1
EXHIBIT 99.1
RISK FACTORS
You should carefully consider the risks described below and other
information in the Form 10-K to which this document is an exhibit and subsequent
reports filed with the Securities and Exchange Commission before making any
decision to invest in our securities. If any of the following risks actually
occurs, our business, financial condition or operating results could be
materially adversely affected, the trading prices of our securities could
decline, and you could lose all or part of your investment.
1. RISKS RELATED TO OUR BUSINESS
CYCLICAL INDUSTRY AND GENERAL ECONOMY -- WITH INDUSTRY AND/OR ECONOMIC
DOWNTURN OUR RESULTS OF OPERATIONS AND BUSINESS COULD BE ADVERSELY AFFECTED.
The semiconductor industry is highly cyclical and is generally characterized
by average selling price fluctuations. Since the fourth quarter of 1997, we have
experienced significant declines in the pricing of our products as customers
reduced demand and manufacturers reduced prices to avoid a significant decline
in capacity utilization. We believe these pricing declines were due primarily to
the Asian economic crisis and excess semiconductor manufacturing capacity. In
the second half of 2000 there was a sharp slowdown in the economy that
negatively impacted the semiconductor industry and our business. In the fourth
quarter of 2000 we announced lower than expected revenue and earnings per share
for our business for the quarter due to lower customer demand and delayed or
cancelled customer orders. Entering 2001, we continue to experience slowing
demand for our products as customers continue to delay or cancel bookings in
order to manage their inventories in line with incoming business. With the
recent economic downturn, our customers are unable to provide us with much
visibility as to their expected requirements. We cannot assure you of a timely
recovery of either the semiconductor industry or general economy. We also cannot
assure you that either the semiconductor market or the general economy will not
experience subsequent, and possibly more severe and/or prolonged, downturns in
the future. Additionally, we cannot assure you that the present or any future
downturn in either the semiconductor market or the general economy will not have
a material adverse effect on our results of operations or business.
COST REDUCTIONS AND RESTRUCTURING PROGRAM -- COMPLETION AND IMPACT OF
REDUCTIONS AND PROGRAM COULD ADVERSELY IMPACT OUR BUSINESS.
As a result of the recent semiconductor industry and economic downturns, we
are attempting to manage our resources prudently. We plan to continue to adjust
our cost structure to limit the impact of reduced revenue on profitability. Cost
reduction actions include accelerating our manufacturing moves into lower cost
regions, transitioning higher-cost external supply to internal manufacturing,
working with our material suppliers to further lower costs and aggressively
streamlining our overhead. As part of our cost reduction actions, we expect to
incur a restructuring charge in the first quarter of 2001 estimated to be
approximately $30-$40 million (before income taxes and cash portion). Our
ability to complete the implementation of these cost reductions and
restructuring program and the impact of these actions on our ability to
effectively compete are subject to risks and uncertainties. Because the actions
involve many aspects of our business, the reductions and program could adversely
impact productivity to an extent we have not anticipated. Even if we fully
execute and implement the actions and they generate the anticipated cost
savings, there may be other factors that adversely impact our profitably and
business.
SHORT-TERM PERFORMANCE -- FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
MAY CAUSE OUR STOCK
2
PRICE TO DECLINE.
Given the nature of the markets in which we participate, we cannot reliably
predict future revenues and profitability, and unexpected changes may cause us
to adjust our operations. A high proportion of our costs are fixed, due in part
to our significant sales, research and development and manufacturing costs.
Thus, small declines in revenue could disproportionately affect our operating
results in a quarter. Factors that could affect our quarterly operating results
include:
- the timing and size of orders from our customers, including
cancellations and reschedulings;
- the timing of introduction of new products;
- the gain or loss of significant customers, including as a result of
industry consolidation;
- seasonality in some of our target markets;
- changes in the mix of products we sell;
- changes in demand by the end users of our customers' products;
- market acceptance of our current and future products;
- variability of our customers' product life cycles;
- changes in manufacturing yields or other factors affecting the cost of
goods sold, such as the cost and availability of raw materials and the
extent of utilization of manufacturing capacity;
- changes in the prices of our products, which can be affected by the
level of our customers' and end users' demand, technological change,
product obsolescence or other factors; and
- cancellations, changes or delays of deliveries to us by our third-party
manufacturers, including as a result of the availability of
manufacturing capacity and the proposed terms of manufacturing
arrangements.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE -- AN INABILITY TO
INTRODUCE NEW PRODUCTS COULD ADVERSELY AFFECT US, AND CHANGING TECHNOLOGIES
OR CONSUMPTION PATTERNS COULD REDUCE THE DEMAND FOR OUR PRODUCTS.
