital stock of Jazz Semiconductor, Inc. (“Jazz”) for $262.4 million in cash. The acquisition was accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method, Jazz was treated as the “acquired” company for financial reporting purposes. As a result, the accompanying unaudited condensed consolidated financial statements include the results of operations for Jazz from February 17, 2007 to March 30, 2007.
Based in Newport Beach, California, we have become an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. Our specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes, for the manufacture of analog and mixed-signal semiconductors. Our customers use the analog and mixed-signal semiconductor devices in products they design that are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
15.
The accompanying unaudited condensed consolidated statements of operations reflect the operating results of Jazz since February 17, 2007. However, in the results of operations section below we have also presented pro forma unaudited revenues, cost of revenues, gross margins and operating expenses assuming the acquisition of Jazz had occurred on January 1, 2006. We present the pro forma information in order to provide a more meaningful comparison of our operating results with prior periods.
Critical Accounting Policies and Estimates
Estimates
Our discussion and analysis of our financial condition and results of operations is based on the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required 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 period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis, including those related to sales allowances, the allowance for doubtful accounts, inventories and related reserves, long-lived assets, investments, pensions and other retirement obligations and income taxes. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result. We believe the following critical accounting policies require significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize product revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended by SAB 101A, SAB 101B and SAB 104. SAB 101 requires four basic criteria to be met before revenues can be recognized:
• | persuasive evidence that an arrangement exists; |
• | delivery has occurred or services have been rendered; |
• | the fee is fixed and determinable; and |
• | collectibility is reasonably assured. |
Determination of the criteria set forth in the third and fourth bullet points above is based on our judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause us to determine that these criteria are not met for certain future transactions, revenues recognized for any reporting period could be adversely affected.
We generate revenues primarily from the manufacture and sale of semiconductor wafers. In addition, we also derive a portion of our revenues from the resale of photomasks and engineering services.
Recognition of revenues from product sales occurs when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable and collection of the related receivable is reasonably assured, generally at the time of shipment. Accruals are established, with the related reduction to revenues, for allowances for discounts and product returns based on actual historical exposure at the time the related revenues are recognized. Revenues for engineering services are recognized ratably over the contract term or as services are performed. Revenues from contracts with multiple elements are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered elements. Advances received from customers towards future engineering services, product purchases and in some cases capacity reservation are deferred until products are shipped to the customer, services are rendered or the capacity reservation period ends.
16.
We provide for sales returns and allowances as a reduction of revenues at the time of shipment based on historical experience and specific identification of an event necessitating an allowance. Estimates for sales returns and allowances require a considerable amount of judgment on the part of management.
Accounts Receivable
We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon historical experience, industry norms and specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates as we have in the past. Our accounts receivable are concentrated among a relatively few number of customers. Should there be a significant change in the liquidity or financial position of any one customer, resulting in an impairment of its ability to make payments, we may be required to increase the allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.
Inventories
We initiate production of a majority of our wafers after we have received an order from a customer. Generally we do not carry a significant inventory of finished goods except in response to specific customer requests or if we determine to produce wafers in excess of orders when we forecast future excess demand and capacity constraints. We seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. The total carrying value of our inventory is net of any reductions we have recorded to reflect the difference between cost and estimated market value of inventory that is determined to be obsolete or unmarketable based upon assumptions about future demand and market conditions. Reductions in carrying value are deemed to establish a new cost basis. Inventory is not written up if estimates of market value subsequently improve. We evaluate obsolescence by analyzing the inventory aging, order backlog and future customer demand on an individual product basis. If actual demand were to be substantially lower than what we have estimated, we may be required to write inventory down below the current carrying value. While our estimates require us to make significant judgments and assumptions about future events, we believe our relationships with our customers, combined with our understanding of the end-markets we serve, provide us with the ability to make reasonable estimates. The actual amount of obsolete or unmarketable inventory has been materially consistent with previously estimated write-downs we have recorded. We also evaluate the carrying value of inventory for lower-of-cost-or-market on an individual product basis, and these evaluations are intended to identify any difference between net realizable value and standard cost. Net realizable value is determined as the selling price of the product less the estimated cost of disposal. When necessary, we reduce the carrying value of inventory to net realizable value. If actual market conditions and resulting product sales were to be less favorable than what we have projected, additional inventory write-downs may be required.
Intangible Assets and Other Long-lived Assets
Intangible assets and other long-lived assets, including investments are recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net intangible and other long-lived assets acquired. The amounts and useful lives assigned to intangible assets acquired, impact the amount and timing of future amortization, and the amount assigned to in-process research and development is expensed immediately. The value of our intangible assets could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock, (iii) significant slowdown in the worldwide economy or the semiconductor industry or (iv) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or more frequently, if we believe indicators of impairment exist. In the process of our annual impairment review, we primarily use the income approach methodology of valuation, that includes the discounted cash flow method, as well as other generally accepted valuation methodologies to determine the fair value of our intangible assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
17.
In connection with the acquisition of Jazz, we engaged a third party appraiser to assist us in performing a valuation of all the assets and liabilities in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations” (‘‘SFAS No. 141’’). The fair values set forth in the accompanying unaudited condensed consolidated financial statements are based on preliminary valuations estimates of Jazz’s tangible and intangible assets. The final valuations, and any interim updated preliminary valuation estimates, may differ materially from these preliminary valuation estimates and, as a result, the final allocation of the purchase price may result in reclassifications of the allocated amounts that are materially different from the purchase price allocations reflected above.
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property, plant and equipment and amortizable intangible assets. Amortizable intangible assets subject to this evaluation include the valuation of our favorable real estate lease agreements, developed technology, customer backlog and trade name.
If and when an impairment evaluation of a long-lived asset is performed, estimated future undiscounted net cash flows expected to be generated by the asset over its remaining estimated useful life is determined. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the asset over the remaining estimated useful life, we record an impairment loss in the amount by which the carrying value of the asset exceeds the fair value. We determine fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in our current business model. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. If, as a result of our analysis, we determine that our amortizable intangible assets or other long-lived assets have been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations.
Accounting for Income Taxes
Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We believe our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances, and information available at the reporting date. For uncertain tax positions where it is more likely than not that a tax benefit will be sustained, we record the greatest amount of tax benefit that has a greater than 50 percent probability of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. For uncertain income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Our policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.
We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires that we recognize in our consolidated financial statements:
18.
• | deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or our tax returns; and |
• | the amount of taxes payable or refundable for the current year. |
The tax consequences of most events recognized in the current year's financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses and gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in our financial statements. It is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, in the future. Accordingly, a difference between the tax basis of an asset or a liability and its reported amount on the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected “more likely than not” to be realized.
To determine the amount of taxes payable or refundable for the current year, we are required to estimate our income taxes. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained, which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as valuation allowances against deferred tax assets, reserves for tax contingencies, utilization of tax credits and changes in or interpretation of tax laws in jurisdictions where we conduct operations
Utilization of net operating losses, credit carryforwards, and certain deductions may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions (“Section 382 limitations”). The tax benefits related to future utilization of federal and state net operating losses, tax credit carryforwards, and other deferred tax assets may be limited or lost if Section 382 limitations apply. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examinations from various tax authorities.
Pension Plans
We maintain a defined benefit pension plan and a postretirement health and life benefit plan for our employees covered by a collective bargaining agreement. For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon management's judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and cash funding requirements of our retirement plans.
RESULTS OF OPERATIONS
Three months ended March 30, 2007 compared with the three months ended March 31, 2006
For the three months ended March 30, 2007, we had a net loss of $11.7 million compared to a net profit of $0.2 million for the corresponding period in 2006. The results for the three months ended March 30, 2007 include the results of operations for Jazz from February 17, 2007 through March 30, 2007. Our primary source of income prior to the consummation of our initial business combination with Jazz was interest earned on the funds held in a trust account.
19.
Pro Forma Financial Information
The acquisition of Jazz is our first business combination and accordingly, we do not believe a comparison of the results of operations and cash flows for the quarter ended March 30, 2007 versus March 31, 2006 is very beneficial to our investors. In order to assist investors in better understanding the changes in our business between the quarters ended March 30, 2007 and March 31, 2006, we are presenting in the discussion below pro forma results of operations for the Company and Jazz for the three months ended March 30, 2007 and March 31, 2006 as if the acquisition of Jazz occurred on January 1, 2007 and January 1, 2006, respectively. We derived the pro forma results of operations from (i) the unaudited consolidated financial statements of Jazz for the period from December 30, 2006 to February 16, 2007 (the date of the Jazz acquisition) and the three months ended March 31, 2006, and (ii) our unaudited consolidated financial statements for the three months ended March 30, 2007 and March 31, 2006.
The pro forma results of operations are not necessarily indicative of the results of operations that may have actually occurred had the merger taken place on the dates noted, or the future financial position or operating results of us or Jazz. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The pro forma adjustments include adjustments for interest expenses (relating primarily to interest on the $166.8 million principal amount of convertible senior notes issued in December 2006) and increased depreciation and amortization expense as a result of the application of the purchase method of accounting.
Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired and liabilities assumed, based on various estimates of their respective fair values. We have engaged a third party appraiser to assist us in performing a valuation of Jazz’s assets and liabilities in accordance with SFAS No. 141. The depreciation and amortization expense adjustments set forth above are based on preliminary valuation estimates of Jazz’s tangible and intangible assets described in Note 1 to the unaudited condensed consolidated financial statements. The final valuation, and any interim updated preliminary valuation estimates, may differ materially from these preliminary valuation estimates and, as a result, the final allocation of the purchase price may result in reclassifications of the allocated amounts that are materially different from the purchase price allocations reflected herein. Any material change in the valuation estimates and related allocation of the purchase price could materially impact our depreciation and amortization expenses and our actual and pro forma results of operations. In addition, the pro forma results of operations for the three months ended March 30, 2007 do not include approximately $3.8 million in non-recurring charges relating to the write-off of in-process research and development incurred in connection with the acquisition.
Revenues
Our revenues are generated principally from the sale of semiconductor wafers and in part from the sale of photomasks and other engineering services. Net revenues are net of provisions for returns and allowances. Revenues are categorized by technology group into specialty process revenues and standard process revenues. Specialty process revenues include revenues from wafers manufactured using our specialty process technologies—advanced analog CMOS, radio frequency CMOS, or RF CMOS, high voltage CMOS, bipolar CMOS, or BiCMOS, SiGe BiCMOS, and bipolar CMOS double-diffused metal oxide semiconductor, or BCD, processes. Standard process revenues are revenues derived from wafers employing digital CMOS and standard analog process technologies.
This is our first quarter of reportable revenues. Prior to our acquisition of Jazz, we had no revenues.
20.
