| AMIS HOLDINGS INC ITEM 1A RISK FACTORS Factors that May Affect our Business and Future Results The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also adversely affect our business |
| If we are unable to improve and maintain the quality of our internal control over financial reporting, a weakness could materially and adversely affect our ability to provide timely and accurate information about our company, which could harm our reputation and share price |
| In connection with the preparation of our financial statements and other reports for the year ended December 31, 2005, we identified a deficiency in our internal control over financial reporting relating to revenue recognition that we have concluded rose to the level of a “material weakness |
| ” Our internal control over financial reporting was not designed to effectively identify when delivery of products to our customers had occurred and related revenue could accordingly be recognized |
| Had the errors related to this material weakness in our internal control over financial reporting not been identified during our year-end review procedures, our revenue and net income would have been overstated by dlra1dtta8 million and dlra0dtta6 million, respectively, for the year ended December 31, 2005 |
| We cannot be certain that the measures we are taking will ensure that we will be able to correct and maintain adequate controls over our financial processes and reporting in the future |
| Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations in a timely and accurate manner |
| Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could adversely affect the trading price of our common stock |
| Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives |
| However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected |
| 11 _________________________________________________________________ [71]Table of Contents We rely on packaging subcontractors, which reliance could have a material adverse effect on our results of operations and financial condition |
| The packaging of semiconductors is a complex process requiring, among other things, a high degree of technical skill and advanced equipment |
| We outsource our semiconductor packaging to subcontractors, most of which are located in Southeast Asia |
| In particular, we rely heavily on a single subcontractor for packaging |
| We depend on these subcontractors to package our devices with acceptable quality and yield levels |
| During the fourth quarter of 2005, our principal packaging subcontractor experienced capacity constraints, which impacted our ability to ship products to customers during the quarter and negatively impacted our revenues |
| We have taken steps to attempt to guarantee capacity in the future, which will cause us to incur additional costs in 2006 |
| Nevertheless, if our subcontractor experiences problems in packaging our semiconductor devices or experiences prolonged quality or yield problems or continued capacity constraints, our operating results would be adversely affected |
| Our success depends on efficient utilization of our manufacturing capacity, and a failure could have a material adverse effect on our results of operations and financial condition |
| An important factor in our success is the extent to which we are able to utilize the available capacity in our fabrication and test facilities |
| Utilization rates can be negatively affected by periods of industry over-capacity, low levels of customer orders, operating inefficiencies, obsolescence, mechanical failures and disruption of operations due to expansion or relocation of operations and fire or other natural disasters |
| Because many of our costs are fixed, a reduction in capacity utilization, together with other factors such as yield and product mix, could adversely affect our operating results |
| The downturn in the semiconductor industry from 2000 to 2003 resulted in a decline in the capacity utilization at our wafer fabrication facilities |
| In addition, our capacity utilization for the second half of 2004 declined from the first half of 2004 and that trend continued through 2005 |
| If this continues, or if we enter another downturn, our wafer fabrication capacity may be under-utilized and our inability to quickly reduce fixed costs, such as depreciation and other fixed operating expenses necessary to operate our wafer manufacturing facilities, would harm our operating results |
| We could be adversely affected by manufacturing interruptions or reduced yields |
| The fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean room environment |
| Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional |
| We may experience problems in achieving acceptable yields in the manufacture of semiconductors, particularly in connection with the production of a new product, the adoption of a new manufacturing process or any expansion of our manufacturing capacity and related transitions |
| The interruption of manufacturing, including power interruptions, or the failure to achieve acceptable manufacturing yields at any of our wafer fabrication facilities, would adversely affect our business |
| In addition, we began moving our test operations to a new facility in the Philippines beginning in the second quarter of 2005 and we are moving our sort operations in the United States and Belgium to this new facility as well |
| During the course of this move, we experienced some shortcomings in execution that resulted in higher costs in the short term, an increased level of customer delinquencies, and imbalances at some points in our internal supply chain |
| This will likely take a few quarters to work out, at which time we expect to return to normal levels of efficiencies in this part of the manufacturing process |
| We are also planning to close our 4-inch wafer fabrication facility in Oudenaarde, Belgium by the first quarter of 2007 |