Rapidly changing technologies and industry standards, along with frequent
new product introductions, characterize the industries that are currently the
primary end-users of semiconductors. As these industries evolve and introduce
new products, our success will depend on our ability to adapt to such changes in
a timely and cost-effective manner by designing, developing, manufacturing,
marketing and providing customer support for our own new products and
technologies.
We cannot assure you that we will be able to identify changes in the product
markets of our customers and end-users and adapt to such changes in a timely and
cost-effective manner. Nor can we assure you that products or technologies that
may be developed in the future by our competitors and others will not render our
products or technologies obsolete or noncompetitive. A fundamental shift in
technologies or consumption patterns in our existing product markets or the
product markets of our customers or end users could have a material adverse
effect on our business or prospects.
COMPETITION -- COMPETITION IN OUR INDUSTRY COULD PREVENT US FROM MAINTAINING
OUR LEVEL OF REVENUES AND FROM RAISING PRICES TO REFLECT INCREASES IN COSTS.
The semiconductor industry, particularly the market for semiconductor
components, is highly
-2-
3
competitive. Although only a few companies compete with us in all of our product
lines, we face significant competition within each of our product lines from
major international semiconductor companies as well as smaller companies focused
on specific market niches. Many of these competitors have substantially greater
financial and other resources than we have with which to pursue development,
engineering, manufacturing, marketing and distribution of their products and are
better able than we are to withstand adverse economic or market conditions. In
addition, companies not currently in direct competition with us may introduce
competing products in the future. Significant competitors in the broadband and
advanced logic market include AMCC, Micrel and Vitesse. Significant competitors
in the power management and standard analog market include Analog Devices,
Fairchild, Linear Technology, Maxim Integrated Products, National Semiconductor,
ST Microelectronics and Texas Instruments. Significant competitors in the
standard semiconductor product market include Fairchild, International
Rectifier, Philips, Rohm, ST Microelectronics, Texas Instruments and Toshiba.
The semiconductor components industry has also been undergoing significant
restructuring and consolidations that could adversely affect our
competitiveness.
Because our components are often building block semiconductors that in some
cases can be integrated into more complex integrated circuits, we also face
competition from manufacturers of integrated circuits, application-specific
integrated circuits and fully customized integrated circuits, as well as
customers who develop their own integrated circuit products.
We compete in different product lines to various degrees on the basis of
price, quality, technical performance, product features, product system
compatibility, customized design, availability, delivery timing and reliability
and sales and technical support. Gross margins in the industry vary by
geographic region depending on local demand for the products in which
semiconductors are used, such as personal computers, industrial and
telecommunications equipment, consumer electronics and automotive goods. In
regions where there is a strong demand for such products, price pressures may
also emerge as competitors attempt to gain a greater market share by lowering
prices. Our ability to compete successfully depends on elements both within and
outside of our control, including industry and general economic trends.
MANUFACTURING RISKS -- UNLESS WE MAINTAIN MANUFACTURING EFFICIENCY AND AVOID
MANUFACTURING DIFFICULTIES, OUR FUTURE PROFITABILITY COULD BE ADVERSELY
AFFECTED.
Manufacturing semiconductor components involves highly complex processes
that require advanced and costly equipment. We and our competitors continuously
modify these processes in an effort to improve yields and product performance.
Impurities or other difficulties in the manufacturing process can lower yields.
Our manufacturing efficiency will be an important factor in our future
profitability, and we cannot assure you that we will be able to maintain our
manufacturing efficiency or increase manufacturing efficiency to the same extent
as our competitors.