Pro Forma Net Revenues
The following table presents pro forma net revenues for the three months ended March 30, 2007 and March 31, 2006:
Pro Forma Net Revenues (in thousands) | |||||||||||||
Three Months Ended March 30, 2007 | Three Months Ended March 31, 2006 | ||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||
Specialty process revenues | $ | 38,458 | 80.0 | $ | 36,301 | 65.0 | |||||||
Standard process revenues | 9,638 | 20.0 | 19,559 | 35.0 | |||||||||
Net revenues | $ | 48,096 | 100.0 | $ | 55,860 | 100.0 |
On a pro forma basis, we posted a net revenue decline of $7.8 million or 13.9% from $55.9 million for the three months ended March 31, 2006 to $48.1 million for the corresponding period in 2007. This decline is the net result of an increase in specialty process revenues of $2.2 million or 5.9% from $36.3 million for the three months ended March 31, 2006 to $38.5 million for the corresponding period in 2007 and a decrease in standard process revenues of $9.9 million or 50.7% from $19.6 million for the three months ended March 31, 2006 to $9.6 million for the corresponding period in 2007.
The decline in pro forma standard process revenues can be attributed to the semiconductor industry cycle in general and specifically to reduced business from a single customer, whose purchases of Jazz products have predominantly been standard process wafers. Given the relative economics of the industry and excess inventory levels at this customer, our standard process revenues were disproportionately impacted during the first quarter of this year. While revenues from Jazz’s standard process technologies have declined over the past several quarters as our customers transition new standard process designs to foundries that focus on high volume, commodity oriented technologies and pricing, we believe that the revenue decline we experienced this quarter is an anomaly. As the market strengthens, we expect standard process revenues to remain relatively unchanged, though we expect a long-term trend to specialty process revenue accounting for an increasing percentage of our total revenues.
The pro forma revenue mix at 80% specialty process revenues and 20% standard process revenues for the three months ended March 30, 2007 compared to 65% and 35%, respectively, for the corresponding period in 2006 was mainly the result of the significant drop in standard process revenues which was primarily attributable to a single customer. While we intend to continue to offer our existing standard processes to our customers, we believe our competitive advantage is in our specialty process services.
Cost of Revenues
Cost of revenues consists primarily of purchased manufactured materials, including the cost of raw wafers, gases and chemicals, shipping costs, labor and manufacturing-related engineering services. Our cost of revenues for wafers manufactured by our manufacturing suppliers includes the purchase price and shipping costs that we pay for completed wafers. Cost of revenues also includes the purchase of photomasks and the provision of test services. We expense to cost of revenues defective inventory caused by fab and manufacturing yields as incurred. We also review our inventories for indications of obsolescence or impairment and provide reserves as deemed necessary. Royalty payments we make in connection with certain of our process technologies are also included within the cost of revenues. Cost of revenues also includes depreciation and amortization expense on assets used in the manufacturing process.
This has been our first quarter of reportable cost of revenues. Prior to our acquisition of Jazz, we had no cost of revenues.
21.
Pro Forma Cost of Revenues
The following table presents pro forma cost of revenues for the three months ended March 30, 2007 and March 31, 2006:
Pro Forma Cost of Revenues (in thousands) | |||||||||||||
Three Months Ended March 30, 2007 | Three Months Ended March 31, 2006 | ||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||
Cost of revenues | $ | 42,574 | 88.5 | $ | 45,050 | 80.6 | |||||||
Cost of revenues - depreciation & amortization of intangible assets | 9,056 | 18.8 | 8,264 | 14.8 | |||||||||
Total cost of revenues | $ | 51,630 | 107.3 | $ | 53,314 | 95.4 |
On a pro forma basis, cost of revenues decreased by $1.7 million or 3.2% to $51.6 million for the three months ended March 30, 2007, compared to $53.3 million for the corresponding period in 2006. Though pro forma revenues declined 13.9%, the corresponding pro forma cost of revenues as a percentage of revenue actually increased. This increase was primarily attributed to the lower fabrication capacity utilization during the first quarter of 2007. The lower capacity utilization is the direct result of market conditions and reduction in customer demand. Declining wafer fabrication during the last two quarters resulted in a greater allocation of fixed production costs to inventory resulting in increased cost per unit sold and correspondingly, increased cost of revenues. Cost of revenues for the three months ended March 30, 2007 also includes $0.2 million related to the reduction in personnel announced by Jazz during the quarter.
The amortization of acquired technology, trade name and backlog has been allocated to cost of revenues and primarily relates to the developed technology acquired from the acquisition of Jazz on February 16, 2007. Net depreciation expense also increased by $0.8 million due to additional capital expenditures associated with the expansion of the Newport Beach fabrication capacity in 2006.
Gross Margin
This has been our first quarter of reportable gross margin. Prior to our acquisition of Jazz, we had no gross margin.
Pro Forma Gross Margin
The following table presents pro forma gross margin for the three months ended March 30, 2007 and March 31, 2006:
Gross Margin (in thousands) | |||||||||||||
Three Months Ended March 30, 2007 | Three Months Ended March 31, 2006 | ||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||
Gross margin | $ | (3,534 | ) | (7.3 | ) | $ | 2,546 | 4.6 |
On a pro forma basis for the three months ended March 30, 2007, there was a negative gross margin of $3.5 million compared to a gross margin of $2.5 million for the corresponding period in 2006. The decrease in gross margin of $6.1 million was directly attributable to reduced revenue levels and increased cost of revenues resulting from lower fabrication capacity utilization.
Operating Expenses
Operating expenses increased to $10.6 million for the three months ended March 30, 2007, compared to $61,000 for the corresponding period in 2006. The expense increase is attributed to the acquisition of Jazz on February 16, 2007.
22.
Research and Development Expenses. Research and development expenses consist primarily of salaries and wages for process and technology research and development activities, fees incurred in connection with the license of design libraries and the cost of wafers used for research and development purposes.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and benefits for selling and administrative personnel, including the human resources, executive, finance and legal departments. These expenses also include fees for professional services and other administrative expenses.
Pro Forma Operating Expenses
The following table presents pro forma operating expenses for the three months ended March 30, 2007 and March 31, 2006:
Pro Forma Operating Expenses (in thousands) | |||||||||||||
Three Months Ended March 30, 2007 | Three Months Ended March 31, 2006 | ||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||
Operating expenses: | |||||||||||||
Research and development | $ | 4,979 | 10.4 | $ | 5,222 | 9.3 | |||||||
Selling, general and administrative | 10,239 | 21.3 | 5,429 | 9.7 | |||||||||
Amortization of intangible assets | 541 | 1.1 | 628 | 1.1 | |||||||||
Total operating expenses | $ | 15,759 | 32.8 | $ | 11,279 | 20.1 |
On a pro forma basis, operating expenses increased $4.5 million to $15.8 million for the three months ended March 30, 2007 from $11.3 million for the corresponding period in 2006.
The decrease in research and development expense of $0.2 million was the net result of higher expense related to engineering wafers offset by lower engineering expense related to the PolarFab process qualification. Research and development for the three months ended March 30, 2007 also includes $0.1 million of additional expenses related to the reduction in personnel announced by Jazz during the quarter.
The increase in selling, general and administrative expenses of $4.8 million can primarily be attributed to:
· | $3.0 million in acquisition-related expenses incurred by Jazz during the first quarter of 2007 prior to the acquisition; |
· | $1.3 million in additional costs associated with the reduction in personnel and the departure of the former chief executive officer of Jazz announced during the quarter; and |
· | $0.5 million of net increase in expenses we incurred in connection with reporting and filing requirements as a publicly-traded company during the first quarter of 2007, off-set by reduced stock compensation expense. Selling, general and administrative expenses for the corresponding quarter in 2006 were $0.1 million. |
The decrease of amortization of intangible assets of $0.1 million reflects the change in pre-acquisition amortization expense.
23.
Interest and Other Income
The following table presents interest and other income for the three months ended March 30, 2007 and March 31, 2006:
Jazz Technologies (in thousands) | |||||||||||||
Three Months Ended March 30, 2007 | Three Months Ended March 31, 2006 | ||||||||||||
Amount | % of Net Revenue | Amount | % of Net Revenue | ||||||||||
Interest income | $ | (2,130 | ) | (4.4 | ) | $ | (218 | ) | 0 | ||||
Interest expense | 3,715 | 7.7 | 2 | 0 | |||||||||
Interest, net | $ | 1,585 | 3.3 | $ | (216 | ) | 0 |
Interest income for the three months ended March 30, 2007 mainly represents interest earned on the net proceeds of our initial public offering and the private placement of our convertible senior notes for the period from January 1, 2007 through the date of the acquisition. Interest expense for the three months ended March 30, 2007 mainly represents interest on our convertible senior notes issued in December 2006.
CHANGES IN FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 30, 2007, we had cash and cash equivalents of $32.5 million, investments in marketable securities of $8.0 million and restricted cash of $2.6 million. Additionally, as of March 30, 2007, we had $63.8 million of availability on our line of credit with Wachovia. As of December 31, 2006, we had cash and cash equivalents of $0.6 million and cash held in trust and escrow accounts of $334.5 million.
Net cash used by operating activities was $13.6 million during the first three months of 2007, and primarily resulted from our net loss, net of non-cash operating expenses of $2.4 million and changes in operating assets and liabilities of $11.2 million. Net cash used by operating activities for the corresponding period in 2006 was $0.1 million and reflected the result of net changes in operating assets and liabilities.
Net cash provided by investing activities was $113.6 million for the first three months of 2007 and primarily represented the funds used for the acquisition of Jazz and the purchase of property and equipment, net of proceeds from the sale of short term securities and funds released from the trust and escrow account. On February 16, 2007, we completed the acquisition of all of the outstanding capital stock of Jazz for a net purchase price of $236.3 million in cash, net of $26.1 million of cash that was acquired. Net cash used by investing activities for the corresponding period in 2006 was $164.4 million and represented the investment of the proceeds of the Company’s initial public offering into a trust account.
Net cash used by financing activities was $68.1 million for the first three months of 2007 and represents $33.2 million of payments to common stockholders who elected to convert their shares into cash, $25.0 million of funds used to repurchase common stock and warrants during the first quarter 2007, and the payment of $10.0 million in fees associated with the acquisition and debt financings. Net cash provided by financing activities for the corresponding period in 2006 was $165.2 million and primarily represented the proceeds of our initial public offering.
On January 11, 2007, we announced that our Board of Directors authorized a stock and warrant repurchase program under which we may purchase up to $50 million of our common stock and warrants through July 15, 2007. Repurchases may be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended at any time, or from time to time, without prior notice. As of March 30, 2007, we had repurchased 2,957,761 shares of our common stock and 11,953,259 of our warrants under this program for an aggregate of $25.1 million.
24.