| If we experience delays or other technical or other problems during these moves, our costs, efficiencies and ability to deliver products to customers may be adversely affected and our results of operations could be adversely affected |
| 12 _________________________________________________________________ [72]Table of Contents We may face product warranty or product liability claims that are disproportionately higher than the value of the products involved, which could have a material adverse effect on our results of operations and financial condition |
| Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated |
| Although we maintain rigorous quality control systems, in the ordinary course of our business we receive warranty claims for some of these products that are defective or that do not perform to specifications |
| Since a defect or failure in our product could give rise to failures in the goods that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenues and profits we receive from the products involved |
| See note 10 to our consolidated financial statements for further discussion |
| In the fourth quarter of 2005, our gross margin was negatively impacted by approximately dlra3dtta7 million due to a charge taken in conjunction with ongoing discussions involving a previous quality issue with one of our customers |
| On March 3, 2006, an agreement in principle was reached with this customer to settle this issue for dlra5 million in cash in exchange for a release for all past and future claims with respect to this matter |
| This amount is fully reserved at December 31, 2005 |
| We attempt, through our standard terms and conditions of sale and other customer contracts, to limit our liability for defective products to obligations to replace the defective goods or refund the purchase price |
| Nevertheless, we have received claims in the past for other charges, such as for labor and other costs of replacing defective parts, lost profits and other damages |
| In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business |
| And, even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill or to settle claims to avoid protracted litigation |
| Our results of operations and business could be adversely affected as a result of a significant quality or performance issue in our products if we are required or choose to pay for the damages that result |
| The cyclical nature of the semiconductor industry may limit our ability to maintain or increase revenue and profit levels, which could have a material adverse effect on our results of operations and financial condition |
| The semiconductor industry is cyclical and our ability to respond to downturns is limited |
| The semiconductor industry experienced the effects of a significant downturn that began in late 2000 and continued into 2003 |
| Our business was impacted by this downturn |
| During this downturn, our financial performance was negatively affected by various factors, including general reductions in inventory levels by customers and excess production capacity |
| In addition, our bookings and backlog decreased during the second half of 2004 and remained sluggish throughout 2005 |
| This resulted in lower revenue in 2005 as compared to 2004 |
| We cannot predict how long the current soft bookings environment will persist or to what extent business conditions will change in the future |
| If the soft bookings environment persists, or business conditions change for the worse in the future, these events would materially adversely affect our results of operations and financial condition |
| Due to our relatively fixed cost structure, our margins will be adversely affected if we experience a significant decline in customer orders |
| We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements |
| The short-term nature of commitments by many of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate future customer requirements |
| On occasion, customers may require rapid increases in production, which can challenge our resources, reduce margins or harm our relationships with our customers |
| We may not have sufficient capacity at any given time to meet our customers’ demands |
| Conversely, downturns in the semiconductor industry, such as the downturn that commenced late in 2000 and ended in 2003, can and have caused our customers to significantly reduce the amount of products 13 _________________________________________________________________ [73]Table of Contents ordered from us |
| In addition, we experienced a decrease in orders in the third and fourth quarters of 2004 |
| Sluggish business conditions continued in 2005 due to general declines in the industry and an above average roll off of old products, particularly in the mixed signal segment, that new product introductions failed to offset |
| These decreases in orders are now negatively impacting our gross margins |
| Reductions in customer orders have caused our wafer fabrication capacity to be under-utilized |
| Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand has an adverse effect on our gross margins and operating income |
| Reduction of customer demand also causes a decrease in our backlog |
| There is also a higher risk that our trade receivables will be uncollectible during industry downturns or downturns in the economy |
| Any one or more of these events could have a material adverse effect on our results of operations and financial condition |
| A significant portion of our revenue comes from a relatively limited number of customers and devices, the loss of which could adversely affect our results of operations and financial condition |
| If we lose a major customer or if customers cease to place orders for our high volume devices, our financial results will be adversely affected |
| While we served more than 530 customers in 2005, sales to our 18 largest customers represented 50dtta6prca of our revenue during this period |