From time to time we have experienced difficulty in beginning production at
new facilities or in effecting transitions to new manufacturing processes that
have caused us to suffer delays in product deliveries or reduced yields. We
cannot assure you that we will not experience manufacturing problems in
achieving acceptable yields or experience product delivery delays in the future
as a result of, among other things, capacity constraints, construction delays,
upgrading or expanding existing facilities or changing our process technologies,
any of which could result in a loss of future revenues. Our results of
operations could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity if revenues do
not increase proportionately.
LACK OF INDEPENDENT OPERATING HISTORY -- IF THE ASSUMPTIONS WE HAVE USED TO
ESTIMATE FUTURE OPERATING RESULTS ARE INCORRECT OR IF WE ENCOUNTER
UNEXPECTED COSTS OR OTHER PROBLEMS, OUR PROFITABILITY COULD BE ADVERSELY
AFFECTED.
Prior to our recapitalization, Motorola allocated to us, as one of several
divisions within its Semiconductor Products Sector, a percentage of the expenses
related to services Motorola provided to us and other divisions of its
Semiconductor Products Sector. During 1998, we incurred approximately $298
million in costs for general, administrative, selling and marketing expenses, of
which Motorola allocated to
-3-
4
us approximately $119 million for services shared with other divisions of its
Semiconductor Products Sector.
As part of our recapitalization, we identified the specific services that we
believed were necessary to our business and that we would not be able initially
to provide ourselves. Motorola agreed to provide or arrange for the provision of
these services, including information technology, human resources, supply
management and finance services, for a limited period of time to facilitate our
transition to a stand-alone company. In addition, Motorola agreed to continue to
provide worldwide shipping and freight services to us for a period of up to
three years after our recapitalization using the cost allocation method Motorola
previously used with us. During 2000, we incurred expenses of approximately $96
million under these arrangements with Motorola.
We believe that the scope of the agreements we entered into with Motorola as
part of our recapitalization and the time frames, pricing and other terms should
provide us sufficient time to effect our transition to a stand-alone company
with minimal disruption to our business, and that we will ultimately be able to
provide these services ourselves or identify third-party suppliers to provide
such services on terms not materially less favorable to us than the terms of our
arrangements with Motorola. We cannot, however, assure you that we have
correctly anticipated the required levels of services to be provided by Motorola
or that we will be able to obtain similar services on comparable terms upon
termination of our agreements with Motorola. Any material adverse change in
Motorola's ability to supply these services could have a material adverse effect
on our business or prospects.
As part of Motorola, we had a number of formal and informal arrangements
with other divisions of Motorola's Semiconductor Products Sector that provided
us with equipment, finished products and other goods and services. Except as
provided for in the agreements between Motorola and us, future business dealings
between Motorola and us will be on an arm's length basis. There can be no
assurance that the arm's length nature of any future business relationship with
Motorola will be as beneficial for us as our past relationship to Motorola.
DEPENDENCE ON MOTOROLA AND OTHER KEY CUSTOMERS FOR OUR PRODUCTS AND SERVICES
-- IF WE WERE TO LOSE ONE OR MORE OF OUR LARGE CUSTOMERS, OUR REVENUES AND
PROFITABILITY COULD BE ADVERSELY AFFECTED.
Motorola has historically constituted our largest original equipment
manufacturer customer and accounted for approximately 7.2% of our net product
revenues in 2000. As a result of our recapitalization, we are no longer part of
Motorola, and our current and future product sales to Motorola and its
affiliates will be on an arm's length basis. We cannot assure you that we will
be able to maintain the level of historical product sales to Motorola or that we
will be able to sell any products to Motorola or its affiliates. Notwithstanding
our broad customer base, the loss of Motorola or any other sizable customer
could harm our results of operations.
Product sales to our ten largest customers accounted in the aggregate for
approximately 52% of our net product revenues in 2000. Many of our customers
operate in cyclical industries, and in the past we have experienced significant
fluctuations from period to period in the volume of our products ordered. We
have no agreements with any of our customers that impose minimum or continuing
obligations to purchase our products. We cannot assure you that any of our
customers will not significantly reduce orders or seek price reductions in the
future or that the loss of one or more of such customers would not have a
material adverse effect on our business or our prospects.