As of March 30, 2007 and March 31, 2006, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
We believe, based on our current plans and current levels of operations, that our cash from operations, together with cash and cash equivalents, short-term investments and available line of credit, we will have sufficient funds for our operations for at least the next 12 months. Poor financial results, unanticipated expenses, acquisitions of technologies or businesses or strategic investments could give rise to additional financing requirements sooner than we would expect. There can be no assurances that equity or debt financing will be available when needed or, if available, that the financing will be on terms satisfactory to us and not dilutive to our then current stockholders.
Contractual Obligations
Lease of Facilities
We lease our headquarters and Newport Beach, California fabrication and probing facilities from Conexant Systems, Inc. under non-cancelable operating leases through March 2017. We have the option to extend the terms of each of these leases for two consecutive five-year periods. Our rental payments under these leases consist solely of our pro rata share of the expenses incurred by Conexant in the ownership of these buildings. We have estimated future minimum costs under these leases based on actual costs incurred during 2006 and applicable adjustments for increases in the consumer price index. We are not permitted to sublease space that is subject to these leases without Conexant’s prior approval.
Convertible Senior Notes
On December 19, 2006 and December 21, 2006, we completed private placements of $166.8 million aggregate principal amount of 8% convertible senior notes due 2011 (“convertible senior notes”). The gross proceeds from the convertible senior notes were placed in escrow pending completion of the acquisition of Jazz.
On February 16, 2007, the conditions to release the escrowed proceeds net of debt issuance costs were released to us.
The convertible senior notes bear interest at a rate of 8% per annum payable semi-annually on each June 30 and December 31, beginning on June 30, 2007. We may redeem the convertible senior notes on or after December 31, 2009 at agreed upon redemption prices, plus accrued and unpaid interest. The holders of the convertible senior notes have the option to convert the convertible senior notes into shares of our common stock at an initial conversion rate of 136.426 shares per $1,000 principal amount of convertible senior notes, subject to adjustment in certain circumstances, which is equivalent to an initial conversion price of $7.33 per share.
25.
Wachovia Line of Credit
On February 28, 2007, we entered into an amended and restated loan and security agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead arranger, bookrunner and syndication agent, and Wachovia Capital Finance Corporation (Western), as administrative agent, and Jazz and Newport Fab, LLC, as borrowers, with respect to a three-year senior secured asset-based revolving credit facility in an amount of up to $65 million. The maturity date of the facility is February 28, 2010, unless earlier terminated. Borrowing availability under the facility as of March 30, 2007 was $60.0 million. As of March 30, 2007, we had zero borrowings outstanding and $1.2 million in letters of credit committed under the facility.
Jazz Acquisition Contingent Payments
As part of the acquisition of Jazz, we acquired a 10% interest in HHNEC (Shanghai Hau Hong NEC Electronics Company, Ltd.). The investment is carried at $19.3 million which is the fair value based upon the application of the purchase method of accounting. As a result of the acquisition of Jazz, we are obligated to pay additional amounts to former stockholders of Jazz if we realize proceeds in excess of $10 million from a liquidity event during the three year period following the completion of the acquisition of Jazz. In that event, we will pay an amount equal to 50% of the proceeds over $10 million.
Royalty Obligations
We have agreed to pay to Conexant Systems, Inc. a percentage of our gross revenues derived from the sale of SiGe products to parties other than Conexant and its spun-off entities through March 2012. Under our technology license agreement with Polar Semiconductor, Inc., or PolarFab, we have also agreed to pay PolarFab certain royalty payments based on a decreasing percentage of revenues from sales of devices manufactured for PolarFab’s former customers.
Operating Leases
We also have commitments consisting of software leases and facility and equipment licensing arrangements.
Future minimum payments under non-cancelable operating leases as of March 30, 2007 are as follows:
Payment Obligations by Year | |||||||||||||||||||
Remainder of 2007 | 2008 | 2009 | 2010 | Thereafter | Total | ||||||||||||||
(in thousands) | |||||||||||||||||||
Operating leases | $ | 1,975 | $ | 2,520 | $ | 2,375 | $ | 2,300 | $ | 14,259 | $ | 23,429 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our market risk exposures are related to our cash, cash equivalents and investments in marketable securities. We invest our excess cash in highly liquid short-term investments, municipal securities, commercial paper and corporate bonds. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and therefore impact our cash flows and results of operations.
Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) were effective as of the end of the period covered by this report.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and our chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
26.
Changes In Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
In addition to the other information contained in this Form 10-Q, and risk factors set forth in our most recent SEC filings, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
The risk factors included herein include any material changes to and supersede the risk factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. We have marked with asterisks (**) those risk factors that reflect substantive changes from the risk factors included in our Annual Report Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2006.
Risks Related to Our Business and Industry
**We currently depend on Jazz Semiconductor’s spin-off customers, Conexant Systems, Inc. and Skyworks Solutions, Inc., for a significant portion of our revenues. A reduction in business from either one of these customers would adversely affect our revenues and could seriously harm our business.
For 2005, 2006 and the first quarter of 2007, Conexant Systems, Inc. and Skyworks Solutions, Inc., an entity that resulted from the spin-off of Conexant’s wireless division and subsequent merger with Alpha Industries, Inc., Jazz Semiconductor’s spin-off customers, together accounted for 60.5%, 38.9% and 37.8% of Jazz Semiconductor’s revenues, respectively (which includes the effect of a charge against revenue from Conexant of $17.5 million during the second quarter of 2006 associated with the termination of the Conexant wafer supply agreement described further below). We expect that we will continue to be dependent upon these spin-off customers for a significant portion of our revenues for the foreseeable future. Jazz Semiconductor entered into wafer supply agreements with Conexant and Skyworks; however, the minimum purchase requirements under those agreements terminated in March 2005. Jazz Semiconductor and Conexant agreed to terminate Conexant’s wafer supply agreement as of June 26, 2006. The initial term of the Skyworks wafer supply agreement expired in March 2007. We expect that as Conexant and Skyworks transition from their current designs to next generation designs, particularly with respect to designs based on standard process technologies, their business with us will decline significantly unless we capture a significant portion of their new designs based on specialty process technologies. At its formation, Jazz Semiconductor licensed back to Conexant certain patent and intellectual property rights to make Conexant products. Conexant may use this license to have its products produced for it by third party manufacturers, rather than us. Jazz Semiconductor’s revenues from each of Conexant and Skyworks declined in 2006 and we expect that they will continue to decline over the long term. Loss or cancellation of business from, significant changes in deliveries to, or decreases in the prices of services sold to, either one of these customers has, in the past, significantly reduced Jazz Semiconductor’s revenues for a reporting period and could, in the future, harm our margins, financial condition and business.
We may not be successful in continuing to add new customers or in securing significant volume from new and existing customers.
In order to be successful under our business plan, we need to continue to add new customers whose products use our specialty process technologies and to generate significant revenues from those customers. We cannot assure you that we will be able to attract new customers or generate significant revenues from existing or new customers in the future. The sales cycle for our services is long and requires us to invest significant resources as we work with each potential customer, without assurance of sales to that potential customer. Currently none of our significant customers has an obligation to purchase a minimum number of wafers from us.
27.
When a new or existing customer decides to design a specific semiconductor using one of our processes, we define this as a design win. The period between design win and volume production for a successful product design often takes between eight and 26 months. Due in part to the length of this process, we cannot assure you that a given design will actually be implemented in our customer’s product and result in commercial orders or generate any revenues. The customer may decide to put on hold or abandon a product incorporating a design win for one or a combination of reasons such as lack of market demand, budgetary or resource constraints, and development of a superior, competitive product. If we are not successful in adding new customers who use our specialty process technologies, do not secure new design wins with new or existing customers, or do not convert design wins with new and existing customers into revenue generating products, our revenues and results of operations will be harmed.
Our business plan is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers for the production of semiconductors using specialty process technologies. Our business will not be successful if this trend does not continue to develop in the manner we expect.
We operate as an independent semiconductor foundry focused primarily on specialty process technologies. Our business model assumes that demand for these processes within the semiconductor industry will grow and will follow the broader trend towards outsourcing foundry operations. Although the use of foundries is established and growing for standard complementary metal oxide semiconductor processes, the use of outsourced foundry services for specialty process technologies is less common and may never develop into a significant part of the semiconductor industry. If fabless companies and vertically integrated device manufacturers opt not to, or determine that they cannot, reduce their costs or allocate resources and capital more efficiently by accessing independent specialty foundry capacity, the manufacture of specialty process technologies may not follow the trend of standard complementary metal oxide semiconductor processes. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies we intend to target, our business and results of operations will be harmed.
If we cannot compete successfully in the highly competitive foundry segment of the semiconductor industry, our business will suffer.
We compete internationally and domestically with dedicated foundry service providers such as Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation, Semiconductor Manufacturing International Corporation and Chartered Semiconductor Manufacturing Ltd., which, in addition to providing leading edge complementary metal oxide semiconductor process technologies, also have capacity for some specialty process technologies. We also compete with integrated device manufacturers that have internal semiconductor manufacturing capacity or foundry operations, such as IBM. In addition, several new dedicated foundries have commenced operations and may compete directly with us. Many of our competitors have higher capacity, longer operating history, longer or more established relationships with their customers, superior research and development capability and greater financial and marketing resources than us. As a result, these companies may be able to compete more aggressively over a longer period of time than us.
IBM competes in both the standard complementary metal oxide semiconductor segment and in specialty process technologies. In addition, there are a number of smaller participants in the specialty process arena. Taiwan Semiconductor Manufacturing Company publicly announced in 2001 that it planned to use the 0.18 micron or greater silicon germanium bipolar complementary metal oxide semiconductor process technologies that it licensed from Conexant at that time to accelerate its own foundry processes for the networking and wireless communications markets. In the event Taiwan Semiconductor Manufacturing Company or other dedicated foundries determine to focus their business on these processes, they will compete directly with us in the specialty process market, and such competition could harm our business.
As our competitors continue to increase their manufacturing capacity, there could be an increase in specialty semiconductor capacity during the next several years. As specialty capacity increases there may be more competition and pricing pressure on our services, and underutilization of our capacity may result. Any significant increase in competition or pricing pressure may erode our profit margins, weaken our earnings or increase our losses.
28.
In addition, some semiconductor companies have advanced their complementary metal oxide semiconductor designs to 90 nanometer or smaller geometries. These smaller geometries may provide the customer with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. Our specialty processes will therefore compete with these processes for customers and some of our potential and existing customers could elect to design these advanced complementary metal oxide semiconductor processes into their next generation products. We are not currently capable of internally manufacturing at 90 nanometer or smaller geometries and are currently dependent on third parties to meet our customers’ demands for these smaller geometries. If our potential or existing customers choose to design their products using these advanced complementary metal oxide semiconductor processes, our business may suffer.
