EXHIBIT 99.1
RISK FACTORS
You should carefully consider the risks described below and other
information in the Form 10-Q 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.
Effective January 1, 2001, we changed our accounting method for
recognizing revenue on sales to distributors. Recognition of revenue and related
gross profit on sales to distributors is now deferred until the distributor
resells the product. In the risk factors set forth below, we have generally
restated financial information on a pro forma basis for periods prior to 2001 to
reflect the change in revenue recognition on sales to distributors.
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RISKS RELATED TO OUR BUSINESS
WE HAVE RECENTLY EXPERIENCED SUBSTANTIAL DECLINES IN REVENUES AND OPERATING
LOSSES, AND WE MAY EXPERIENCE ADDITIONAL DECLINES IN REVENUES AND OPERATING
LOSSES IN THE FUTURE.
Our total revenues for the first nine months of 2001 were $947.7
million compared to $1,488.1 million in the corresponding period in 2000. This
decline was due primarily to reduced demand for our products resulting from the
recent economic slowdown and actions taken by our customers to manage their
inventories in line with incoming business. We incurred a net loss of $380.5
million for the nine months of 2001 compared to net income of $22.1 million in
the same period in 2000. The recent downturn in our business has been most
pronounced in our broadband product family. Net revenues from broadband
products, which accounted for approximately 10.9% of net product revenues in the
nine months ended September 28, 2001, decreased 54.4% from $225.5 million in the
first nine months of 2000 to $102.8 million for the comparable period in 2001.
During 2000 and the first nine months of 2001, we implemented a number
of cost reduction initiatives. These initiatives have included 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, work force reductions, salary reductions, temporary shutdowns of
facilities with mandatory vacation, and aggressively streamlining our overhead.
However, we cannot assure you that actual results of these cost reduction
initiatives will, in and of themselves, return us to profitability.
We expect that reduced end-user demand, underutilization of our
manufacturing capacity and other factors will continue to adversely affect our
business in the near term and we may experience additional declines in revenue
and operating losses in the future. In order to return to profitability, we must
successfully implement our business plan, including our cost reduction
initiatives. We also currently face an environment of uncertain demand in the
markets our products address. We cannot assure you that we will be able to
return to profitability or that we will be able to sustain our profitability, if
achieved.
WE OPERATE IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY, WHICH IS SUBJECT TO
SIGNIFICANT DOWNTURNS.
The semiconductor industry is highly cyclical. The industry has
experienced significant downturns, often in connection with, or in anticipation
of, maturing product cycles (for semiconductors and for the end-user products in
which they are used) and declines in general economic conditions. These
downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices. We have experienced these conditions in our business in the past, are
currently experiencing a significant downturn and may experience such downturns
in the future. The current downturn and future downturns in the semiconductor
industry may be severe and prolonged. Future downturns in the semiconductor
industry, or any failure of the industry to fully recover from its recent
downturn, could seriously impact our revenues and harm our business, financial
condition and results of operations.
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During the 1990s and continuing into 2000, the semiconductor industry
enjoyed unprecedented growth, benefiting from the rapid expansion of the
Internet and other computing and communications technologies. During the first
nine months of 2001, we - like many of our customers and competitors - were
adversely affected by a general economic slowdown and an abrupt decline in
demand for many of the end-user products that incorporate our integrated
circuits and standard semiconductors. The terrorist attacks of September 11,
2001 may further depress economic activity and demand for end-user products. The
impact of slowing end-customer demand has been compounded by higher than normal
levels of equipment and component inventories among our original equipment
manufacturer, subcontractor and distributor customers. We expect that reduced
demand for end-user products, underutilization of our manufacturing capacity,
changes in our revenue mix and other factors could adversely impact our
operating results in the near term.
OUR GROSS MARGIN IS DEPENDENT ON A NUMBER OF FACTORS, INCLUDING OUR LEVEL OF
CAPACITY UTILIZATION.
Semiconductor manufacturing requires significant capital investment,
leading to high fixed costs, including depreciation costs. If we are unable to
utilize our manufacturing and testing facilities at a high level, the fixed
costs associated with these facilities will not be fully absorbed, resulting in
higher average unit costs and lower gross margins. The decline in product orders
and shipments in the first nine months of 2001 has resulted in reduced capacity
utilization of our facilities as we have attempted to match production with
anticipated customer demand. Our gross margins have declined primarily as a
result of this reduced utilization of our production capacity and erosion of the
average selling price of our products. As a percentage of total revenues, gross
margin declined to 18.8% for in the first nine months of 2001 from 34.2% for the
corresponding period in 2000. We cannot guarantee that the industry downturn and
increased competition in the face of weakening demand will not lead to further
price erosion, lower revenues and lower margins for us in the future.