| The identities of our principal customers have varied from year to year and our principal customers may not continue to purchase products and services from us at current levels, or at all |
| In addition, while we sold over 2cmam360 different products in 2005, the 104 top selling devices represented 50dtta1prca of our revenue during this period |
| The devices generating the greatest revenue have varied from year to year and our customers may not continue to place orders for such devices from us at current levels, or at all |
| Significant reductions in sales to any of these customers, the loss of a major customer or the curtailment of orders for our high volume devices within a short period of time would adversely affect our business |
| We may not be able to sell the inventories of products on hand, which could have a material adverse effect on our results of operations and financial condition |
| In preparation for the relocation of our test facilities in the Philippines, the consolidation of our sort facilities in Belgium and the United States into the new facility in the Philippines, the closure of our 4-inch wafer fabrication facility in Oudenaarde, Belgium, and for other reasons, we have built up and may continue to build up inventories of certain products in an effort to mitigate or prevent any interruption of product deliveries to our customers |
| In many instances, we have manufactured these products without having first received orders for them from our customers |
| Because our products are typically designed for a specific customer and are not commodity products, if customers do not place orders for the products we have built, we may not be able to sell them and we may need to record reserves against the valuation of this inventory |
| If these events occur, it could have a material adverse effect on our results and financial condition |
| We may need to incur impairment and other restructuring charges, which could materially affect our results of operations and financial conditions |
| During industry downturns and for other reasons, we may need to record impairment or restructuring charges |
| We have incurred impairment or restructuring charges in each of the last three fiscal years |
| Most recently, we began relocating our test operations to a new larger facility in the Philippines and are in the process of transferring our wafer sort operations in Pocatello, Idaho and Oudenaarde, Belgium to that new facility |
| These actions resulted in restructuring charges in 2005 of approximately dlra0dtta5 million |
| We expect to complete this relocation during the first quarter of 2006 |
| In addition, on August 17, 2005, we announced a plan to close our 4-inch wafer fabrication facility in Oudenaarde, Belgium by the first quarter of 2007 |
| We expect this action to result in restructuring charges in the range of approximately dlra23dtta0 million to dlra28dtta0 million, of which approximately dlra4dtta9 million was recorded in 2005, with the remainder to be recorded in 2006 and the first quarter of 2007 |
| In 2004, we eliminated approximately 110 employee positions, recording dlra7dtta9 million in related restructuring charges over the life of this plan |
| In the future, we may need to record additional impairment charges or further restructure our business and incur additional 14 _________________________________________________________________ [74]Table of Contents restructuring charges, which could have a material adverse effect on our results of operations or financial condition, if they are large enough |
| We depend on growth in the end markets that use our products, and a lack of growth in these markets could have a material adverse effect on our results of operations and financial condition |
| Our continued success will depend in large part on the growth of various industries that use semiconductors, including our target automotive, medical and industrial markets, as well as the communications, military and computing markets, and on general economic growth |
| Factors affecting these markets as a whole could seriously harm our customers and, as a result, harm us |
| These factors include: • recessionary periods or periods of reduced growth in our customers’ markets; • the inability of our customers to adapt to rapidly changing technology and evolving industry standards; • the potential that our customers’ products may become obsolete or the failure of our customers’ products to gain widespread commercial acceptance; and • the possibility of reduced consumer demand for our customers’ products |
| Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology, as well as our ability to operate without infringing the proprietary rights of others, and our inability to do so could have a material adverse effect on our business |
| As of December 31, 2005, we held 83 US patents and 92 foreign patents |
| At the end of 2006, approximately 7prca of the patents we currently have in place will be expiring |
| We do not expect this to have a material impact on our results, as these technologies are not revenue producing and we will be able to continue using the technologies associated with these patents |
| We intend to continue to file patent applications when appropriate to protect our proprietary technologies |
| The process of seeking patent protection takes a long time and is expensive |
| We cannot assure you that patents will issue from pending or future applications or that, if patents issue, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage |
| In addition, we cannot assure you that other countries in which we market our services will protect our intellectual property rights to the same extent as the United States |
| We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, by confidentiality agreements |
| We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach |
| Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others |
| We have no means of knowing what patent applications have been filed in the United States until they are published |