Our ability to compete successfully may depend to some extent upon factors outside of our control, including general industry and economic trends, import and export controls, exchange controls, exchange rate fluctuations, interest rate fluctuations and political developments. If we cannot compete successfully in our industry, our business and results of operations will be harmed.
We have incurred a significant amount of debt, which may limit our ability to fund general corporate requirements and obtain additional financing, limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic and industry conditions.
We have incurred a substantial amount of indebtedness to finance the acquisition of Jazz Semiconductor, related transaction costs and deferred underwriting fees and fund our operations going forward. In December 2006, we issued $166.8 million aggregate principal amount of convertible senior notes in private placements. In addition, we have entered into an agreement with Wachovia Capital Finance Corporation with respect to a three-year senior secured revolving credit facility in an amount of up to $65 million, although to date we have incurred less than $1 million of debt under the senior secured credit facility. As a result of the substantial fixed costs associated with the convertible senior notes and the potential for additional substantial fixed costs in the event we incur significant debt under the Wachovia credit facility, we expect that:
· | a decrease in revenues will result in a disproportionately greater percentage decrease in earnings; |
· | we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; |
· | we may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures; and |
· | we may not have sufficient liquidity to respond to business opportunities, competitive developments and adverse economic conditions. |
These debt obligations may also impair our ability to obtain additional financing, if needed. Our indebtedness under the senior secured revolving credit facility is secured by substantially all of our assets, leaving us with limited collateral for additional financing. Moreover, the terms of our indebtedness under the senior secured revolving credit facility restrict our ability to take certain actions, including the incurrence of additional indebtedness, mergers and acquisitions, investments and asset sales. Our ability to pay the fixed costs associated with our debt obligations will depend on our operating performance and cash flow, which in turn depend on general economic conditions and the semiconductor market. A failure to pay interest or indebtedness when due could result in a variety of adverse consequences, including the acceleration of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under or repay the accelerated indebtedness or otherwise cover our fixed costs.
29.
Decreases in demand and average selling price for end-user applications of our customers’ products may decrease demand for our services and may result in a decrease in our revenues and results of operations.
The vast majority of our revenues are derived from customers who use our services to produce semiconductors for use in the wireless and high-speed wireline communications, consumer electronics, automotive and industrial end markets. Any significant decrease in the demand for end-user applications within these end markets will also result in decreased demand for our customers’ products. Our customer base is highly concentrated and variations in orders from these customers, including Jazz Semiconductor’s spin-off and post-spin-off customers, tend to vary significantly by customer based upon that customer’s inventory levels of electronic systems and semiconductors, changes in end-user demand for that customer’s product, product obsolescence and new product development cycles. If demand for semiconductors manufactured using our services decreases, the demand for our services will also decrease, which may result in a decrease in our revenues and earnings. In addition, the historical and continuing trend of declining average selling prices of end-user applications places pressure on the prices of the components that go into these end-user applications. If the average selling prices of end-user applications continue to decrease, the pricing pressure on components produced by us for our customers may lead to a reduction of our revenues and earnings.
**If we are not able to continue transitioning our product mix from standard complementary metal oxide semiconductor process technologies to specialty process technologies, our business and results of operations may be harmed.
Since Jazz Semiconductor’s separation from Conexant, it has focused its research and development and marketing efforts primarily on specialty process technologies and adding new customers. These specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide semiconductor processes and double-diffused metal oxide semiconductor processes. We anticipate that any growth in our business will primarily result from these technologies, particularly from post-spin-off customers. During 2005, 2006 and the first quarter of 2007, Jazz Semiconductor derived 62.3%, 79.2% and 80.0%, respectively, of its revenues from specialty process technologies and 37.7%, 20.8% and 20.0%, respectively, of its revenues from standard complementary metal oxide semiconductor processes (which includes the effect of a charge against revenue from Conexant of $17.5 million during the second quarter of 2006 associated with the termination of the Conexant wafer supply agreement). To be competitive, reduce this historical dependence on standard process technologies and successfully implement our business plan, we will need to increase our percentage of revenues derived from specialty processes technologies. In order to expand and diversify our customer base, we need to identify and attract customers who will use the specialty process technologies we provide. We cannot assure you that demand for our specialty process technologies will increase or that we will be able to attract customers who use them. Some of the large dedicated foundries offer standard process technologies that support 90 nanometer or smaller geometries that may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. If we are not able to increase our percentage of revenues from specialty process technologies, our business and results of operations may be harmed.
In addition, there are significantly more providers of foundry services for standard complementary metal oxide semiconductor processes than specialty process technologies, and consequently much greater competition. Because we intend to continue to focus on specialty process technologies, we do not plan to invest in the research and development of more advanced standard complementary metal oxide semiconductor processes. As standard complementary metal oxide semiconductor process technologies continue to advance, we will not remain competitive in these process technologies. If our current customers switch to another foundry for standard complementary metal oxide semiconductor process technologies at a rate that is greater than our ability to increase our revenues from our specialty process technologies, our business and results of operations will be harmed.
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We are dependent on the highly cyclical semiconductor market, which has experienced significant and sometimes prolonged downturns and overcapacity. A significant or prolonged downturn in this industry would cause our revenues, earnings and margins to decline, potentially more significantly than declines for integrated device manufacturers, because such manufacturers may reduce their purchases from foundries before reducing their own internal capacity and they may make additional capacity available on a foundry basis.
Our business is dependent upon market conditions in the highly cyclical semiconductor industry. Downturns in this industry may lead to reduced demand for our services, increased pricing pressure and variations in order levels from our customers that may directly result in volatility in our revenues and earnings. From time to time, the semiconductor industry has experienced significant, and sometimes prolonged, downturns. Historically, companies in the semiconductor industry have aggressively expanded their manufacturing capacity during periods of increased demand, as was the case in 2000. As a result, periods of overcapacity in the semiconductor industry have frequently followed periods of increased demand. Starting in the first quarter of 2001, the semiconductor industry experienced a significant downturn due to a number of factors, including a slowdown in the global economy, oversupply and overcapacity in the semiconductor industry and a worldwide inventory adjustment. Due to the significant downturn in the industry, most, if not all, integrated device manufacturers that had previously begun purchasing wafer fabrication services from foundries reduced purchases from such foundries, and many integrated device manufacturers allocated a portion of their internal capacity to contract production of semiconductor wafers for others, particularly fabless companies that we also target as customers.
Any increase in the portion of internal capacity allocated to contract production of semiconductor wafers for others by integrated device manufacturers or any significant downturn in our customers’ markets or in general economic conditions would also likely result in a reduction in demand for our services. Any reduction in demand for our services may force us to operate at significantly less than full capacity or idle our fab for a period of time. This would reduce our margins and harm our financial condition and results of operations. We cannot assure you that any of our customers will continue to place orders with us in the future at the same levels as in prior periods.
**Jazz Semiconductor has experienced net losses during its limited history operating as an independent company and we may not be able to sustain profitability.
Since the inception of Jazz Semiconductor’s business on March 12, 2002, it has incurred cumulative net losses through March 30, 2007 of approximately $61.6 million. While Jazz Semiconductor achieved net income for some quarters, it predominantly incurred net losses in its reported results of operations and may continue to do so in the future. We cannot assure you that we will be able to sustain profitability on a quarterly or annual basis in the future. If we are not able to sustain profitability, our stock price may decline.
Jazz Semiconductor’s historical financial performance may not be indicative of our future results.
Since Jazz Semiconductor’s inception, a significant majority of its revenues have been derived from its spin-off customers, and a large percentage of its revenues have primarily been derived from products manufactured using standard complementary metal oxide semiconductor processes that are no longer the focus of its business. As customers design their next generation products for smaller geometry complementary metal oxide semiconductor processes, they may look to other foundries to provide their requisite manufacturing capacity. As a result, it is unlikely that we will continue to generate the same level of revenues from our standard complementary metal oxide semiconductor processes in the future as we shift our focus and operations to our more specialized processes: advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide semiconductor processes and double-diffused metal oxide semiconductor processes.
The pro forma financial statements contained in our SEC filings are not an indication of our actual financial condition or results of operations following the merger with Jazz Semiconductor.
The pro forma financial statements contained in our SEC filings, including in the proxy statement relating to stockholder approval of our acquisition of Jazz Semiconductor and our report on Form 8-K filed in connection with the consummation of our acquisition of Jazz Semiconductor, are not an indication of our actual financial condition or results of operations following the merger with Jazz Semiconductor. The pro forma financial statements have been derived from our and Jazz Semiconductor’s historical financial statements and many adjustments and assumptions have been made regarding the combined company after giving effect to the merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. As a result, our actual financial condition and results of operations following the merger may not be consistent with, or evident from, these pro forma financial statements.
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In addition, our actual earnings per share, which is referred to as EPS, following the merger, may decrease below that reflected in the pro forma financial information for several reasons. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our actual EPS following the merger.
We expect our operating results to fluctuate from quarter-to-quarter and year-to-year, which may make it difficult to predict our future performance and could cause our stock price to fluctuate and decline.
Our revenues, expenses and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly from quarter-to-quarter and year-to-year in the future due to a number of factors, many of which are beyond our control. A significant portion of our overall costs are fixed, so reductions in demand for our services or changes in the mix of products towards standard complementary metal oxide semiconductor products, which typically have lower selling prices, or a greater weighting of revenues from Jazz Semiconductor’s spin-off customers, which typically have lower margins than revenues from new customers, can have a negative effect on our results of operations, as we have limited ability to reduce costs to respond to revenue declines. We expect fluctuations in our revenues, expenses and results of operations to continue for a number of reasons, including:
· | the level of utilization and yield of our manufacturing facility; |
· | slow or negative growth in the markets served by our customers; |
· | the loss of a key customer or a significant portion of our business; |
· | the rescheduling or cancellation of large orders by our customers, the deferral of shipment of our finished products to customers, or the failure of a customer to pay us in a timely manner; |
· | unanticipated delays or problems in introducing new products by us or our customers; |
· | shifts by integrated device manufacturers between internal and outsourced production; |
· | our or our competitors’ new product, service or technological offerings; |
· | changes in our pricing policies or the pricing policies of our competitors; |
· | the mix of process technologies used at our and our manufacturing suppliers’ facilities; |
· | rescheduling or cancellation of planned capital expenditures, or actual capital expenditures exceeding planned capital expenditures; |
· | costs related to possible acquisitions of technologies or businesses; |
· | customer concessions, or returns of wafers due to quality or reliability issues; and |
· | changes in foreign currency exchange rates. |
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations.
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Most of our customers do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues, adjust production costs and allocate capacity efficiently on a timely basis.
Most of our customers generally place purchase orders only three to four months before shipment. Most of our customers are also generally able to cancel or delay the delivery of orders on short notice. In addition, due to the cyclical nature of the semiconductor industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog and the limited certainty of customer orders can make it difficult for us to forecast our revenues in future periods and allocate our capacity efficiently. Moreover, our expense levels are based in part on our expectations of future revenues and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls.