Prior to our recapitalization, we and other divisions of Motorola's
Semiconductor Products Sector provided manufacturing services to each other at
cost (as calculated for financial accounting purposes). We and Motorola agreed
to continue providing manufacturing services to each other for limited periods
of time following our recapitalization at fixed prices that are intended to
approximate each party's cost of providing the services. Motorola has no
purchase obligations after 2000, and we currently anticipate that any purchases
thereafter by Motorola will be insignificant. During 2000, Motorola purchased
manufacturing services from us of approximately $62 million. We could be
adversely affected if Motorola
-4-
5
does not purchase manufacturing services from us at the level we have
anticipated, cancels these arrangements or discontinues using our manufacturing
services after these agreements expire or if we are unable to find other uses
for, or dispose of, the manufacturing facilities we currently use to provide
these services in a manner that allows us to cover our fixed costs.
DEPENDENCE ON MOTOROLA AND OTHER CONTRACTORS FOR MANUFACTURING SERVICES --
THE LOSS OF ONE OR MORE OF OUR SOURCES FOR MANUFACTURING SERVICES, OR
INCREASES IN THE PRICES OF SUCH SERVICES, COULD ADVERSELY AFFECT OUR
OPERATIONS AND PROFITABILITY.
Prior to our recapitalization, we and other divisions of Motorola's
Semiconductor Products Sector provided manufacturing services to each other at
cost (as calculated for financial accounting purposes). In 1997, 1998 and the
period from January 1, 1999 to August 3, 1999, the costs charged by other
divisions of Motorola's Semiconductor Products Sector to us for these services
amounted to $310.5 million, $266.8 million and $125.5 million, respectively.
During the period from August 4, 1999 through December 31, 1999 and in 2000, we
paid $101.3 million and $162.3 million, respectively, for manufacturing services
to Motorola under our transition agreements. Motorola manufactures our
emitter-coupled logic products, which are high margin products that accounted
for approximately 15.5% of our net product revenues in 2000. We currently have
no other manufacturing source for these emitter-coupled logic products. We
expect emitter-coupled logic products to remain one of our single most important
product families over the next several years.
We and Motorola agreed to continue providing manufacturing services to each
other (including Motorola's manufacturing of our emitter-coupled logic products)
for limited periods of time following our recapitalization at fixed prices that
are intended to approximate each party's cost of providing these services.
Subject to our right to cancel upon six months' written notice, we have minimum
commitments to purchase manufacturing services from Motorola of approximately
$51 million, $41 million and $40 million in fiscal years 2001, 2002 and 2003,
respectively, and have no purchase obligations thereafter. We could be adversely
affected if Motorola is unable to provide these services on a timely basis or if
we are unable to relocate these manufacturing operations to our own facilities
or to other third-party manufacturers on cost-effective terms or make other
satisfactory arrangements prior to the time when these agreements expire.
We also use other third-party contractors for manufacturing activities,
primarily for the assembly and testing of final goods. In 2000, these contract
manufacturers, including AIT, Batam, ASE and Phenitec, accounted for
approximately 31% of our cost of sales. Our agreements with these manufacturers
typically require us to forecast product needs and commit to purchase services
consistent with these forecasts, and in some cases require longer-term
commitments in the early stages of the relationship. Our operations could be
adversely affected if these contract relationships were disrupted or terminated,
the cost of such services increased significantly, the quality of the services
provided deteriorated or our forecasts proved to be materially incorrect.
DEPENDENCE ON SUPPLY OF RAW MATERIALS -- THE LOSS OF OUR SOURCES OF RAW
MATERIALS, OR INCREASES IN THE PRICES OF SUCH GOODS, COULD ADVERSELY AFFECT
OUR OPERATIONS AND PROFITABILITY.