THE COMPLETION AND IMPACT OF OUR RESTRUCTURING PROGRAM AND COST REDUCTIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
In the nine months ended September 28, 2001, we recorded restructuring
and other charges of $133.8 million to cover costs associated with our cost
reduction initiatives. These costs were primarily comprised of employee
separation costs and asset impairments. Our ability to complete the
implementation of these cost reductions and the impact of these actions on our
ability to effectively compete are subject to risks and uncertainties. Because
our restructuring activities involve many aspects of our business, the cost
reductions could adversely impact productivity to an extent we have not
anticipated. Even if we fully execute and implement the activities and they
generate the anticipated cost savings, there may be other factors that adversely
impact our profitability and business.
IF WE ARE UNABLE TO IMPLEMENT OUR BUSINESS STRATEGY, OUR REVENUES AND
PROFITABILITY MAY BE ADVERSELY AFFECTED.
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 net product revenues on research and development in the future;
(3) accelerate our manufacturing and other moves into lower cost regions, such
as China and Eastern Europe; and (4) implement measures to reduce operating
expenses. We will also consider selective dispositions of assets or businesses
as opportunities arise. 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 and operating expenses, 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
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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 and reduce operating expenses 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. 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.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON
D.C. ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT THE
MARKETS IN WHICH OUR COMMON STOCK TRADES, THE MARKETS IN WHICH WE OPERATE AND
OUR PROFITABILITY.
On September 11, 2001 the United States was the target of terrorist
attacks of unprecedented scope. These attacks may lead to armed hostilities or
further acts of terrorism and civil disturbance in the United States or
elsewhere. The terrorist attacks caused instability in the global financial
markets, and contributed to downward pressure on stock prices of United States
publicly traded companies, such as ours. Future terrorist attacks or armed
conflict could result in greater economic instability and further depress stock
prices, including the price of our common stock.
The September 11 attacks disrupted the global insurance and reinsurance
industries, and we may experience delays in renewing some insurance policies and
may not be able to obtain insurance at historical levels on all of our
facilities. Future terrorist attacks or armed hostilities could affect our
domestic and international sales, disrupt our supply chain and impair our
ability to produce and deliver our products. Such attacks and hostilities could
directly impact our physical facilities or those of our joint ventures,
suppliers or customers, both in the United States and elsewhere. Our primary
facilities are located in the United States, Malaysia, the Philippines, Japan,
and Slovakia. In connection with our joint ventures, we also have facilities in
China and the Czech Republic. In addition, the threat of additional acts of
terrorism may make transportation of our supplies and products more difficult or
cost prohibitive. Any impairment of our financial performance as a result of
terrorist attacks or armed conflict could increase the risk of noncompliance
with the financial covenants in our principal credit agreement resulting in
events of default and the possible acceleration of our indebtedness. Due to the
broad and uncertain effects that the September 11 attacks have had on financial
and economic markets generally, we cannot provide any reliable measure of the
impact that the attacks have had on our recent financial performance or any
estimate as to how these attacks might affect our future results.
THE AGREEMENTS GOVERNING OUR INDEBTEDNESS CONTAIN RESTRICTIVE COVENANTS THAT
LIMIT OUR ABILITY TO FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS OR ENGAGE IN
OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR INTEREST.
Our principal credit facility and other 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;
- - make capital expenditures in excess of certain limitations;
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- - 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, the covenants under our principal credit agreement require
us to maintain specified financial ratios. As a result of our recent financial
performance, at June 29, 2001 we were not in compliance with covenants under our
principal credit agreement requiring the maintenance of minimum interest expense
and leverage coverage ratios. We negotiated a waiver in respect of our
noncompliance with these covenants, and in respect of any future noncompliance
with these covenants through December 31, 2002. In connection with the waiver,
we amended our principal credit agreement. Under these amendments, minimum
interest expense coverage ratio and leverage ratio requirements for periods
between January 31, 2003 through December 31, 2005 were reduced, maximum capital
expenditure limits were reduced and covenants requiring the maintenance of a
minimum cash and cash equivalent balance until certain financial ratios are
achieved and minimum EBITDA levels through December 31, 2002 were added. Our
ability to maintain the minimum EBITDA levels and minimum cash and cash
equivalent balance under our amended credit facility may be affected by events
beyond our control.