Our ability to achieve and maintain profitability depends significantly on our ability to obtain high capacity utilization and fab yields at our Newport Beach, California fab.
Our ability to achieve and maintain profitability depends significantly on our ability to:
· | obtain high capacity utilization at our Newport Beach, California fab, which is measured by the level of its production activity in relation to its available production capacity; |
· | continuously maintain and improve our fab yield, which is the number of wafers completed that meet certain acceptance criteria, expressed as a percentage of total wafers started; and |
· | continuously maintain and improve our manufacturing yield, which is the percentage of functioning die on a wafer, expressed as a percentage of total die per wafer. |
During periods of lower capacity utilization, fab yield and manufacturing yield, we manufacture and sell fewer wafers over which to allocate our fixed costs. Because a large percentage of our costs are fixed, this can significantly and adversely affect our gross margins and our ability to achieve and maintain profitability. While high capacity utilization rates are a significant contributor to our ability to achieve profitability, numerous other factors also affect our operating results and our ability to achieve profitability. Accordingly, we cannot assure you that if we achieve high capacity utilization rates we will be profitable. We have in the past and may in the future achieve high capacity utilization rates in a quarter but still experience net losses in that quarter due to unrelated factors, such as one-time merger-related expenses and write-offs.
Our Newport Beach, California fab yields and manufacturing yields also directly affect our ability to attract and retain customers, as well as the price of our services. If we are unable to achieve high capacity utilization and continuously maintain or improve our yields, our margins may substantially decline and our business and results of operations may be harmed.
We may not be able independently to develop or secure on commercially reasonable terms critical process technology, which may result in our loss of customers and market share and may cause us to incur an investment obligation or give up rights.
Enhancing our manufacturing process technologies is critical to our ability to provide services for our customers. The semiconductor industry and the process technologies used are constantly changing. If we do not anticipate these changes in process technologies and rapidly develop innovative technologies, or secure on commercially reasonable terms the rights to use critical process technology developed by others, we may not be able to provide specialty foundry services on competitive terms. If we are unable to maintain the ability to provide specialty foundry services on competitive terms, some of our customers may use the services of our competitors instead of our services.
In addition, our research and development efforts are focused primarily on upgrading our specialty process technologies and developing advanced specialty process technologies for new applications. Many other foundries continue to invest significant amounts in the research and development of standard process technologies. For example, some foundries have developed standard process technologies of 90 nanometer or smaller geometries that may provide customers with performance and integration features that may be comparable to, or exceed, features offered by our specialty process technologies, and may be more cost-effective at higher production volumes for certain applications, such as when a large amount of digital content is required in a mixed-signal semiconductor and less analog content is required. We are not currently capable of internally manufacturing at 90 nanometer or smaller geometries and are currently dependent on third parties to meet our customers’ demands for these smaller geometries. As a result, we expect that we will need to offer, on an ongoing basis, increasingly advanced and cost-effective specialty process technologies prior to these or comparable technologies and processes being offered by our competitors. If we are unable to continue transitioning our product mix from standard process technologies to specialty process technologies and our standard process technologies are unable to compete in the marketplace, we will lose market share and our revenues are likely to decline.
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We intend to expand our operations, which may strain our resources and increase our operating expenses, and if we expand our business through acquisitions or strategic relationships we may not be able to integrate them successfully in a cost-effective and non-disruptive manner.
Our success depends on our ability to expand our operating capacity and to enhance our process technologies in response to changing customer demands, competitive pressures and technologies. We may expand our capacity and enhance our process technologies, both domestically and internationally, through internal growth, strategic relationships or acquisitions. As we expand our capacity, broaden our customer base or increase the breadth of specialty process technologies that we offer, our management resources may become constrained, we may not adequately be able to service our customers and our business may be harmed. We may determine that it is necessary to grow our business through acquisitions and strategic relationships. We cannot assure you that we will be successful in reaching agreements to acquire other businesses or to enter into strategic relationships or, if such agreements are reached, that their terms will be favorable to us. Even if we complete acquisitions or enter into strategic relationships we may not be successful in integrating the acquisition or adapting our business to the strategic relationship. Integrating any business or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses or technologies effectively, our business will suffer. We also expect that any expansion of our business will strain our systems and operational and financial controls. In addition, we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls. If we fail to do so, our growth will be limited. Our officers have limited experience in managing large or rapidly growing businesses. Further, our officers have limited experience managing companies through acquisitions. If we fail to effectively manage our planned expansion of operations, our business and results of operations may be harmed.
If we fail to adequately protect our intellectual property rights, we may lose valuable assets, experience reduced revenues and incur costly litigation to protect our rights.
We depend in part on patents and other intellectual property rights covering our design and manufacturing processes. We hold patents and patent licenses and we intend to continue to seek patents on our inventions relating to product designs and manufacturing processes. The process of seeking patent protection can be long and expensive, however, and we cannot guarantee that all of our currently pending or future applications will result in issued patents. Even if patents are issued, they may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage. Because patent and other intellectual property litigation is costly and unpredictable, our attempts to protect our rights or to defend ourselves against claims made by others could impose high costs and risks on our business. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business and results of operations.
A portion of our intellectual property is also used by our manufacturing suppliers in China, a country in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater risk for us as we seek to increase our use of manufacturing capacity in China, which provides less protection for intellectual property than does the United States. Our inability to enforce our intellectual property rights, and the inability of our manufacturing suppliers to enforce their intellectual property rights in some countries, especially China, may harm our business and results of operations.
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If we are subject to a protracted infringement claim or one that results in significant damage awards, our results of operations may be adversely affected.
Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are either published or granted. Due to the complexity of the technology used and the multitude of patents, copyrights and other overlapping intellectual property rights, the semiconductor industry is characterized by frequent litigation regarding patent, trade secret, copyright and other intellectual property rights. It is common for patent owners to assert their patents against semiconductor manufacturers. From time to time we receive communications from third parties asserting that their patents cover certain of our technologies and alleging infringement of their intellectual property rights. We expect that we will continue to receive such communications in the future. As a result, we engage in discussions from time to time concerning the licensing of third party technology or cross-licensing such technology and its technology. We cannot assure you that we will be successful in reaching agreements to license or cross-license a third party’s intellectual property or, if such agreements are reached, that their terms will be favorable to us. In the event any third party were to make a successful claim against us or our customers that we or our customers have misappropriated their trade secrets or infringed on their patents, copyrights or other intellectual property rights, we or our customers could be required to:
· | seek to acquire licenses, which may not be available on commercially reasonable terms, if at all; |
· | discontinue using certain process technologies, which could cause us to stop manufacturing selling, offering to sell, using or importing certain products; |
· | pay substantial monetary damages; and |
· | seek to develop non-infringing technologies, which may not be feasible. |
In addition, third parties, some of which are potential competitors, may initiate litigation against our manufacturing suppliers, alleging infringement of their proprietary rights with respect to existing or future materials, processes or equipment. In the event of a successful claim of infringement and the failure or inability to license or independently develop alternative, non-infringing technology on a timely basis by us or our manufacturing suppliers, we may be unable to obtain sufficient manufacturing capacity or offer competitive products. As a result, our product portfolio would be limited, and we would experience increased expenses.
Any one of these developments could place substantial financial and administrative burdens on us and hinder our business. We may not have sufficient resources to defend ourselves or our customers against litigation. If we fail to obtain necessary licenses or if litigation relating to patent infringement or other intellectual property matters occurs, it could hurt our reputation in our industry and prevent us from manufacturing particular products or applying particular process technologies, which could reduce our opportunities to generate revenues. As a result, our business, operating results and financial condition could be significantly harmed.
The international nature of our business exposes us to financial and regulatory risks.
A significant portion of our planned manufacturing capacity, as well as our ability to provide assembly and test services through subcontractors, is derived from our international relationships with manufacturers and others, particularly in Asia. We have an established office in Asia and are seeking to expand our global presence by opening additional offices, particularly in Asia and Europe. To date, we do not have significant sales in foreign countries. If we are successful in expanding our global presence, we will be more significantly exposed to risks associated with international operations. International operations are subject to a number of risks, including the following:
· | political and economic instability, international terrorism and anti-American sentiment; |
· | laws and business practices favoring local companies; |
· | withholding tax obligations on license revenues that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties; |
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· | the timing and availability of export licenses and permits; |
· | tariffs and other trade barriers; |
· | difficulties in collecting accounts receivable; |
· | currency exchange risks; |
· | burdens and costs of compliance with a variety of foreign laws; |
· | less effective protection of intellectual property than is afforded to us in the United States; and |
· | difficulties and costs of staffing and managing foreign operations. |
In addition, the United States or foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products, leading to a reduction in sales and profitability in that country. The geographical distance between the United States, Asia and Europe also creates a number of logistical and communication challenges. We cannot assure you that we will not experience any serious harm in connection with our international operations.
Failure to comply with governmental regulations by us, our manufacturing suppliers or our customers could reduce our sales or require design modifications.
The semiconductors we produce and the export of technologies used in our manufacturing processes may be subject to U.S. export control and other regulations as well as various standards established by authorities in other countries. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic foreign regulatory approvals or certificates could materially harm our business by reducing our production capacity, requiring modifications to our processes that we license to our foreign manufacturing suppliers, or requiring unacceptable modifications to the products of our customers. If controlled, neither we nor our customers may export such products without obtaining an export license. In addition, we depend on our manufacturing suppliers in China for a significant portion of our planned manufacturing capacity, and export licenses may be required in order for us to transfer technology related to our manufacturing processes to our foreign manufacturing suppliers. These restrictions may make foreign competitors facing less stringent controls on their processes and their customers’ products more competitive in the global market than us or our customers are. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised.
Our manufacturing suppliers in China are subject to extensive government regulation, which can lead to uncertainty.
ASMC and HHNEC, which we refer to as our manufacturing suppliers, are located in China. We currently rely on ASMC and HHNEC for approximately 10% of our manufacturing capacity and expect that we could be dependent upon these manufacturers for approximately 10% to 20% of our future manufacturing capacity in the next two years. The Chinese government has broad discretion and authority to regulate the technology industry in China. China’s government has also implemented policies from time to time to regulate economic expansion in China. The economy of China has been transitioning from a planned economy to a market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. New regulations or the readjustment of previously implemented regulations could require us and our manufacturing suppliers to change our business plan, increase our costs or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results.
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In addition, the Chinese government and provincial and local governments have provided, and continue to provide, various incentives to domestic companies in the semiconductor industry, including our manufacturing suppliers and competitors, in order to encourage development of the industry. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to us or our manufacturing suppliers could adversely affect our business and operating results.
A significant portion of our workforce is unionized, and our operations may be adversely affected by work stoppages, strikes or other collective actions which may disrupt our production and adversely affect the yield of our fab.