Our results of operations could be adversely affected if we are unable to
obtain adequate supplies of raw materials in a timely manner or if the costs of
our raw materials increase significantly or their quality deteriorates. Our
manufacturing processes rely on many raw materials, including silicon wafers,
copper lead frames, mold compound, ceramic packages and various chemicals and
gases. We have no agreements with any of our suppliers that impose minimum or
continuing supply obligations, and we obtain our raw materials and supplies from
a large number of sources on a just-in-time basis. From time to time, suppliers
may extend lead times, limit supplies or increase prices due to capacity
constraints or other factors. Although we believe that our current supplies of
raw materials are adequate, shortages could occur in various essential materials
due to interruption of supply or increased demand in the industry.
INABILITY TO IMPLEMENT OUR BUSINESS STRATEGY -- IF WE ARE UNABLE TO
IMPLEMENT OUR BUSINESS STRATEGY, OUR REVENUES AND PROFITABILITY MAY BE
ADVERSELY AFFECTED.
-5-
6
Our future financial performance and success are largely dependent on our
ability to implement successfully our business strategy. Our present business
strategy includes, without limitation, plans to: (1) continue to execute on our
long-range growth plan in broadband and power management solutions while
appropriately managing short-term demand fluctuations, (2) spend 5% to 6% of our
sales revenue on R&D in the future; and (3) accelerate our manufacturing and
other moves into lower cost regions (e.g., China and Eastern Europe). We cannot
assure you that we will successfully implement the business strategy or that
implementing our strategy will sustain or improve our results of operations. In
particular, we cannot assure you that we will be able to build our position in
markets with high growth potential, increase our sales, increase our
manufacturing efficiency, optimize our manufacturing capacity, lower our
production costs, or make strategic acquisitions, alliances and dispositions.
Our business strategy is based on our assumptions about the future demand
for our current products and the new products and applications we are developing
and on our continuing ability to produce our products profitably. Each of these
factors depends on our ability, among other things, to finance our operating and
product development activities, maintain high quality and efficient
manufacturing operations, relocate and close manufacturing facilities as part of
our ongoing cost restructuring with minimal disruption to our operations, access
quality raw materials and contract manufacturing services in a cost-effective
and timely manner, protect our intellectual property portfolio and attract and
retain highly-skilled technical, managerial, marketing and finance personnel.
Our strategy also depends on our ability to implement our transition to a
stand-alone company, which depends to a certain extent on Motorola's ability to
provide transition services to us for limited periods of time and on our ability
to provide or procure such services thereafter. Several of these and other
factors that could affect our ability to implement our business strategy, such
as risks associated with international operations, increased competition, legal
developments and general economic conditions, are beyond our control. In
addition, circumstances beyond our control and changes in our business or
industry may require us to change our business strategy.
FUTURE ACQUISITIONS AND STRATEGIC ALLIANCES -- WE MAY ENGAGE IN ACQUISITIONS
AND ALLIANCES THAT MAY HARM OUR OPERATING RESULTS, CAUSE US TO INCUR DEBT OR
ASSUME CONTINGENT LIABILITIES OR DILUTE OUR STOCKHOLDERS.
We acquired Cherry Semiconductor Corporation in April 2000, and we may in
the future acquire and form strategic alliances relating to other businesses,
products and technologies. Successful acquisitions and alliances in the
semiconductor industry are difficult to accomplish because they require, among
other things, efficient integration and aligning of product offerings and
manufacturing operations and coordination of sales and marketing and research
and development efforts. The difficulties of integration and alignment may be
increased by the necessity of coordinating geographically separated
organizations, the complexity of the technologies being integrated and aligned
and the necessity of integrating personnel with disparate business backgrounds
and combining different corporate cultures. The integration and alignment of
operations following an acquisition or alliance requires the dedication of
management resources that may distract attention from the day-to-day business,
and may disrupt key research and development, marketing or sales efforts. In
addition, we may issue equity securities to pay for any future acquisitions or
alliances, which could be dilutive to our existing stockholders. We may also
incur debt or assume contingent liabilities in connection with acquisitions and
alliances, which could harm our operating results. We financed our acquisition
of Cherry Semiconductor with cash on hand and additional borrowings under our
senior secured bank facilities. Without strategic acquisitions and alliances we
may have difficulty meeting future customer product and service requirements.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL
OPERATIONS SUBJECT US TO RISKS INHERENT IN DOING BUSINESS ON AN
INTERNATIONAL LEVEL THAT COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Approximately 46%, 33% and 21% of our net product revenues in 2000 were
derived from sales, directly or through distributors or electronic manufacturing
service providers, to end users in the Americas, the Asia/Pacific region and
Europe (including the Middle East), respectively. We maintain significant
operations in Guadalajara, Mexico; Seremban, Malaysia; Carmona, the Philippines;
Aizu, Japan; Leshan, China; Roznov, the Czech Republic; and Piestany, the Slovak
Republic. In addition, we rely on a number of
-6-
7
contract manufacturers (primarily for assembly and testing) whose operations are
primarily located in the Asia/Pacific region.