If we are unable to comply with any of the provisions of our debt
instruments, we will be in default, which could cause cross-defaults under other
loans or agreements. A default, if not waived by our lenders, could result in
the acceleration of our outstanding indebtedness and cause our debt to become
immediately due and payable. If we were required to obtain waivers of defaults,
we may incur significant fees and transaction costs. If waivers of defaults are
not obtained and acceleration occurs, we would not be able to repay our debt and
it is unlikely that we would be able to borrow sufficient additional funds to
refinance the debt.
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR
BUSINESS.
We are highly leveraged and have significant debt service obligations.
As of September 28, 2001, we had total long-term indebtedness of approximately
$1,394.9 million (including current maturities, but excluding unused
commitments) and interest expense of approximately $93.4 million for the
nine months ended September 28, 2001. 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 meet our debt service requirements, 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 industry;
- - our debt covenants may restrict us from raising additional financing on
satisfactory terms; and
- - our substantial leverage could place us at a competitive disadvantage
compared to our competitors who have less debt.
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As a condition to the recent modifications to the covenants under our
principal credit agreement, we agreed to specified increases in the interest
rates on our outstanding borrowings and the imposition of supplemental interest
charges. As a result, our interest rate expense on an annual basis is expected
to increase by approximately $36.1 million.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE, AND ADDITIONAL FUNDS MAY NOT BE
AVAILABLE ON TERMS ACCEPTABLE TO US.
We believe that our existing cash and cash equivalents, together with
the cash that we expect to generate from our operations, will be sufficient to
meet our planned capital needs. However, it is possible that we may need to
raise additional capital to fund our future activities or to consummate
acquisitions of other businesses, products or technologies. We may be able to
raise these funds by selling securities to the public or selected investors, or
by borrowing money. We may not be able to obtain additional funds on favorable
terms, or at all. If adequate funds are not available, we may be required to
curtail our operations significantly, make selective dispositions of our assets
or obtain funds through arrangements with strategic partners or others that may
require us to relinquish rights to certain technologies or potential markets. If
we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentage of existing shareholders would be reduced.
In addition, the equity or debt securities that we issue may have rights,
privileges or preferences senior to those of our common stock.
WE MAY BE UNABLE TO MAKE THE SUBSTANTIAL RESEARCH AND DEVELOPMENT INVESTMENTS
REQUIRED TO REMAIN COMPETITIVE IN OUR BUSINESS.
The semiconductor industry requires substantial investment in research
and development in order to develop and bring to market new and enhanced
technologies and products. We cannot assure you that we will have sufficient
resources to maintain the level of investment in research and development
required to remain competitive in our business.
UNCERTAINTIES INVOLVING THE ORDERING AND SHIPMENT OF, AND PAYMENT FOR, OUR
PRODUCTS COULD ADVERSELY AFFECT OUR BUSINESS.
Our sales are typically made pursuant to individual purchase orders and
we generally do not have long term supply arrangements with our customers.
Generally, our customers may cancel orders 30 days prior to shipment without
incurring a significant penalty. In addition, we sell a portion of our products
through distributors, some of whom have rights to return a portion of unsold
products to us. Sales to distributors accounted for approximately 42% of net
product revenues in 2000 and 43% of net product revenues in the first nine
months of 2001. We routinely purchase inventory based on customers' estimates of
demand for their products, which is difficult to predict. This difficulty may be
compounded when we sell to original equipment manufacturers indirectly through
distributors or contract manufacturers, or both, as our forecasts for demand are
then based on estimates provided by multiple parties. In addition, our customers
may change their inventory practices on short notice for any reason. The
cancellation or deferral of product orders, the return of previously sold
products or overproduction due to failure of anticipated orders to materialize
could result in excess obsolete inventory, which could result in write-downs of
inventory or the incurrence of significant cancellation penalties under our
arrangements with our raw materials and equipment suppliers.