A significant portion of our employees at our Newport Beach, California fab are represented by a union and covered by a collective bargaining agreement that expires in 2008. We cannot predict the effect that continued union representation or future organizational activities will have on our business. Conexant experienced a work stoppage at our Newport Beach, California fab in 1998. We cannot assure you that we will not experience a material work stoppage, strike or other collective action in the future, which may disrupt our production and adversely affect our customer relations and operational results.
If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers’ design needs, our business could be harmed.
We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers’ design needs successfully depends on the availability and quality of the relevant services, tools and technologies provided by electronic design automation vendors and design service providers, and on whether we, together with these providers, are able to meet customers’ schedule and budget requirements. Difficulties or delays in these areas may adversely affect our ability to attract customers, and thereby harm us.
**Our recent reduction in workforce may adversely affect the morale and performance of our personnel, our ability to hire new personnel and our operations.
As a result of a workforce reduction in March 2007, we have incurred and may continue to incur substantial costs relating to severance and other employee-related costs. Our workforce reduction may also subject us to litigation risks and expenses. In addition, our workforce reduction may reduce employee morale and may create concern among existing employees about job security, which may lead to increased attrition or turnover. As a result of these factors, our remaining personnel may decide to seek employment with more established companies or with smaller, private companies, and we may have difficulty attracting new personnel that we might wish to hire in the future.
**We depend on key personnel, and we may not be able to retain, hire and integrate sufficient qualified personnel to maintain and expand our business.
Our success, including our ability to integrate the business of Jazz Semiconductor, depends to a significant extent upon our key senior executives and research and development, engineering, finance, marketing, sales, manufacturing, support and other personnel. Our employment relationship with each of our executive officers is at-will, and accordingly any of our executive officers could choose to terminate their employment with us at any time. In addition, while certain key employees of Jazz Semiconductor executed employment agreements in connection with the merger, these employment agreements are at-will and these key employees can also terminate their employment with us at any time. Many of these individuals have been with us for several years and have developed specialized knowledge and skills relating to our technology and lines of business. The unexpected loss of the services of one or more of these executives or other key personnel could adversely affect our ability to integrate our business after the merger. We do not carry key person insurance on any of our executives or other key personnel.
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Our success also depends upon our ability to continue to attract, retain and integrate qualified personnel, particularly engineers and finance personnel. The competition for these employees is intense and we cannot assure you that we will be able to secure the services of enough qualified personnel, or do so at a reasonable cost, for our business to succeed. If we fail to retain, hire, train and integrate qualified employees, we will not be able to maintain and expand our business.
We have incurred significant costs associated with the merger, which has reduced the amount of cash otherwise available for other corporate purposes.
As a result of the completion of the merger with Jazz Semiconductor, we have incurred significant costs associated with the merger. These costs have reduced the amount of cash otherwise available for other corporate purposes. We estimate that we have incurred direct transaction costs of approximately $4.5 million associated with the merger, which have been included as a part of the total purchase cost of the merger for accounting purposes. In addition, we incurred direct transaction costs of approximately $6.2 million in connection with the issuance of convertible senior notes used to finance a portion of the merger consideration. Further, we may incur additional material charges reflecting additional costs associated with the merger in fiscal quarters subsequent to the quarter in which the merger was completed. There is no assurance that the significant costs associated with the merger will prove to be justified in light of the benefits ultimately realized.
Prior to the merger with Jazz Semiconductor, Jazz Technologies did not have any operations and Jazz Semiconductor never operated as a public company. Fulfilling our obligations as a public company going forward will be expensive and time consuming.
Prior to the merger, Jazz Semiconductor, as a private company, had not been required to document and assess the effectiveness of its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Jazz Semiconductor does not currently have an internal audit group. Although we have maintained disclosure controls and procedures and internal control over financial reporting as required under the federal securities laws with respect to our activities as a blank-check company, we will now have to establish and maintain such disclosure controls and procedures and internal controls over financial reporting over a larger enterprise. Under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the American Stock Exchange, we are required to implement additional corporate governance practices and adhere to a variety of reporting requirements and accounting rules. Compliance with these obligations requires significant time and resources from our management and our finance and accounting staff and will significantly increase our legal, insurance and financial compliance costs. As a result of the increased costs associated with being a public company, our operating income as a percentage of revenue is likely to be lower.
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and test Jazz Technologies’ internal controls over financial reporting beginning with the fiscal year ending December 31, 2007 and Jazz Semiconductor’s internal controls over financial reporting beginning with the fiscal year ending December 31, 2008, and will require an independent registered public accounting firm to report on its assessment as to the effectiveness of these internal controls over financial reporting. Any delays or difficulty in satisfying these requirements could adversely affect future results of operations and our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established control framework and to report on our management’s conclusion as to the effectiveness of these internal controls over financial reporting. We will also be required to have an independent registered public accounting firm test the internal controls over financial reporting and report on the effectiveness of such controls for Jazz Technologies for the fiscal year ending December 31, 2007 and subsequent years and for Jazz Semiconductor for the fiscal year ending December 31, 2008 and subsequent years. In addition, an independent registered public accounting firm will be required to test, evaluate and report on the completeness of management’s assessment. We may incur significant costs to comply with these requirements.
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We may in the future discover areas of internal controls over financial reporting that need improvement, particularly with respect to any businesses acquired in the future. There can be no assurance that remedial measures will result in adequate internal controls over financial reporting in the future. Any failure to implement the required new or improved controls, or difficulties encountered in their implementation, could materially adversely affect our results of operations or could cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our auditors are unable to provide an unqualified report regarding the effectiveness of internal controls over financial reporting as required by Section 404, investors may lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. In addition, failure to comply with Section 404 could potentially subject the company to sanctions or investigation by the SEC or other regulatory authorities.
The completion of the merger with Jazz Semiconductor could result in disruptions in business, loss of customers or contracts or other adverse effects.
The completion of the merger with Jazz Semiconductor may cause disruptions, including potential loss of customers and other business partners, which could have material adverse effects on our business and operations. Although we believe that our business relationships are and will remain stable, our customers, manufacturing suppliers and other business partners, in response to the completion of the merger, may adversely change or terminate their relationships with us, which could have a material adverse effect on our business going forward.
**Significant changes in our stockholder composition may jeopardize our ability to use some or all of our net operating loss carryforwards going forward.
At March 30, 2007, Jazz Semiconductor had federal tax net operating loss, or NOL, carryforwards of approximately $104.7 million and state tax net operating loss carryforwards of approximately $89.8 million. The federal tax loss carryforwards will begin to expire in 2022, unless previously utilized. The significant state tax loss carry forwards will begin to expire in 2013, unless previously utilized. At March 30, 2007, Jazz Semiconductor had combined federal and state alternative minimum tax credits of $0.1 million. The alternative minimum tax credits do not expire. Utilization of net operating losses, credit carryforwards and certain deductions may be subject to annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended (“Section 382 limitations”), and similar state provisions. The tax benefits related to future utilization of federal and state net operating losses, tax credit carryforwards and other deferred tax assets may be limited or lost as a result of Section 382 limitations. Our acquisition of Jazz resulted in an ownership change as defined by Section 382. We have not yet determined the amount of any limitations on net operating loss and credit carryforwards. Such limitations could be significant.
Risks Related to Our Manufacturing
Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can significantly increase our costs and delay product shipments to our customers.
Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve fab and manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of products in process. As system complexity has increased and process technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. From time to time we have experienced production difficulties that have caused delivery delays and quality control problems. In the past, we have encountered manufacturing and related problems, including:
· | capacity constraints due to changes in product mix; |
· | the delayed delivery or qualification of equipment critical to our production, including steppers and chemical stations; |
· | delays during expansions and upgrades of our clean rooms and other facilities; |
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· | difficulties in increasing production at our Newport Beach, California fab and at our manufacturing suppliers; |
· | difficulties in changing or upgrading our process technologies at our Newport Beach, California fab and at our manufacturing suppliers; |
· | raw materials shortages and impurities; |
· | required unscheduled maintenance or repairs; |
· | malfunctions of our wafer production equipment or that of our manufacturing suppliers; and |
· | other operational and engineering problems resulting in reduced product yields for our customers. |
We cannot guarantee you that we will be able to maintain our efficiency or avoid impurities in the manufacturing process or avoid other manufacturing disruptions in the future, to the same extent as in the past. In addition, we cannot guarantee you that our manufacturing suppliers will not experience production difficulties.
If we are unable to obtain raw materials and equipment in a timely manner, our production schedules could be delayed and we may lose customers.
We depend on our suppliers of raw materials. To maintain competitive manufacturing operations, we must obtain from our suppliers, in a timely manner, sufficient quantities of materials at acceptable prices. Although we source most of our raw materials from several suppliers, we obtain our silicon wafers only from Wacker Siltronic Corporation because of the consistent quality of their wafers, the long working history of our predecessors, Conexant and Rockwell International Corporation, with this supplier and our sales arrangement with this supplier. Siltronic maintains an approximately six week supply of inventory at our fab. We believe that qualification of a second wafer supplier could take from six months to one year. We also use single suppliers for photomasks and certain photoresists used in our processes. For example, Photronics Inc. is the sole-service supplier of our photomasks. We believe it would take between ten and twelve months to qualify a new supplier if Photronics was unable or unwilling to continue as a supplier. We receive EKC 652, a chemical used in the etch process, from E.I. du Pont de Nemours and Company. DuPont is the sole producer of this chemical, and its chemistry is unique. We believe that it would take between five and six months to replace this chemical if DuPont was unable or unwilling to continue as a supplier. We do not have long-term contracts with most of our suppliers. From time to time, vendors have extended lead times or limited the supply of required materials to us because of capacity constraints. Consequently, we have experienced difficulty in obtaining the quantities of raw materials we need on a timely basis.
From time to time we may reject materials that do not meet our specifications, resulting in a decline in manufacturing or fab yields. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and other supplies in a timely manner. If the supply of materials is substantially diminished or if there are significant increases in the costs of raw materials, we may not be able to obtain raw materials at all or we may be forced to incur additional costs to acquire sufficient quantities of raw materials to sustain our operations, which may increase our marginal costs and reduce profitability.
We also depend on a limited number of manufacturers and vendors that make and maintain the complex equipment we use in our manufacturing processes. We rely on these manufacturers and vendors to improve our technology to meet our customers’ demands as technology improves. In periods of volatile market demand or with respect to the procurement of unique tools, the lead times from order to delivery of this equipment can be as long as six to 12 months. Following delivery, installation and qualification of our processes on this equipment can also be time consuming and difficult. If there are delays in the delivery, installation or qualification of equipment, it could cause us to delay our introduction of new manufacturing capacity or process technologies and delay product deliveries, which may result in the loss of customers and revenues.