We cannot assure you that we will be successful in overcoming the risks that
relate to or arise from operating in international markets. Risks inherent in
doing business on an international level include, among others, the following:
- economic and political instability;
- changes in regulatory requirements, tariffs, customs, duties and other
trade barriers;
- transportation delays;
- power supply shortages and shutdowns;
- difficulties in staffing and managing foreign operations and other labor
problems;
- currency convertibility and repatriation;
- taxation of our earnings and the earnings of our personnel; and
- other risks relating to the administration of or changes in, or new
interpretations of, the laws, regulations and policies of the
jurisdictions in which we conduct our business.
Our activities outside the United States are subject to additional risks
associated with fluctuating currency values and exchange rates, hard currency
shortages and controls on currency exchange. Motorola historically engaged in
hedging activities to reduce the risk of adverse currency rate fluctuations
affecting its overall business, but as a stand-alone company we now bear the
risks and costs associated with any such hedging activities. Additionally, while
our sales are primarily denominated in U.S. dollars, worldwide semiconductor
pricing is influenced by currency rate fluctuations.
DEPENDENCE ON HIGHLY SKILLED PERSONNEL -- IF WE FAIL TO ATTRACT AND RETAIN
SKILLED PERSONNEL, OUR RESULTS OF OPERATIONS AND COMPETITIVE POSITION COULD
DETERIORATE.
Our success depends upon our ability to attract and retain highly-skilled
technical, managerial, marketing and finance personnel. The market for personnel
with such qualifications is highly competitive. In particular, analog component
designers are difficult to attract and retain, and the failure to attract and
retain analog component designers could compromise our ability to keep pace with
our competitors in the market for analog components. We cannot assure you that
we will be able to continue to attract and retain individuals with the
qualifications necessary to operate our company most effectively.
DEPENDENCE ON INTELLECTUAL PROPERTY -- WE USE A SIGNIFICANT AMOUNT OF
INTELLECTUAL PROPERTY IN OUR BUSINESS. SOME OF THAT INTELLECTUAL PROPERTY IS
CURRENTLY THE SUBJECT OF DISPUTES WITH THIRD PARTIES, AND LITIGATION COULD
ARISE IN THE FUTURE. IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY
WE USE, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
We rely on patents, trade secrets, trademarks, mask works and copyrights to
protect our products and technologies. Some of our products and technologies are
not covered by any patents or pending patent applications, and we cannot assure
you that:
- any of the more than approximately 740 U.S. and foreign patents and
pending patent applications that Motorola has assigned, licensed or
sublicensed to us in connection with our recapitalization will not lapse
or be invalidated, circumvented, challenged or licensed to others;
- the license rights granted by Motorola in connection with our
recapitalization will provide
-7-
8
competitive advantages to us; or
- any of our pending or future patent applications will be issued or have
the coverage originally sought.
Moreover, we cannot assure you that:
- any of the trademarks, copyrights, trade secrets, know-how or mask works
that Motorola has assigned, licensed or sublicensed to us in connection
with our recapitalization will not lapse or be invalidated,
circumvented, challenged or licensed to others; or
- any of our pending or future trademark, copyright, or mask work
applications will be issued or have the coverage originally sought.