During the first nine months of 2001, the markets in which our
customers operate have been characterized by a dramatic decline in end-user
demand and continued high levels of channel inventories, which have reduced
visibility of future demand for our products and may, in some cases, lead to
delays or defaults in payments for our products. We expect these and other
factors to continue to affect our revenues in the near term.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
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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 portion of our costs are fixed, due in part
to our significant sales, research and development and manufacturing costs.
Thus, small declines in revenues could negatively affect our operating results
in any given 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.
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 predict
and adapt to these 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 and requirements 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 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 competitive. As a result of the recent economic downturn,
competition in the markets in which we operate has intensified as manufacturers
of semiconductor components have offered reduced prices in order to
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combat production overcapacity and high inventory levels. 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. In addition, companies not currently in direct competition with us may
introduce competing products in the future. The semiconductor components
industry has also been undergoing significant restructuring and consolidations
that could adversely affect our competitiveness.
Many of our competitors may have certain advantages over us, including:
- - substantially greater financial and other resources with which to withstand
adverse economic or market conditions and pursue development, engineering,
manufacturing, marketing and distribution of their products;
- - longer independent operating histories and presence in key markets; and
- - greater name recognition.
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, strategic relationships with customers, new
product innovation, availability, delivery timing and reliability and customer
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. Our ability to compete successfully
depends on elements both within and outside of our control, including industry
and general economic trends.
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 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, transferring production to other 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, transferring production to
other facilities, 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.
WE MUST INCUR SIGNIFICANT CAPITAL EXPENDITURES FOR MANUFACTURING TECHNOLOGY AND
EQUIPMENT TO REMAIN COMPETITIVE.
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Semiconductor manufacturing requires a constant upgrading of process
technology to remain competitive, as new and enhanced semiconductor processes
are developed which permit smaller, more efficient and more powerful
semiconductor devices. We maintain certain of our own manufacturing, assembly
and test facilities, which have required and will continue to require
significant investments in manufacturing technology and equipment. We have made
substantial capital expenditures and installed significant production capacity
to support new technologies and increased production volume.
We cannot assure you that we will have sufficient capital resources to
make necessary investments in manufacturing technology and equipment. In
addition, our principal credit agreement limits the amount of our capital
expenditures. Although recent amendments to the credit agreement relax these
restrictions, they still may prevent us from making capital expenditures in an
amount our management believes to be necessary to maintain or enhance our
competitive position.
IF WE WERE TO LOSE ONE OF OUR LARGE CUSTOMERS, OUR REVENUES AND PROFITABILITY
COULD BE ADVERSELY AFFECTED.
Product sales to our ten largest customers accounted in the aggregate
for approximately 52% and 51% of our net product revenues in 2000 and the nine
months ended September 28, 2001, respectively. 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.
Generally, our agreements with our customers impose no minimum or continuing
obligations to purchase our products. We cannot assure 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 our customers would not have a material adverse
effect on our business or prospects.
THE LOSS OF OUR SOURCES OF RAW MATERIALS OR MANUFACTURING SERVICES, OR INCREASES
IN THE PRICES OF SUCH GOODS OR SERVICES, COULD ADVERSELY AFFECT OUR OPERATIONS
AND PRODUCTIVITY.
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. Generally, our agreements with suppliers impose no 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.
In addition, for some of our products, such as our new Silicon
Germanium (SiGe) technology, we are dependent upon a limited number of highly
specialized suppliers for required components and materials. The number of
qualified alternative suppliers for these kinds of technologies is extremely
limited. We cannot assure you that we will not lose our suppliers for these key
technologies or that our suppliers will be able to meet performance and quality
specifications or delivery schedules. Disruption or termination of our limited
supply sources for these components and materials could delay our shipments of
products utilizing these technologies and damage relationships with current and
prospective customers.
We also use third-party contractors for manufacturing activities,
primarily for wafer fabrication and the assembly and testing of final goods. In
2000, these contract manufacturers, including Motorola, AIT, ASE and Phenitec,
accounted for approximately 45% 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 contractual 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.
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In the case of Motorola, we 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. Under our agreements with Motorola, the price of these
services are fixed at levels that are intended to approximate each party's cost
of providing the services. Subject to our right to cancel upon six months'
written notice, we have minimum commitments to purchase manufacturing services
from Motorola, as of November 1, 2001, of approximately $56 million, $26 million
and $25 million in fiscal years 2001, 2002 and 2003, respectively, and have no
purchase obligations thereafter. We could be adversely affected 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.