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We rely on ASMC and HHNEC, manufacturing suppliers over whom we have limited control, for a significant portion of our future manufacturing capacity, and these manufacturing suppliers may not deliver sufficient production capacity or quality to allow us to meet our customers’ needs.
We operate one semiconductor fabrication facility in Newport Beach, California, in which we currently produce the majority of our products. We have entered into manufacturing supply agreements with ASMC and HHNEC that are designed to allow us to utilize production capacity at two additional fabrication facilities in China. We expect to use our Newport Beach, California fab to develop and implement new specialty process technologies required to meet the needs of our customers, and to use the foundry capacity of ASMC and HHNEC to support higher volume production for our customers after process implementation and part qualification are complete. We are dependent on these arrangements to achieve the capacity levels needed for our business to continue to grow. However, we have limited control over ASMC’s and HHNEC’s production and quality control systems, and these companies have limited manufacturing experience using our specialty process technologies. We rely on our third-party manufacturers to implement successfully our specialty process technologies at their facilities. This has in the past, and may in the future, require more time than what we anticipate. Jazz Semiconductor began to utilize volume production capacity at ASMC in the first quarter of 2004 and we have not fully tested our ability to access capacity at acceptable quality levels of ASMC and HHNEC. We are aware of certain instances where the yield of product produced by ASMC and HHNEC has been below that of our Newport Beach fab, although still sufficient to meet customers’ demands. We believe that ASMC and HHNEC have periodically experienced increased demands for their available capacity. While these suppliers have substantially met our requests for wafers to date, if we had a sudden significant increase in demand for their services, it is possible that they would not be able to satisfy our increased demand in the short term and that from time to time may be unable to provide all of the manufacturing capacity we may desire to utilize, including amounts that are within the capacity they have contractually agreed to provide us. Should we fail to maintain and expand our manufacturing supply agreements or fail to implement our specialty processes at a manufacturing supplier’s facility in a timely manner, or if our manufacturing suppliers do not continue to deliver the capacity that we require in a timely manner or do not produce wafers to specifications and at costs acceptable to our customers, our ability to meet our customers’ needs could be seriously harmed and our customers may turn to our competitors to satisfy their requirements, causing us to lose significant sources of revenues.
If the semiconductor wafers we manufacture are used in defective products, we may be subject to product liability or other claims and our reputation could be harmed.
We provide custom manufacturing to our customers who use the semiconductor wafers we manufacture as components in their products sold to end users. If these products are used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. The occurrence of a problem could result in product liability claims as well as a recall of, or safety alert or advisory notice relating to, the product. We cannot assure you that our insurance policies will cover specific product liability issues or that they will be adequate to satisfy claims made against us in the future. Also, we may be unable to obtain insurance in the future at satisfactory rates, in adequate amounts, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and on our ability to attract and retain customers.
We occasionally manufacture wafers based on forecasted demand, rather than actual orders from customers. If our forecasted demand exceeds actual demand we may have obsolete inventory, which could have a negative impact on our gross margin.
We initiate production of a majority of our wafers once we have received an order from a customer. We generally do not carry a significant inventory of finished goods unless we receive a specific customer request or if we decide to produce wafers in excess of customer orders, because we forecast future excess demand and capacity constraints. If our forecasted demand exceeds actual demand, we may be left with excess inventory that ultimately becomes obsolete and must be scrapped when it cannot be sold. Significant amounts of obsolete inventory could have a negative impact on our gross margin and results of operations.
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We may be subject to the risk of loss due to fire because materials we use in our manufacturing processes are highly flammable and our insurance coverage may not be sufficient to cover all of our potential losses.
We use highly flammable materials such as silane and hydrogen in our manufacturing processes and may therefore be subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely eliminated. We maintain insurance policies to reduce losses caused by fire, including business interruption insurance. Our insurance coverage is subject to deductibles and would not be sufficient to cover all of our potential losses such as the full replacement of our fab. If our fab or our manufacturing suppliers’ fabs were to be damaged or cease operations as a result of a fire, the time to repair or rebuild the fab would be significant and it would reduce our manufacturing capacity, delay the manufacture of our customers’ products, reduce our revenues and profit, cause us to lose important customers and would have a material adverse effect on our results of operations.
Our production yields and business could be significantly harmed by natural disasters, particularly earthquakes.
Our Newport Beach, California fab is located in southern California, a region known for seismic activity. In addition, substantially all of our manufacturing suppliers’ capacity is located in a geographically concentrated area in China, where disruptions from natural disasters may affect the region. Due to the complex and delicate nature of our manufacturing processes, our and our manufacturing suppliers’ facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. We cannot be certain that precautions we have taken to seismically upgrade our fab will be adequate to protect our facilities in the event of a major earthquake, and any resulting damage could seriously disrupt our production and result in reduced revenues.
Our production may be interrupted if we cannot maintain sufficient sources of fresh water and electricity.
The semiconductor manufacturing process requires extensive amounts of fresh water and a stable source of electricity. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the areas in which our fabs are located. In particular, our Newport Beach, California fab is located in an area that is susceptible to water and electricity shortages. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, we may need to limit or delay our production, which could adversely affect our business and operating results. Increases in utility costs would also increase our operating expenses. In addition, a power outage, even of very limited duration, could result in a loss of wafers in production and deterioration in our manufacturing yields, and substantial downtime to reset equipment before resuming production.
Failure to comply with environmental regulations could harm our business.
We use hazardous materials and substances in the manufacturing and testing of products and in the development of our technologies in our research and development laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous materials and substances. Failure to comply with environmental regulations could result in revocation of operating permits, the imposition of substantial fines or penalties on us, interruption of production, alteration of our manufacturing processes or cessation of operations. In addition, we must obtain and comply with operating permits in a timely manner to support our product development and product ramp or our production may be delayed or halted. Compliance with environmental regulations could require us to pay increased fees, acquire expensive pollution control equipment or to incur other substantial expenses. We could also be required to incur costs associated with the investigation and remediation of contamination at currently or formerly owned, operated or used sites, or at sites at which our hazardous waste was disposed. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liability under certain statutes. The imposition of these liabilities could significantly harm our business.
42.
Risks Related to Our Securities
The price of our common stock is volatile and may be less than what you originally paid for your shares of common stock.
The price of our common stock is volatile, and may fluctuate due to factors such as:
· | actual or anticipated fluctuations in quarterly and annual results; |
· | mergers, consolidations and strategic alliances in the semiconductor industry; |
· | market conditions in the semiconductor industry; |
· | our earnings estimates and those of our publicly held competitors; and |
· | the general state of the stock markets. |
The semiconductor industry has been highly unpredictable and volatile. The market for common shares of companies in this industry may be equally volatile. Our common stock may trade at prices lower than what you originally paid for your corresponding shares of our common stock.
If we are unable to maintain a current prospectus relating to the common stock underlying our warrants, our warrants may have little or no value and the market for our warrants may be limited.
No warrants will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us, we have agreed to use our reasonable best efforts to maintain a current prospectus relating to the common stock issuable upon exercise of our warrants until the expiration of our warrants. However, we cannot assure you that we will be able to do so. If the prospectus relating to the common stock issuable upon exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, our warrants may not be exercisable before they expire and we will not net-cash settle the warrants. Thus, our warrants may be deprived of any value. The market for our warrants may be limited, and the warrants may expire worthless. Even if warrant holders are not able to exercise their warrants because there is no current prospectus or the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, we can exercise our redemption rights.
**Our outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock.
Excluding 666,668 warrants held by Acquicor Management LLC, Dr. Harold L. Clark and Messrs. John P. Kensey and Moshe I. Meidar, who were stockholders prior to our initial public offering, we have outstanding redeemable warrants to purchase an aggregate of 46,213,409 shares of common stock as of March 30, 2007. These warrants will be exercised only if the $5.00 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. In addition, we sold to the underwriters in the initial public offering an option to purchase up to 1,250,000 units at $7.50 per unit, part of which was transferred to Paul Pittman, our Executive Vice President and Chief Financial and Administrative Officer. The exercise of this option, and the exercise of the warrants included in the units issuable upon the exercise of this option, would lead to further dilution and a potential increase in the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our shares.
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We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders.
We may redeem the warrants issued as a part of our units (including warrants issued and outstanding as a result of the exercise of the purchase option that we agreed to sell to the underwriters in our initial public offering and the warrants sold in the private placement) at any time after the warrants become exercisable in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days’ prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price therefor at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Stock and Warrant Repurchases
Total Number of Securities Purchased | Average Price Paid per Security | Total Number of Securities Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Securities that May Yet Be Purchased Under the Program | |||||||||||||||||||
Period | Shares | Warrants | Shares | Warrants | Shares | Warrants | ||||||||||||||||
2/15/07 - 2/28/07 (1) | 9,414,854 | 972,400 | $ | 4.65 | $ | 0.94 | 623,000 | 972,400 | $ | 45.8 million | ||||||||||||
3/01/07 - 3/30/07 | 2,334,761 | 10,621,658 | $ | 4.75 | $ | 0.90 | 2,334,761 | 10,621,658 | $ | 25.2 million | ||||||||||||
Total | 11,749,615 | 11,594,058 | $ | 4.67 | $ | 0.90 | 2,957,761 | 11,594,058 | $ | 25.2 million |
(1) | Includes (a) 1,249,998 shares purchased by Acquicor Management LLC and our outside directors on February 15, 2007 at $5.83 per share, (b) 1,873,738 shares redeemed by us from Acquicor Management LLC and our outside directors on February 16, 2007 at approximately $0.0047 per share and (c) 5,668,118 shares converted into a pro rata portion of our trust account at $5.85 per share in connection with our acquisition on February 16, 2007. |
Use of IPO Proceeds
On February 16, 2007, we consummated the acquisition of Jazz Semiconductor. At the closing of the acquisition, $168.1 million of net proceeds from our initial public offering (including accrued interest) held in trust and $167.7 million of net proceeds from the issuance of our convertible senior notes (including accrued interest) held in escrow were both released to us.
The net proceeds from our initial public offering and the issuance of our convertible senior notes were applied as follows:
(in thousands) | ||||
IPO proceeds held in trust | $ | 168,057 | ||
Convertible senior note proceeds held in escrow | 167,693 | |||
Total funds available | 335,750 | |||
Total purchase price, net of cash acquired | (236,303 | ) | ||
Deferred underwriting fees | (3,450 | ) | ||
Debt issuance costs | (6,199 | ) | ||
Conversion of common stock | (33,159 | ) | ||
Redemption of management shares | (9 | ) | ||
Stock and warrant repurchases | (25,121 | ) | ||
Funds applied to working capital and general corporate expenses | $ | 31,429 |
We acquired Jazz Semiconductor for a net purchase price of approximately $236.3 million. In connection with the acquisition, we also made a payment of $3.5 million of deferred underwriting fees to the underwriters in our initial public offering and total payments of $6.2 million related to debt issuance costs incurred in connection with the issuance of our convertible senior notes. Also, in connection with the acquisition, the holders of 5,668,116 shares of our common stock elected to convert their shares into a pro rata portion of our trust account, or $5.85 per share. We made total payments of $33.2 million to the converting stockholders.