| In January 2003, Ricoh Company, Ltd |
| filed in the US District Court for the District of Delaware a complaint against us and other parties alleging infringement of a patent owned by Ricoh |
| The case was transferred to the US District Court for the Northern District of Delaware in August 2003 and was subsequently transferred to the US District Court for the Northern District of California |
| Ricoh is seeking an injunction and damages in an unspecified amount relating to such alleged infringement |
| The patents relate to certain methodologies for the automated design of custom semiconductors |
| Based on information available to us to date, our belief is that the asserted claims are without merit or, if meritorious, that we will be indemnified (with respect to damages) for these claims by Synopsys, Inc |
| and resolution of this matter will not have a material adverse effect on our future financial results or financial condition |
| The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights |
| As is typical in the semiconductor industry, we have from time to time received communications from third parties asserting rights under patents that cover certain of our 15 _________________________________________________________________ [75]Table of Contents technologies and alleging infringement of certain intellectual property rights of others |
| We expect to receive similar communications in the future |
| In the event that any third party had a valid claim against us or our customers, we could be required to: • discontinue using certain process technologies which could cause us to stop manufacturing certain semiconductors; • pay substantial monetary damages; • seek to develop non-infringing technologies, which may not be feasible; or • seek to acquire licenses to the infringed technology which may not be available on commercially reasonable terms, if at all |
| In the event that any third party causes us or any of our customers to discontinue using certain process technologies, such an outcome could have an adverse effect on us as we would be required to design around such technologies, which could be costly and time consuming |
| Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others |
| If we fail to obtain a necessary license or if litigation relating to patent infringement or any other intellectual property matter occurs, our business could be adversely affected |
| Our industry is highly competitive, and a failure to successfully compete could have a material adverse effect on our results of operations and financial condition |
| The semiconductor industry is highly competitive and includes hundreds of companies, a number of which have achieved substantial market share |
| Current and prospective customers for our custom products evaluate our capabilities against the merits of our direct competitors, as well as the merits of continuing to use standard or semi-standard products |
| Some of our competitors have substantially greater market share, manufacturing, financial, research and development and marketing resources than we do |
| We also compete with emerging companies that are attempting to sell their products in specialized markets |
| We expect to experience continuing competitive pressures in our markets from existing competitors and new entrants |
| Our ability to compete successfully depends on a number of other factors, including the following: • our ability to offer cost-effective products on a timely basis using our technologies; • our ability to accurately identify emerging technological trends and demand for product features and performance characteristics; • product introductions by our competitors; • our ability to adopt or adapt to emerging industry standards; • the number and nature of our competitors in a given market; and • general market and economic conditions |
| In addition, in recent years, many participants in the industry have substantially expanded their manufacturing capacity |
| If overall demand for semiconductors should decrease, this increased capacity could result in substantial pricing pressure, which could adversely affect our operating results |
| We depend on successful technological advances for growth, and a lack of such advances could have a material adverse effect on our business |
| Our industry is subject to rapid technological change as customers and competitors create new and innovative products and technologies |
| We may not be able to access leading edge process technologies or to license or otherwise obtain essential intellectual property required by our customers |
| If we are unable to 16 _________________________________________________________________ [76]Table of Contents continue manufacturing technologically advanced products on a cost-effective basis, our business would be adversely affected |
| Our customers may cancel their orders, change production quantities or delay production, which could have a material adverse effect on our results of operations and financial condition |
| We generally do not obtain firm, long-term purchase commitments from our customers |
| Customers may cancel their orders, change production quantities or delay production for a number of reasons |
| Cancellations, reductions or delays by a significant customer or by a group of customers, which we have experienced in the past as a result of soft business conditions, have adversely affected and may continue to adversely affect our results of operations |
| In addition, while we do not obtain long-term purchase commitments, we generally agree to the pricing of a particular product for the entire lifecycle of the product, which can extend over a number of years |
| If we underestimate our costs when determining the pricing, our margins and results of operations will be adversely affected |
| We depend on our key personnel, and the loss of these personnel could have a material effect on our business |