ACQUISITIONS AND STRATEGIC ALLIANCES MAY HARM OUR OPERATING RESULTS, CAUSE US TO
INCUR DEBT OR ASSUME CONTINGENT LIABILITIES OR DILUTE OUR STOCKHOLDERS.
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. Without
strategic acquisitions and alliances we may have difficulty meeting future
customer product and service requirements.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS INHERENT IN DOING BUSINESS ON
AN INTERNATIONAL LEVEL THAT COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Approximately 41%, 37% and 22% of our net product revenues in the nine
months ended September 28, 2001 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 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 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;
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- - 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. While our sales are
primarily denominated in U.S. dollars, worldwide semiconductor pricing is
influenced by currency rate fluctuations.
IF WE FAIL TO ATTRACT AND RETAIN HIGHLY-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. For
example, 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 have not entered into employment agreements with all of our key personnel. As
employee incentives, we issue common stock options that generally have exercise
prices at the market value at time of the grant and that are subject to vesting.
Recently, our stock price has declined substantially, reducing the effectiveness
of these incentives. Loss of the services of, or failure to effectively recruit,
qualified personnel, including senior managers and design engineers, could have
a material adverse effect on our business.
WE USE A SIGNIFICANT AMOUNT OF INTELLECTUAL PROPERTY IN OUR BUSINESS. SOME OF
THAT INTELLECTUAL PROPERTY IS CURRENTLY SUBJECT TO DISPUTES WITH THIRD PARTIES,
AND LITIGATION COULD ARISE IN THE FUTURE. IF WE ARE UNABLE TO PROTECT THE
INTELLECTUAL PROPERTY WE USE, OUR BUSINESS COULD 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 substantial number of U.S. and foreign patents and pending
patent applications that we employ in our business, including those that
Motorola assigned, licensed or sublicensed to us in connection with our
recapitalization, will not lapse or be invalidated, circumvented,
challenged, abandoned or licensed to others;
- - the license rights granted by Motorola in connection with our
recapitalization will provide competitive advantages to us;
- - any of our pending or future patent applications will be issued or have the
coverage originally sought;
- - 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, abandoned 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.
In addition, our competitors or others may 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. Effective patent, trademark, copyright and trade secret protection
may be unavailable, limited or not applied for in the United States and in
foreign countries.
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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.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS COULD ADVERSELY AFFECT OUR ABILITY TO
CONDUCT OUR BUSINESS AND COULD REQUIRE EXPENDITURES THAT COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR RESULTS OF OPERATIONS AND 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 the closing of our recapitalization transaction. We
also have purchased environmental insurance. However, we cannot assure you that
such indemnification arrangements and insurance policy will cover all material
environmental costs relating to pre-closing matters and subsequent matters,
respectively. In addition, 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 any 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;
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- - 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.
WE ARE PARTY TO SECURITIES CLASS ACTION LITIGATION WHICH MAY BE COSTLY TO DEFEND
AND THE OUTCOME OF WHICH IS UNCERTAIN.
In July 2001, three stockholder class action lawsuits were filed in the
United States District Court for the Southern District of New York against us,
certain of our officers and directors and various investment banking firms who
acted as underwriters in connection with our initial public offering in April
2000. The class action lawsuits generally allege that our offering documents
failed to disclose (i) certain underwriting fees and commissions and (ii)
underwriter tie-ins and other arrangements with certain customers that impacted
the price of our common stock in the aftermarket. The plaintiffs are seeking
monetary damages and other appropriate relief.
We can provide no assurance as to the outcome of this securities
litigation. Any conclusion of this litigation in a manner adverse to us could
have a material adverse effect on our business, financial condition and results
of operations. In addition, the cost to us of defending the litigation, even if
resolved in our favor, could be substantial. Such litigation could also
substantially divert the attention of our management and our resources in
general. Uncertainties resulting from the initiation and continuation of this
litigation could harm our ability to compete in the marketplace. Because the
price of our common stock has been, and may continue to be, volatile, we can
provide no assurance that additional securities litigation will not be filed
against us in the future.
RISKS RELATED TO OUR COMMON STOCK
IF OUR SHARES ARE DELISTED, YOU MIGHT NOT BE ABLE TO SELL YOUR INVESTMENT IN OUR
COMPANY.