Furthermore, we cannot assure you that our competitors or others will not
develop products or technologies that are similar or superior to our products or
technologies, duplicate our products or technologies or design around our
protected technologies. In addition, effective patent, trademark, copyright and
trade secret protection may be unavailable, limited or not applied for in the
United States and in foreign countries.
Also, we may from time to time in the future be notified of claims that we
may be infringing third-party patents or other intellectual property rights.
Motorola has agreed to indemnify us for a limited period of time with respect to
some claims that our activities infringe on the intellectual property rights of
others. If necessary or desirable, we may seek licenses under such patents or
intellectual property rights. However, we cannot assure you that we will obtain
such licenses or that the terms of any offered licenses will be acceptable to
us. The failure to obtain a license from a third party for technologies we use
could cause us to incur substantial liabilities or to suspend the manufacture or
shipment of products or our use of processes requiring the technologies.
Litigation could cause us to incur significant expense, by adversely affecting
sales of the challenged product or technologies and diverting the efforts of our
technical and management personnel, whether or not such litigation is resolved
in our favor. In the event of an adverse outcome in any such litigation, we may
be required to:
- pay substantial damages;
- cease the manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
- discontinue the use of processes; or
- obtain licenses to the infringing technologies.
We cannot assure you that we would be successful in any such development or
acquisition or that any such licenses would be available to us on reasonable
terms. Any such development, acquisition or license could require the
expenditure of substantial time and other resources.
We will also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that persons or institutions will not assert rights to
intellectual property arising out of our research.
-8-
9
ENVIRONMENTAL LIABILITIES; OTHER GOVERNMENTAL REGULATION -- REGULATORY
MATTERS COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS AND COULD
REQUIRE EXPENDITURES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Our manufacturing operations are subject to various environmental laws and
regulations relating to the management, disposal and remediation of hazardous
substances and the emission and discharge of pollutants into the air and water.
Our operations are also subject to laws and regulations relating to workplace
safety and worker health which, among other things, regulate employee exposure
to hazardous substances. Motorola has agreed to indemnify us for environmental
and health and safety liabilities related to the conduct or operations of our
business or Motorola's ownership, occupancy or use of real property occurring
prior to our recapitalization. We cannot assure you that such indemnification
arrangements will cover all material environmental costs relating to pre-closing
matters. Moreover, the nature of our operations exposes us to the continuing
risk of environmental and health and safety liabilities related to events or
activities occurring after our recapitalization.
We believe that the future cost of compliance with existing environmental
and health and safety laws and regulations (and liability for currently known
environmental conditions) will not have a material adverse effect on our
business or prospects. However, we cannot predict:
- changes in environmental or health and safety laws or regulations;
- the manner in which environmental or health and safety laws or
regulations will be enforced, administered or interpreted; or
- the cost of compliance with future environmental or health and safety
laws or regulations or the costs associated with any future
environmental claims, including the cost of clean-up of currently
unknown environmental conditions.
2. RISKS RELATED TO OUR CAPITAL STRUCTURE
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR
ABILITY TO OPERATE OUR BUSINESS.
We are highly leveraged and have significant debt service obligations. As of
December 31, 2000, we would had total long-term indebtedness of approximately
$1,252.7 million (excluding unused commitments), stockholders' equity of
approximately $337.7 million and annual interest expense of approximately $131.2
million. We may incur additional debt in the future. Our substantial
indebtedness could have important consequences to you, including the risks that:
- we will be required to use a substantial portion of our cash flow from
operations to pay principal and interest on our indebtedness, thereby
reducing the availability of our cash flow to fund working capital,
capital expenditures, product development efforts and strategic
acquisitions;
- our interest expense could increase if interest rates in general
increase because a substantial portion of our debt will bear interest
rates based on market rates;
- our level of indebtedness will increase our vulnerability to general
economic downturns and adverse industry conditions;
- our debt service obligations could limit our flexibility in planning
for, or reacting to, changes in our business and the semiconductor
components industry;
- our indebtedness may restrict us from raising additional financing on
satisfactory terms to fund working capital, capital expenditures,
product development efforts and strategic acquisitions; and
-9-
10
- our substantial leverage could place us at a competitive disadvantage
compared to our competitors who have less debt.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS -- THE AGREEMENTS GOVERNING
OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO FINANCE FUTURE OPERATIONS OR
CAPITAL NEEDS OR ENGAGE IN OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR
INTEREST.