| Our success depends to a large extent upon the continued services of our chief executive officer, Christine King, and our other key executives, managers and skilled personnel, particularly our design engineers |
| In July 2005, we signed a new employment agreement with Ms |
| King that expires on December 31, 2008 |
| Generally our employees are not bound by employment or non-competition agreements and we cannot assure you that we will retain our key executives and employees |
| We may or may not be able to continue to attract, retain and motivate qualified personnel necessary for our business |
| Loss of the services of, or failure to recruit, skilled personnel could be significantly detrimental to our product development programs or otherwise have a material adverse effect on our business |
| We are dependent on successful outsourcing relationships, which dependence could have a material adverse effect on our results of operations and financial condition |
| We have formed arrangements with other wafer fabrication foundries to supplement capacity and gain access to more advanced digital process technologies |
| If we experience problems with our foundry partners, we may face a shortage of finished products available for sale |
| We believe that in the future we will increasingly rely upon outsourced wafer manufacturing to supplement our capacity and technology |
| If any foundries with which we form an outsourcing arrangement, experience wafer yield problems or delivery delays, which are common in our industry, or are unable to produce silicon wafers that meet our specifications with acceptable yields, our operating results could be adversely affected |
| We rely on test subcontractors, which reliance could have a material adverse effect on our results of operations and financial condition |
| The testing of semiconductors is a complex process requiring, among other things, a high degree of technical skill and advanced equipment |
| We are increasing our outsourcing of semiconductor testing to subcontractors, most of which are located in Southeast Asia |
| In particular, we plan to rely heavily on a single subcontractor for this activity |
| If our subcontractors experience problems in testing our semiconductor devices, our operating results would be adversely affected |
| We depend on successful parts and materials procurement for our manufacturing processes, which dependence could have a material adverse effect on our results of operations and financial condition |
| We use a wide range of parts and materials in the production of our semiconductors, including silicon, processing chemicals, processing gases, precious metals and electronic and mechanical components |
| We procure materials and electronic and mechanical components from domestic and foreign sources and original equipment manufacturers |
| However, there is no assurance that, if we have difficulty in supply due to an unforeseen catastrophe, worldwide shortage or other reason, alternative suppliers will be available or 17 _________________________________________________________________ [77]Table of Contents that these suppliers will provide materials or electronic or mechanical components in a timely manner or on favorable terms |
| If we cannot obtain adequate materials in a timely manner or on favorable terms, our business and financial results would be adversely affected |
| To service our consolidated indebtedness, we will require a significant amount of cash |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on our consolidated indebtedness and to fund working capital requirements, capital expenditures and research and development efforts will depend on our ability to generate cash in the future |
| Our historical financial results have been, and we expect our future financial results will be, subject to substantial fluctuation based upon a wide variety of factors, many of which are not within our control |
| These factors include: • the cyclical nature of both the semiconductor industry and the markets for our products; • fluctuations in manufacturing yields; • the timing of introduction of new products; • the timing of customer orders; • changes in the mix of products sold and the end markets into which they are sold; • the extent of utilization of manufacturing capacity; • the length of the lifecycle of the semiconductors we are manufacturing; • availability of supplies and raw materials; • price competition and other competitive factors; and • work stoppages, especially at our fabs in Belgium |
| Unfavorable changes in any of these factors could harm our operating results and our ability to generate cash to service our indebtedness |
| If we are unable to service our debt using our operating cash flow, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling equity securities, each of which could adversely affect the market price of our common stock |
| However, we cannot assure you that any alternative strategies will be feasible at the time or prove adequate |
| Also, certain of these strategies would require the consent of our senior secured lenders |
| We may incur costs to engage in future acquisitions of companies or technologies and the anticipated benefits of those acquisitions may never be realized, which could have a material adverse effect on our results of operations and financial condition |
| From time to time we have purchased other businesses or their assets |
| In November 2004 we acquired substantially all of the assets of Dspfactory Ltd |
| On September 9, 2005, we purchased substantially all of the assets and certain liabilities of the semiconductor business of Flextronics International USA Inc |