Our common stock is listed on the Nasdaq National Market System. To
continue to be listed on that market, however, we must continue to satisfy, with
certain exceptions, specified maintenance criteria, including:
- - required levels of total assets, net tangible assets, stockholders' equity
or revenues,
- - a minimum market value of our public float, and
- - a minimum bid price per share.
While Nasdaq recently announced a temporary suspension, until January
2, 2002, of the minimum bid price and public float requirements for continued
listing, our failure to meet these maintenance criteria in the future may result
in the delisting of our common stock from the Nasdaq National Market System. If
we are delisted from the Nasdaq National Market, we may continue to be listed on
the Nasdaq SmallCap Market if we are able to satisfy its continued listing
criteria. In the event that we cannot satisfy the listing criteria of the Nasdaq
SmallCap Market, trading, if any, in our common stock would be conducted in the
over-the-counter market in the so-called "pink sheets" or the OTC Bulletin
Board. Consequently, selling our common stock would be more difficult because
smaller quantities of shares would likely be bought and sold, transactions could
be delayed, and security analysts' coverage of us may be reduced. These factors
could result in lower prices and larger spreads in the bid and ask prices for
shares of our common stock. A delisting from Nasdaq also may have a material
adverse effect on our ability to raise capital through the issuance of
additional equity.
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In the event our common stock is delisted from Nasdaq, we would become
subject to certain securities law restrictions requiring broker/dealers who
recommend low-priced securities to persons (with certain exceptions) to satisfy
special sales practice requirements, including making an individualized written
suitability determination for the purchaser and receive the purchaser's written
consent prior to the transaction. These "penny stock" regulations also require
additional disclosure in connection with any trades involving low-priced stocks
(subject to certain exceptions), including the delivery, prior to any
transaction, of a disclosure schedule explaining the market for such stocks and
the associated risks. These requirements could severely limit the market
liquidity of our common stock and your ability to sell the common stock in the
secondary market.
HOLDERS OF OUR COMMON STOCK MAY EXPERIENCE DILUTION AND THE PRICE OF OUR COMMON
STOCK MAY DECLINE AS A RESULT OF THE ISSUANCE OF SERIES A PREFERRED STOCK.
In September 2001, we sold 10,000 shares of our Series A preferred
stock to TPG ON Holdings LLC, an affiliate of the Texas Pacific Group. Each
share of Series A preferred stock is convertible at the option of the holder
into approximately 3,546 shares of our common stock, subject to customary
anti-dilution adjustments. Under the anti-dilution provisions, the conversion
price is subject to downward adjustment in the event we issue common stock, or
derivative securities entitling the holder to subscribe for or acquire common
stock, at a price below the then-current conversion price or market price.
Holders of Series A preferred stock are entitled to cumulative dividends,
payable quarterly in cash, at a rate of 8% per annum (or if greater during the
relevant quarterly period, in an amount equal to the value of the dividends that
would be paid on our common stock then issuable upon conversion of the Series A
preferred stock), subject to applicable restriction imposed by our principal
credit facility. In the event dividends are not paid, the dividends will
accumulate on a compounded basis and the number of shares of common stock into
which the Series A preferred stock is convertible will increase proportionately.
There is a possibility that the Series A preferred stock will be
converted at a price per share that is less than the then current market price
of our common stock. If this were to occur, it may cause substantial dilution to
our existing common stockholders. Additionally, we are required to register the
shares of common stock issuable upon conversion of the Series A preferred stock
under the Securities Act for public resale. Therefore, in the event that the
Series A preferred stock is converted, a substantial number of shares of our
common stock may be sold into the market, which could decrease the trading price
of our common stock and encourage short sales by the selling shareholder or
others. Short sales could place further downward pressure on the price of our
common stock.
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;
- - loss of a major customer or failure to complete significant transactions;
and
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- - additions or departures of key personnel.
As of November 5, 2001, the trading price of our common stock since our
initial public offering has ranged from a high of $27.75 on May 1, 2000 to a low
of $1.12 on October 5, 2001.
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, including shares of common stock issued upon conversion of the Series A
preferred stock, 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.
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 THE STOCKHOLDERS.
Affiliates of Texas Pacific Group own 124,999,433 shares of our common
stock and all of the outstanding shares of Series A preferred stock. These
shares represent approximately 76% of the total voting power of our capital
stock. As a result, Texas Pacific Group, through its affiliates, 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.
PROVISIONS IN OUR CHARTER DOCUMENTS MAY DELAY OR PREVENT THE 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.
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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.
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