Our debt instruments contain various provisions that limit our management's
discretion in the operation of our business by restricting our ability to:
- incur additional indebtedness;
- pay dividends and make other distributions;
- prepay subordinated debt;
- make restricted payments;
- enter into sale and leaseback transactions;
- create liens;
- sell and otherwise dispose of assets; and
- enter into transactions with affiliates.
These restrictions may adversely affect our ability to finance our future
operations or capital needs or engage in other business activities that may be
in our interest. In addition, our senior bank facilities require us to maintain
compliance with specified financial ratios. Our ability to comply with these
ratios may be affected by events beyond our control. A breach of any of the
provisions of our debt instruments could result in a default under our
indebtedness, which would allow our lenders to declare all outstanding amounts
due and payable. In such an event, our assets might not be sufficient to repay
those amounts.
3. RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON
STOCK
STOCK PRICE FLUCTUATIONS -- OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS IN OUR SECURITIES.
The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock.
The market price of the common stock may also fluctuate significantly in
response to the following factors, some of which are beyond our control:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial performance;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, capital
commitments, new products or product enhancements;
-10-
11
- loss of a major customer or failure to complete significant
transactions; and
- additions or departures of key personnel.
SHARES ELIGIBLE FOR FUTURE SALE -- OUR STOCK PRICE COULD BE AFFECTED BECAUSE
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK WILL BE AVAILABLE FOR
SALE IN THE FUTURE.
Sales in the public market of a substantial number of shares of common stock
or other equity or equity-related securities could depress the market price of
the common stock and could impair our ability to raise capital through the sale
of additional equity securities. A substantial number of shares of our common
stock will be available for future sale.
CONTROLLING STOCKHOLDER -- ONE OF OUR PRINCIPAL STOCKHOLDERS CONTROLS OUR
COMPANY, WHICH WILL LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE
THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS SUBMITTED FOR A VOTE OF
OUR STOCKHOLDERS.
An affiliate of Texas Pacific Group owns 124,999,433 shares of our common
stock, each share of which entitles its holder to one vote on stockholder
actions, representing approximately 73% of the overall voting power of our
outstanding stock, and will be able to:
- elect all of our directors and, as a result, control matters requiring
board approval;
- control matters submitted to a stockholder vote, including mergers and
consolidations with third parties and the sale of all or substantially
all of our assets; and
- otherwise control or influence our business direction and policies.
In addition, our certificate of incorporation provides that the provisions of
Section 203 of the Delaware General Corporation Law, which relate to business
combinations with interested stockholders, do not apply to us.
ANTI-TAKEOVER PROVISIONS -- PROVISIONS IN OUR CHARTER DOCUMENTS MAY DELAY OR
PREVENT ACQUISITION OF OUR COMPANY, WHICH COULD DECREASE THE VALUE OF OUR
STOCK.
Our certificate of incorporation and bylaws contain provisions that could
make it harder for a third party to acquire us without the consent of our board
of directors. These provisions:
- create a board of directors with staggered terms;
- permit only our board of directors or the chairman on our board of
directors to call special meetings of stockholders;
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting;
- prohibit stockholder action by written consent;
- authorize the issuance of "blank check" preferred stock, which is
preferred stock with voting or other rights or preferences that could
impede a takeover attempt and that our board of directors can create and
issue without prior stockholder approval; and
- require the approval by holders of at least 66 2/3% of our outstanding
common stock to amend any of these provisions in our certificate of
incorporation or bylaws.
-11-
12
Although we believe these provisions make a higher third-party bid more likely
by requiring potential acquirors to negotiate with our board of directors, these
provisions apply even if an initial offer may be considered beneficial by some
stockholders.
-12-