| These, as well as any future acquisitions, are accompanied by risks, including the following: • potential inability to maximize our financial or strategic position, which could result in impairment charges if the acquired company or assets are later worth less than the amount paid for them in the acquisition; • difficulties in assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings and revenue synergies; • entry into markets or countries in which we may have limited or no experience; 18 _________________________________________________________________ [78]Table of Contents • potential increases in our indebtedness and contingent liabilities and potential unknown liabilities associated with any such acquisition; • diversion of management’s attention due to transition or integration issues; • difficulties in managing multiple geographic locations; • cultural impediments that could prevent establishment of good employee relations, difficulties in retaining key personnel of the acquired business and potential litigation from terminated employees; and • difficulties in maintaining uniform standards, controls and procedures and information systems |
| We may in the future make additional acquisitions of complementary companies or technologies |
| We cannot guarantee that we will be able to successfully integrate any company or technologies that we might acquire in the future and our failure to do so could harm our business |
| The benefits of an acquisition may take considerable time to develop and we cannot guarantee that any acquisition will in fact produce the intended benefits |
| In addition, our senior credit facilities and our senior subordinated notes may prohibit us from making acquisitions that we may otherwise wish to pursue |
| We may need to raise additional capital that may not be available, which could have a material adverse effect on our results of operations and financial condition |
| Semiconductor companies that maintain their own fabrication facilities have substantial capital requirements |
| We made capital expenditures of dlra34dtta5 million in 2005 and dlra32dtta4 million in 2004 |
| In 2005, these expenditures were made in relation to the transfer of our wafer sort operations and the relocation of our test facility in the Philippines to a new location as well as for increases in our manufacturing capacity |
| In 2004, these expenditures were made to expand capacity in our eight-inch fabrication facility, replace equipment and expand our test and design capabilities |
| In the future, we intend to continue to make capital investments to support business growth and achieve manufacturing cost reductions and improved yields |
| The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors |
| We may seek additional financing to fund further expansion of our wafer fabrication capacity or to fund other projects |
| As of December 31, 2005, we had consolidated indebtedness of approximately dlra317dtta9 million |
| Because of this or other factors, additional financing may not be available when needed or, if available, may not be available on satisfactory terms |
| If we are unable to obtain additional financing, this could have a material adverse effect on our results of operations and financial condition |
| Our substantial consolidated indebtedness could adversely affect our financial health |
| AMI Semiconductor, Inc, our wholly owned subsidiary through which we conduct all our business operations, has a substantial amount of indebtedness that is guaranteed by us |
| We are a holding company with no business operations and no significant assets other than our ownership of AMI Semiconductor, Inc |
| ’s capital stock |
| On March 2, 2005, we announced a tender offer for our 10^3/4prca senior subordinated notes as well as a refinancing of our existing dlra125dtta0 million senior secured term loan and dlra90dtta0 million revolving credit facility, which we refer to collectively as our senior credit facilities |
| In September 2005 we amended our existing senior credit facilities to permit the Flextronics Acquisition and to permit an increase of dlra110dtta0 million in our indebtedness |
| As of December 31, 2005, our consolidated indebtedness was approximately dlra317dtta9 million and our total consolidated debt as a percentage of total capitalization was 52prca |
| Subject to the restrictions in the senior credit facilities, our subsidiaries and we may incur certain additional indebtedness from time to time |
| 19 _________________________________________________________________ [79]Table of Contents Our substantial consolidated indebtedness could have important consequences |
| For example, our substantial indebtedness: • will require our operating subsidiaries to dedicate a substantial portion of cash flow from operations to payments in respect of indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; • could increase the amount of our consolidated interest expense because some of our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; • will increase our vulnerability to adverse general economic or industry conditions; • could limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; • could restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; • could place us at a competitive disadvantage compared to our competitors that have less debt; and • could limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets |
| These factors could have a material adverse effect on our results of operations and financial condition |
| Restrictions imposed by the senior credit facilities limit our ability to take certain actions |
| Our senior credit facilities contain certain operating and financial restrictions and covenants and require us to maintain certain financial ratios, which become more restrictive over time |
| Our ability to comply with these ratios may be affected by events beyond our control |
| We cannot assure you that the operating and financial restrictions and covenants will not adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest |
| A breach of any of the covenants or our inability to comply with the required financial ratios could result in a default under our senior credit facilities |