44.
On February 16, 2007, we effected a redemption of 1,873,738 shares of our common stock held by Acquicor Management LLC and our outside directors at a redemption price of $0.0047 per share. Additionally, between February 20, 2007 and March 31, 2007, we repurchased 2,957,761 shares of our common stock and 11,953,259 warrants to purchase our common stock on the open market pursuant to our stock and warrant repurchase program for an aggregate cost of $25.1 million. The remaining net proceeds from our initial public offering and the issuance of our convertible senior notes have been applied to working capital and general corporate expenses. These proceeds may also be applied to fund future acquisitions, though we currently have no commitments to do so.
Limitations on Dividends
On February 28, 2007, we entered into an amended and restated loan and security agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead arranger, bookrunner and syndication agent, and Wachovia Capital Finance Corporation (Western), as administrative agent, both of whom are collectively referred to as Wachovia, with respect to a three-year senior secured asset-based revolving credit facility in an amount of up to $65 million. The loan agreement with Wachovia limits our ability to declare dividends or to repurchase or redeem our outstanding stock and warrants. We may only declare dividends or repurchase or redeem our outstanding stock and warrants if we meet certain cash and borrowing availability thresholds, and any such dividends, repurchases or redemptions are subject to a cap of $50 million.
We have not paid any dividends on our common stock to date and do not intend to pay dividends in the foreseeable future. It is our board’s current intention to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. The payment of dividends, if and when paid, will be within the discretion of our then board of directors and will be contingent upon compliance with the provisions of the amended loan agreement with Wachovia and upon our revenues and earnings, if any, capital requirements and general financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
We held a Special Meeting of Stockholders on February 15, 2007. The results of the voting were as follows:
1. To approve and adopt the Agreement and Plan of Merger, dated as of September 26, 2006, by and among us, Joy Acquisition Corp., Jazz Semiconductor, Inc. and TC Group, L.L.C., as stockholders’ representative, and to approve the merger contemplated by such agreement.
FOR: 14,073,905 AGAINST: 9,423,016 ABSTAIN: 8,650
SHARES EXERCISING CONVERSION RIGHTS: 5,668,116
2. To approve our name change from “Acquicor Technology Inc.” to “Jazz Technologies, Inc.”
FOR: 21,617,679 AGAINST: 4,863,228 ABSTAIN: 2,678,336
3. To approve the removal of the fifth article from our amended and restated certificate of incorporation.
FOR: 21,302,767 AGAINST: 5,082,876 ABSTAIN: 2,774,400
4. To approve a restriction on the ability of our stockholders to act by written consent.
FOR: 13,871,443 AGAINST: 9,450,468 ABSTAIN: 5,837,332
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5. To approve an increase in our authorized shares of common stock from 100,000,000 shares to 200,000,000 shares.
FOR: 21,001,907 AGAINST: 5,414,496 ABSTAIN: 2,742,840
6. To approve our 2006 Equity Incentive Plan.
FOR: 20,573,447 AGAINST: 5,720,330 ABSTAIN: 2,865,466
Description | ||
3.1 | Amended and Restated Certificate of Incorporation — Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on February 23, 2007. | |
*10.5 | 2006 Equity Incentive Plan, as amended — Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2007. | |
†10.6 | Contribution Agreement among Specialtysemi, Inc., Conexant Systems, Inc. and Carlyle Capital Investors, L.L.C. dated February 23, 2002 — Incorporated by reference to Exhibit 10.1 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.7 | First Amendment to Contribution Agreement between Specialtysemi, Inc., Conexant Systems, Inc. and Carlyle Capital Investors, L.L.C. dated March 12, 2002 — Incorporated by reference to Exhibit 10.2 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.8 | Second Amendment to Contribution Agreement dated July 1, 2002 among Jazz Semiconductor, Inc., Conexant Systems, Inc., Carlyle Partners III L.P., CP III Coinvestment, L.P. and Carlyle High Yield Partners, L.P. — Incorporated by reference to Exhibit 10.3 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.9 | Third Amendment to Contribution Agreement dated September 1, 2003 among Jazz Semiconductor, Inc., Conexant Systems, Inc., Carlyle Partners III L.P., CP III Coinvestment, L.P. and Carlyle High Yield Partners, L.P. — Incorporated by reference to Exhibit 10.4 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.10 | Newport Fab, LLC Contribution Agreement between Conexant Systems, Inc. and Newport Fab, LLC dated February 23, 2002 — Incorporated by reference to Exhibit 10.5 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.11 | IP License Agreement between Specialtysemi, Inc., Newport Fab, LLC and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.6 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.12 | First Amendment to IP License Agreement dated July 1, 2002 between Jazz Semiconductor, Inc. and Conexant Systems, Inc. — Incorporated by reference to Exhibit 10.7 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.13 | Transferred IP License Agreement between Specialtysemi, Inc., Newport Fab, LLC and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.8 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.14 | First Amendment to Transferred IP License Agreement dated July 1, 2002 among Jazz Semiconductor, Inc., Conexant Systems, Inc. and Newport Fab, LLC— Incorporated by reference to Exhibit 10.9 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.15 | Guarantee between Specialtysemi, Inc. and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.10 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). |
46.
Description |
10.16 | Half Dome Lease Agreement between Specialtysemi, Inc. and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.13 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.17 | First Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated May 1, 2004 — Incorporated by reference to Exhibit 10.14 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.18 | Second Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated December 31, 2005 — Incorporated by reference to Exhibit 10.15 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.19 | Third Amendment to Half Dome Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated as of September 26, 2006— Incorporated by reference to Exhibit 10.14 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.20 | El Capitan Lease Agreement between Specialtysemi, Inc. and Conexant Systems, Inc. dated March 12, 2002 — Incorporated by reference to Exhibit 10.16 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.21 | First Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated October 1, 2004 — Incorporated by reference to Exhibit 10.17 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.22 | Second Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated November 31, 2005 — Incorporated by reference to Exhibit 10.18 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.23 | Third Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated September 1, 2006 — Incorporated by reference to Exhibit 10.18 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.24 | Fourth Amendment to El Capitan Lease Agreement between Newport Fab, LLC and Conexant Systems, Inc. dated September 26, 2006— Incorporated by reference to Exhibit 10.19 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
†10.25 | Wafer Supply Agreement between Newport Fab, LLC and RF Micro Devices, Inc. dated October 15, 2002 — Incorporated by reference to Exhibit 10.34 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.26 | Master Joint Technology Development Agreement between Newport Fab, LLC and RF Micro Devices, Inc. dated October 15, 2002 — Incorporated by reference to Exhibit 10.35 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.27 | License and Supply Agreement between Newport Fab, LLC and Advanced Semiconductor Manufacturing Corp. of Shanghai dated December 16, 2003 — Incorporated by reference to Exhibit 10.36 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.28 | HHNEC Wafer Supply Agreement between Jazz/Hua Hong, LLC, Newport Fab, LLC and Shanghai Hua Hong NEC Electronics Company, Limited dated August 29, 2003 — Incorporated by reference to Exhibit 10.37 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.29 | LLC Wafer Supply Agreement between Jazz/Hua Hong, LLC, Newport Fab, LLC and Shanghai Hua Hong NEC Electronics Company, Limited dated August 30, 2003 — Incorporated by reference to Exhibit 10.38 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.30 | Technology Sublicense Agreement—Jazz Advanced Technology by Jazz/Hua Hong, LLC, Shanghai Hua Hong NEC Electronics Company, Limited and Newport Fab, LLC dated August 30, 2003 — Incorporated by reference to Exhibit 10.39 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). |
47.
Description |
†10.31 | Technology License and Transfer Agreement by Newport Fab, LLC and Shanghai Hua Hong NEC Electronics Company, Limited dated August 30, 2003 — Incorporated by reference to Exhibit 10.40 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.32 | Technology License Agreement—Jazz Advanced Technology Newport Fab, LLC, Jazz/ Hua Hong, LLC and Shanghai Hua Hong NEC Electronics Company, Limited dated August 30, 2003 — Incorporated by reference to Exhibit 10.41 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.33 | Wafer Supply and Services Agreement among Jazz Semiconductor, Inc. and Skyworks Solutions, Inc. dated as of May 2, 2003 — Incorporated by reference to Exhibit 10.42 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.34 | Amendment One to Wafer Supply and Services Agreement among Jazz Semiconductor, Inc. and Skyworks Solutions, Inc. dated as of May 2, 2003 — Incorporated by reference to Exhibit 10.43 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
†10.35 | Amendment Two to Wafer Supply and Services Agreement among Jazz Semiconductor, Inc. and Skyworks Solutions, Inc. dated June 13, 2003 — Incorporated by reference to Exhibit 10.44 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
*10.36 | 401(k) Hourly Savings Plan between Jazz Semiconductor, Inc. and Fidelity dated January 6, 2003 — Incorporated by reference to Exhibit 10.46 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
*10.37 | 401(k) and Profit Sharing Retirement Savings Plan between Jazz Semiconductor, Inc. and Fidelity dated January 6, 2003 — Incorporated by reference to Exhibit 10.47 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
10.38 | License Agreement between Jazz Semiconductor, Inc. and Conexant Systems, Inc. dated as of July 2, 2004 — Incorporated by reference to Exhibit 10.48 to Jazz Semiconductor’s Registration Statement on Form S-1 (Registration No. 333-133485). | |
*10.39 | Employment Agreement, dated as of September 26, 2006, by and between Jazz Semiconductor, Inc. and Shu Li — Incorporated by reference to Exhibit 10.36 to Jazz Technologies’ Current Report on Form 8-K filed on February 23, 2007. | |
10.40 | Amended and Restated Loan and Security Agreement by and among the Registrant, Jazz Semiconductor, Inc., Newport Fab, LLC, Wachovia Capital Markets, LLC, Wachovia Capital Finance Corporation (Western) and the lenders from time to time party thereto, dated as of February 28, 2007 — Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2007. | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
† | Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
* | Denotes a management compensatory plan or arrangement. |
48.
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.
ACQUICOR TECHNOLOGY INC. | ||
| | |
Date: May 14, 2007 | By: | /s/ Gilbert F. Amelio |
Gilbert F. Amelio | ||
Chairman and Chief Executive Officer (Principal Executive Officer) |
By: | /s/ Paul A. Pittman | |
Paul A. Pittman | ||
Executive Vice President, Chief Financial and Administrative Officer (Principal Financial and Accounting Officer) |
49.
INDEX TO EXHIBITS
Number | Description |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
50.