| In the event of any default under the senior credit facilities, the lenders under our senior credit facilities will not be required to lend any additional amounts to us and could elect to declare all outstanding borrowings, together with accrued interest and other fees, to be due and payable, and require us to apply all of our available cash to repay these borrowings |
| If we are unable to repay any such borrowings when due, the lenders could proceed against their collateral, which consists of substantially all of our assets, including 65prca of the outstanding stock of certain of our foreign subsidiaries |
| If the indebtedness under our senior credit facilities were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full |
| In addition, we may be required to seek waivers or consents in the future under our senior credit facilities |
| We cannot be sure that these waivers or consents will be granted |
| We could incur material costs to comply with environmental laws, which could have a material adverse effect on our results of operations and financial condition |
| Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released into the environment from our operations |
| We have incurred and will in the future incur costs, including capital expenditures, to comply with these regulations |
| Significant regulatory changes or increased public attention to the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs or requiring changes in the way we make our products |
| For example, Belgium has enacted national legislation regulating emissions of greenhouse gases, such as carbon dioxide |
| In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of accidental spills or other sources of contamination, which could result in injury 20 _________________________________________________________________ [80]Table of Contents to the environment, personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings |
| For example, we have recently received concurrence with a proposal to curtail pumping at one of our former manufacturing sites |
| If levels significantly change in the future additional remediation may be required |
| In addition, at some point in the future, we will have to formally close and remove the extraction wells and treatment system |
| The discovery of additional contamination at this site or other sites where we currently have or historically have had operations could result in material cleanup costs |
| These costs could have a material adverse effect on our results of operations and financial condition |
| Our international sales and operations expose us to various political and economic risks, which could have a material adverse effect on our results of operations and financial condition |
| As a percentage of total revenue, our revenue outside of North America was approximately 58prca in 2005 |
| Our manufacturing operations are located in the United States and Belgium, our test facilities and our primary assembly subcontractors are located in Asia and we maintain design centers and sales offices in North America, Europe and Asia |
| International sales and operations are subject to a variety of risks, including: • greater difficulty in staffing and managing foreign operations; • greater risk of uncollectible accounts; • longer collection cycles; • logistical and communications challenges; • potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws; • changes in labor conditions; • burdens and costs of compliance with a variety of foreign laws; • political and economic instability; • increases in duties and taxation; • greater difficulty in protecting intellectual property; and • general economic and political conditions in these foreign markets |
| An adverse development relating to one or more of these could have a materially adverse effect on our results of operations and financial position |
| We are subject to risks associated with currency fluctuations, which could have a material adverse effect on our results of operations and financial condition |
| A significant portion of our revenue and costs are denominated in foreign currencies, including the euro and, to a lesser extent, the Philippine Peso and the Japanese Yen |
| Euro-denominated revenue represented approximately 29prca of our revenue in 2005 |
| As a result, changes in the exchange rates of these foreign currencies to the US dollar will affect our revenue, cost of revenue and operating margins and could result in exchange losses |
| The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted |
| From time to time, we will enter into exchange rate hedging programs in an effort to mitigate the affect of exchange rate fluctuations |
| However, we cannot assure you that any hedging transactions will be effective or will not result in foreign exchange hedging losses |
| 21 _________________________________________________________________ [81]Table of Contents We are exposed to foreign labor laws due to our operational presence in Europe, which could have a material adverse effect on our results of operations and financial condition |
| We had 891 employees in Europe as of December 31, 2005, most of whom were in Belgium |
| The employees located in Belgium are represented by unions and have collective bargaining arrangements at the national, industry and company levels |
| In connection with any future reductions in work force we may implement, we would be required to, among other things, negotiate with these unions and make severance payments to employees upon their termination |
| In addition, these unions may implement work stoppages or delays in the event they do not consent to severance packages proposed for future reductions in work force or for any other reason |
| Furthermore, our substantial operations in Europe subject us to compliance with labor laws and customs that are generally more employee favorable than in the United States |
| As a result, it may not be possible for us to quickly or affordably implement workforce reductions in Europe |